201.

MATERIALS MANAGEMENT
Materials, Purchase and Stores 23
23.1.1. ntroduction
Mosti
gnufacturing concerns
materials:soak up a
substantialspend more than 60% ofthe
portion of the
Management
moneytheytake in, for
This emphasizes the nced for capital
saving in materials can adequate materials invested in an industrial materials, Le.,
Materials
Management may be
1
reduce the
production costmanagennent
to a andIcontrol
c concern. a
because
even small
fair extent and
a
of company dealing with the thought of as an thus
integrated functioning add to the profits.
oimum supply of of
and oplimum materials and other related : activities so as tosections
the different
co-ordination
Voterials Management invOlves minimum expenditure on materials. obtain
rchase of various materials etc.,controlling thc type, amount,
a1.2 Functions of Materials Management used in an industrial location, movement, timings of
concern.
(0) Materials planning
iD Procurement or
purchasing of materials.
(i) Receiving and warehousing
(iv) Storage and store-administration.
() Inventory control.
(vi) Standardization,
Simplification and Value-analysis.
(vi) External transportation (.e., traffic,
shipping, etc.) and materials handling (i.e., internal
ransportation).
(vii) Disposal of scrap, surplus and obsolete materials.
23.1.3. Objcctives of Materials Management
(i) To minimize materials cost.
(") To procure and provide materials of desired qualitywhen required, at the lowest possible overall
OSt of the
concern.
(n) To reduce investment tied in inventories for use in other productive purposes and to develop
high inventory
turnover ratIOS.
telated")10
costs. purchase, receive, transport (i.e., handle) and store materials efficiently and to reduce the
(v) To trace new sources of supply and to develop cordial relations with thegi in order to ensure
tontinuous matterial supply at reasonable rates.
(vi) To cut down costs through simplification, standardization, value analysis, import substitution,

(vi) To reportChanges
cha in market conditions and other factors affectingthe concern, to the concern.
(vii) To modify paper work procedure in order to minimize delays in procuring materials.
as to minimize
cOnductstudies in areas such as quality, consumption and cost of materials so
 23-2 INDUSTRIAL ENGINEERING AND MANAGEMLe
cost of production.
() To train personnel in the ficld of materials managemcnt in order to incrcase operatios.
efficiency.
23.2. PURCHASING OR PROCUREMENT
23.2.1. Introduction
The purchasing department occupies a vital and unique position in the organisation of an
industrial concern because purchasing is one of the main functions in the success of a moder
manufacturing concern.
Mass production industries, since they rely upon a continuous flow of right materials, demand
for an efficient purchasing division.
The purchasing function is a liaison agency which operates between the factory organisation and
the outside vendors on all matters of procurement.
Purchasing implies-procuring materials, supplies, machinery and services needed for produc
tion and maintenance of the concern.
23.22 Objectivcs of Purchasing Department
() To procure right material.
(ü)) To procure material in right quantities.
(üü) To procure materials of right quality.
(iv) To procure from right and reliable source or vendor.
(v) To procure material economically, Le., at right or reasonable price.
(vi) To receive and deliver materials at
right place, and at
right tíme.
to achieve the
Purchasing department has to perform certain activities, duties and functions in order
above mentioned objectives.
23.23. Activitics, Dutics and Functions of Purchasing Departmcnt
() Keep records-indicating possible materials and their substitutes.
of materials.
(iü) Maintain records of reliable sources of supply and prices
standardizing them.
(iii) Review material specifications with an idea of simplifying and
(iv) Making contacts with right sources of supply.
(v) Procure and analyze quotations.
(vi) Place and follow up purchase orders.
(vii) Maintain records of all purchases.
quantity, quality, etc.) of material nas
(viiü) To make sure through inspection that right kind (ie.,
been purchased.
different departments of the concern such as
(u) To act as liaison between the vendors and
production, quality control, finance, maintenance, ctc.
and at cconomical rates.
(c) To check if the material has been purchased at right time
uninterrupted supply of materials so that production continues with least capita
(ai) To keep an
tied in inventories.

(xii) To prepare purchasing budge. departments of the organisae

update list of materials required by different
(ciii) To prepare and
 MATERIALS, PURCHASE
AND STORES MANAGEMENT
hin a specificd span of time. 23-3
To handle
ensure subconiracts
at the time of
i ) To high
relations.
that prompt
payments are madebusiness activity.
to the vendors in the interest of good Pe
sa PURCHASE ORGANISATION
Purchasing department is a staff function in the
The internal overall company structure
organisation of the
director of purchases or purchasing purchasing department is on a line basis, with(Refer ig.
wosnonsible for the overall cfficient manager being the incharpe of purchase purchasing E
The purchasing manager is, operation of the department. department. He s
however,
clerical staff (refer Fig. 23.1l). assisted in purchasine by a number of
assistanis and a tp*
The purchasing manager has thee powers to
divides the duties among the assistants accordingexecute purchasing contracts for the
concern. e
example, one assIstant may purchase only electricalto the nature of purchases to be made. For
plant equipment and so on. goods, another (major) raw material, tntd
This functional division of efforts
etant to makes for increased
better feel and know the market, he is specialisation and gives a chance to te
assigned.
Purchasing Manager
Assistant purchasing Purchase service Records and
assistant correspondence assistant

