A

PROJECT REPORT
ON

MATERIAL HANDLING
AND INVENTORY
MANAGEMENT OF
PHARMACUETICAL
COMPANY
PROJECT GUIDE: TEJAS PAREKH
(MBAGJ0042)
PAREPARED BY: VISHALKUMAR PATEL

 Introduction

and

Importance

of

Inventory

Management
The term inventory refers to the goods or materials used by a
firm for the purpose of production and sale. It also includes the items,
which are used as supportive materials to facilitate production.

There are three basic types of inventory: raw materials, work-inprogress and finished goods. Raw materials are the items purchased
by firms for use in production of finished product. Work-in-progress
consists of all items currently in the process of production. These are
actually partly manufactured products. Finished goods consists of
those items, which have already been produced but not yet sold.

Inventory constitutes one of the important items of current assets,

which permits smooth operation of production and sale process of a
firm. Inventory management is that aspect of current assets
management,

which

is

concerned

with

maintaining

optimum

investment in inventory and applying effective control system so as to

minimize the total inventory cost.

Definition

Inventory management is the supervision of non-capitalized

assets (inventory) and stock items.

component

of

supply

chain

management,

inventory

management supervises the flow of goods from manufacturers to

warehouses and from these facilities to point of sale. A key function of
inventory management is to keep a detailed record of each new or
returned product as it enters or leaves a warehouse or point of sale.

Inventory control, a similar term, is the area of inventory management

that is concerned with minimizing the total cost of inventory while
maximizing the ability to provide customers with product in a timely
manner.

Importance of Inventory Management

Inventory management is important from the view point that it
enables to address two important issues:

1. The firm has to maintain adequate inventory for smooth production

and selling activities.

2.

It

has

to

minimize

enhance firm's profitability.

the

investment

in

inventory

to

Investment in inventory should neither be excessive nor inadequate. It

should just be optimum. Maintaining optimum level of inventory is
the main aim of inventory management. Excessive investment in
inventory results into more cost of fund being tied up so that it
reduces the profitability, inventories may be misused, lost, damaged
and hold costs in terms of large space and others. At the same time,
insufficient investment in inventory creates stock-out problems,
interruption in production and selling operation. Therefore, the firm
may loose the customers as they shift to the competitors. Financial
manager, as he involves in inventory management, should always try
to put neither excessive nor inadequate investment in inventory. The
importance or significance of inventory management could be
specified as below:

* Inventory management helps in maintaining a trade off between

carrying costs and ordering costs which results into minimizing the
total cost of inventory.

* Inventory management facilitates maintaining adequate inventory

for smooth production and sales operations.

* Inventory management avoids the stock-out problem that a firm

otherwise would face in the lack of proper inventory management.

* Inventory management suggests the proper inventory control system

to be applied by a firm to avoid losses, damages and misuses.

SCOPE
The thesis examines the problems in achieving inventory

readiness for pharmaceuticals and analyzes alternative inventory

management policies to resolve existing problems. It also examines
shelf-life extension, drug stability, and inventory actions to better
track expiration dates. All of the measures will help reduce disposal
costs. Alternatives will be analyzed to optimize the distribution of
pharmaceuticals, to increase accuracy of records, and eventually to
minimize

annual

operating

costs.

The

study

is

limited

to

pharmaceuticals prepositioned with the Medlog. Specific methods to

reduce inventory costs and to improve the efficiency of inventory
management will be addressed.

Definition & Scope of Materials Management

Material management is an approach for planning, organizing,
and controlling all those activities principally concerned with the flow
of materials into an organisation.
The scope of Materials Management varies greatly from company to
company and may include material planning and control, production
planning,

Purchasing,

inventory

movement, and waste management.

control,

in-plant

materials

It is a business function for planning, purchasing, moving, storing

material in a optimum way which help organisation to minimise the
various costs like inventory, purchasing, material handling and
distribution costs.

Principles

of

Purchasing

Materials

Management
The fundamental objectives of the Materials Management
function ,often called the famous 5 Rs of Materials Management, are
acquisition of materials and services :

of the right quality

in the right quantity

at the right time

from the right source

at the right price

Purchasing Principle # 1. Right Quality:

Quality has been defined as the capability of doing a certain
thing or the power to satisfy a particular need.

