Management of Stores

Introduction Store is a place where excess material is kept

which will be used as and when required. Store management is “ to receive materials, to

protect them while in storage from damage & unauthorized removal, to issue the material in the right quantities, at the right time to the right place and to provide these service promptly and at least cost”.

Objectives of store

Minimizing cost of production through minimizing cost on materials

Maintaining the value of materials Service to user departments Establishing Co-ordination with other

departments Advising materials Manager

Functions of Stores 1. Receipt2. Storage 3. Retrieval4. Issue5. Records6. Housekeeping7. Control8. Surplus management9. Verification10. Interaction & coordination

Receipt Any item of goods or material that enters the

organization always enters through the stores. Similarly, every item unless specifically excluded, has to leave through the store. Stores is the final account keeper of all materials.

Material sent by any supplier after the security clearance comes to the stores. Stores check the document carried by the carrier, known as Delivery Challan, against the copy of the Purchase Order placed on the supplier by the organization.

Receipt Once the adequacy is established and quantity is verified the

material is sent for testing for quality parameters.

Some times quality control tests are elaborate and time consuming. If the policy of receipt is to unload the material subject to quality control acceptance, it is cleared for unloading.

Unloaded material is kept on the hold if it not yet cleared by quality control department. If the material is rejected it is sent back to the supplier after clear documentation.

Storage Once the unloaded material is approved by the

quality control department, as per the quality plan in the quality system, it is moved to a specific place in the stores layout.

The material is so stored that it becomes easy to retrieve and issue subsequently.

Storage should also ensure protection against deterioration, damage and pilferage.

Storage Detailed system is adopted for location and labeling

of items while in storage. Storage plan is made keeping in mind,

1. nature of the product- physical state, toxicity, inflammability and other hazards

2. volume and weight- heavy or light 3. movement frequency- fast moving or slow moving4. point of use

Retrieval Easy and quick retrievability of items that are demanded

by the internal customers.

Easy identification, maximum space utilization and minimum handling are key factors to retrieval functions.

It is common knowledge in many of the companies that after hours of searching for the item is declared to be out of stock. This causes hold up of production process and avoidable urgent purchase of out of stock material. This function takes place as per established retrieval system.

Issue Fulfilling customer demand for the item in

minimum time, keeping quality high and cost minimum is issue.

An internal customer doesn’t pay the price but he has to fulfill requirement of authorization for the demand.

A duly authorized indent or requisition for the item is the key

Records Maintaining records of receipt and issue. Updating the stock levels as per movement of

materials. Basic records of store are bin card and stock

register. Bin card is placed on the bin in which items are stored.

This gives information about receipt, issue and balance. stock register gives all the information in the bin card

and also the value.

Housekeeping Maintenance of spic and span cleanliness in

the store and ensuring principle of Place for Everything and Everything in its place is fully implemented.

Good housekeeping ensures satisfactory work practices

Control Taking measures to ensure material plan is being

adhered to.

Any changes in consumption pattern or replenishment pattern are closely monitored for corrective action.

Material movement is watched to identify nonmoving material for disposal. Effective control puts into effect management objective of ‘no shortage and no excess’.

Surplus management Effective disposal system for unneeded

material to reduce inventory cost and proactive measures to eliminate deterioration and obsolescence.

Obsolete items are good in all respect but have no useful role in the company due to changes that have occurred in the course of time.

Surplus management Surplus items are those that have accumulated due to

faulty planning, forecasting and purchasing. Hence a usage value is associated with these items.

Scrap is wastage generated due to processes like turning, boring drilling etc. and also due to bad manufacturing. it is said that in India nearly Rs. 2500 crores are tied up as obsolete, surplus and scrap items.

Verification Stock verification to eliminate gap between

information and physical stock. In stores some items are maintained as stock items. The stores triggers the procurement cycle for such items when a predetermined reorder level is reached. Hence correct stock position through verification is critical to ensure ‘no shortage and no excess’ for the item.

