MODULE III

Inventory control techniques, working capital management, management of stores, material handling

Space, room, or building where various types of material, semi finished items or items purchased as temporarily placed (for supply, for production or for sale) is called a store / ware house. Stock/ stock room Finished parts ready for sale and shipment. Each and every types of materials needs a separate place, bin or container and a room. The process of supplying and storing various material and parts is called stores management. Materials are supplied from the stores based on demand and request. Storage of material maintains continuously in production. Classification Classification based on the type of material stored and according to the location. According to the location. 1) Fixed location easy for locating material, less time for delivery 2) Random location 3) Zoned location items of a particular groups are stored in a given zone Main criterion in deciding the type of location is 1) Less time of travel. 2) Easy storing and retrieval of items using MHS Centralized & decentralized stores Centralized Variety of goods can be supplied to all users from one location, minimum inventory, less manpower. Better control, economy in space, Inspection & receipt easy, MH easy, wastage & deterioration will be less. Not suitable for large organization, more manpower needed for transportation of material to various production units. Safety and maintenance is difficult in large centralized stores. Record keeping difficult. Decentralized Needs are planning and highly optimum location , more suitable for large organization , less manpower and need for transportation. Safety and maintenance more easy . Record keeping more easy, variety of material is limited , more inventory of a limited type of material, difficult to control and co-ordinate a number of stores, inspection & receipt issue is difficult , more wastage .
Dr Pramod Kumar Mangayil, Associate Professor, VJCET Page 1

Store management & store keeping The purpose of store management is to device the activities of storing in such a way that the material are received on one end, kept inside the storing room and are issued to deliver at the production control. 3 main functions Receipt Storing Issue

Objectives of store keeping 1) To procure and maintain the required raw materials, parts, equipments, tools required for the process and to store them. 2) To provide maintenance of material spare parts. 3) To store scrap, discarded and obsolete goods. 4) To receive and issue finished goods and stock Functions:1) To store material above safety stock and up to maximum capacity 2) To see that essential components required for production doesnt fall below the required minimum level. 3) To inspect and check the material after receipt and before storing 4) To arrange and store the material 5) To maintain material flow, up to date records of incoming and outgoing materials Organization of stores: Store keeper is the main person responsible to manage all the stores. Store is the link between purchase department and production department. Centralized stores are managed by materials management department and decentralized store are managed by production controllers. The organization of a typical store is given below.

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The main duties of Chief store keeper 1) 2) 3) 4) Planning the store for optimum utilization. Receiving all supplied materials, checking, inspecting and recording them. Storing material in proper place, maintaining bin cards and stock cards. Receiving requests from various facilities and sending them to purchase department before shortage arises. 5) Codification and classification. 6) Stock valuation, verification, stock disposal record keeping Types of warehouses/ stores Stores are designed and located, depending upon the type of material to be stored, the frequency of receiving and withdrawing material and the method of storing They are classified into two categories based on 1. Physical size and location and 2. Function 1) Physical stores The stores are located at various places based on their sizes which depend on the quantity and type of material kept in them. 1. Central warehouse located at one place, serves various sub stores or different plants. Controlled by one storekeeper and his associates. Centralization of material receipt and stock, can be located at a suitable location to supply materials required for several manufacture facilities which requires material handling and gives better control. Hence advantages for both small as well as big organization. 2. Transit stores used to keep material temporarily, Mainly WIP/ Semi finished goods. 3. Sub stores Stores located near the place of manufacturing. So that they can be immediately used up. 4. Storing sites For large construction and fabrication project, stores are built up near project sites for storing bulk and material needed. 5. Departmental stores- These are places where all the material required for a particular department will be kept to facilitate the working of the department. 6. Company warehouses- Large companies have their big group stores located at one place as a company warehouse, which serve all their selling units. They are located all over the country. 2) Functional stores Place where material of a particular use are stored and supplied 1) Raw material store Raw material used for production operation and process are purchased in bulk quantities, requires large spaces and also trucks and transportation equipments.
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2) Spare parts stores Parts not manufactured in plants but are required for making the product used in assembly line. They are kept at separate places and in bins, type of storing depends on the items present. Electronic & electrical parts dust free & a/c environment. Welding rods moisture free environment. Rubber parts- dark rooms, coated with chalk powder. Auto parts (gears, bearing, and tools) water protection environment, greased, & painted rust free. Screw, fasteners, bolts, nuts, etc. in proper bins.