Buyer Buyer Buyer Clerk Clerk Clerk Order Record File

electrical raw plant elecrical raw plant clerk clerk clerk
goods materials equipments goods materials equipment
Fig. 23.1.
Organisation of a Purchasing Department.
- Fig. 23.1 shows an organisation of a typical purchasing department. There are three main
sections namely purchasing, purchase service and records.
1. Purchasing section places orders with the vendors.
2. Purchase service section follows the progress of the order at vendor's end, its
shipment by the
vendor and its final receipt in the company.
3. Records section maintains all records of quotations, costs, purchases, etc.
23.3.1. Centralized and Decentralizcd Purchase Organisations
The problem of centralising or decentralising the purchase activities arises in large
organisations-particularly in multiplant industries.
Advantages of Centralized Purchasing
The centralization of purchasing,
() almost invariably makes for more efficient ordering of materials;
() forms a basis to gain bargaining advantage ;
(ü) eliminates duplication of efforts ;
() helps procuring uniform and consistent materials;
(") simplifies purchasing proccdure ;
 INDUSTRIAL ENGINEERING i AND)
23-4

(vi) simplifies the pavment of invoices

; and
buycrs.
MANAGEMENT
(vi) permits a degrece of specialization among
1. Centralizcd ofpurchasing
Disadvantages Purchasing
Centralizedis little slower and more cumbersome than decentralized purchasing.
Applications of Centralized purchasing
1. For concerns using few matcrials whose quality and availability are vial Lo the SuccesS of the

Concern.
as tool bits, grinding wheels.
2. For purchasing small items of fairly high value such
be obtained.
,dial gauges, etc.,
as well aS those for which bigger quantity discounts can
Advantages of Decentralized Purchasing
1. Improved clficiency.
2. Faster procurcment of materials.
3. Control over purchases is no longer remote.
4. Deccntralized operations are more flexible.
Disadvantages of Decentralized Purchasing
1. Less quantity discounts.
2. Involves duplication of efforts.
Applications of DecentralizedPurchasing
1. Where different plants of alarge organisation require quite different types of materials.
2. Where branch plants require heavy and bulky items such as oil products, fuels, paints, etc.
3. Where purchases are to be made within the local community to promote better public relations.
23.4. BUYING TECHNIQUES

Materials can be bought or purchased by one of the following techniques :

(a) Spot Quotations. The buyer can go to the market, collect minimum three quotations (for
purchasing one material) from different suppliers, take aspot decision, pay cash and buy the commodity.
Generally the item is purchased from the vendor who furnishes a quotation of least price.
(b) Floating the Limitcd Enquiry. A few reliable (and otherwise
vendors are written letters to send the price and other details for a particularregistered
commodity.
with the company)
as shown in Fig. 23.2 is generally used for calling the quotations : Aquotation fomi

QUOTATION FORM
From

To
No. M.E.DJ..
Date.
Dear Sir,
Please submit your quotations for the materials listed below so as to reach the office of the
undersigned at the latest on ....at.
literature if any along with the quotations.Please send full details, specifications, pamphlets, a
Please note the terms and conditions
1. Please mention on the top of mentioned
Enquiry No.
envelope:
Date on which due..
 , PURCHASE AND STORES
2 Submit quotations in
Preferably quote in the
MANAGEMENT
duplicate. 23-5

cach same order as in the

4. Price item separatcly and the enquiry letter.
5. Ifyou are unable to prices quoted
giedetails. furnish materials asper our
should be for
destination..
6. Quotations should be valid for at least onc
descriptions and|wish tooffer a
substitute, please
1. Taxes sshould be
mentioned for cach casc.
month from the date of
Quotations should be sent in
opening-
rioht is reserved to scaled covers.
Thequotations will be opened on.
accept or reject quotations on cach
...at...... in the office of the itcm separately or as a whole.
Description
Quantity Unit
undersigned.
Price Discount Total Net Price