In other words quality means the useful value of a specific thing for
a specific purpose to fulfil.
The starting point for determining the quality of the materials
needed in an organisation is the end use, i.e., what is intended to
be done or accomplished.
We then have to establish a specification and this is what quality is
all about. A full and complete quality specification is an essential
part of a purchase contract.
The quality of a material has a direct relationship with its end use.
In other words, an inappropriate quality would mean that the end
product is either too good or too bad for a particular purpose. Both
these have a direct effect on costs and competitiveness of the end
product. In one case, some extra cost has to make the quality more
than is necessary and, in other case, the quality of the incurred
product would suffer.
We can express quality in various ways, i.e., dimensions, weights,
and measures, chemical properties, physical properties, strength,
power, limit and tolerance, hardness, finish, colour, capacity,
durability, performance characteristics, appearance, design, etc.
The quality requirement should be determined first and then
correctly specified. Ambiguity in defining quality is one of the
major problems in purchasing. This can be avoided by ensuring
that the supplier really understands exactly what is required by
the purchaser. If the supplier does not understand the quality

requirements correctly, certain wrong types of materials would be

supplied.
This, in its turn, may lead to various problems like production
stoppages, rejection of finished product(s) by quality control people,
and the emergence of a high quantity (percentage) scrap, at the
end of the production process. All these amount to waste.
Right quality means that the quality should be just right, neither
too high nor too low. A production process would always like to
have the best quality available in order to make sure that the end
product is of best quality available in case of spares and
components. It is necessary to ensure that the machine does not
go out of control due to poor quality of such materials.
It is important for the purchaser to know the exact purpose for
which the materials are required and he must try to convince the
production people to accept the materials which would serve the
purpose. At the same time he must not take any undue risk in
buying inferior materials which might be more expensive in the
long run.
In case of doubt, he must discuss the matter with the production
person and gather knowledge from him regarding the usage. The
purchaser should also have knowledge of the materials of various
brands as also qualities available in the market.

Purchasing Principle # 2. Right Quantity:

The purchaser must buy the materials in the right quantity
to ensure that there is no stoppage of production or no extra stock
piling. Normally, the inventory control wing of purchase (stores)
department, fixes up the economic order quantity (EOQ), i.e., the
quantity which should be purchased at a time to get the maximum
benefit at minimum total cost.
This requirement is mentioned in the purchase order and it is
necessary to see that the materials are delivered.

Purchasing Principle # 3. Right Price:

It is not easy to determine the right price of material. However,
through cost and value analyses one can guess what an item
should cost. Thereafter, the purchasers negotiation skill, his
relations with the supplier and the nature of competition in the
market will together determine the actual purchase price.
This function is of prime importance because this is where the
purchaser can be really of much help to the company. But to
perform this function properly, the purchaser must have a
thorough idea about the market prices, especially the current
prices

of

raw

materials,

their

likely

future

trends,

and

environmental conditions which affect prices. The purchaser

should not be forced by the seller to accept any price quoted by the
supplier. There are various ways of determining the right price.

The supplier may be asked to give a break-up of prices showing the

cost of raw materials, overhead, profit, etc., and the buyer should
check up the various cost items by comparing them with the
available data. He may also take the help of production
department. In some situations tendering to a large number of
suppliers may also help in obtaining the correct price.
However, the purchaser must use his own judgement because often
the suppliers form a cartel or an association (a ring) and they
quote high prices. This would really pose a very serious problem.
The purchaser can either break the ring or call all the bidders to
reduce their prices on a rational basis. For purchasing of
engineering items one should have the basic technical knowledge
to deal with the suppliers.
One should have an idea about the right price of the materials and
current prices should be compared with the past prices to find out
how much the prices have gone up over a certain period of time.

Purchasing Principle # 4. Right Source:

Right source means the source which is reliable in all
respect such as quality, delivery, after sales service, etc. It is
obvious that when all the other things have been done right (i.e.,
selection of right quality, quantity and prices), the source of supply
from

where

the

automatically right.

materials

have

been

obtained

should

be

However, there are cases where anomaly occurs and it is, therefore,
necessary to get the materials from the right source.