3) General suppliers stores Material not entering the product but are supporting items in manufacturing 4) Tool room material stores- cutting & machining tools, oils, lubricants, abrasives , gloves, shields etc. carefully stored to prevent rusting and other chemical action. 5) Packing stores material used in packing, various types of containers and other packing material. 6) Receipt & quarantine stores- Stores or warehouses where materials are received from vendors Receipt stores, material kept here till they are inspected. Materials are sent for inspection and verification to quarantine store 7) Work in process stores Various types of parts and components are produced at different production facilities in batches. If a batch producing one part has more items than required, the remaining parts are temporarily kept near the production facility before being used up. These are called work in process stores. 8) Finished product stores Finished product before being sold are kept as stock in finished product stores 9) Stationary stores Office material like files and other stationary items are kept here. 10) Bonded stores Store where goods on which customs or excise duty has not been paid are kept. 11) Cold storage or refrigerated stores, dehumidified and flammable stores Perishable materials are kept in cold storage or refrigerated stores. Inflammable and toxic materials are kept in special fire proof and entry restricted rooms. There are flammable stores. They have ample safety devices and precautions. Materials which are to be kept in a moisture free environment are properly packed sealed and kept in dehumidified stores. These stores also have the necessary safety devices and precautions and handling equipments needed. 12) Open sheds / open yards used to store large material outside in open places.
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Organizing stores Stores are organized according to type of material received and layout and location. The activities of stores departments is as follows 1) Material planning All materials required for production must be identified and well defined. (Codification, specification & standardization). 2) Receipt of material All material purchased from vendors are received by the storekeeper. A number of documents are checked like Challan, suppliers despatch note, consignment note, material transport advice note, and packing list. After checking the material for its quantity and damages, the delivery note is signed, checked and stamped by the receipt section and one copy is retained by them and information entered into the goods receipt register. 3) Inspection & verification- material are inspected for correct quantity as per specification. ( Quality certificate are issued by the supplier) 4) Storing & issue of material Types of storing depends on the types of material and how frequently they are used. if material are to be stored for a long period , then their safety and security are important . The method for storing and issue of material may be done according to two way FIFO method and LIFO method. 5) Preservation and maintenance of material stored 6) Transport and material handling 7) Record keeping 8) Stock taking and auditing 9) Inventory control 10) Finished goods inventory packing and dispatching Methods of storing the materials Material will be stored depending upon its size, shape & weight. They are usually stored in bins, Shelves or racks , pallets, heavy lifts, containers etc

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Bins Small items that can be handled easily, fast moving items, usually manual loading & unloading. Bin card is used for recording material leaving, entry and balance in the bin are recorded. Max & minimum levels of inventory, ordering levels etc. are also recorded. Shelves or Racks Items which are large in size and heavy to be stored and where manual handling is not possible o o o o o Static racks Live racks Drive through racks Honey comb racks Self cracked racks

Pallets Specially designed platforms for stacking loads which can be moved by forklift. Its suitable for stocking small number of items which are frequently moved. Containers manually used to store liquids and gases Issue of materials Materials are released or issued from stores by materials issue requisition. These issued in triplicates are requisitions made to the storekeeper by an authorized person to issue materials to the bearers of the requisition. It contains information like date, material description, department requiring the material, job number, signatures. If the material supplied is not fully utilized, the balance is returned back to store. They are returned by material return note. For keeping proper recorder of materials, various store registers are

