Materials management can thus also be defined as a joint action of various materials activities
directed towards a common goal and that is to achieve an integrated management approach to
planning, acquiring, processing and distributing production materials from the raw material state to
the finished product state.
In its process of managing, materials management has such sub fields as inventory
management , value analysis, receiving, stores and management of obsolete , slow moving and non
moving items. The various activities represent the following four functions:
• Planning and control
• Purchasing
• Value analysis and
• Physical distribution
Every organization, big or small, depends on materials and services from other organizations
to varying extents. These materials and services are obtained through exchange of money and the
physical arrangement of it all is called Materials Management or even Material Management.
Various materials used as inputs, such as raw materials, consumables & spares, are required
to be purchased and made available to the shops / users as & when needed to ensure uninterrupted
production. Therefore, efficient management of input materials is of paramount importance in a
business organization for maximizing materials productivity, which ultimately adds to the profitability
of the organization.
The main concern of any Business management is to maximise the Return on Investment
(ROI). The relationship of various entities here can be expressed as:
Profit Sales
ROI = ---------- X -----------------------------------------
Sales Current Asset + Fixed Asset
A firm's profit margin reflects management's ability to control costs in relations to revenue. The
asset turnover rate reflects management's ability to effectively utilize the firm's productive assets.
Hence a firm can improve ROI in three ways:
• By reducing cost
• By getting more sales from available assets or Get Currency converter
• By some combination of the above
All the materials related activities such as material planning & indenting, purchase systems &
procedure, variety reduction through standardization & rationalization, reducing uncertainties in
demand & supply, handling & transportation, inspection, proper storage & issue of materials to the
internal customers, inventory management, vendor management & finally disposal of obsolete,
surplus & scrap materials etc. taken together is termed as “INTEGRATED MATERIALS
MANAGEMENT”
To carry out these functions efficiently, it is essential to have a very good supplier base, order
booking process & inventory management system as well as expert MATERIALS MANAGEMENT
(MM) professionals.
The overall objectives of an organisation tend to be achieved most efficiently when the
organisation is structured by grouping similar activities together. The process begins by dividing the
total operation into its basic functional components. Each component , in turn, is divided into a
number of sub-functions.
The process is continued until each individual job encompasses a reasonable number of
related tasks. The basic aim is to have a system that is functionalised , has proper control over the
activities and is well co-ordinated. Materials Management provides an integrated systems approach
to the co-ordination of the materials activities and the control of total material costs.
Once the whole Materials Management function has been divided into its different sub-
functions as follows.
Purchasing
• Administrative : Purchasing administration involves all the tasks associated with the
management process, with emphasis on the development of policies , procedures, controls and the
mechanics for coordinating purchasing operations with those of other departments.
• Special projects (Non routine) : In order to facilitate smooth purchasing in a highly competitive
business environment , purchasing authorities have to keep building the capacity to do better by
taking up as special projects activities such as vendor development, vendor registration, value
analysis, market studies, system studies etc
• Routine : Purchasing process or procedure involving routine or every day activities such as
dealing specific purchase file , placing orders, maintaining records of commodities, vendors etc.
In any integrated Materials Management environment, planning for getting the materials is the
starting point for the whole MM function. Materials planning sets the procurement function and the
subsequent material functions rolling. Material planning is a scientific way of determining the
requirements starting with raw materials, consumables, spare parts and all other materials that are
required to meet the given production plan for a certain period.
Material planning is derived from the overall organisational planning and hence it is always a sub -plan
of the broad organisational plan. It helps in forecasting and initiating for procurement of materials
1) Macro factors: Global factors such as price trends, business cycles, government's import and
export policies etc are called the Macro factors. Credit policy of the government is a critical factor as
banks follow these guidelines only while extending financial support to a business entity.
2) Micro factors: These are essentially the factors existing within the organisation such as corporate
policy on Inventory holding, production plan, investments etc. For any organisation, factors such as
Lead time of procurement, acceptable inventory levels, working capital, seasonality, delegation of
power are micro factors.
There are a few techniques used for planning material for the given period. The following two are,
however, commonly used:
MRP has, as its starting point, the annual production plan of the manufacturing concern. Once
a firm determines its annual production plan, the overall material requirement, to meet the given
production plan, is worked out. It is a detailed analysis encompassing the materials and quantities
Since, it is always possible to have a situation where some parts of an assembly are available
and some others not available, Bill of Materials is exploded. It is quantifying all the materials
(components) needed for various assemblies, all needed as per the production plan. BOM is thus a
list displaying the code, nomenclature of an item, its unit and quantity, location of use and also the
estimated price of each component. An explosion chart is a series of bills of materials grouped
together in a matrix form so that combining the requirements for different components can be made.
Once the BOM is ready, the same is handed over to the Purchasing wing which initiates the
purchasing activities. MRP thus keeps in view the Lead time also. Using computers, preparation of
BOM through explosion of lists is quite easy and smooth.
Purchasing function is a function commonly seen in all those organizations that undertake
purchasing activities. The purchasing function is usually performed by a specialized and centralized
purchasing department, directed by an efficient manager to achieve the performance in an
economical manner. Purchase department is a unit of an organisation that performs purchasing
function.
Purchasing is responsible for spending nearly half of a company's income for buying the input
materials. Obviously, any saving achieved by it results into direct saving for the company and all such
savings are a company's profit. Going by a thumb rule "even 1% saving achieved in Purchasing
results in 5% profit for any organisation".
It is used to define one of several supply functions involved in logistics activities. In the
broadest sense procurement includes the entire process by which all classes of resources (people,
materials, facilities and services) for a particular project are obtained. Since purchasing is a unique
function, it differs a bit from procurement in the sense that while procurement, with the same objective
has a wider domain, purchasing with the same objective is included in it.
The classical definition of objectives of purchasing is to buy materials and services of the right
quality, in the right quantity, at the right place, from the right source and at the right time. However, in
general management parlance the objectives of purchasing are:
• To support company operations with an uninterrupted flow of materials & services.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 5
• To buy competitively and wisely
• To help keep a minimum Inventory
• To develop reliable alternate sources of supply
• To develop good vendor relationship and a good continuing supplier relationship
• To achieve maximum integration with the other departments of the firm
• To train & develop highly competent personnel who work for the success of firm/ department.
• To develop policies and procedures which permit accomplishment of the preceding seven
objectives at the lowest reasonable operating cost.
The basic objective is to derive the maximum value for each unit of currency spent in buying.
Purchasing is no doubt a vast subject and as the competition among the firms grows this function of
business is expected to see a lot of evolution
Considering the nature of business an organisation has there could be different approaches and
hence Purchasing can be any of these types:
Forward Buying
Tender Buying
Speculative Buying
Systems Contracting
Rate Contract
Reciprocity
Zero Stock buying
Blanket Order
Forward Buying
Forward Buying as the name suggests is the system under which buying is done with longer
term in perspective. It is not meant for meeting the present consumption requirement. It is rather a
commitment on part of both the buyer and the seller, normally for a period of one year.
Depending upon the availability of the item, the financial policies, the economic order quantity,
the quantitative discounts, and the staggered delivery, the future commitment is decided. A few
organizations do “hedge”, particularly in the commodity market by selling or buying contracts.
Forward buying helps a firm in booking capacity of a supplier and thus often results into a
safeguard against a competitor acquiring his capacity. It is usually done for Raw materials but is not
limited to it. With competition becoming globalised these days, such an arrangement is a win-win
situation for both, the buyer and the supplier.
Tender Buying
Tender buying is selecting a supply source (supplier) out of many sources available. That is,
many tenderers are invited to participate in the tendering process and then one or more than one
tender is selected for order placement. Such tenders are also called the Accepted tender/s (A/Ts).
Types of Tenders:
Since the tenders are sent to the probable vendors , knowledge of vendors for the item in
question is a necessity. It's based on this concept that the types or mode of tendering is decided
against a particular purchase requisition. Most commonly used Types of tendering / tender buying are
as below:
1) Global Tender :
As the name suggests a global tender is floated with a view to elicit offers / response from any
vendor situated anywhere in the world. The need for a global tender arises when the purchaser either
does not know about the vendors for a particular item in question or when he thinks that a wider
choice of vendor is possible through it, irrespective of his nation's boundaries. A few reasons are :
• Lack of information on vendors
• Only a few vendors known
• When there are chances of cartel formation among known vendors
• Anticipation that more response may come
What is of importance in this popular mode is the way a global tender is floated. With internet
becoming the most powerful tool transcending the national boundaries, a wide range of applications
are now possible. There are tender portals (www.tendertiger.com, www.indiatenders.com, etc.) on
which one can upload the whole tender enquiry and then ask the interested vendors to make offers.
Besides, this increasingly popular way of inviting tenders , listing the tender in international trade
2) Open Tender :
An Open tender too like a Global tender tends to invite tender from any interested vendor. The
basic difference assumed between an open tender and a global tender enquiry is essentially the
range of its applicability. While a global tender gets the worldwide publicity, an open tender is limited
only within a country. Otherwise, the concept remains the same as it also seeks to elicit better or
wider response.
Since the Open tender enquiry is limited within the country itself , besides the internet mode ,
the enquiry is also printed in the national dailies, internal trade bulletins etc for ensuring its wide
publicity, within the country. Any vendor who meets the tender requirements can make an offer.
3) Limited Tender :
When the issue of tender enquiry is limited only to a selected few vendors ,it is called Limited
Tender Enquiry (LTE). LTE is issued when the capabilities of the vendors is well known to the
purchaser. It is considered better than Global and Open tender modes as there is always an element
of uncertainty in those two modes with respect to the capabilities of the vendors.
For issuing LTE , a purchaser maintains a list of approved / registered vendors whose capabilities are
checked periodically.
4) Single Tender :
An STE is issued only when either the item is proprietary in nature, that is only one supplier
produces that item or where there may be more vendors but due to certain exigencies it is not
possible to devote time on evaluating the vendors' offers / one supplier can ,for sure , fulfill the needs.
Which mode to use and when depends on many factors including company's procurement
policy. For example, for a small value purchase, if the policy does not prohibit, Single tender enquiry
or Limited tender enquiry is considered ideal. These are also ideal for high value and frequently
bought items.
On the other hand, for high value and non frequently bought items / systems , Open / Global
tenders are suited. In many government organizations, whose procurements are also called public
procurements for the reason that they spend public money for the public cause ,all the tenders are to
be invited only through Open / Global tenders.
Speculative Buying
When purchasing is done purely from the point of view of taking advantage of a speculated
rise in price of the commodity it is called Speculative buying. The intent is not to buy for the internal
consumption but to resell the commodity at a later date when the prices have gone up and to make a
profit by selling. The items may be those that are needed for internal consumption but the quantity
shall be much more than the requirement so as to take advantage of the coming price rise.
