Material Management & Inventory Control

MATERIALS MANAGEMENTDEFINITION
A process encompassing acquisition, shipping, receiving, evaluation, warehousing and distribution of goods, supplies and equipment.

Need
Maintaining Continuity of productive operations by ensuring uniform flow of materials. Reducing material costs.

What Is Inventory?
Stock of items kept to meet future demand.

i.e. 1. Raw materials 2. Purchased parts and supplies 3. Work-in-process (partially completed) products (WIP) 4. Items being transported 5. Tools and equipment

Inventory control
A scientific system which indicates:
1. What to order
2. When to order

3. How much to order

4. How much to stock

Inventory Costs
Carrying cost
cost of holding an item in inventory

Ordering cost
cost of replenishing inventory

Shortage cost
temporary or permanent loss of sales when

demand cannot be met

Inventory Order Cycle

Order quantity, Q Inventory Level

Demand rate

Reorder point, R

Lead time Order Order placed receipt

Lead time Order Order placed receipt

Time

Economic Order Quantity

EOQ is order quantity that minimizes total

inventory holding costs and ordering costs. It is also knows as Wilson EOQ formula or Wilson Formula.

Underlying Assumptions:
1. Constant Rate of usage 2. Material is supplied without fail at the end of one lead time after reorder (Lead time is constant)

EOQ Formula
Notation
D = demand in units per year H = holding cost in dollars/unit/year S = cost of placing an order in dollars Q = order quantity in units

Total Annual Cost for Purchase Lots

TCp S ( D / Q) H (Q / 2)
Economic order Quantity

EOQ

2 DS H

Balancing Carrying against Ordering Costs

Annual Cost
Higher Minimum Total Annual Stocking Costs Total Annual Stocking Costs Annual Carrying Costs Annual Ordering Costs Smaller EOQ Larger Order Quantity

Lower

ABC analysis
Class A- 10-20 % of items accounts for 70-80% of annual turnover Class B- 20-40 % of items accounts for 10-15% of annual turnover Class C- 40-70 % of items accounts for 05-15% of annual turnover.

VED Analysis
V stands for Vital- items of Extreme

criticality.
E stands for Essential- Items somewhere in

between.
D stands for Desirable- Not critical.

FSN Analysis
F stands for Fast Moving Materials- they are

stocked nearer to the store keeper.

S stands for Slow moving materials- they are

stocked at a Considerable distance.

N stands for Non moving materials- they are

stored at Remote place.

END