Interaction & coordination Very close interaction between Purchasing,

production, quality control and engineering functions is obviously needed in the discharge of the functions discussed so far. It also becomes necessary to coordinate the flow of material samples and information through a network of departments for performance of stores functions. Besides, every management function being an internal customer interaction is very important.

Types of Stores Centralized store Decentralized store

Centralized or decentralized stores organization Centralized stores concept is to store all items

at a central place and control materials movement from this central place. Whereas

Decentralization concept is moving the material to the respective consumer function or directly to the points of use.

Centralized Store Figure

Features of centralized stores organization 1.      Effective supervision and control.2.      Issue at single point reduces cost of issue3.      Reduced personnel requirement4.      Efficient layout for stores5.      Better handling technology6.      Better inventory checks7.      Maintenance of optimum stores8.      Elaborate documentation

Advantages of centralized store The variety of goods can be supplied to all

users from one small location. Less manpower will be required. Better control of materials is possible. Material handling will be easy. Wastage and deterioration of materials will be

less.

Disadvantages of centralized store It may not be suitable for large manufacturing

concern. More staff will be required for shifting &

transportation of the materials to various production units.

Decentralized Stores Figure

Features of decentralized stores organization 1.      Reduced handling2.      Customer friendly3.      Fewer production stoppages4.      Visual management is easier

Advantages of decentralized stores Reduced material handling and associated

cost. Less chances of bottlenecks and delays. Convenient for every department to draw

materials. Less transportation time.

Disadvantages of decentralized stores Coordination and control of all decentralised

store is a challenge to management. Labor utilization may suffer due to low store

activity level.

INTRODUCTION

Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be placed.

Items carried in inventory can be

Raw materials Purchased parts Components Subassemblies Work-in-process Finished goods

© Wiley 2010 30

Types of Inventory

Reasons for keeping Inventories  To stabilise production To take advantage of price discounts To meet the demand during the

replenishment period To prevent loss of orders(sales) To keep pace with changing market

conditions

Objectives and Benefits

Inventory control aims at keeping track of inventories. In other words, inventories of good quality and right quantities should be made available to different departments as and when they needed.

Goals: Reduce Cost, Improve Service

By effectively managing inventory:– Xerox eliminated $700 million inventory from its

supply chain– Wal-Mart became the largest retail company

utilizing efficient inventory management– GM has reduced parts inventory and

transportation costs by 26% annually

Functions of Inventory

To meet anticipated demand

To smooth production requirements

To decouple operations

To protect against stock-outs

COSTS IN INVENTORYInventory Management

Inventory costs may vary from 28 to 32% of the total cost. Apart from material costs, several other costs are also involved in inventory. These are given as below:

Ordering Costs Holding Costs/ Carrying Costs Stock Out Costs

06 July 2012 KLE College of Pharmacy, Nipani. 35

Stationary Clerical and processing, salaries/rentals Postage Processing of bills Staff work in expedition /receiving/

inspection and documentation

Ordering CostsInventory Management

06 July 2012 KLE College of Pharmacy, Nipani. 36

Holding/Carrying Costs Storage space (rent/depreciation) Property tax on warehousing Insurance Deterioration/Obsolescence Material handling and maintenance, equipment Stock taking, security and documentation Capital blocked (interest/opportunity cost) Quality control

Inventory Management

06 July 2012 KLE College of Pharmacy, Nipani. 37

Loss of business/ profit/ market/ advise Additional expenditure due to urgency of

purchasesa) telegraph / telephone chargesb) purchase at premiumc) air transport charges

Loss of labor hours

Stock out CostsInventory Management

06 July 2012 KLE College of Pharmacy, Nipani. 38

Inventory Planning and ControlFor maintaining the right balance between high and low inventory to minimize cost

Inventory Control DecisionsDecisions:

How much to order? When to order?