A right supplier must fulfill the following basic

conditions:
(a) He must be fully equipped to manufacture and supply the
items ordered.
(b) He must look into the interest of the company and assist
the buyer whenever there is any scope of cost reduction by way of
supplying alternative materials suited for the purpose.
(c) He must also assist the buyer in market research.
(d) He must be polite.
(e) He must be in a position to assist the buyer in improving
on delivery negotiations whenever necessary.
(f) He must be a man of integrity.
For source selection or to develop the right source of supply
initial information about the name and address of the
suppliers can be had with the help of the following:
(1) Suppliers catalogue
(2) Trade requisition and directories
(3) Trade journals

(4) Yellow pages of telephone directory

(5) Vendors files
(6) Buyers guides
(7) Salespersons
(8) Trade exhibits industrial trade fairs
(9) Company personnel
(10) Buyer-seller meet
(11) Purchasing departments of similar organisations.
There are various ways of ascertaining the right suppliers.
Typical vendor registration forms are given to the supplier by the
purchase department. Such forms should give all the necessary
information as required by the buyer.
On receipt of the complete form, a representative of the buyer
should call at the vendors premises and submit his report
(containing all his findings).
He should ascertain the following factors during his visit and
inspection at the suppliers plant:
(i) Technical know-how of the supplier for manufacturing items.
(ii) Financial capability of the supplier to undertake the job.

(iii) Organisational set-up and manpower of the supplier.

(iv) Records of past performance of the supplier in delivering
materials at the right time and in right quality and quantity.
(v) Ability to deliver materials promptly and in required quantity.
(vi) Own manufacturing unit.
(vii) Quality control system of the firm.
(viii) Staff and line capability of the firm.
(ix) Service level.
(x) History of labour relations in the firm.
If this report meets the need of that particular company, the
vendor may be registered on the approved suppliers list and be
given a trial order. Performances of the vendor should be only
judged after satisfactory and timely execution of orders.
A right supplier today might become a wrong supplier next year. As
safeguard against this possibility, the purchase department should
also keep some record of the performance of different suppliers.
There

are

some

typical

ways

of

evaluating

suppliers

performance. Moreover, various norms or criteria could be used to

compare one supplier with another.

Purchasing Principle # 5. Right Time:

Just as one has to buy the materials in the right quantity, he
must also obtain them exactly when required. The delivery timings
are again fixed by the indentor or the stock control department. It
is the primary duty of the purchase department to follow up the
orders and to ensure that the flow of materials remains
unchanged.
It should also be seen that the materials are delivered exactly on
time. This function is very important in India as the suppliers
often fail to maintain the delivery schedule.

Purchasing Principle # 6. Right Place (of Delivery):

The function of purchase department is not over until the
materials are delivered at the right place. Therefore, this also
becomes a primary function of the purchase department. Suppose
the go down of the purchase department is in Calcuttas Taratala
area and the material is booked to Howrah railway station. It must
be ensured that the materials are cleared from Howrah and
delivered to the go down.

From the management point of view , the key objectives of MM are :

To buy at the lowest price , consistent with desired quality and

service

To maintain a high inventory turnover , by reducing excess

storage , carrying costs and inventory losses occurring due to
deteriorations

of

quality

materials

and

services

to

users

which

permits

efficient

and

effective

operation

atmosphere

in

performance

and

pricing

To minimize the overall cost of acquisition by improving the

efficiency

pilferage

To develop reliable alternate sources of supply to promote a

competitive

and

To maintain the specified material quality level and a consistency

of

obsolescence

To maintain continuity of supply , preventing interruption of the

flow

of

operations

and

procedures

To hire, develop, motivate and train personnel and to provide a

reservoir

of

talent

To develop and maintain good supplier relationships in order to

create a supplier attitude and desire furnish the organisation with
new

ideas

products,

and

better

prices

and

service

To achieve a high degree of cooperation and coordination with user

departments

To maintain good records and controls that provide an audit trail

and

ensure

efficiency

and

honesty

To participate in Make or Buy decisions

Materials Management thus can be defined as that function of
business that is responsible for the coordination of planning,
sourcing, purchasing, moving, storing and controlling materials in
an optimum manner so as to provide service to the customer, at a
pre-decided level at a minimum cost.