Rate Contracts
Rate contracts are mutual agreements between the buyer and the seller to operate a set of
chosen items, during a given period of time, for a fixed price or price variation. Under this system the
rates are fixed and at times even the quantity of the selected items. As and when the need arises the
buyer issues a Purchase order directly on the basis of the rate chart available on the supplier who in
turn supplies the items.
The system of rate contract is prevalent in public sector organizations and government
departments. It is common for the suppliers to advertise that they are on “rate contract” with the
DGS&D (Directorate General of Supply & Disposal), for the specific period for the given items. After
negotiation, the seller and the buyer agree to the rates of items. Application of rate contract helps
organizations cut down the internal administrative lead time as individual firms need not go through
the central purchasing departments and can place orders directly with the suppliers.
However, suppliers always demand higher prices for prompt delivery, as rate contracts
normally stipulate only the rate and not the schedule on which the item is needed. This difficulty has
been avoided by ensuring the delivery of a minimum quantity at the agreed rates. This procedure of
fixing a minimum quantity is called the running contract and is being practiced by the railways and the
DGS&D.
As mentioned above, this system of buying helps an organisation reduce its internal as well as
the external lead time, reduces administrative work load as the files don't need to go up and down,
helps in building Buyer-supplier relationship as the contract period id usually one year and then there
is always a chance of the same players doing the next contract.
The system works well normally in a situation where the selected items are routinely
consumed. However, there is no compulsion that the demand be uniform over the period of time.
Blanket Orders
Under the Blanket Order system an agreement is done between the buyer and the supplier to
provide a required quantity of specified items, over a period of time, usually for one year, at an agreed
price. This system minimizes the administrative expenses and is useful for 'C' class items for which
rigid controls are not required.
Deliveries are made depending upon the buyer’s needs. The system relieves the buyer from
routine work, giving him more time for focusing attention on high value items such as 'A' and part of
'B' class.
Blanket Order system requires fewer purchase orders and thus reduces clerical work. It often
achieves lower prices through quantity discounts by grouping the requirements. The supplier, under
the system, maintains adequate inventory to meet the blanket orders, but he does not incur selling
costs, once the negotiations are finalised.
2) Bill of Materials
In brief, all the parts / components needed to make a product ,when listed along with the individual
quantity, are called Bill of materials.
This is basically a list ,structured in the same way a product can be thought of. For example,
when a design personal produces design of a new product then he may be needing a number of parts
that ultimately when assembled shall produce the item concerned.
List of such parts is called Bill of Materials (BOM).All other things remain the same as in case of other
forms of transmission of need of an item
Selection of Source (Supplier)
'Sourcing' or 'Selection of source/s' is a major challenge for any Purchasing manager. Source
of supply of required materials is basically selection of a suitable supplier. The Purchasing manager
has to ensure , getting the material / service from the right source (one of 5 R).
Once the Indent (also called requisition or Material Procurement Requisition/ MPR) is received
in the Purchase department ,the concerned dealing person scrutinizes it , in respect of :
• The complete specifications including drawings, if required
• Consumption pattern
• Stock in hand and dues in
• Budget availability
• Availability of all prescribed enclosures and certificates,
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 13
• Estimates
• Inspection guidelines, if any
On being fully satisfied that the next stage activities i.e. sourcing is now called for, the mode of
selection of source , often called mode of tendering is decided.
A tendering process addresses itself by clearly describing the need i.e. materials or service
with complete specification (tender specification) so that there is no ambigui ty left between the
purchaser and the seller, identifying the sources (vendors / suppliers )from whom the need can be
satisfied and spelling out the terms and conditions for agreement between the seller and the buyer.
It's basically the urge to get the right price that the concept of competitive buying emerged.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 14
It implies generating competition among the sellers in respect to the price for their acceptable
materials / service, on the basis of other terms and conditions, by the buyer. It is based on the
tendering process that ultimately the seller is selected for placement of order.
Besides the above , other dimension of the modes of tendering is the tendering steps that is to
be followed while scrutinizing the tenders. The following are popularly used methods :
• Single Bid
• Two stage Bid
• three stage Bid etc.
Online procurement systems are effective simply because they involve a number of features
that make purchasing simpler for businesses. These systems usually support the creation of online
catalogs containing goods from multiple suppliers, so employees only need to consult one place to
find the items they need, instead of dozens. Many of the programs also offer several ways of
communicating with select suppliers so that the buyer can choose the method most appropriate to
their needs. Generally, email, electronic data interchange (EDI), and automated fax are the preferred
options. As mentioned above, online procurement does automate most of the purchasing process,
including approval. Systems can literally send purchase orders directly and automatically to all
individuals who need to approve them, then once approved, they can be automatically sent to the
vendor for fulfillment.
Once a business switches to an online-based procurement system, they can begin seeing
benefits immediately. The administrative costs for each purchase are significantly reduced because
most of the paperwork is handled by the programs running the system and not by employees
Catalogue content
At the heart of every e-procurement process lies an electronic catalog. Similar to a traditional
mail-order catalog, electronic catalogs contain detailed information on products or services available
for sale. Suppliers customize the content to address the specific needs of targeted buyers. This
content is manipulated and imported into a database that the e-procurement application integrates
into web pages
The management of catalog data can be handled using import and aggregation tools or by
outsourcing the task to companies specializing in content management. Content providers generally
offer the following services:
• Convert catalog data into a uniform language and format
• Gather and aggregate data from multiple suppliers into one catalog
• Publish and maintain the product catalog
Once a catalog is created, various cataloging strategies are used to provide access to the content.
Strategies include using a centralized catalog model where the aggregated data is hosted at a central
location, a distributed model where data resides at multiple sites, or a content-retrieval method where
suppliers present catalog data directly to buyers.
There are three types of catalogues that address various buyer needs:
Product catalogs: Contain data on tangible items such as office products, medical supplies, rolls of
steel, etc.
Service catalogs: Offer professional service “intangibles” such as office maintenance
services, temporary personnel services, etc.
Commodity-specific catalogs: Offer specific product families or groups such as chemicals, paper,
or other raw materials
E-procurement Processes
In addition to creating an electronic catalog, existing procurement processes need to be
“electrified” end-to-end to support the entire e-procurement process. This includes requisition and
User Maintenance
Closely related to the two preceding process management components, user maintenance
includes defining the individuals authorized to use the e-procurement system, how these users will be
enrolled, and how to provide them access to the trading community. This component serves as the
foundation for managing the complex buyer-supplier relationships that will occur within the
marketplace.
Creating the buyer organization: Identifying and defining the individual buyers, how they will form
buying groups, and how they will access the e-procurement process
Creating the supplier organization: Identifying sellers, maintaining company profiles, and creating
shipping options and other high-level parameters for supplier activities
E-procurement organization: Aggregating the entire marketplace, including buyer and supplier, to
include such things as hours of operation, billing rates, etc.
Additionally, user maintenance requires establishing authorization levels and associated
procedures to precisely govern buyer and supplier capabilities.
Three authorization levels that must be addressed are:
Access to the electronic catalog: Defines who may access catalogs and how to do so
Creating and editing requisitions: Defines who can create requisitions, who can edit
requisitions, and who can edit accounting codes
Managing orders: Defines who has access to POs and who has authorization to
override shipping or billing information
Billing Management
E-procurement revenues are generally based on transaction fees. A billing management
system will calculate usage charges and generate and distribute statements or invoices to buyer-
seller members of the e-procurement network. Suppliers may also use the billing system to calculate
ordering charges or to distribute operating costs for specific orders. These functions must directly
interface with back office invoicing systems to automatically generate bills.
Price Establishment
Effective pricing enables buyers to negotiate the best possible deals and sellers to liquidate
excess inventory. Two major pricing options are used: Dynamic Pricing and Fixed Pricing.
Dynamic pricing: Allows buyers and sellers in an Internet market to trade goods and services
at prices determined by market forces instead of by a predetermined price list or catalog. An example
of dynamic pricing includes business services such as auctions, reverse auctions, and exchanges.
Fixed pricing: Based on a predetermined price list or catalog prices negotiated between a
buyer and seller
Data Transmission
Transmitting data over the Internet involves two facets: messaging agents and security. Data
and messaging tools enable the Internet-based exchange of transactional data between different
buyers and suppliers in the e-procurement marketplace. To do this, transactions are sent via the
Internet as “messages” and then integrated into a supplier’s or buyer’s back-office system, enabling
financial postings that coincide with the receipt, payment, and invoicing processes. Data messaging
tools are also used to cancel transactions and log failures when messages can’t be delivered within a
predefined time period or following a specified number of attempts. The most important aspect of the
messaging tool is that it enables real-time communication between buyers and sellers.
Coincidentally, security is an important aspect of any Internet transaction. Protecting a buyer’s
confidential financial information and ensuring that only designated buyers have access to supplie r
product information is critical to ensuring confidence in any e-procurement system.
System Management
Maintaining an e-procurement system involves configuring and monitoring performance usage,
average response time, transaction sources, and traffic patterns. To maximize the benefits and
strategic opportunities e-procurement systems offer, this information should be used to analyze
growth patterns, session times, and ultimately to fine-tune the system’s performance to fit specific
market communities or technical environments.
Increased productivity:
Automated procurement processes can yield significant time savings at all levels across an
enterprise, increasing opportunities for employees to focus on more strategically important tasks and
functions. Increased opportunity to leverage preferred vendor relationships:
According to a leading e-procurement systems vendor, 80% of indirect goods and services are
purchased from vendors classified as “other.” This results from the frustrations and time delays
inherent in processing paper-based purchases. This practice decreases the volume of purchases
from preferred vendors and consequently drives up costs.
3. Reduced labor time/reduced transaction costs: By far, the greatest e-procurement savings
result from the combination of less time required for the total purchasing cycle and the
subsequent reduced transaction costs. Together, these decreased transactional factors
translate into significant cost savings.
Cost/Cycle Time (Avg. $0.50/minute) $75 $15.50 Per Purchase, Savings NEARLY $60.
E-procurement Offers Tremendous Opportunity to Save Both
Now project your own potential e-procurement benefit by multiplying the Per Purchase Savings rate
by the number of purchase orders your own organization processes in a single year. D epending on
the size of your enterprise, e-procurement savings could amount to millions of dollars annually. For
suppliers, e-procurement stands to yield significant reductions in inventory holding times and safety
stock levels, and an overall reduction in the purchasing cycle—the time it takes from ordering an item
to receiving it.
Inventory refers to those idle resources which have economic value and thus it may be defined
as usable but idle resources that have economic value. Inventory is a stock of direct or indirect
material , from raw material to finished goods stocked in order to meet an unexpected future demand.
In other words inventory is a physical stock of goods kept for the future purposes.
Inventory is expressed in terms of both quantity and monetary value. In terms of quantity , it
can be expressed as the number of units of an item lying where as in monetary terms it is the sum
total of the monetary value of all its items.