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used. They are inward & outward register, receipt and issue register, stock register, loan register & packages register. Valuation of stock & materials Inventories have money value. They are assets and working capital of the organization. Material & parts are purchased at different cost in the book of accounts. They are valued according to some method so that all items have the same price. This valuation will show loss or profit. The method for valuation is to be approved by the board and is valid for 3 years. The various methods used for valuable are 1) First in First out 2) Last in First out 3) Highest in first out and next in first out 4) Simple average & Weighted average method 5) Fixed price & standard price method 6) Base stock method 7) Actual cost method. 8) Current value method 9) Inflated price method 10) replacement price method Lay out of stores Lay out planning is important for easy receipt , handling & issue of materials Manufacturing continuity in flow minimum movement Full utilization of space while storing & handling For optimum time & labor utilization To minimize wastage, erosion, rusting and deterioration

With respect to the above reasons the following types are suggested 1. Straight through flow 2. Straight line flow 3. Lay out of work element Straight through flow simple layout, items enter from one door and exit through another. Items will be picked from the rows and move in one direction. Different types of stores will be arranged in each row and there will be sufficient movement spaces around each store. Large centralized stores / large warehouses etc. have this layout

Dr Pramod Kumar Mangayil, Associate Professor, VJCET

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Straight line flow Here stores are arranged according to items incoming and outgoing from each of the storing places. They are arranged in such a way that a straight line flow of material is possible. Usually for small items

Layout of work element stores are arranged according to work element grouping together for that particular work. Very flexible. They are arranged as per fast moving, medium moving or slow moving items. Depending on the space available, the various types of equipments Bins , racks , Pallets , Boxes , containers are successfully designed to make the layout effective .

Material handling Every operation requiring raising, lowering, or moving an item may be termed as material handling. It corresponds to the basic movement of material from one point to another and is not a value added activity. Basic principles 1. Least handling is the best handling. Since handling does not add value to the production, it is best to keep it minimum. Hence minimize the handling cost. 2. Standardization of equipments MH system should be flexible and capable of performer multiple operations. Standardization is important as it reduces cost of operations, maintenance, repair and also storage.

Dr Pramod Kumar Mangayil, Associate Professor, VJCET

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3. Specialized equipment kept to a minimum- Though desirable it should be minimized as the initial cost, operating, maintenance, repair cost are high. 4. Volume dictates method material volume determine the method of handling 5. Planning ahead like all other planning activities, MH planning should also done in advance 6. Length and number of moves The movement of materials should be studied in detail to avoid back tracking. 7. Equipment capacity Equipment capacity should be carefully analyzed. Overloading and under loading should be equally avoided. Overloading causes wear & tear, increases maintenance and repair cost and also create accidents. 8. Analysis of operation Determine the combination of activities so that simplification and concurrency can be achieved. 9. Payload The physical state of the materials, the value of the material, all determine the selection of the MH system. 10. Straight flow line The movement of MH system should be in a straight line. 11. Standardization of methods The methods of picking loading & unloading, movement, etc. should be standardized. So as to avoid wastage in time, labor and equipment. 12. Short irregular moves in some cases where deployment of equipment may be costlier than manpower, it is economical to use manual labor for sort irregular moves. Types of Equipment 1) Pallets 2) Fork lift 3) Cranes 4) Conveyers 5) Elevators 6) Hoists 7) Movable ramps 8) Hand trolley & tractors Objective of MH The main objectives of MH are 1. Increase space utilization 2. Improving operating efficiency by reducing MH and load per movement .Hence improving productivity and saving cost. 3. Timely delivery of materials 4. Reducing cost by increasing capacity improving working conditions, improving customer service, improving space & equipment utilizations.
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Functions of MH 1) To increase the efficiency of production and to have better productivity 2) To increase floor space utilization 3) To reduce in process inventory 4) To reduce working distance & traffic congestion 5) to smooth production flow 6) to simplify handling activities 7) to optimize worker & equipment utilization 8) To prevent accidents and to have a better control. Unit load concept It is defined as a number of items, so arranged that mass can be picked up and moved as a single object. The determination of unit load depends upon 1) Purpose for which unit load is intended 2) Characteristics of items and carrier 3) Capabilities and limitations of handling systems 4) Vendor, plant & customer details Unit load should be analyzed with respect to 1) Low cost 2) Mini tare weight- unladen weight, is the weight of an empty vehicle or container 3) Mechanical strength 4) Disposable 5) Optimum size 6) Ease of utilization & identification 7) Versatility 8) Transportable &interchangeable 9) Optimum shape 10) customer requirements Basic Principles 1) Planning 2) Systems 3) Material flow
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4) Simplification 5) Gravity 6) Space utilization 7) Unit size 8) Safety 9) Mechanization 10) Equipment selection 11) Standardization 12) Dead weight 13) Flexibility 14) Motion 15) Idle time 16) Maintenance 17) Obsolescence 18) Capacity 19) Performance efficiency MH Methodology For MH planning its necessary to know the movements of materials inside the plant during processing. The space between machines, storage systems and equipments, decide the MH S. the following points are necessary while deciding M H planning. 1) 2) 3) 4) 5) 6) 7) 8) Avoid unnecessary material transportation & excessive handling Avoid the use of specialized MH S Prepare detailed specification of MH equipments before purchase Avoid repacking Avoid back tracking & cross traffic Move material only in quantity required Use containers , bins & racks effectively effective use of building height