Objective of Inventory Control Systems The objective of an inventory control system

is to ensure the constant availability of products, by defining: When products should be ordered. What quantities of products should be ordered How to maintain adequate quantities to meet

demand, while avoiding overstocks and stockouts

Inventory Control SystemsMaximum/minimum Inventory Control System are defined by

months of stock

Systems are designed so stock quantities routinely fall between the minimum and maximum stock levels

The minimum stock level includes safety/buffer stock

Any inventory control system (max/min or other) must take into account safety/buffer stock

Process of Inventory Management and control

Détermination of optimum inventory levels and procedures – trends of sales inventory

Determination of degree of control-by classification

Planning and design of inventory control system-Fixed order quantity system and Fixed order periodic system

Planning for inventory control organisation

44

ABC Inventory ClassificationABC classification is a method for determining level of control

and frequency of review of inventory items A Pareto analysis can be done to segment items into value

categories depending on annual dollar volume A Items – typically 20% of the items accounting for 80% of

the inventory value-use Q system B Items – typically an additional 30% of the items

accounting for 15% of the inventory value-use Q or P C Items – Typically the remaining 50% of the items

accounting for only 5% of the inventory value-use P

© Wiley 2010 45

The AAU Corp. is considering doing an ABC analysis on its entire inventory but has decided to test the technique on a small sample of 15 of its SKU’s. The annual usage and unit cost of each item is shown below

© Wiley 2010 46

(A) First calculate the annual dollar volume for each item

© Wiley 2010 47

B) List the items in descending order based on annual dollar volume. (C) Calculate the cumulative annual dollar volume as a percentage of total dollars. (D) Classify the items into groups

© Wiley 2010 48

Graphical solution for AAU Corp showing the ABC classification of materials

The A items (106 and 110) account for 60.5% of the value and 13.3% of the items The B items (115,105,111,and 104) account for 25% of the value and 26.7% of the items The C items make up the last 14.5% of the value and 60% of the items How might you control each item classification? Different ordering rules for each?

49

ABC Application Jewelry Store Fine Dining Restaurant Outdoor Retailer Large Department Store

Selective Inventory Control is defined as a process of classifying items into different categories, thereby directing appropriate attention to the materials in the context of company’s viability.

SELECTIVE INVENTORY CONTROLInventory

Management

50

Classification Criteria

A-B-C Annual value of consumption of the items

V-E-D Critical nature of the components with respect to products.

H-M-L Unit price of materialF-S-N Issue from storesS-D-E Purchasing problems in regard to availability

S-O-S SeasonalityG-O-L-F Channel for procuring the materialX-Y-Z Inventory value of items stored

Classification of Materials for

Inventory Control

06 July 2012 51

ABC Classification SystemClassifying inventory according to annual value of consumption of the items.

AA - very important BB - mod. important CC - least important

Annual $ value of items

AA

BB

CC

High

LowFew Many

Number of Items

Inventory Management

52

ABC Classification System (Cont’d)

When a large number of items are involved, relatively few items account for a major part of activity, based on annual value of consumption of items.

It is based on the principles of ‘vital few and trivial many’.

Inventory Management

53

ABC Classification System (Cont’d)

A-items : 15% of the items are of the highest value and their inventory accounts for 70% of the total.

B-items : 20% of the items are of the intermediate value and their inventory accounts for 20% of the total.

C-items : 65%(remaining) of the items are lowest value and their inventory accounts for the relatively small balance, i.e., 10%.

Inventory Management

06 July 2012 54

All items used in an industry are identified. All items are listed as per their value. The number of items are counted and

categorized as high-, medium- and low-value. The percentage of high-, medium- and low-

valued items are determined.

Procedure for classificationInventory Management

55

Inventory Management

Pareto curve

56

Based on the critical nature of items.

Applicable to spare parts of equipment, as they do not follow a predictable demand pattern.

Very important in hospital pharmacy.