Functions of Inventory
Though Inventory is a blocked capital , in the sense that it is not being used in the present, it plays a
distinct role in the life of any organisation for a smooth and efficient running of business. For example,
if a firm does not have any inventory then as soon as it receives a supply order i t will look for raw
material to manufacture the items and thus the customers shall be kept waiting.
It alone may cost the firm its customers who may not like to wait. Further, all the internal agencies
shall have to work in emergency for getting the material, completing the production etc. if there is no
inventory. Inventories decouple individual phases of the total operation.
The basic function of inventory is thus to insulate the production process from changes in the
environment. It decouples various interlinked functions and thus enables each function to conduct
itself independently like Purchasing, Production, Marketing etc. There are several reasons, the most
important for a high inventory being
Inventory is idle resources that have future economic value. It indicates that it may be available
in different forms depending upon the production cycle stage it is in. Classification of inventory is
done on this basis and thus the different classifications of inventory are as follows:
Components and Parts - Just as raw materials are converted to finished goods in a manufacturing
operation, components and parts are assembled into finished goods in an assembly operation.
Maintenance, repair and operating inventories (MRO) - These include parts, supplies, and
materials used in or consumed by routine maintenance and repair of operating equipment, or in
support of operations.
In-process goods - These are goods in the process of manufacturing and only partially completed.
In-process inventories are usually measured for accounting purposes in between significant
conversion phases. They provide the flexibility necessary to deal with variations in demand between
different phases of manufacturing.
Finished goods - These represent the completed conversion of raw materials into the final product.
They are goods ready for sale and shipment.
Resale goods - These are goods acquired for resale. Such goods may be purchased by a
wholesaler for resale to distributors, or by distributors for resale to consumers, etc.
Capital goods - These are items (such as equipment) that are not used up or consumed during a
single operating period, but have extended useful lives and must be expensed over multiple operating
periods. Tax laws require that such an item be capitalized, and a predetermined percentage of its
cost be recognized as an expense each operating period, over a predetermined time frame,
according to equipment classes.
Construction materials - These are raw materials and components for construction projects such as
a building, bridge, etc.
Hard goods/soft goods - What one identifies as hard goods and soft goods will vary depending on
the industry involved. For example, in data processing, hard goods include apparatus such as
computers and terminals, while soft goods include software, data storage media, and the like.
The periodic review system of indent raising is also known as calendar based system or P- system.
In this system, the stock position and consumption trends of different commodities are reviewed in a
fixed time period and the indent is generated to cover the requirement up to the next review. Usually
this review is done annually so that indents are raised for annual quantity.
However in practice, the fixed quantity to be procured is the annual requirement quantity and the
stock levels (Inventory) is maintained by scheduling the delivery suitably.
Also called the Order-point control systems, Independent demand patterns for an item occur when
future demand for it is not related to and is unaffected by its previous demand.
For example, in case of maintenance, repair, and operating supplies, a given item X may be used by
many operating departments, and demand by each department may depend on many factors over
For inventories exhibiting independent demand pattern control is exercised based on predetermined
order points. Such systems are so designed that whenever a predetermined point in inventory level or
in time is reached action to re-order is taken.
There are two basic systems of managing or controlling Inventory under the independent demand
pattern:
Material Requirement Planning (MRP) happens to be the best model of dependent demand
pattern of Inventory. Under it, the requirement of an item is predetermined as it depends upon the
actual need of it, triggered by certain production schedule. Obviously, MRP has two main
characteristics, the known requirement and the known period of requirement (time).
MRP is a set of techniques that takes the Master Production Schedule and other information
from inventory records and product structure records as inputs to determine the requirements and
schedule of timing for each item.
Creates schedules identifying the specific parts and materials required to produce end items
Determines exact numbers needed
Determines the dates when orders for those materials should be released, based on lead
times
MRP, by its nature, does not need carrying of any inventory ahead of requirement. It starts with
the finalisation of the production plan in a firm.
The production plan then is used by the Materials management professionals to explode the "Bill
of material" which is a complete detailing of the materials needed including their various components.
It is exploded for the number of units to be produced, to obtain that product's exact requirement.
Since a given common part is used in many items, sub-assemblies etc, total requirement of that
part is summed up to draw a consolidated requirement. After the Bill of material is finalised it's taken
over by the Materials professionals of the firm who check the availability of any item.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 26
A detailed action plan indicating the materials , quantity to be procured and most importantly the
time these are required at is prepared. Accordingly, the orders are placed and the suppliers are asked
to match the given delivery period.
Inventory management, over the period has acquired a sound status in the arena of business
management. It has a body of knowledge besides it is having its own language. Vari ous terms have
got into use are explained here too:
Maximum Limit: When devising a suitable Inventory model ,the Maximum limit establishes the upper
limit to which the stock of an inventory item shall be allowed.
Minimum Limit: It is the lower limit to which the stock can be allowed to fall in course of
replenishment of the stock of an item. Normally, this is taken to be the safety stock also.
Safety Stock: This is the stock that is maintained to counter the variation in demand of an item
during the replenishment lead time.
Expressed in terms of consumption per unit of time, demand or usage of an item is the average
quantity of an item consumed in a particular period of time. Often D is expressed as average
consumption per month and is assumed to be a stable one.
Lead Time (LT) : It is the total time taken from the day procurement action has been initiated to the
day the stock is replenished. Lead Time has two components viz. Internal Lead time and External
Lead time. Internal Lead time is the time taken between raising the materials requisition request and
placing the order. External Lead time is the time taken between placement of an order to actual
receipt of the item.
Thus, Total Lead time (LT) = Internal Lead time + External Lead time.
Maximum Limit (MaxL) : While drawing the Inventory policy, MaxL is the desired highest level to
which an item's inventory can be maintained.
Minimum Limit (MinL) : It is that limit on the lower side for an inventory item to which the level can
go down and by which the stock is to be replenished.
Reorder Level (ROL) : This is the level at which if the stock of an item falls , in course of its
consumption, fresh replenishment action is initiated by way of raising the Materials procurement
requisition or Indent.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 27
Review Period (RP) : This is the time period defined for an item or a group of similar inventory items,
during which a review on whether to raise procurement requisition or not is done. Often ,it decides the
number of procurement requisitions to be raised during the period.
Perpetual inventory system is also known as "Automatic Inventory System". Perpetual inventory
system is a technique of controlling stock items by maintaining store record in a manner such that
stock balances at any point of time are readily available. The terms 'Perpetual Inventory' refer to the
system of record-keeping and a continuous physical verification of stocks, with reference to store
records.
1. Recording store receipts and issues to determine the stock in hand at any time, in quantity or value
or both, without the need for physical counting of the stock.
2. Continuous verification of the physical stock with reference to the balance recorded in the store
record is convenient for the management.
* Perpetual inventory system provides an opportunity to verify the physical stock of materials.
* Perpetual inventory system helps in rapid stock checking which, in turn, helps in the preparation of
interim accounts.
* The investment in materials and supplies may be kept at the lowest point.
* It is not necessary to stop the production so as to carry out a complete physical stocktaking.
* Perpetual inventory system helps to discover or find out discrepancies and errors and remedial
action can be taken quickly.
* Timely replenishment of stock is facilitated by means of recording the level specified in the bin card.
A - outstandingly important;
B - of average importance;
C - relatively unimportant as a basis for a control scheme.
The ABC concept is derived from the Pareto's 80/20 rule. ABC concept is applied to inventory
management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an
inventory remains in about 20% of the items. This rule, in general , applies well and is frequently used
by inventory managers to put their efforts where greatest benefits , in terms of cost reduction as well
as maintaining a smooth availability of stock, are attained. Thus, applied in the context of inventory,
it's a determination of the relative ratios between the number of items and the currency value of the
items purchased / consumed on a repetitive basis:
10-20% of the items ('A' class) account for 70-80% of the consumption
the next 15-25% ('B' class) account for 10-20% of the consumption and
the balance 65-75% ('C' class) account for 5-10% of the consumption
Specific items on which efforts can be concentrated profitably provides a sound basis on which
to allocate funds and time. A,B & C , all have a purchasing / storage policy - "A", most critically
reviewed , "B" little less while "C" still less with greater results.
Percentage of Items
ABC Analysis is the basis for material management processes and helps define how stock is
managed. It can form the basis of various activity including leading plans on alternative stocking
arrangements (consignment stock), reorder calculations and can help determine at what intervals
inventory checks are carried out (for example A class items may be required to be checked more
frequently than c class items)
In addition to other management procedures, ABC classifications can be used to design cycle
counting schemes. For example, A items may be counted 3 times per year, B items 1 to 2 times, and
C items only once, or not at all.
A items (High cons. Val) B items (Moderate cons.Val) C item (Low cons. Val)
Very strict cons. control Moderate control Loose control
No or very low safety stock Low safety stock High safety stock
Phased delivery (Weekly) Once in three months Once in 6 months
Weekly control report Monthly control report Quarterly report
Maximum follow up Periodic follow up Exceptional
As many sources as possible Two or more reliable Two reliable
Accurate forecasts Estimates on past data Rough estimate
Central purchasing /storage Combination purchasing Decentralised
Max.efforts to control LT Moderate Minimum clerical efforts
To be handled by Sr.officers Middle level Can be delegated
Inventory Control Application: The ABC classification system is to grouping items according to annual
issue value, (in terms of money), in an attempt to identify the small number of items that will account
A system of categorization, with similarities to Pareto analysis, the method usually categorizes
inventory into three bands with each band having a different management control associated.
Although different criteria may be applied to each category the typical method of “scoring” an
inventory item is that of annual stock value of said item (qty in stock X cost of item) with the result
then ranked and then scored (X, Y or Z).
Bandings may be specific to the industry but typically follow a 70%, 90%, 100% banding in that X
class items represent 70% of the stock value (although they may account for 20% number wise), Y
class items fall between 70% and 90% of the annual stock value with C class the remaining. In
practical terms the complex high cost materials typically fall into the X class items, with the
consumable, low cost (and typically fast moving) classed as X class.
Not all stock is equally valuable and therefore doesn’t require the same management focus. The
results of the XYZ analysis provide information that helps evaluate how each inventory part should be
monitored and controlled.
X class items which are critically important and require close monitoring and tight control
Y class are of lower criticality requiring standard controls and periodic reviews of usage.
Z class require the least controls, are sometimes issues as “free stock” or forward holding.
Classification of inventory in terms of XYZ can form the basis of various activity including leading
plans on alternative stocking arrangements (consignment stock), reorder calculations and can help
determine at what intervals inventory checks are carried out (for example X class items may be
required to be checked more frequently than Z class stores.
1.18 Concept Of Economic Order Quantity(EOQ) And Related Costs While Determining EOQ
Economic order quantity is also known as reorder quantity. Economic order quantity (EOQ) is
a level of inventory where the total cost of holding inventory is at minimum. Economic order quantity
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 31
is the level of quantity at which the cost of ordering will be equal with the storage cost of materials. In
other words, the quantity of materials which is economical to be ordered at one time is known as
economic order quantity. The total costs of materials consists of the ordering cost and carrying cost.