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Material handling safety MH increases the possibility of injures and adds to cost of production. To reduce the number of MH injures and to increase plant efficiency. MH should be minimized by combining and eliminating operators Manual handling accounts for 25% of all occupational injuries. Strains sprains, fractures & bruises are common MH injures. Improper lifting, carrying too heavy loads, incorrect gripping, failure to observe proper foot or hand clearances and failure to wear safety equipments are the main reasons for these injures. *Always assess property and weight of the material to be handled *Check equipment & safety working load *Assess age, sex, physique and environmental condition *Search for potential hazards *Give adequate margin for safety Selection of MH Equipments 1) Depends on type of material moved Size, shape, weight, volume etc. 2) Physical & chemical properties 3) Layout type of building, width of road, floor level ,height , room size , 4) Method, direction & movement. 5) Type of machine/equipment used for production 6) MH cost , safety and life of equipments 7) Equipment cost installation maintenance Selective inventory control Method of inventory control vary from item to item .The items are selected on the basis of their values and other priorities .Thousands of materials purchased have to be classified and stored as per their cost/ volume / use for effective control and economic production. The methods used to classify the inventories systematically are called selective inventory control analysis. The various methods of Selective Inventory control are 1) ABC 2) VED 3) XYZ 4) FSN 5) HML 6) GOLF 7) VEIN 8) SDE 9) SOS 10) FAN analysis

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ABC analysis Developed by Ford Dickie of GEC. This analysis is used to classify material according to their sales value. All items are classified into 3 groups A B & C . Sales value (Annual Quality of item * sales price) of all the items are calculated & tabulated. % sales value and % Quantity of each item is also found out . 70% of total sales value will be listed as A category 20% will be listed as B category and 10 % is listed as C category A items - they have 70 % of sales value but less than 20 % of quality. Working capital should not be blocked on this. Can be ordered frequently and should be consumed immediately. Purchase controlled by top management. Utmost care is given. B items They have 20 % sales value and about 20% of Quality. Medium value products. They can also be frequently ordered and economically purchased. C Items They have least sales value of 10 % but are required in large Quantities almost 60 %. They should be purchased in bulk, only purchased once or twice a year, least valued. ABC= Always better control Advantages 1) Reduces Capital investment Costlier items note stored for longer periods. 2) Reduces ordering and carrying cost Various items are economically ordered and stored 3) Purchasing becomes easy 4) Better record keeping

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Dr Pramod Kumar Mangayil, Associate Professor, VJCET