***.*...

Yours faithfully
Store Purchase Officer
Fig. 23.2
 INDUSTRIAL ENGINEERING,
AND
23-8
product are stated on
The necessary quality standards for a particularSpecifications.
dimensional tolerances or written into the test
the MANAGIEMENT
drawing in tems of
as per these standards
The manufacturing department then makes products and the
division inspects the products to the same
standards.
Drawings show the shape and the exact
dimcnsions and the etolerances permitted
on
inspecion
the prOduct
as colour, chemical
whereas Specifications describe such characteristics of raw material ctc. composition, mechani-
,
tensile strength, hardness), kind
calpropertics (i.e.,
Specifications can be in the form of,
(a) Dimensional and naterial specifications. They must consist of alist ofi physical
or chemical
properties desired in the product. Raw materials, oils and paints are specified this way.
Performance specifications. They indicate the performance or use of the purchased :
(b)
for example, a component may be specificd as capable of bearing a reverse bend a
temperature.
() Blue prints. Blue print is the most precise and probably the most accurate of all tvneset
descriptions and it finds applications where close tolerances or a high degree to merhan:
cal perfection is desired.
Both drawings and specifications describe what the product should be like after it has been made
Quality standards are dictated by the following requirements
()) The efficiency with which the product can perform its function.
(iü) The cost and the estimated life of the product.
(ii) The quality of interchangeability and the ease of making assembly.
(iv) Appearance and FEEL of the production in use.
23.6. ORDERING OF MATERIAL OR THE PURCHASING PROCEDURE

23.6.1. Steps Involved in One Complcte Purchasing Cycle

(i) Recognition of need, receipt and analysis of purchase requisition.
(iü)Selection of possible potential sources of supply.
(iüi) Making request for quotation.
(iv) Receipt and analysis of quotations.
(v) Selection of right source of supply.
(vi) Issuing the purchase order.
(vii) Follow-up and expediting the order.
(vii) Analysing recciving reports and processing discrepancies and rejections.
(ix) Checking and approving vendor's invoices for payment.
() Closing completed orders.
(xi) Maintenance of records and files.
These different subdivisions of thepurchasing procedure will be briefly discussed bero
1. Recognition of nccd, reccipt and analysis of purchase requisition purclhasing
notice of the
Whenever adepartment nccds an item, it is officially brought to the
department. For this purpose two procedures are followed : sdepartment,
() Oneinvolves the issuance of requisition bythe using department or thesstores
(ii) The other involves the issuance of a bill of materials.
 MATERIALS, PURCHASE .AND STORES MANAGEMENT
Apurchase
purchase requisition (Fig. the forms the basis for
requisition contains23.5)) action by
23-9

the purchasing department. A

What material is following data
required and of what quality ?
Ouantity of material to be purchased.
(üi) Date by which the
Place at which the material required.
is
(iv) material should be
Purchase requisition is prepared in duplicatedelivered.
and is signed by authorized individuals only.
Purchase requisition is usually routed through the stores
the item is available in stores. denartment in order to chcck whether
Requisition No...
Date.
Please order the Under-mentioned for delivery on or before ....to.

Quantity Description Code No.

Requisition for Unit price

Quantity in stock.
Maximum stock.
Minimum stock.

Storekeeper
Order No.

For use by Checked by....

Purchasing approved by...
Department
Fig. 23.5. Purchase Requisition.
small expendable tools are to be purchased.
- A bill of material is used when standard parts andfrom the bill of material, goes through the list
The buyer works out total material requirements materials to be purchase.
net
of existing inventories and finally decides the
) Selection of possible potential sourccs of supplynumber of vendors in accordance with established
selecting a fair
- This process consists of
guidelines, from whom quotations will be requested. from
purchased frequently, the buyer usually has a few preferred suppliers
For items which are
whom he purchases regularly. off the following from
which
refercnce may be made to one or more
For purchasing new items,
information may be obtaincd.
(a Catalogues,
(b) Trade journals,
Advertisements,
(c)
 INDUSTRIAL ENGINEERING,, AND MANAGEMENT
23-10