While determining the economic order quantity, the ordering cost and carrying cost should be
considered.
Ordering Cost
The ordering cost is the repurchase cost and is repeated in nature. Purchasing of large
quantities of materials helps reduce the ordering cost. The following costs are included in the ordering
cost.
* Cost of staff appointed in the purchasing, inspection and payment departments.
* Cost of stationary purchases, telephone charge, email charge, fax charge etc.
Ordering costs also includes the cost of floating tenders, the cost of making comparison among
quotations, cost of paper work, cost of transpiration etc.
Carrying Cost
Carrying cost is concerned with the storage of materials. It suggests purchasing in small
quantities. If small quantities of material purchased, the storing cost will below. The following costs
are included in carrying costs.
* Cost of storage ( warehousing, salaries, rent etc.)
* Cost of spoilage in stores and handling
* Insurance cost of materials
* Interest on capital blocked on materials or opportunity cost
* Cost of maintaining the materials to avoid deterioration
* Cost of obsolescence due to a change in the process or product.
1. Formula Method
With the help of following formula, the economic order quantity can be calculated.
2. Graphical Method
Under this method, the carrying cost, ordering cost and total cost are shown on graph. It is based on
the principle that the total carrying cost increases as the order size increases. However, the ordering
cost decreases if the order size increases. The point at which the ordering cost and carrying cost
intersects each other, total cost is minimum.
Concept Of First In First Out (FIFO) Method, Its Advantages And Disadvantages
The method in which materials are issued from the stores on a first come first serve basis is
called FIFO method. In FIFO method, materials are issued strictly on a chronological order. The units
of opening stocks of materials are issued first, the units from the first purchase are issued next and
the closing stock that remains in stock is always from the latest purchase. The value of the closing
stock of materials is at the price of the latest purchase.
Advantages Of FIFO
1. FIFO method is easy to understand and operate.
2. FIFO method is useful where transactions are not voluminous and prices of materials are falling.
3. FIFO method is suitable for bulky materials with high unit prices.
4. FIFO method helps to avoid deterioration and obsolescence.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 33
5. Value of closing stock of materials will reflect the current market price.I
Disadvantages Of FIFO
1. FIFO method is improper if many lots are purchased during the period at different prices.
2. The objective of matching current costs with current revenues can not be achieved under FIFO
method.
3. If the prices of materials are rising rapidly, the current production cost may be understated.
4. FIFO method overstates profit especially in inflation.
Concept Of Last In First Out (LIFO) Method, Its Advantages And Disadvantages
Last-In-First-Out (LIFO) method follows the principle that the last items of materials purchased
are issued at first. The valuation of the materials issued is made according to the latest purchase
price of materials. The closing stocks of materials are valued always on the earliest prices of
materials. In case of a rising price, LIFO method is suitable because material is issued at current
market price.
Advantages Of LIFO Method
1. LIFO method is appropriate for matching cost and revenue.
2. LIFO method is simple to operate and easy to understand.
3. LIFO method facilitates complete recovery of material cost.
4. LIFO method is most suitable when prices are rising.
Average Inventory is calculated as the sum of the inventory at the beginning and at the end of the
period divided by 2.
Cost of goods sold is obtained from the income statement and the values of beginning and
ending inventory are obtained from the balance sheets at the start and at the end of the accounting
period.
Analysis
Inventory turnover ratio is used to measure the inventory management efficiency of a
business. In general, a higher value indicates better performance and lower value means inefficiency
in controlling inventory levels. A lower inventory turnover ratio may be an indication of overstocking
which may pose risk of obsolescence and increased inventory holding costs. However, a very high
turnover may result in loss of sales due to inventory shortage. Inventory turnover is different for
different industries. Businesses which trade in perishable goods have very higher turnover with
comparison to those dealing in durables. A comparison would be fair only if made between
businesses of same industry.
Example During the year ended December 31, 2010 ABC Corporation sold goods costing
Rs.324,000. Its average stock of goods during the same period was Rs.23,432. Calculate the
company's inventory turnover ratio.
Inventory Turnover Ratio = 324,000 / 23,432 = 13.83
UNIT II
Store-Keeping
A store refers to raw materials, work-in-progress and finished goods remaining in stock. Store-
keeping means the activities relating to purchasing, issuing, protecting, storing and recording of the
materials. Store-keeping includes the receipts and issues of materials, their recording, movements in
and out of the store and safeguarding of materials. The store is a service department headed by a
store-keeper who is responsible for a proper storage, protection and issue of all kinds of materials.
A typical Store has a process and a space within, to receive the incoming materials (Receiving Bay),
keep them for as long as they are required for use (Custody) and then to move them out of stores for
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 35
use (Issue). In a manufacturing firm this process forms a cycle to maintain and run the activities of
Stores.
Objectives Of Store-keeping
* To avoid over and under-stocking of materials.
* To maintain systematic records of materials.
* To protect materials from losses and damages.
* To minimize the storage costs of materials
The basic responsibilities of stores are to act as custodian and controlling agent for parts,
supplies, and materials, and to provide service to users of those goods. Well-designed systems
provide flexibility to absorb the shock demand variation, and enable purchasing to plan ahead,
practice forward buying, and so forth.
An organization usually has different types of stores like which it refers by different names on
the basis of material nature such as:
• Raw Materials Store
• Processed or Semi-Finishing Materials Store
• Finished Goods Store
• Yard Store
Such stores range from ordinary ones with shelves and bins to cold or dehumidified storage’s,
huge silos for storage of food grains or bonded stores for keeping goods on which customs and
excise duties have not been paid. Storage is an essential and most vital part of the economic cycle
and Storage Management is a specialized function, which can contribute significantly to the overall
efficiency and effectiveness of the materials function.
The interesting facet of the whole situation is that Demand comes bundled while supplies
unbundled. That is demand is usually from Production which will give Stores a BOM (Bill of Materials)
and probably different materials (which come from different suppliers) are required at the same time.
While supply comes from different suppliers from different regions which may or may not (in all
possibility may not) come at the same time. Hence balancing all these is a considerably demanding
job, which is required to be performed by stores personnel. In the face of a challenging situation faced
by stores personnel, one of the main responsibilities for them is to:
• Properly account for every item received in the stores
• Preserve the material till its issue from stores and
• Issue the material when demanded
To have effective control and proper accounting of materials, a professionally managed Stores has
the following main functions:
• Receiving
• Custody
• Inventory Control
• Disposal
To discharge the functions effectively, a typical stores division consists of several physical structure
(building) known as Receiving bays, Custody storage, Quarantine space etc
During stage inspection, sample is collected by the inspecting officer for Chemical analysis /
Physical testing at either their own facility or at 3rd party locations. On receipt of test results,
conformance to specification is verified & clearance is given to the supplier for further processing of
the item. After readiness of the material in all respect & internal checking, the supplier gives the final
Inspection Request to the inspection agency. In some critical cases, joint inspection by Indenter &
Inspection is carried out at supplier’s premises.
Document Inspection:
Sometimes and usually for very standard ,off the shelf items, inspection can be carried out
through the verification of supplier given certificates such as Material Test Certificate (MTC),
Manufacturing Certificate (Mfg. TC), Guarantee Certificate (GC) etc. After ensuring conformance of
materials to the ordered specification in all respect, Inspection Certificate (IC) is issued by the
inspecting officer to the supplier.
• Awaiting inspection – This category consists of material that has been received and is awaiting
inspection before being moved into stock.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 38
• Acceptance upon certification – This category consists of material that may be accepted
pending certification.
• Rework – In this category are materials that are defective and must be reworked.
• Return – This category contains materials that are defective and will be returned to the supplier
for credit or replacement.
• Materials to be tested – This category consists of materials which have been received and are
awaiting delivery to the using/testing department.
In case of specialized items, which require special proficiency for inspection, help of third party
inspection agencies is taken. e.g Statutory Compliances ( IBR, EXPLOSIVE) : In case of items, which
require approval of statutory authority such as IBR (Indian Boiler Regulation), CCE (Chief Controller
of Explosives) etc, verification & correlation of documents with the materi als is done by the inspection
agency before acceptance.
If the materials issued to the user department is found to be having defects such as
dimensional deviation, fitness problem etc, the supplier is asked to supply free replacement against
such defects. If there is a pre-mature failure of the material, joint investigation is carried out by the
indenter & inspection agency. If it is established that, the pre-mature failure has occurred due to use
of wrong material or faulty workmanship, the supplier is asked to either rectify the defects (if feasible)
or supply free replacement.
A professionally managed store has a process and a space within, to receive the incoming
materials (Receiving Bay), keep them for as long as they are not required for use (Custody) and then
to move them out of stores for use (Issue). In a manufacturing firm this process forms a cycle to
maintain and run the activities of Stores.
The basic responsibilities of stores are to act as custodian and controlling agent for parts,
supplies, and materials, and to provide service to users of those goods. Typically and at times
essentially, a Stores has to follow certain activities that are managed through use of various
resources and are thus called Stores Management.
The task of storekeeping relates to safe custody and preservation of the materials stocked, to their
receipts, issue and accounting.
The objective is to efficiently and economically provide the right materials at the time when it i s
required and in the condition in which it is required.
However, irrespective of the type and lay out , any Stores would have , as its starting activity ,
receiving and accounting of the incoming goods. This part of Stores is known as Receiving Bay.
Once the material has been received and cleared through inspection and accepted for use, it needs
safe custody till it's actually used. It calls for a separate physical storage space , open or closed, as
per need. It maintains all documents that are able to trace an item , show all its details and preserve it
up to its shelf life in the manner prescribed or till it is issued for use. This part of Stores is called
Custody.
Thus the role of Custody is to receive and preserve the material and then to issue it to the user, as
and when needed. A stage comes when the material is needed for use. Stores thus releases the
material from its custody to the user department and the process is called 'issue of goods. It might
also happen that after partial use , some materials having useable value in future are returned to the
stores and thus they also become part of the custody again.
In the long drawn process of preserving the materials till its use ,some materials might get obsolete
and unserviceable and may require removal from stores , in order to clear space for other incoming
goods. This activity is known as Disposal of goods for which auction etc is done.
Since the material has a cost , the organisation would definitely like to incur optimum cost on this
account and thus there is a need to manage the materials within a stores such that the total cost of
maintaining materials remains optimum.
Hence , record keeping is a vital function of stores . Of course , it also goes along the various
activities and with development in the information technology domain, the record keeping in stores
too is through electronic medium making the whole process smooth and efficient. Any Stores as
such is a physical entity which deals with material receipt, preservation and issue. Material handling
therefore is another vital function. Just as Lay out of a Stores is designed considering the nature of
material Stores has to handle, material movement equipment and implements also are important.
Within a typical manufacturing organisation, its Stores is seen having Forklifts, Over head Cranes,
Trolleys etc inside the Stores and trucks, Dumpers and Railway wagons as outside Stores equipment
to handle materials.