V-E-D ClassificationInventory Management

57

V-E-D Classification (Cont’d) V-Vital : Items without which the

activities will come to a halt. E-Essential : Items which are likely to

cause disruption of the normal activity.

D-Desirable : In the absence of which the hospital work does not get

hampered.

Inventory Management

58

H-M-L Classification Based on the unit value (in rupees) of items. Similar to A-B-C analysis

H-High M-Medium L -Low

Inventory Management

59

F-S-N Classification Takes into account the distribution and

handling patterns of items from stores. Important when obsolescence is to be

controlled.F – Fast moving

S – Slow movingN – Non moving

Inventory Management

60

S-D-E Classification Based on the lead-time analysis and

availability.S – Scarce : longer lead timeD – Difficult : long lead timeE – Easy : reasonable lead time

Inventory Management

61

S-O-S Classification S-O-S :Seasonal- Off- Seasonal Some items are seasonal in nature and hence

require special purchasing and stocking strategies.

EOQ formula cannot be applied in these cases.

Inventories at the time of procurement will be extremely high.

Inventory Management

62

G-O-L-F Classification

G-O-L-F stands for:

G – Government O – Ordinary L – Local F – Foreign

Inventory Management

63

X-Y-Z Classification Based on the value of inventory stored.

If the values are high, special efforts should be made to reduce them.

This exercise can be done once a year.

Inventory Management

64

05/03/23 65

What is EOQ ? Economic order quantity is one of the techniques

of inventory control which minimizes total holding and ordering costs for the year.

The economic order quantity is the technique

which solves the problem of the materials manager.

05/03/23 66

Definition of EOQ

“ EOQ is essentially an accounting formula that determines at which the combination of order, costs and inventory carrying cost are the least. The result is the most cost effective quality to order. In purchasing this is known as order quantity, in manufacturing it is known as the production lot size.”

- Dave Piasecki

05/03/23 67

EOQ Models ‘Q’ Models; &

‘P’ Models.

05/03/23 68

Assumption of the EOQ ModelsDemand is known and is deterministic, i.e. constant;The lead time, i.e. the time between placement of the order and the receipt of the order is known and constant;The receipt of inventory is instantaneous. In other words the inventory from an order arrives in one batch at one point in time;Quantity discount are not possible, in other words it dose not make any difference how much we order, the price of the product will still be the same; andThat only costs pertinent to inventory model are the cost of placing an order and cost of holding or storing inventory over time.

69

‘Q’ Model of EOQ

In ‘Q’ model, a fixed quantity of material is ordered when ever the stock on hand reaches the recorder point the fixed quantity of material ordered each time is nothing but the economic order quantity (EOQ). when the new consignment arrives the total stock shall be within the maximum and the minimum limits.

70

Graphic presentation of ‘Q’ Model

EOQ

RE-ORDERLEVELBUFFER

STOCK

MAXIMUM LEVEL

MINIMUM LEVEL

E GINVENTORY

TIME PERIOD

K

A B C D

05/03/23 71

Mathematical method of EOQThe objective is to determine the quantity to order which minimize the total annual inventory management cost;Minimize Total cost per period = inventory holding cost per period + order cost per period;Where order cost = the number of order placed in the period ‘x’ order cost; andCarrying cost = average inventory level ‘x’ the carrying costs of 1 unit of stock for one period.

05/03/23 72

Merits of ‘Q’ systemEach material can be in the most economical quantity;Purchasing an inventory control personnel automatically devote attention to the items that are needed only when required; andPositive control can be easily exerted to maintain total inventory investment at the desired level, simply by manipulating the plant maximum and minimum values.

05/03/23 73

Demerits of ‘Q’ systemThe orders are raised at irregular intervals which may not be convenient to the suppliers;In case the lead time is very high supply of inventory may interpret;EOQ may give you an order quantity which is much below the supplier minimum, and there is always a chance that the ordering level for an item has been reached but not noticed in which case a stock out may occur; andThe items cannot be group and ordered at a time since the recorder points occur irregularly.