(d) Trade exhibitions and fairs, and

Trade directories (classified).
(e)
consider
When considering a potential source of supply, the buyer should
afield :
(1) whether to purchase from local market or farther
(2) whether to buy from a single vendor or from several vendors at a time ; and
(3)
whether to purchase directly from manufacturers or through wholesalers
(iiü) Making roqucst for quotations
Request for quotations is made on prescribed quotation form (refer Fig,23.2) to all he sol.
(possible) sources of supply.
The request is not a purchase order, rather it is merely an enquiry to know whether the we.,
can supply the desired material by the specified date and if so, then at what rate.
Quotation form has printed on it the terms and conditions under which the buyer would libe.
purchase the material.
(iv) Receipt and analysis of quotations
After receiving a number of quotations from different suppliers, they are studied and:
comparative statement (refer to Fig, 23.3) of rates and other terms and conditions mentioned in
the quotations is prepared.
() Selection of right source of supply
The comparative statement as prepared in step (iv) above serves a good guide in selecting the
right source of supply.
Other questions which might also be given a thought are,
1 Will vendor maintain quality ?
2 Will vendor supply material in time ?
3 Does the vendor have adequate facilities to handle the contract ?
4 How far the vendor's plant is situated ? etc.
(vi) 0ssuing the purchase order
After selecting the right supplier, a purchase order (Fig. 23.6) is dispatched to him. The purchase
order constitutes a legal document and it serves as the vendor's authority to ship the materias
and bill the company.
A purchase order once accepted by the vendor constitutes a contract for the delivery of the
articles in accordance with the terms of purchase agreement.
The purchase order is executed in six copies.
1 Two copies go to the supplier, one he preserves, other he signs and returns.
2 One copy goes to accounts section.
3 One copy goes to purchase service to follow-up the order.
One copy is sent to receiving department.
The last copy is kept in the files of the purchasing
(vii) Folkow-up and expediting the order department.
After placing the order, the purchase service section maintains contact with thevendor in order
to,
1 Obtain information as to the progress of the
ensure that delivery dates will be met; and toorder ;
3 take corrective actions (such as transferring sSome of the orders to some other supplier,
materials
change the mode of shipment, i.e., from rail
road to that the
air service ctc.,) so t
can reach the plant as originally
planned.
 ATERLASPURCHASE
AND STORES
MANAGEMENT 23-11

ABC PURCHASE ORDER

HARDWARE COMP ANY
6, Harrison Road
CALCUTTA
Order No..

Dlezse enter our order tor the following materials or

services and note instructions given below.
Manager
Purchasing Department
Price
eem No. Duantity Description Each Total

1. Number of this order must appear on your invoice.

2. Please return attached acknowledgement of this order and state the delivery date.
3. Mail invoices, etc., on date of shipment.
4. Only, invoices covered by a signed purchase order will be processed.
5. Packing slip must accompany each shipment. inspection and rejection.
6. Allmaterials shall be received subject to buyer's reasonable time.
7. An order may be cancelled if not fulfilled within a
Fiz 23.6. Purchase Order.
the following information are frequently employed for
Specially designed postcards containing
routine follow-up.
Purchase order Number.
2 Pre-decided delivery date.
3. Promising shipment date, etc. discrepancies andrejections
processing
Analysing receiving rreports and of what has been actually received. discrepancies, Le.
records
Keciving reports are the purchase order in order to find
reports are compared with the
ecVing of the received
Variations in quantity, ctc., if any. inspection as regards the quantity or quality
during
crepanciesfound if any brought to the notice of the supplier. necessary for the buyer
promptly end, it is
Imaterial should he rcjccted during inspection
at his
rmaterial replacement.
eIorereturning theauthorization for return and
get the vendor's
 3-12 INDUSTIAL ENGINEERING AND MANAGEMENY
(i) Checking and approving vendor's invoiccs for payment
Invoices should e checked to cnsure that
1 the correctmaterial (in quality and quantity) has been supplied ;
the material has been supplicd at agrccd prices ; and
agreed discounts have becn given.
After onfirming the above, the payment is made to the vendor for thc (valuc of) goods received
() Cksing completed orders
Before closing the completed orders, the file copy of the purchase order must be checked against
both the receiving reports and the vendor's invoice and a notation of this fact should be made on
it. It should then be removed and stored in the file of closed orders.
() Maintcaance of records and files
The final step in the purchasing procedure consists of filing the records of the transaction.
23.7. ACCOUNTING
All purchase transactions initiate a chain of accounting transactions taking from charging the
transaction to the proper account to the final payment of the bill.
Basically, the checking of invoices is an accounting procedure which can be handled efficienty
a
by the accounting department but unluckily when accounting department does so, it becomesits
such as
mere clerical routine procedure. Checking of invoices involves technical features also
(ie., invoice's) compliance with the description and specifications contained on the purchase
order.
involved in
For this reason and since large company funds and significant discounts are
accounting tasks, there should be close cOordination between purchasing and accounting
departments.
23.8. STORES AND MATERIAL CONTROL
238.1. Introdudion
majority of business enter
Materials and supplies constitute the most important assets in the extent on the eticient
prises. The success of the business, besides other factors, depends to a large
storage and material control.
handling of stores lead to reduccd
Material pilferage, deterioration of material and careless
profits.
store-room is avaílable to all employees
Even losses can be incurred by concerns in which the
to be used.
without check as to the quantities and purpose for which materials are
23.8.2 Requircments of a Material Control System
storage, accounimk:
1. Proper coordination of departmentssuch purchase, receiving, testing,
2. Making cconomy in purchase and use of materials.
involving materials, supplies, cquipneu
3. Operating an internal check to verify all transactions
etc