A) Closed stores – Closed systems are utilized when close control and accounting for inventories
are desirable. In such cases, storage area are kept locked and entry is limited to stores employees, or
to others only on an authorized basis. Goods enter inventory through a formal receiving process and
leave through an authorized requisition or bill of materials. Closed systems typically include industrial
or business stores operations, and involve repair parts, consumables, tools, and materials or
components for assembly where ongoing control and accuracy is essential.
B) Open stores – There are instances where the cost of closely controlling inventories outweighs
expected losses in an uncontrolled environment. In such cases, inventory storage areas may be left
open or kept close to the point of use for efficient user access. Such inventories are available for use
as needed, with emphasis on expediting production, or operations rather than on security.
C) Random access – In random access systems, goods are stored without regard for commodity
groupings. Instead, goods are stored in the next or nearest available space of suitable size. However,
it is good planning to select from available storage spaces with consideration for the anticipated
frequency of issue. Locating items in random access storage usually requires a computerized
system. Random access systems tend to be used in conjunction with a closed stores system.
D) Automated warehouse – A large variety of automatic storage and retrieval systems (ASRS) are
being used today. ASRS systems have the capability of bringing goods from storage or placing goods
into storage upon computer entry of the item identification and/or storage location. Such systems may
range in size from small rooms to whole warehouses, and may handle items ranging form small parts
in tote pans to large materials on pallets.
In some cases, supply contractors have branches built next door to industrial plants, for the sole
purpose of supplying all needs of the plant. In some cases, the two facilities are separated by a
common wall and supplies are issued through an opening in the wall. This is an emerging trend for
MRO and office supply goods.
Depending upon the nature of business, location of action, raw material, market place etc. there are
basically two broad classes :
Functional Stores: It depends on the use to which the material is put – chemicals, tools, raw
materials stores, etc.
Physical Stores: It depends on the size and location – Central stores, Sub-stores, Transit stores,
Site stores etc.
Production Store:
Production also requires a large number of materials, generally called "consumables", - eye-
shields, cutting oils, abrasives, gloves, aprons, jigs, small tools etc. A store stocking such items is
called a Production Store.
General Store:
Various kinds of miscellaneous items like paints, brushes, cleaning materials, wood and spirit
are kept here. In some cases where there is no Production Store, the materials mentioned in (ii) are
kept in the General Store.
Tools Store:
All kinds of tools files, measuring instruments, saws, small tools like hammers, pliers, etc. or
sell them as scrap. Steel scrap is usually kept separately, preferably in the open. Some metal scrap
like copper can be very costly and should, therefore, be kept safely in covered stores.
Packing store:
Packing materials are kept here and these include wood for making crates, cardboard cartons
or bottles, as in a pharmaceutical company, or empty cylinders.
Receipt Store:
This is where goods are received from vendors or those cleared from the railway station,
airport or the docks. The materials arriving here have to be retained until they are inspected, finally
accepted and sent on to the respective places for storage, or directly to where they will be used.
Quarantine Store:
Here materials received from outside awaiting inspection, and this is usually a part of the
receipt store. The term quarantine is used because often inspection may not be completed in a day;
e.g., a lab test may be required for specific items. In such cases, these materials are placed in the
Quarantine Store.
Work-in-progress Store:
In many cases a particular shops produce an item in batches, e.g., 1000 units. The other
shops might not be able to reach this figure or the actual quantity required might only be 200. Here
rest of the 800 units in semi-finished from are kept in the WIP Store for future use. This is neither raw
materials nor finished goods. It is in an intermediate state. In some instances the Spare Parts Store
can also be a WIP Store.
Stationary store:
Keeps office stationary for issued to various departments of the company.
Bonded store:
This is a store is goods on which customs or excise duty has not been paid.
Dehumidified store:
It meets the need of materials or equipment to be stored in a moisture-free atmosphere
(humidity free condition). When properly sealed and conditioned almost any type of item can be
stored here efficiently.
Transit Sheds:
These are normally roofed sheds without any walls and open on four sides and are mainly
intended to protect goods from sun and rain. One can find such sheds in ports, adjacent to berthed
cargo ships. They are specially adapted for the items are handling of material shipped or received by
sea. Here the items are handled and stored in bulk quantities. In certain cases, the Food Corporation
of India stores bags of rice or wheat in such open sheds. ‘Transit’ signifies that storage is temporary
and that the goods are to be moved out soon.
Dry Tanks:
Dry tanks are used for long term storage and are constructed entirely with steel, except for a
concrete floor. Because of the size and shape of dry tanks, there is no operating aisle for materials
handling equipment. There is no direct access into the tanks, which are sealed after materials are
stored in them. The dry tanks can be temperature controlled and dehumidified.
Shed storage:
A shed is a roofed structure without complete side and end walls, and is used for the storage
of materials that require maximum ventilation or those that do not require protection from weather.
This type of building is a compromise between a yardstore and a closed stores building, because it
offers more protection to materials than former but less than the latter. If necessary, tarpaulins, can
be used on the side for protection during the monsoon. It is built at ground level with a concrete floor.
Open Yard:
This is used for storing bulk items, which do not require specialised storage. Even though there
is no protection from sun and rain, the surface of the open yard is normally levelled and is covered by
sheets or steel mats.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 44
The organization set-up of the stores will depend upon the requirements, and have to be tailor-
made to meet the specific needs of an enterprise. It may also be stated here that separate bui ldings
are not necessary for these stores. They can all be in one building in the manner described above.
The afore mentioned list is by no means complete; one can have an infinite variety. For example, one
a military establishment or a very big shipping or Airlines Company can have a large number of
sepcialized types of stores.
Centralized store:
There can be a central store serving three or four factories or several shops in a large factory
or it can be a central warehouse containing finished goods. The word ‘central’ only denotes that it
severs various units each of which may have separate sub-stores or departmental stores. Central
stores also exist in multi-plant situations. One of the problems in having a central store is the handling
costs involved in transferring materials to the sub-stores or shop floor. Usually, therefore, the central
stores located at the point of greater usage.
One of the main control factors in the establishment of a central store is to ensure that unnecessary
inventories are not built up by the sub-stores, or that matter by the sub-stores and the central stores
should be considered as one.
Decentralized Sub-store:
A sub-store is located at the place of usage. It can be even within the shop floor
Departmental Store:
This serves a particular department of a factory. For example, in a textile mill there can be several
departments like spinning, weaving, bleaching, printing, etc. each of which can be served by a
separate store. The reason behind this is that each requires sparate kinds of materials. This store,
then becomes a specialised store. Actually. There need be little difference between this category of
store and a sub-store.
Group Stores:
In some companies it can happen that several factories belonging to the same group are all in one
compound. For example the J. K. Group of Industries has several factories belonging to the same
owner, which have been set up in one big industrial estate. There can be a garment factory, a
chemical plant, a radio factory and a foundry all belonging to one group and located at the same
place. The group stores can serve all these units.
Site store:
This is usually at a project site containing building or construction materials like cement, steel, tools,
etc.
As its name implies, this is where goods are stored for a temporary period.
1. A better supervision of store is possible because the store is located under a single supervision.
This is a mixed store system, a mix of centralized and decentralized stores. Under this store system,
sub-stores are established in different departments according to the requirement of the company.
Sub-stores are maintained at each department when the central store is at a distance from the
production department. Such sub-stores are managed and controlled bu the central store itself. At the
beginning of a period, the central store issues a fixed quantity of materials to the sub-stores. At the
end of the period, sub-stores send a filled requisition form to the central store to maintain the stock to
a predetermined level.
Meaning of storekeeper
A storekeeper is a person who is the chief of stores and who is given the responsibility of store
management. Storekeeper is responsible for safeguarding the materials and supplies in proper place
until they are required for production activities. A storekeeper should be well-experienced, well-
trained, honest and familiar with the tricks of store-keeping.
* Maintaining the proper record of materials relating to the receipt and issue of materials.
* Checking the physical quantity of materials and verify with a bin card.
* Maintaining the stock registers, entering therein all receipts, issues and balance of materials.
* Checking and controlling losses due to evaporation, leakage, theft and so on.
1. Bin Card : Bin card is also known as a bin tag or stock card. A bin is a place, rack or cupboard
where materials have been kept. Quantitative records of receipts, issues and closing balance
of items of store are shown in a bin card. Separate bin cards are maintained for each item and
are placed in shelves or bins or are suitably hung up as it convenient.
Bin card is the document in the stores custody where the history of transactions of an item is
maintained. There are separate bin cards maintained for each of the stores item under
separate catalogue number. Each receipt and issue transactions are posted in the bin card
giving the up to date stock position of the item. The item description, unit of transaction and
location of items are also maintained in the Bin card. Functionally, when an item is received in
the stores, its receipt details are written on the top of the card and thus its history of receiving
With increasing use of computers now a days, the role of Bin cards is slowly and gradually
diminishing and in most of the stores the manual handling of this vital information database
has given way to a highly sophisticated computerised system.
In some manufacturing companies, a bin is divided into two parts: a smaller and larger one. The
smaller bin stores the quantity equal to the minimum quantity and the larger part stores the remaining
quantity. The quantity in the smaller part is not issued so long as the quantity is available in the larger
part. New supply is ordered as soon as the larger bin is empty. Thus, the two bin system facilitates a
physical review of stock by the storekeeper for the purpose of purchase requisitions.
3. Store Ledger
A store ledger is a record of stocks, both in quantity and value and is maintained by the store
accounting section. Store ledger consists of the same column of a bin card, but in addition, there is an
amount column, in which the values are entered. Thus this ledger provides information for the pricing
of materials issued and the value of materials at any time.
1.User
Bin card is maintained by the storekeeper.
Store ledger is prepared by cost accounting department.
2. Nature
Bin card is a record of quantity only.
Store ledger is a record of quantities and values.
4. Posting
Postings are made before a transaction in bin card.
Postings are made after a transaction in store ledger.
5. Using Department
Bin card is kept inside the store.
Store ledger is kept outside the store.
4. To initiate purchase requisitions for the replacement of stock of all regular stores items whenever
the stock level of any item of store approaches the minimum limit fixed in respect thereof.
5. To initiate action for stoppage of further purchasing when the stock level reaches maximum limit.
6. To check and receive purchased materials forwarded by the receiving department and to arrange
for the storage in appropriate places.
8. To issue materials only in required quantities against authorised requisition notes/material lists.
9. To check the book balances, with the actual physical stock at frequent intervals by way of internal
control over wrong issues, pilferage, etc.
Materials required for manufacturing process to run are received from various sources from outside
which are verified and accounted for in the Stores.
Materials required are received from various sources through various modes of transportation. The
major mode of transportation are Rail and Road. Other than this the materials are received through
air, sea , courier, registered post or by hand also (Door delivery).