05/03/23 XIDAS, Jabalpur 74

‘P’ model of EOQ

In this model the stock position of each item of material is regularly is reviewed;

Under this model inventory is ordered based on fixed period.

05/03/23 XIDAS, Jabalpur 75

QUALITY

UNITS OFSTOCK

Replenishment level

R1 15 days

Y1

Y2 Y3

R3R1

G

S3R2S2

S1

S2R2 R3 S3

Graphical Presentation of ‘P’ Model

05/03/23 XIDAS, Jabalpur 76

Merits of P model The ordering and inventory cost are low; The supplier will also offer attractive

discount on sales are granted; and The system works well for material which

exhibit an irregular or seasonal use and whose purchase must be planned in advance on the basis of sales estimates.

05/03/23 XIDAS, Jabalpur 77

Demerits of ‘P’ modelIt compels a periodic review of all item; this in itself make the system somewhat inefficient. because of difference in uses rate supply may not have to be order until succeeding review;Equally important the system demand the establishment of rather inflexibility order quantities. in The interest of the administrative efficiency; andThe periodic review system tends to peak the purchasing work around the review dates.

Inventory Counting Systems (Cont’d)

Two-Bin System - Two containers of inventory; reorder when the first is empty.

Universal Bar Code - Bar code printed on a label that hasinformation about the item to which it is attached.

214800 232087768

Inventory Management

78

Value Analysis Manufacturing: Systematic analysis that identifies and selects the best value alternatives for designs, materials,

processes, and systems. It proceeds by repeatedly asking "can the cost of this item or step be reduced or eliminated, without diminishing the effectiveness, required quality, or customer satisfaction?"

Also called value engineering, its objectives are (1) to distinguish between the incurred costs (actual use of resources) and the costs inherent (locked in) in a particular design (and which determine the incurring costs), and (2) to minimize the locked-in costs.

2. Purchasing: Examination of each procurement item to ascertain its total cost of acquisition, maintenance, and usage over its useful life and, wherever feasible, to replace it with a more cost effective substitute. Also called value-in-use analysis.

VALUE ANALYSIS: STEPSFirst step is to specify the Function of the Product and to identify those Product Characteristics and Dimensions that are of value to Customers.

Typical questions might be:a.What is the Product or Component?

b. What is its Function? What does it do? Why do we need to do it?

c. What characteristics are of value to the customers? How will the customer use the Product?

It is helpful to define the function of a product or component using two-word statements.

For example to the question ‘What is the product or component supposed to do?’ The answer might be: Control current (Electrical device), Transfer funds (bank cheque), Cure illness (Medical procedure), Heat fluid (Heating element in machine). This type of answer reveals the core of the product..

VALUE ANALYSIS: STEPS (contd.)(contd.)The second step is to determine how each product characteristic or component contributes to its value (functionality) and to determine what each component costs. Typical questions might be:a. How does this component contribute to functionality? How does it increase the product’s value?b. What does it cost.

The final step is the creative phase in which we redesign product or component to reduce its cost or improve its value. During this phase, team members focus especially on simplifying the design and evaluating the appropriateness of the product specifications, using the following questions:

VALUE ANALYSIS: STEPS (contd.)(contd.)

a. Can this be done another way? Can it be done more cheaply?

b. Is the item over-engineered? Does it do more than necessary?

c. Can the item’s function be combined with that of another component? How much does it cost to do this?

d. Can a standard or existing component be used?

e. Can a different material be used?

f. Can this product be made easier to assemble?

The answers to these questions represent design alternatives that can be compared and evaluated in terms of their value and cost.

Example: VE played an important role in Honda’s design of its 1994 ACCORD. Each part has to pass careful examination by a VE team. Not until the part passed this evaluation (answering questions such as: Why this shape? Why this material?) could a designer sketch a prototype part.