4. Storing materials and supplics properly in a sale place.

system of perpetual inventory to find at any time the amount and valuc of cact k
5. Operating a
of material in stock.
VATERIALS PURCHASE AND STORES MANAGEMENT
23-13
2383. Stores Management
Stores management takes care,
1 that the required material is never out of stock ;
that no material is available in (much) excess than required :
3 to purchase materials on the principle of economic order quantity (refer chapter 24) so
that the associated costs can be minimized; and
4
to protect stores against damage, theft, etc.
This can be achieved through
1 A proper purchasing practice (ie. when to order materials).
An adequate procedure of receipt and issue of materials.
3 Proper methods of storing materials.
An effective system of physical control of materials.
A proper method of keeping store records.
23.8.4. Functions of Storcs Department and the Duties of the Storekceper
identification.
1. To receive materials, goods and equipments, and to check them for
in the factory.
2. To receive parts and components which have been processed
3. To record the receipt of goods.
supplies in the store.
4. To correct positioning of all materials and
condition by taking all precautions to ensure that they
5. To maintain stocks safely and in good and
deterioration.
do not suffer from damage, pilfering or requisitions.
To issue items to the users only on the receipt of authorised stores
6.
and issues of materials.
7. To record and update receipts the bins.
To check the bin card balances with the physical quantities in
8. good order.
stores are kept clean and in
9. To make sure that stores.
persons from entering the
10. To prevent unauthorized
that materials are issued promptly to the users.
11. To make sure height).
utilisation of the cubic space (Le length, breadth and
12. To plan store for optimum materials are located easily.
required never out
13. To ensure that the appropriate time so that the materials required are
cycle at the
14. To initiate purchasing
of stock. the purchasing, manufacturing, inspection
cooperate to the full extent with
15. To cOordinate and control departments.
and production planning andANDLAYOUT OF STORES
23.85. LOCATION
23.8.5.1. Location ensure maximum
carefully decided and planned so as to
stores should be
1. Location of the cOStS related to
efficiency. minimizes total handling costs and other materials.
is one that protection for stored items and
2. Thebest location of stores the nceded
operation and at the same time provides the items to be stored and the frequency
with
stores value of
Store location depends upon the nature and
3. received and issued.
which the items are close to the points of use.
stores are located
4. In general,
 INDUSTRIAL ENGINEERING.
AND
23-18

Both the copies are then fowarded to material

accounting division :for MANAGEMENT
pricing and entrv in
the
stock ledger.
stock ledger clerkkto be used
One copy of the material requisition is retained by the as the
for an entry in theIssued section of the stock ledger accounts. The balances
section basis
ledger accounts is then complcted to show the new balance figures for quantity, cosof the stock
it as the:
The second ecopy goes to the foreman of the department who uses basis for a
the appropriate production order for which he prepared the material rcquisition charge to
23.10. STORE RECORDS
Two records are usually kept of materials and other goods received, issued or
namely on BIN (or STOCK) CARDS and in the STORE LEDGER. transferred-
Bin cards are written and kept in the stores, whereas store ledger is sometimes maintained h.
stores office or cost department.
This minimises the clerical work of the storekeeper and store ledger, .e. stores accounting recorde
are kept cleaner and accurate by an experienced personnel in the stores office or cost department.
23.10.1. Bin Cards
In a store room, materials and other items are kept in appropriate bins, drawers or oher
receptacles ; some items are stacked, while others are racked.
For each kind of material, a separate record is kept on a BIN CARD or STOCK CARD which
shows details of quantities of cach type of material received, issued and on hand each day. The
storekeeper maintains bin cards up-to-date.
Bin card is attached to each bin or shelf.
A bin card is not considered as an accounting record ; it simply informs store-keeper of the
quantities of each item on hand.
Bin cards may be made in duplicate; one card is attached to the bin (containing the material) and
the second remains with the storekeeper on his table for ready reference to the quantity of any
materials on hand.
A bin card is used as a check on the stock ledger accounts in the material accounting division.
Besides the details of the issue and receipt of materials, a bin card may contain the following
information as well to increase it utility :
(i) The maximum and minimum quantity of each material to be carried out.
(iü Normal quantity of each material to be ordered.
(iii ) When certain materials or items require placing orders in advance, (e.g. when purchasi
from some forcign country) an ordering level (between the maximum and minimum
quantity) may be specified on the bin card so that the materials can be ordered and
procured in timc.
Bin cards are checked periodically by the stores inspectors to see that they are accurately
maintained. Discrepancies, if any, are noted.
Fig. 23.11 shows a BIN (or STOCK) CARD.
23.10.2. Stores Lcdger
Store ledger is identical with bin card except that money values are shown.
The ledger is usually of the loose-leafor card type, each account representing an iitemofmaterial
in store.
The store ledger accounts may be maintained by a separate departmentor
material accounting
in small concerns by the store-keeper himself.
MATERLALS,, PURCHASE AND
STORES MANAGEMENT 23-19

BIN CARD
Bin No. Maximum Quantity..
Materia.. Ordering level.
Code No. Minimum Quantity.
Stores Ledger Folio.