The bulky material required in huge quantity like Raw materials are received by Rail in rake load. A
rake is the multiple number of wagons received together. In such cases the whole rake is received
inside the plants and the wagons are returned back to railways after unloading. When the quantity
received is less than a rake load, materials are received in wagons which are transferred inside the
plant by the Railways and empty wagons are returned to railways after unloading. The consignments
received in rake load or wagon load are accompanied by the carrier’s( Railways) document called
Railway receipt (RR). The wagons / rakes are to be unloaded within the stipulated time limit given by
the Railways known as Free Time. For any delay in releasing the wagons beyond the free time
Railways charge extra amount based on the extra time the wagons are held, known as “ Demurrage”.
Material less than a wagon load are received in smaller consignments also known as “Smalls”. The
railway documents accompanying such small consignment is also know as Parcel Way Bill (PWB).
These small consignments/ Parcels are received from the railways from their godown within the
stipulated time. For any delay in collection of such material from Railway godown Railways charge
extra amount known as ‘warfage’.
By Road:
The materials are also received through the Road transportation by trucks. The material received by
truck are accompanied by a transporters document know as consignment note. Depending on the
terms of the Purchase Orders, the material by road are received in the Plant Stores or in the
transporters local godown in which case Stores collects the material from the transportation godown.
The materials sourced from the foreign countries are received by Ship or through Air Carrier up to the
nearest Sea port/ Airport respectively which is further transported to Plants by Road.
Verification of Consignments :
When the materials are received by Rail the wagons received are verified for any pilferage / shortage
and also weighed for ascertaining the receipt of correct quantity. Any discrepancy in the quantity
found or the damages observed is recorded on the RR / PWB. A Railway claim is lodged against this
discrepancy. This Railway claims become a prerequisite for lodging insurance claim with
underwriters.
The material received through trucks are verified at the point of receipt for the correctness against our
Purchase order and the suppliers challan and outward damages or shortages in quantity if any. If any
shortage or outward damage in the received material/consignment is observed the remarks is made
on the transporters document and a carrier claim is lodged. Acknowledgement for the receipt of
consignment/material was given on the transporters document like consignment note or on the
delivery challan of the firm.
The correctness/completeness and the quality of material received is checked as per the terms of
Purchase Orders. Then the document for receipt accounting is prepared which is known as “Goods
receipt note (GRN)” or “Stores Receipt Voucher (SRV)”. GRN/ SRV is the document through which
the received materials are taken on charge in the plant, also the document which communicates the
acceptance/rejection of the material supplied and a document enabling the payment to the supplier
against the supply.
The materials against the various Purchase Orders are generally received centrally by stores and
stored after verification and accounting. However in case of certain items where there is no central
facility of storage in the Stores the material is directly transferred to the storage facility available with
the user departments. After ascertaining the quantity and the quality of such materials received at the
user departments and their certification the material receipt is accounted for by raising GRN/SRV.
Excise documentation :
Against most of the materials we procure from the suppliers we reimburse excise duty/Central VAT
(CenVAT) and State VAT (Value added tax) paid by the suppliers. The corresponding CenVAT
gatepass VAT document is sent by the supplier along with the materials. For the materials used i n the
direct production or enabling production, we get CenVAT/ VAT credit benefit from the concerned
Government. For claiming this CenVAT/ VAT benefit from the Govt. Authority the CenVat document
(Excise Gate pass) and Vat documents received along with the consignment are required. Therefore
the receipt of these documents are particularly ensured and transferred to Accounts in time to claim
the CenVAT/ VAT credit. In case of not reciving these documents the same is recorded on the
suppliers challan & the supplier is not reimbursed these charges as per Purchase Order stipulations.
The material received from various sources are verified and accounted for in the Stores only after
which the materials can be made available for the use by the user department and the payment to the
supplier can be made or regularised. So, the timely accounting of the receipt of the material is very
important. The time taken in accounting & taking the material on charge from the time it is received i n
Stores is known as “Lead time of Receipt accounting” or “GRN/SRV lead time” . Every plant tries to
make this GRN/SRV lead time as minimum as possible to ensure timely accountal of material,
availability of received material for use and the timely payment/ regularization of payment to the
suppliers .
Safe custody of materials received in stores happens to be the foremost activity and concern of any
stores.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 52
Materials received from various sources need to be stored properly in Stores for ensuring the proper
upkeep of material till its use, to ensure security and safety of the material, the ease of retrieval and
handling. The various aspects considered in the storage of material are as given below:
While using large number of items it is difficult to identify, account and handle the material by its
nomenclature alone. There can be near similar nomenclature yet items may be different. So, in order
to identify , each item is given a unique code representing that item alone for enabling easy
identification, accounting and handling it. The item code thus becomes a the communicating mode for
the item in the company and even outside. These item codes while associated with full description o f
the item are also known as catalogue number of the item. Thus for a scientific management , the
items being handled by a stores need to be properly codified. The codes are specific to an item and
therefore are non repetitive and unique for each item.
Preservation of material :
In any Stores, there is a time lag between the receipt & actual use of the material. Different materials
get deteriorated to different extent during the storage period based on the nature of items. So, the
items need to be preserved to maintain their useful life. The action taken to maintain the useful life of
the material to avoid its deterioration and maintaining its useful life is known as preservation of
material. The useful life is also referred to as Shelf life. Items need to be initially preserved to avoid
deterioration during storage and subsequently they need to be verified for any change in their
conditions and corrective actions need to be taken to restore the preservation.
Some items have fixed useful life beyond which they become useless. Such items are known as shelf
life items & the period within which they continue to have their useful life is known as shelf life. Some
of the items having shelf life are : Medicines, chemicals, rubber items, chemicals and reagents etc.
The shelf life information of these items need to be maintained on the bin card or the tags on them so
that they can be issued for use before they get deteriorated.
2. Proper Storage :
For maintaining the useful life of the items stored for future use proper storage needs to be ensured.
Different materials have different storage requirement for ensuring their useful life & to avoid damage
/loss. The items which gets affected by keeping in open weather needs to be stored in the closed
storage spaces. Also, there has to be a customised storage for hazardous materials.
While Storing the items care needs to be taken to ensure the security of the items so that the items
are available when required. Proper security needs to be maintained to ensure avoidance of
theft/pilferage of items. Costly & pilfer-able items may have to be stored in strong rooms, Safes with
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 53
lock and key. The movement of items in a store needs to be with proper documentation to ensure
accountability as well as precaution against pilferage/damages.
While storing the items it also need to be ensured that these material will not be a safety threat to the
persons handling them or the other material in the vicinity. Thus Storage of materials , also known as
Stores Custody is a critical activity of any Stores.
In the course of running an Organisation, particularly a manufacturing unit there arise some
defectives ,surplus and obsolete items. These items not only have significant economic value they
also occupy valuable space. It requires efforts to clear off spaces and free the blocked money to be
used as working capital.
The activities viz. identifying, segregating and finally selling off such items is usually referred to as
disposal. There are different categories of disposable items :
1 Obsolete-Surplus-Non-moving.
2 Unserviceable
4 By-products
Disposable item have no use and thus need to be removed from the premises. These are often sold
out through the following method :
Tendering
Contracts
Under Tendering, a Tender catalogue is prepared which contains the detailed list of the items
earmarked for disposal such as description, unit , quantity and location within the premises etc. The
catalogue is sold to the prospective buyers, who submit their best offer in a sealed envelope, on a
fixed date.
All envelopes are opened at a stipulated date and time in presence of the Tenderers. Comparative
statement of quoted rates is prepared and those lots where the Highest bid , known as H1 bids are
within a specified percentage of the acceptable price , called Reserve price, are sold.
Under Fixed Price Sale, material is offered for sale at a fixed price decided by competent authority.
Interested vendors can lift material after depositing payment at the fixed price.
Under Online Auctioning through an E-commerce portal, called Service provider, the disposable lots
are declared to the general public by uploading the Auction Catalogue on a popular website offering
for sale through the Internet. In India , portals offered by companies such as Mjunction is highly
popular and more and more such auctions , also called Forward auctions are conducted through
them.
Each vendor who shows a willingness to participate in the forward auction for the declared items, by
submitting the required EMD, is given a unique user name and password, through which they can
access the online auction and bid for the eligible lots.
The bidding for the given lots implies increase in bid value by each bidder till the time bidding stops at
the highest value for the given lots. After completion of auction, the Service provider submits lot-wise
H-1 bid report to the seller. The H-1 bids are compared with the lot-wise Reserve price and those lots
which are within a specified percentage of the reserve price are sold.
Sale Orders for sold lots are issued in favour of the highest bidder (H1), asking them to deposit the lot
value. On receipt of lot value, Delivery Order is issued in favour of the highest bidder, who then lifts
the sold lot within the stipulated time.
Location of an item in stores is the place where it is stored. The location of the stock of each item is
maintained so that any item can be easily traced , located for transactions like receipt & issue.
There are two ways of maintaining item locations: Fixed location & random locations. In case of fixed
location system the item is stored in a specific place every time it is received. This fixed location is
maintained in bin cards. In case of random location system, items are stored in different locations
based on the availability of space and corresponding location reference is given on the bin card
against the corresponding stock.
The location of stores should be carefully planned for a maximum efficiency. Store should be located
near the materials receiving departments and materials user departments. The following factors are
important for deciding the location of the store.
* Heavy and bulky items should be stocked very close to user department.
* The receiving department should also be in proximity to the store god owns
Stores, apart from Finance function, is one that comes in contact with all the major functions of any
organization or business. In its daily working , it is closely related to Purchase function that virtually
feeds it with its Purchase orders and the user departments, on the other hand, which draw materials
from it on daily basis. In addition, it is the Finance function which is fed by stores many information
on daily basis.
One of the major roles of Stores , in any business, is Inventory Control. This vital function of Stores, in
itself , affects many functions of business by decoupling many activities and functions.
Stores serves all departments of an organization, but the highest degree of relations are between
Purchase who feeds the stores, and Production whom the Stores supplies various materials.
The two functions of materials management, Stores and Purchase, are complementary to each other.
Apart from the close relationship that exits on a day-to-day basis in the purchase of various items of
stores there are other important activities which can best be done by close cooperation between
stores and purchase. These are :
Variety reduction
Stores sends indents to purchase based on inventory levels determined in accordance with usage
and delivery lead times.
Correct specification writing, code numbers, mention of units (e.g. pounds instead of kilos) etc., are all
vital in this regard.
Determination of ‘lot sizes’ for purchase which should suit production requirements, transport,
handling and storage space is to be planned.
Purchase informs stores of orders placed and stores informs purchase of receipts, rejections,
shortages, breakages, theft and loss, if any.
Stores should inform purchase of changing production trends, slow or non-moving stock, obsolete or
surplus stock, scrap, etc.
The production or the user department happens to be the main customer of stores. In production
meetings, if stores is represented, coordination can be excellent. Any change in a production
schedule needs to be communicated to stores to enable prompt corrective action. After all it is Stores
that has to cater to the needs of the user departments.