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VED This classifies items are vital, essential & desirable. V- The production will stop without them E The production will be disrupted D - Production will not suffer immediately. F S N - This classifies items as fast moving, slow moving and non moving items F- Fast moving, consumed very fast S Slow moving consumed slowly N Non moving will reduce inventory cost The non moving items can be completely thrown off after a certain period of time & the slow moving items stock can be drastically reduced HML Analysis Here items are classified as per their unit value H- Items are having highest cost per unit M- Items are medium cost items per unit L- Items are least price items Quantity consumption or usage per year is not considered. Many times HML & ABC are done together. XYZ Analysis -Based on the value of inventory stored X- Items are those whose inventory value is higher Y Medium value Z Least inventory values not reviewed frequently Combined Analysis 1. A B C & X Y Z X Layout cost & high value A important items stored carefully Medium cost & high B value items stored carefully Low cost high value items ordered in C sufficient Quantity for fully discovered Y Layout cost medium value item ordered using EOQ Medium cost medium value items ordered regularly Low cost medium value items always available in store Z Largest cost & low value item stored in sufficient Quantity Medium cost less value stored sufficiently Low cost less value items purchased once a year in large amount

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2. HML & VED. V H High price vital items must be available in store E D High price essential items High price desirable ordered frequently items, economically ordered Medium price essential items available in store Low price essential items stored in large numbers Medium desirable items ordered once or twice a year Low price desirable items ordered once in a year

M Medium price vital items must be available in store L Low price vital items availability assured

Factors affecting the selection of MH Group1) Adaptability load carrying & movement characteristics should fit the MH problem 2) Flexibility it should have flexibility to handle more than one material 3) Load capacity it should have enough load Carrying characteristics to do the job effectively 4) Power- should have optimum power 5) Speed Rapidity of movement within limits of production process 6) Space required Enough space to install , operate & supervise 7) Ease of maintenance 8) Environment Should confirm to environment regulations 9) Cost Working Capital Management Net working capital (N W C) is an absolute measure of a companys current operative capital employed. N W C = Current assets current liabilities Current assets are assets which are expected to be sold or used within a fiscal year. Cash, cash equivalent, accounts receivable, inventory and short term investments. Current liabilities are those that are to be settled in cash within the fiscal year. Account payable for goods / services, Short term loans, dividends & interests and taxes. Working capital indicates companies operating efficiency. High working capital indicates too much money is tied up in the business. The main areas of effective working capital management are inventories, accounts receivable & accounts payable.
Operative NWC = Inventories + receivables- Payables Advances received + Advances made. Dr Pramod Kumar Mangayil, Associate Professor, VJCET Page 16

A frequently used measure for the effectiveness of Working capital is called cash to- cash cycle. It reflects the time it taken (in days) for a company to get back one monetary unit spent in operations. Also we have days outstanding i.e. no of days during which cash is bound in inventory and receivables or financed by suppliers in account payables. CCC=DIO + DSO DPO Where DIO = Days inventory outstanding Avg. number of days inventory is held (Avg. Inventory / Cumulative cost of sales)* 365 DSO = Days sales outstanding Avg. Number of days until a company is paid by its customers (Avg. Receivables / Cumulative sales)* 365 DPO= Days payables outstanding - Avg. number of days until a company pays its suppliers (Avg. Payables/ Cumulative purchasing volume)* 365 Optimizing these three components not only accelerates CCC but also increases value addition & free cash flow WCM and inventories Excess inventory is the most overlooked sources of cash. It accounts for almost half the saving from WC Optimization projects. By streamlining processes within the company, the company can minimize inventory. Enhanced forecast accuracy and demand planning improved forecast accuracy and regular update s of customer demand lead to a much more reliable planning process and help companies not only to reduce inventory , but also to improve the ability to deliver. Advanced delivery and logistics advanced demand driven logistics concepts with their suppliers like vendor managed inventory, JIT, just in sequence. Optimized production process Important aspect to reduce WIP is to redesign the production processes. Reduction of non value added time and excessive inventory between production steps, removing bottlenecks, changing from push to pull system. Service level adjustments increased service level for products which are critical to customers and decreased service levels for products that are uncritical. Calculating security stocks based on target availability and deviations in production & demand. Variance management reducing production complexity, reorganize, tighten the assortments and concentrating on most important ones.

Inventories constitute a substantial portion of total assets employed. Inventory control comprises accounting and the physical control of materials, WIP and finished goods. The objectives of establishing control levels is to ensure that excessive stock are not carried and working capital is not sacrificed.

Dr Pramod Kumar Mangayil, Associate Professor, VJCET

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