Date Quantisy Received Quantity Issued Balance Remarks

Fig. 23.11. BIN or STOCK CARD.

Fig. 23. 12 showS a Stores Ledger Account.

are made as a copy of purchase order is received from purchasing
Entries in ordered section
department.
STORES LEDGER ACCOUNT
Maximum Quantity
Code..
Material. Minimum Quantity.
Folio. BALANCE
Bin No..
RECEIVED ISSUED
ORDERED Unit Toal O Unit Toal
Uni Total Date R Deptt
cost COst
SL Date P.O. O D.E. Date P.. No cOst cOst
COst cOst
No
No. No

Purchase order No.

P.O. No, -
Quantity
D.E. Date cxpccted
Requisition No.
R. No. -
Ledger Account.
Fig. 23.12. Stores
 24
Inventory Control and Management
24.1. INVENTORY
Inventory is a detailed list ofthose movable items which are
to maintain the cquipment and neceSsary to manufacturc a product and
is also mcntioned in the lis. machinery in good workingorder. The quantity and the value of every item
Inventory is actually 'money' kept in the
roxd, milling cutters or welding clectrodes. store room in the shapcof ahigh speed steel bit, amild steel
24.2 INVENTORY CONIROL
Inventory control is concerned with achieving an optimum balance
objectives. The objectives are : between two competing
() to minimize investment in
inventory,
(ü) to maximize the service levels to the firm's
customers and its own operating departments.
Inventory control may be defined as the scientific method of finding out how much stock should
be maintained in order to meet the production demands and be able to
provide right type of
material at right time in the right quantities and at competitive prices.
243. INVENTORY CLASSIFCATION
Inventory may be classifed as follows:
(i)Raw inventories. They include, raw material and semifinished products supplied by another firm
and which are raw items for the present industry.
(ü) In-process inventories. They are semi-finished goods at various stages of manufacturing cycle.
(uü)Finished inventories. They are the finished goods lying in stock rooms and waiting dispatch.
(iv) Indirect in ventories. They include lubricants and other items (like spare parts) needed for proper
operatiorn, repair and maintenance during manufacturing cycle.
24.4. INVENTORY MANAGEMENT
To manage these various kinds of inventories two alternative control procedures can be use
i) Order point system
items are
This has been the traditional approach to inventory control. In this sys tem, the
restocked when the inventory levels become low.
iventovy management.
Lotsize and reorder point calculations are the more spectacular aspectof
Once the calculations are complete, the routing commences lor
checking deliveries and physical
Ountpf the amount on hand.
(2) Materials Requirncnts Planning (MRP)
poccdure. I is really more than that.
MRP is sometimes thought of as an inventory conttol
manufacturing inventories.
MRP is the technique uscd to plan and conrol into a
computational technique that converts the master schedule for end products
MRP is a components used in the end products.
detailed schedule for the raw material and
 INVENTORY CONTROL AND MANAGEMENT
5. Create 24-3
motivational effect. A person may be tempted to
displayed in bulk. purchase more if inventories are
24.7. ECONOMICORDER QUANTITY
Concept. A problem which always remains is that how much
industry making bolts will definitely like to know the material may be ordered ata time. An
This length ofsteel bars is length of steel bars to be purchased at any one time.
called'Economic Order Quantity"
permits lowest cost per unit and is most advantageous. and an economicorder quantity is one which
Before calculating cconomic order quantity it is
mum inventory, minimum inventory, standard necessary to become familiar with terms like maxi
order and reorder point, which are known as uantity
Standards. Figure 24.1 shows different quantity standards.
Starting from an instant when inventory OA is in the stores, it
quantity from A along AD at a uniform rate. It is preknown that it (inventory) consumes gradually in
initiating order and receiving the required inventory. Therefore as the takes L number of days between
requisition is initiated which takes from B to C, that is time R. From Cquantity reaches point B, purchase
to Dis the inventory procurement
time P. AL the pointD when only reserve stock is left, the ordered
the total quantity shoots to its maximum value, i.e. the point material is supposed to reach and again
A'(A=A).
Maximum Quantity OA is the upper or maximum limit to which the inventory can be kept in the
stores at any time.
Minimum Quantity OE is the lower or minimum limit of the inventory which must be kept in the
stores at any time.
The purpose should be to hold enough and not excessive stock of material. Stock holding:
(a) Avoids running out of stock.
(b) Helps creatinga buffer stock which may be utilized if the material falls below the minimum level.
(c) Makes sure the predecided delivery dates.
(d) Provides quick availability of materials.
(e) Takes care of price fluctuations and shortage of inventory in the market.
) Advises regarding, obsolete and slow moving items.
(2) Helps in standardization and thus reducing the variety of items to be handled.
Standard Order. (AD) is the difference between maximum and minimum quantity and it is known
as economical purchase inventory size.
so the
Reorder Point (B) indicates that it is high time to initiate a purchase order and if not done
before the new material arrives.
Inventory may exhaust, and even reserve stock utilized
the basis of past experience. It
From B' to D' it is as lead time (L) and it may be calculated on
includes :
(a) time to prepare purchase requisition and placing the order;
(b) time taken to deliver purchase order to the seller;
(c) time for seller (vendor) to get or prepare inventory; and customer.
dispatched from thc ventor's end and to reach the
(d) timc for the inventory to be
known as requisition time (R) and (b) +(c) +(d) is the procurement time (P).
Time, (a) above is
cconomic lot size for an order or the cconomic order quantity depends upon two types of costs :
The
 24-4 INDUSTRIAL ENGINEERING
AND
Inyentory
consumption
Maximum MANAGEMENT
trend