Materials function

The broad Materials function has the following as identified and

interlinked sub functions:

Materials planning and control:

Materials required for any operation are based on the sales
forecasts

and

production

plans.

Planning and control is done for the materials taking into account
the materials not available for the operation and those in hand or
in

pipe

line.

This involves estimating the individual requirements of parts,

preparing materials budget, forecasting the levels of inventories,
scheduling the orders and
monitoring the performance in relation to production and sales.

Purchasing:
Basically, the job of a materials manager is to provide , to the user
departments right material at the right time in right quantity of
right quality at right price from the right source.

To meet these objectives the activities undertaken include selection

of sources of supply, finalisation of terms of purchase, placement
of purchase orders, follow up, maintenance of relations with
vendors, approval of payments to vendors, evaluating, rating and
developing

vendors.

Stores :
Once the material is delivered , its physical control , preservation ,
minimisation of obsolescence and damage through timely disposal
and efficient handling, maintenance of records, proper locations
and

stocking

is

done

in

Stores.

Inventory control :
One of the powerful ways of controlling the materials is through
Inventory control.

It covers aspects such as setting inventory levels, doing various

analyses such as ABC , XYZ etc ,fixing economic order quantities
(EOQ), setting safety stock levels, lead time analysis and reporting.

Materials Management's scope:

The scope is vast. Its sub functions include Materials planning

and control, Purchasing, Stores and Inventory Management
besides others.

Basically, under its scope are :

emphasis on the acquisition aspect

inventory control and stores management

material logistics, movement control and handling aspect

purchasing, supply , transportation , materials handling etc

supply management or logistics management

all the interrelated activities concerned with materials

Materials management can thus also be defined as a joint action
of various materials activities directed towards a common goal and
that is to achieve an integrated management approach to planning,
acquiring, processing and distributing production materials from
the

raw

material

state

to

the

finished

product

state.

In its process of managing , materials management has such sub

fields as inventory management , value analysis, receiving, stores
and management of obsolete , slow moving and non moving items.
The various activities represent these four functions:

Planning and control

Purchasing

Value analysis and

Physical distribution

Objectives

of

Materials

Secondary Objectives.

Management:

Primary

and

The objectives of material management can be classified into two

categories viz; primary objectives and secondary objectives.

Primary Objectives:
The following are the primary objectives:
1. Low Prices:
If materials department succeeds in reducing the price of items it buys, it
contributes in not only reducing the operating cost but also in enhancing
the profits.
2. Lower Inventories:
By keeping inventories low in relation to sales, it ensures that less capital
is tied up in inventories. This increases the efficiency with which the
capital of the company is utilized resulting in higher return on
investment. Storage and carrying costs are also lower.
3. Reduction in Real Cost:
Efficient and economical handling of materials and storage lowers the
acquisition and possession cost resulting in the reduction in the real
cost.
4. Regular Supply:
Continuity of supply of materials is essential for eliminating the
disruption in the production process. In the absence of regular supply of
materials, production costs go up.

5. Procurement of Quality Materials:

Materials department is responsible for ensuring quality of materials
from outside suppliers. Therefore, quality becomes the single most
objective in procurement of materials.
6. Efficient handling of Materials:
The effective material control techniques help the efficient handling of
materials resulting in the lowering of production cost.
7. Enhancement of firms goodwill:
Good relations with the suppliers of materials enhance the companys
standing in the society as well as in the business community.
8. Locating and developing future Executives:
Materials manager must devote special effort to locate men at lower
position who can take up the executive posts in future. It helps in
developing talented personnel who are ready to undertake future
responsibilities of the business relating to materials management.

Secondary Objectives:
The following are the important secondary objectives of materials
management.
1. Reciprocity:
The purchase of raw materials from the organisations/customers by the
concern and in turn, sale of finished products to the above customers is

known as reciprocity. It serves the twin purpose of increasing purchasing

as well as sales.
2. New Developments:
The staff of the materials department deals regularly with the suppliers
responsible

for

new

developments

in

material

handling.