The strong relationship between stores and sales exists in the marketing scenario where Sales is the
chief customer of the finished goods store.
The sales department wants to ensure stocks at all times and this might be a costly philosophy in
terms of inventory holdings. Close cooperation and an integrated approach can increase profitability.
Usually the accounts department does all the stores accounting ensuring a day-to-day working
relationship.
Selection of the right person for stores work and an adequate training in storage, preservation and
accounting techniques is vital.
Interestingly, Stores is a function that is visible in probably any physical house. Be it a hotel, a
hospital, a shop or industrial set up Stores is found every where. Its presence every where
adequately underlines the responsibility of Stores. Depending upon where it is located a Stores has to
burden from minor to major responsibilities.
Receipt is the process of checking and accepting, from all sources (vendors, production units, repair
units etc.), all materials and parts which are used in the organisation. These include supplies for
manufacturing or operating processes, plant maintenance, offices and capital installations.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 57
Identification is the process of systematically defining and describing all items of materials in stock.
It includes the preparation of a Stores Code or Vocabulary, the adoption of materials specifications
and the introduction of a degree of standardisation. In certain cases, part of this work may be done by
the design, planning or standards departments or sometimes the purchase department.
Inspection involves the examination of incoming consignments for quality. Very often there is a
separate Quality Control or inspection department, which undertakes this work for most, materials.
Otherwise goods are inspected by Stores to ensure that the inspection procedures laid down are
carried out before materials are accepted into stock.
Storage and preservation involves items to be binged and kept in storage bins and impounds; as
usually indicated in the yard. The location is usually indicated in the transaction card. The storage
period may vary between one day and one year or more, depending upon recoupment
procedures/safety stock required, etc. storage is the physical act of storing the materials. The general
rule is: "A place for everything in its place". Presentation involves the maintenance, of materials to
retain their quality. Quite often, temperature, humidity, dust and other factors cause deterioration of
materials.
Materials handling involves movement and handling. This can be manual or mechanical (e.g. by
use of forklifts) heavy items, dangerous or inflammable goods, and delicate merchandise have all to
be handled differently.
Packaging : Materials dispatched to customers from the finished goods store or from one store to
another at different location require to be packed. Materials required packing according to their nature
and this may vary from heavy wooden crates to ordinary paper cartons.
Issue and Despatch is the process of receiving demands, selecting the items required and handling
them over to users, or despatching them to customers.
Stock Records are the documents which record, form day to day, full particulars of individual receipts,
issues and balances of materials in stock.
Stores accounting is the process of recording details of stock movements and balances in terms of
financial value. It is sometimes undertaken by accounts department, but there is much to be said for it
being handled by stores. In practice, it is often found that such an arrangement saves a good deal of
work and duplication. It has the added advantage of making Stores personnel responsible for
providing their own financial information, which they require for the purpose of inventory control
Inventory control is the operation of continuously arranging receipts and issues in such a way so as
to ensure that stock balances in quantity and/or value are adequate to support the current rate of
consumption at all times with due regard to economy. It involves the related process of provisioning,
which is the means whereby instructions are given for the placing of orders to correspond with future
estimated requirements. In some industrials concerns, the production control department may have a
large share in provisioning, at least as far as production materials are concerned. Nevertheless this
should always ultimately be the function of Stores.
Stock-taking is the process of physical verification of the quantity and condition of goods in store.
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 58
A Stores manager, therefore, is responsible for carrying out the following functions:
A Stores is a virtual money that can be encashed. However, this money needs to be properly counted
or accounted for. Stock accounting is thus a systematic way of assessing the money value of the
items lying in stores as also the items under transaction through stores. Transactions, in terms of
receipts and issues are a regular feature in any stores and therefore Stock accounting process , in
most of the cases, concentrates only on the stock in hand, lying in Stores.
The most popular methods of accounting are, FIFO i.e First In First Out and LIFO, Last In First Out.
FIFO and LIFO Methods as accounting techniques are used in managing inventory (Stock lying in
Stores for future use) and financial matters involving the amount of money a company has tied up
within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods
are used to manage assumptions of cost flows related to inventory, stock repurchases (if purchased
at different prices), and various other accounting purposes.
FIFO standing for first-in, first-out, implies that the oldest inventory items are recorded as sold first but
do not necessarily mean that the exact oldest physical object has been tracked and sold.
LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold
first. Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their
The difference between the cost of an inventory calculated under the FIFO and LIFO methods is
called the LIFO reserve. This reserve is essentially the amount by which an entity's taxable income
has been deferred by using the LIFO method.
For maintaining the continuous accountability of items under storage, it is essential to periodically
verify the stock of the items with respect to their storage record.
The process of physically verifying the stock of items with respect to the stock on record is known as
stock verification. The correction of the record to take care of any observed discrepancy in stock is
known as reconciliation of stock. The periodicity of stock verification depends on the value of the item
and also nature of the item. High value & pilfer-able items are verified more frequently.
Physical verification of stores is the process of actual counting, weighing and measuring all items of
stock, recording the results and to ensure that the materials are according to the nomenclature,
description, specification shown in the stock ledgers and the actual balances of such stocks agree
with balances appearing in the books and are confirmed and authenticated. The excess or shortage if
any brought to notice on such verification is properly investigated, accounted for and reconciled.
Purpose
• It is an audit requirement that physical verification of all stores shall be carried out at least once
in a year.
• It is essential as it checks the accuracy of stores records and brings about an overhaul of the
stores section specially its physical condition.
• It is useful as it discloses any weakness or defects in the system for the custody and control of
stock besides bringing the stock accounts up-to-date.
• It reveals the possibility of frauds, theft or loss and suggests adoption of additional preventive
measures to stop them.
• It helps in clearing up surplus and obsolete items thus avoiding locking up of resources.
• It ensures that the stores are well preserved against any damage or deterioration due to wrong
storage or other hazards.
• It is valuable as it greatly assists in training the staff and making them more conversant with
stores keeping methods and techniques.
• The verification shall be conducted in the presence of the official responsible for the custody of
stores or any other responsible person deputed by him who should make himself available to
the stock verifier till the verification is over.
• Stores must be arranged properly with locations marked on the ledger folios and identification
labels be tagged thereon for quick and easy verification.
• Items which are not the inventory of the shop ought to be marked or labeled in advance
• List out items sent for repairs or processing or stocks lying at project sites and obtain their
confirmation.
• Stores issued on loan must be accounted for before the stock verification takes place.
• Staff connected with verification should not be permitted to proceed on leave during the period
of verification.
1. List of discrepancies.
The list of discrepancies will show the balance available in the ledgers and the balance found
physically.
2. Narrative report.
The narrative report shall include a critical observation on the system of stock control, custody of
stores giving suggestions/ recommendations etc. for improving the working of stores and measure for
avoiding such lapses/ discrepancies in future.
3. Matters which the verifier may like to bring to the notice of the authorities confidentially.
The report will be submitted to the higher authorities for further action.
Each User department is allocated the Budget for the consumption of various commodities of items in
the beginning of the financial year. Issue of material to the user department is made after ensuring
the availability of budget for that department for that commodity.
Once the issue of material is made the budget of the department is updated. Once the budget is
exhausted the user departments need to take additional budget provision or clearance of competent
authority to draw further material from Stores.
Value engineering is also known as value analysis. Value engineering is a systematic examination of
factors affecting the cost of a product or a service in order to devise means of achieving the specified
purpose at the required standard of quality and reliability of the target cost.
The main aim of value engineering is to achieve a product's target cost, by:
* Identifying improved product designs that reduce the product's cost without sacrificing its
functionality
* Eliminating unnecessary functions that increase the cost of product.
Value engineering requires the use of functional analysis. This process involves segregating a
product into its many elements. For example, in the case of automobiles, the function might consist of
style, comfort, performance, reliability, quality, attractiveness and other aspects. A price or a value for
each element is determined, which reflects the amount the customer is willing to pay for the product.
To obtain this information, companies normally conduct surveys and interviews with customers. The
total of the values for each function gives the estimated selling price from which the target profit is
deducted to derive the target cost. The cost of each function of a product is compared with the
benefits perceived by the customers. If the cost of the function exceeds the benefits to the customer,
then the function should be eliminated, modified to reduce its cost, or enhanced in terms of its
perceived value so that its value exceeds the cost.
Therefore, value engineering is the technique applied to analyze all the aspects of an existing product
or component to determine the minimum cost necessary for specific functional requirements.
Price of the function is expected price for a particular function which the customers are ready to pay.
Cost of the function is the expected expenses to be made by the company to achieve that function.
It is obvious that price must exceed cost; therefore value should be greater than one. The higher the
value, the higher will be the contribution of the function towards the product's profitability.
Due to the growth of industrial activity and diverse kind of industrial requirements, a large no.
of organizations have to store a large number of items, often running into several thousands and even
lacs. Therefore, there should be some means of identifying them. A common practice is to describe
the items by names. Since several departments use the same item, they call the same item by
different names and store them in different places. One of the most useful techniques of “Materials
Management’’ is a rationalized codification system for properly classifying equipments, raw materials,
components and spares to suit to the particular needs of any organization. Old system of functional
codification is no longer suitable for the already large and increasing inventory range of stocks and
stores. It has come across several instances of duplication of stock of the same item under different
nomenclature and codes and under different stores categories where such items are common to
more than one consumption center. It is necessary that items are brought together for the purpose
standardization, variety reduction and the application of other modern materials management
techniques such as value analysis, operational research etc. so that the maximum return could be
secured with the minimum of inventory range and values. Standardisation leads to cheaper &easier
procurement and cost of replacement can also be reduced.
CODIFICATION
The process of giving name or symbol or numerical code to a particular item. This code can be a no .
alphabet or both.
Eg. Blue colour for painting iron parts is used and its code no. can be pb2054.
To avoid confusion and to purchase , store and supply to production department a specific item of
recquired quality and characteristic. The material management identify every item by unique code.
An article of stores is identified by its simple description or nomenclature. Difficulty arises when the
same article is known by different names.
For example;
chipping goggles, grinder goggles, or white goggles are one item but may be
stored separately under same nomenclature as different items.
One storekeeper might classify an item as Sal Ammoniac, whereas a research
chemist might identify it under the name of Ammonium Chloride, only to be told
that it is not available.
A classic example comes from the U.K. An electric firm found that a simple item
of a screw with a width of 3/8” and length of 6” had as many as 118 names
depending on the type of usage and the department using the screw. A few
names are:
Plunger, dowel pin, roller, locating peg, drive pin, armature stud pinion spindle,
pin mould holding, motor drive spindle, etc
. Two firms in Western India have been able to reduce the variety of lubricating oils from 30 and
32 to 9 and 7 respectively.
At a control depot of State Road Transport Authority, 583 hardware items were reduced to 105
through codification. In a large electrical firm, it was found that excessive stocks of copper items were
due to designers specifying too many sizes.