SIondard order
Or Order quantit

Reordertpoint is B
Averoge
WOrting
inçen tory Averoge inventory
Mininum
| RS)
f
Reserve stock (RS)
Time (Days)
Fig. 24.1. Quantity Standards.
(a) Inventory procurement costs, which consist of expenditure
connected with
1. receiving quotations;
2. processing purchase requisition;
3. following up and expediting purchase order;
4. receiving material and then
inspecting it; and
5. processing seller's (vendor's) invoice.
Procurement costs decrease as the order quantity increases (see Fig. 24.2)
(b) Carrying costs, which vary with quantity ordered,
base on average inventory and consist of :
1. interest on capital investment;
2. cost of storage facility, up-keep of
material, record keeping etc;
3. cost involving deterioration and
4. cost of insurance,
obsolescence; and
property tax, etc.
Carrying costs are almost directly proportional to the order size or lot size
or order quantity,

Cost
Total Cost
MIN Carrying cost
Procur ement
cOst

Order Quontity
Fig. 24.2.
Relationsh1p between cost and quantity
In Fig. 24.2 the
quantity in lot. Total procurement costs and
cost is calculated inventory
by adding carrying costs
procurement cost have
and been
carrying respect to
Cost.withTotal
plotted cost is
minimum at the point A and thus A'
represents the
Another method of finding E.O.Q. that is by economic order quantity or economie o
mathematical means, is given below :
INVENTORY CONTROL AND MANAGEMENT
Let O is 24-5
the economic lot size or
E.O.O.
Cis the cost for one
item.
Iis the cost of carrying
lescence, taxes ctc. inventory percentage per period, including
in
insurance, obso
P is the
procurement cost associatcd with one order.
and U is total quantity used per
Number of period say annually.
purchase orders to be furnished
Total quantity
E.0.Q.
Total procurement cost
Number of purchase orders xCOst involved in one purchase or
procurement

XP ...(a)
Average annual inventroy = O2
Inventory carrying cost Average inventory × cost per item × cost of carrying inven
tory in percent per period.

..b)
Total cost, T = (a) + (b)
UxP
T= +

T= U.P.0:1+

To minimize the total cost, differentiate T, w.r.t., Qand put it equal to zero
dT
dQ (UPQ+Cxr)
0= -UPQi+ CI/2 or UP /Q =CI/2
C= 2UP.JcI.
2 U.P. ..)
CI.

FExample 24.1 : Given that

() Anrual usage, U=60 units
() procurement cOst, P=Rs.15 per order
(uu) cost per picce, C=Rs. 100
on obsolescence, taxes, insur
(iv)cost of carrying inventory I, a percentage including expenditure
ance, deterioration ctc. = 10%. Calculate E.O.0.
Solution: 2 U.P
;substituting the values
CI

|2x60x 15 = 13.41
100x (10/100)
 INDUSTRIALI ENGINEERING AN M
24-6

60
MANAM
Therefore, number of order per year = 11 41 4.47 say 5.

Hence Qor E.0,Q - 12units (Ans.) (roundcd)

The readers may try the following problems.

Problem: 24.1: The rate ofusc of aparticular raw material from stores is 2) units per vear
cost of carróng in
of placing and rocciving an order is Rs. 40. Thc cost of cach unit is Rs 100. The economicorder
in per cent peryear is 0. 16andit depends upon thc average stock. Determine the
If the lead time is3 months, calculate the reorder point [Ans. 10,
Prablem: 24.2 : Find Economic Order Quantity from thc following data :
Average annual demand = 30,000 units
Inventory carrying cost = 12% of the unit value per year
= Rs. 70
Cost of placing on order
Cost of unit = Rs 2
[Ans. 4183,4286 (rounded Ggrt
Problem: 24.3: A factory uses two picces per day of arod 6 mm in diameter and 150 mm ong
one of their manufacturing processes. The rod costs Rs. 3 each and the total expenses itvobet
purchasing and receiving them are Rs. 50 per order. The annual inventory carrying cost per itesRe
1. The procurement period is 3 days and minimum stock kept is 8 pieces. Find out,
() Standard ordering quantity,
(ü) Reorder point, and
(i) maximum stock,
[Ans. (i) 245,200 (rounded), (ü) 14, and (=
24.8. INVENTORY MODELS

Concept
Inventory models determine when and how much inventory to carry.
Inventory models handle chiefly two decisions.
(1) How much to order at one time, and
(2) When to order this quantity to minimize total costs.
Lowest-cost decision rules for inventory management pertain to either buying pro
ouside or producing them within the company.
Simple inventory models assume no delivery delay and that demand is known.
Probabilisticmodels handle situations of risk and uncertainty.
Types of inventory models
(1)Simple EOQ model,
(2) EOQ model with stockouls allowed,
(3) Inventory models under risk.
(1) Simplc EOQ model
The simple EOQ model can be used if the demand is known with certaintv
The demand and lead time are known. iN
#ell
The item will be purchascd from outside (the firm) and that demand will continue
future.
the sam
It is also assumed that not onlythe demand is known with certainty,, but that is243 depisth
day to day and that stockouts, are not allowed. Under these assumptions, Fig
inventory position through time.
 24-10 INDUSLLAL ENGINEEING AND MANAGFML
24.9. ABC ANALYSIS

249.1. Necossity
As the size of thc industry increascs, the number of items to be purchascd and then to be
of also incrcases Purchase and Controlofallitens ataime and inbulk mnuch befor 1akcn att.

and is therfore uncoonomica.

theiruse,iTrespeae
of their Usage valuc, price or pocurement problens, biocks and involves a lot of noney and man
hours
ABC anals1s heips segregating the items from onc another and tells how much vaiued the
and controjling it to what extent is in the interest of the orpanisation. item
2492. oiurai Steps
1. Identify ail the items uscd in an industry.
2List all the itcms as per their value.
3 Count the number of high valued, medium valued and low valued items.
4Find thc percentage of high, medium and low valued items. High valued items normal
coniribute for 70% or so of the total inventory cost and medium and low valued items, 20 and 1ts
rspoctively.
5.A graph can be plotted between percent of items (onX-axis) and per cent of total inventory as
(on Y-axs). Figure 24.6 shows such a graph.
Il can be scen that 70% of the total inventory cost is against 10% of the total itens (calledA-items
20% against 20% of the itens (B-items) and 10% against a big buik, i.e. 70% of the items (called C-items
Thus ABC anaiysis furnishes the foilowing information :
1.A-ilens are high vaiued but are limited or fcw in number. They need careful and close inventory
coMTol. Minimum and maximum limits, and reorder point is set for 4 items. Such items should be
thought of in advance and purchased well in time. A deailed record of their receipt and issues should be
kept, and proper handling and storage facilities should be provided for them.
cast
invenforr

fota
Percentq

Parcent of itemg
Fig 246 AHC analysis

Such itens being ustly arc purchascd in snall quanities oftenly and just beore their usc. This of
course increases the prOcurcment aNts and involves alittle risk of non availability. However, the lku
up inventory cost deereaCS and the problems of storage and care taking are minimizecd
A-items generally acount for 70 4"%of the total inventory cost and they constitute about 10
the total items.
 INVENTORY CONTROL AND MANAGEMENT
24-11
2. B-items are medium valued and their number
moderate control. They are more important than C-items. lies in between A and C-items. Such
items need
Thcy are purchased
requiements, record of receipts and issucs is kept and a procuremcnt order is
a on the basis of past
quantity touches reorder point. These items being placed as sOon as the
comparatively
months may be kept, whercas it needs a stock of fortnight less costly, a safety stock of up to 3
or so in case ofA items. B-items also
careful storage and handling. requre
In brief, B-items nced every
care but not so intensive as is required for
B-items generally account for 20 to 15% of the total A-1tems.
of the total items. isventory cost and constitute about 15 to 20 %
3. C-items are low valued, but
maximum numbered items.
These items do not need any control, rather controlling them is
important itemslike clips, all pins, washers, rubber bands, etc. They are uneconomical. These are the least
finish. NO expediting is necessary, no records are normally kept and agenerally procured just betor they
safety stock of 3 months or even
more can be purchased at an instant. Future requirements of such items are never calculated and a two
bin system is sufficient to hint procurement.
C-items generally account for 10 to 5% of the total inventory cost and they constitute about 75%
of the total items.