(i) Speed,
(ii) Unambiguity,
(iii) Saving of Effort,
(iv) Space Saving on forms,
(v) Ease of classification,
(vi) Mechanization.
Characteristics of Codes
As far as possible uniform dimension say, the metric system should be adopted.
Objectives of Codification
In order to identify the items correctly and logically for processing the transactions, and to facilitate
easy location in stores, a codification system should be evolved with the following objectives.
A separate code allotted to each of the items available in the warehouse indicating the size, quality
price, usability, special characteristics, specification etc.
All items are separately codified and are arranged in a logical order. Similar materials are grouped
together (such as stationery items, hardware items) and given a code.
For codification, grouping of identical item is done and it enables the stores to examine the entire
range of items. It facilitates the elimination of those varieties in place of which other varieties of the
same quality can be used. This reduces the number of varieties to a minimum. If proper
standardisation is achieved and the number of items is kept at the minimum, it will considerably
reduce investment in various items as well as the cost of inventory carrying.
Efficient purchasing:
The filling up of purchase requisition, and preparation of purchase orders are simplified by the use of
codes which easily indicates the materials required. Buying instructions to the suppliers become easy
and quick if there is proper understanding of codification by the suppliers.
Efficient recording and accounting codes leads to effective stock control, efficient recording and it
results in yielding accounting. Chances of mistakes are minimized. Pricing and valuation also become
more accurate and reliable.
Easy computerization:
The computer work better with codes then with long description of materials.
CODIFICATION SYSTEMS
One of the prerequisites of classification and codification is to know the basic nature and
characteristics of all materials used in an enterprise and then classify them in broad categories and
then to group and sub-group them in logical progression of kinds, type and sizes etc.
Raw materials, Semi processed Materials, Mechanical (Products and equipment), Electrical (products
and equipments), Chemicals (Allied products and chemical processing equipment), Laboratory and
office (equipment and supplies) etc. can be classified, grouped and sub-grouped first. After
classification in a broad way, a code or symbol is allocated to each of element, the code or symbol so
allotted should be simple, flexible and it should be easily adaptable in order to exploit the full
advantages of codification.
Therefore, codification is a process of representing each item by a number, the digits of which
indicate the group, the subgroup, the type and the dimension of item. The first two digits normally
represent the major groups, such as raw tools, oil stationery, etc. The next two digits i ndicate the sub-
D.VENKATESAN, SoME, SASTRA MATERIALS MANAGEMENT 2013-14 67
groups, such as ferrous, non-ferrous, etc. Dimensional characteristics of length, width, head diameter
usually constitute the further three digits and the last digit is reserved for minor variations.
Many organizations in the private and public sectors like, Railways and DGSD have their own system
of codification. The number of digits in a code may typically be somewhere between eight to thirteen.
There are several methods of codification but the most useful method is that,which give along with
standard form, the history size and type of material.However, a great care should be taken to develop
the code to satisfy a variety of users.
Arbitrary Systems
Arbitrary system as the word ‘arbitrary’ indicates, is based on the serial number under which a
material is received and the same is allotted as a code number.
Using this approach, all inventory items are simply assigned arbitrary numbers in sequence as they
are added to the stores account. Each item thus has a discrete number, but it bears no systematic
relationship to the numbers assigned to related items. Two similar items or two mating parts may
have numbers several thousand digits apart. For example, if bearings are received and suppose a
number 5090 has already been allotted to the previous item received, then the code number of these
bearings will be 5091. This system has the advantage that there is no fixed limit for codifying any
number of items. Moreover, one cannot know the history of the items. This is the reason why the
system is not popular.
Numerical System
A numerical system assigns a six to ten digit code number to each item. The first several numbers
usually indicate the classification to which the item belongs, the next several numbers typically
indicate the sub-class, and the last three numbers are usually uncoded. The following example
illustrates the concept:
This ten digit code number is one firm’s stock number for a ¼ by ¾ inch
1) Raw material
2) Manufactured parts
3) Purchased parts
4) MRO supplies
5) Work in process
The next three digits indicate the generic classification of the item. In this case it is a fastener, code
number 129. All items are generically classified by their nature and carry a number from 000 to 999.
The next three digits indicate the sub-class to which the item belongs. In this case, 017 is a carriage
bolt with a square neck. All fasteners are sub-classified into a class bearing number from 000 to 999.
The last three digits indicate the specific part number of the item. In this case,all part numbers under
500 designate plain steel and numbers over 500 represent various alloys; 503 is stainless steel, ¼ by
¾ inch.
Mnemonic System
A mnemonic system functions much like a numerical system. However, it combines numeric and
alphabetic notations in its symbols. For example, the carriage bolt described under the numerical
system in the following manner :
P Fa BCS 503
Fa is a fastener,
Mnemonic systems, particularly where a small number of items are involved,frequently make visual
identification easier because they are more descriptive and they are often shorter. As more and
different types of items are added to the inventory, however, this advantage diminishes because the
number of good symbols are limited.
Decimal system of codification may said to be the universal in its working. It is simple and easy to
codify items under this system. Day by day, the number of items in almost every sphere of industry is
increasing. Hence, codifications should be such as may meet the increasing requirements and it
should also be simple, handy and easily adaptable. Under this system items up to 5,00,000 can be
easily codified and at the same time each symbol will give the history, size, specification and
complete picture of the item. Modern industrial concerns are generally adopting 7 to 11 digits for
codifying the materials.
In the decimal codification system, each digit indicates some thing or the other.
For example : 1st digit –Section 2nd digit-Class 3rd digit –Group
4th digit -Type of materials 5th digit -Size, part no. specification or any other details required
Example:
Section 0 — Plants and machinery
1 — Machine and hand tools
2 — Construction materials etc.
Group 0 — Cutters
(For section-1) 1 — Files
2 — Knurls
3 — Scrapper etc.
Suppose a file flat, single cut smooth, size 25 mm is to be codified.
It will be indicated by 1st, 2nd and 3rd digits as 131.
The 6th, 7th and 8th digits indicate the size of the file in mm.
Therefore, file flat,single cut smooth size 25 mm will be codified as –
13102025.
Brisch System
The Brisch system consist of seven digits applied in three stages. The items are grouped into
suitable preliminary categories, such as assemblies, sub-assemblies,components and off the shelf
items. After these preliminary categories, items are grouped within the respective class in order to
bring similar items together. The Brisch system through it consists only of seven digits, is quite
comprehensive as the basis is on logical major groupings.
Kodak System
The Kodak system consists of 10 digits of numerical code. The logic of major grouping is based on
sources of supply. All materials are divided into 100 basic classifications, contributed only by
procurement considerations. For instance, a bolt is listed as hardware item if this is listed in hardware
catalogues and available with hardware suppliers. If this bolt is available as a part of the machine, it
will be available under maintenance.
ADVANTAGES OF CODIFICATION
a) As a result of rationalized codification, many firms have reduced the number of items.
b) It enables systematic grouping of similar items and avoids confusion caused by long description of
the items.
c) Since standardisation of names is achieved through codification, it serves as the starting point of
simplification and standardization.
d) It helps in avoiding duplication of items and results in the minimization of the number of items,
leading to accurate records.
e) Codification enables easy recognition of an item in stores, thereby reducing clerical efforts to be
minimum.
f) If items are coded according to the sources, it is possible to bulk the items while ordering.
Process of codification:
Bolts, nuts & washers Brooms & brushes Cans & containers
Depending upon the number of classes , their subclasses and probable number of items under each
sub class decide the length of codes which shall remain fixed for all the inventory items (10 digit,
alphanumeric etc.)
Normally, it is the custodian who does the codification for the items he keeps in his inventory.
However, in firms of substantial sizes where good number of items are received on regular basis ,
codification is usually done by a team consisting of representatives drawn from Stores, user
department and Industrial engineering department. Still, for Automatic procurement items the
responsibility lies with the Stores department.
When codification?
Codification identifies an item. Also it acts as a communicating medium for an item among the
different users of that item in whatever way such as Stores, User department, Planning department,
Finance, Purchasing etc.
Thus , as soon as the item enters into Stores (if item is a new one), it is codified. Once codified, the
same code is used in the cycle of procurement, throughout and for ever.
Store Routing
* Placing order
2. Storing of materials
3. Issuing of materials
* Requisition form
Material Control
Materials control can be defined as a systematic control over purchasing, storing and consumption of
materials. Materials control helps to maintain a regular and timely supply of materials by avoiding
over and under-stocking. Materials control ensures that the right quality and quantity of materials is
available to the company at the right time. Materials control helps to reduce the losses and wastage
of materials by maintaining their efficient purchase, storage and use or consumption in the factory.
The importance of materials control lies in its role in reducing the cost of production and increasing
the profitability of the company.
Types Of Materials
Manufacturing a product needs input of raw materials. Raw materials are main component of the
product. There are two types of materials.
1. Direct Materials
2. Indirect Materials
The materials that can not be form as the main part of a finished product are called indirect materials.
Therefore, such materials can not be easily identified with the product. Nails used in furniture industry
and threads used in garment industry are some example of indirect materials.
* There should be a proper co-operation and co-ordination among the departments dealing with
material purchasing, receiving, testing, storing, production planning and accounting.
* There should be a proper perpetual inventory system, which reflects physical movement of stocks
and their current balance.
* There should be a standard forms for requisitions, order, issue, return and transfer of materials.
* There should be carefully planned materials storage facilities to avoid losses from damage,
evaporation, pilferage, theft and deterioration.
* Stock of different levels should be fixed to ensure that there is no under and over-stocking of
materials.
* The quantity of each type of materials to be ordered should be fixed to reduce the ordering and
carrying costs.
* There should be an effective system of internal check to ensure that all transactions relating to
materials are automatically checked.
1. To ensure better quality of materials at right quantity at right time for efficient and uninterrupted
production of output.
4. To minimize the handling cost and time in storing and using the materials.
5. To provide information to the management about raw materials, their costs and availability.
Materials control is necessary for making efficient purchase, storing and consumption of materials.
Every manufacturing company requires to maintain a materials control system that facilitates efficient
purchase, storage and use of the materials. The needs for materials control system in the company
arise due to the following reasons.
1. Economical Purchase
Every manufacturing company should purchase high quality materials at the most economical price.
An efficient materials control system ensures how better quality materials can be bought at the
economical price, which will finally help reduce the total cost of the production.
2. Minimum Investment
The over-stocking of materials is undesirable to the company, as it raises the cost of production.
Therefore, an efficient materials control system helps to avoid over-stocking of materials and thus
keeps the investment in materials to minimum.
3. Minimum Wastage
An efficient materials control system helps to carefully handle the materials to and from store houses
and factory by trained and efficient store keepers and workers. With the help of an efficient materials
control system, therefore , the wastage and losses of materials by fire, theft, leakage and so on can
be kept at minimum.
4. Balance On Hand
5. Source Of Information
A proper system of recording materials is a great source of information of materials which helps in the
preparation of materials purchasing and production plans.
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