These

developments can be successfully applied in material handling and

management.
3. Make or Buy Decisions:
The material manager with regular reviews of cost and availability of
materials can safely conclude that whether the material is to be
purchased or developed in the organisation itself.
4. Standardisation:
Standardisation of materials is greatly helpful in controlling the material
management process. With regular stock-taking, the non-standardised
items can be rejected and standard components may be brought into
product designs to reduce the cost of production. It is further helpful in
promoting the standardisation with suppliers.
5. Assistance to Production department:
By

supplying the

standardised

materials or components

to the

production department, quality products can be assured. It is helpful in

imparting the economic knowledge in bringing about the desired
improvement in the product.
6. Co-operation with other departments:

Successful management of materials department contributes to the

success of every other department in the organisation. At the same time
the success of materials department depends on how successful it is in
getting the co-operation of the staff of the other departments.
7. Conception of future outlook:
The materials manager must have some conception of future outlook for
prices, cost and general business activity. Forecasting can be made about
the future trends in materials. The materials manager should be able to
foresee the prices and costs of the raw materials and general business
conditions through their daily contracts with the suppliers.
From the above it is clear that materials management serves two fold
objectives viz., to strive for a reduction in cost of production and
distribution and to help the enterprise in attaining its objectives.
These dual objectives of the materials management further aim at
maintaining the regular flow of production by purchasing materials of
right quality, in a right quantity at a right time from a right source, on
right terms and conditions and at lower price.
It is helpful in efficiently controlling the inventories. It is further
beneficial in developing good buyer seller relations. Coordination with
other departments is established and considerably helps the organisation
to grow and advance in technical field.

OBJECTIVE OF THE RESEARCH

This research will analyze Medlog's inventory problems involving

critical pharmaceuticals that are expensive, subject to deterioration,

and require special storage. The research will focus on shelf-life and
drug stability in planning and managing PWR pharmaceuticals. In
addition, the thesis will analyze the cost of using a bar coding system
to

more

accurately

track

expiration

dates

and

location

of

pharmaceuticals in AMAL blocks. Many techniques are used to

compare alternative solutions. One of these is tradeoff analysis. Like
any business entity, cost containment is a major objective. In a
constrained resource environment, especially in a period of budget 4
reduction and increased oversight by both in-house and congressional
agencies, the optimal allocation of funding resources is a major goal of
Medlog. The results of this study will indicate the strengths and
weaknesses of the current pharmaceutical inventory management
policies and suggest future policy alternatives.

Methodology

The aim of this section is to develop a standard procedure for

SPM to manage its raw material more efficiently in order to reduce the
risk of inventory getting expired. The new raw material inventory
management policy is targeted at solving the existing problem of
having excessive inventory by optimizing current raw material
inventory level based on scientific models. The new strategy is
expected not to starve production while it is in practice. There are a
large number of raw materials in API Facility used to produce more
than 10 FDS. It is not efficient to conduct analysis on all the FDS.
This thesis picks three representative FDS: Product A from the
synthesis line, Product B and C from the steroid line. These three
products are key products in company SP's revenue stream. Their Bill
of Material (BOM) contains a wide range of raw materials with
different characteristics. Product A uses more raw materials with
short shelf life (shelf life within 2 years) in its production. Product B
and C are included so that the steroid production line can be
contained in the study to make the case complete. The entire raw
material set of Product A, B and C is checked with the purchasing
group to ensure that the characteristics of raw materials in API
Facility are properly represented so that the developed procedure can
be applied to all the raw materials. There are 33 raw materials in total
included in the study. The BOMs of the products are attached in
Appendix Al and A2. Three solution phases are developed in this
methodology. Phase 1 studies the demand and forecast accuracy of
the three products. Phase 2 involves developing a raw material
inventory grouping strategy to divide the entire set into groups with
different characteristics. Phase 3 uses inventory models to determine

the optimal safety stock level, order quantity and order frequency for
each of the groups

Integrated Materials Management

Various functions served by materials management include the
material planning, purchasing, receiving, stores, inventory control,
scrap and surplus disposal. All these functions can have separate
working norms including the one for performance.
Efficient

management

of input

materials

is

of

utmost

importance in a business organization for maximizing materials

productivity, which ultimately adds to the profitability of the
organization.

This requires well coordinated approach towards various issues

involving

decision

making

with

respect

to

materials.

All the materials related activities such as material planning &

indenting, purchase systems & procedure, variety reduction
through standardization & rationalization, reducing uncertainties
in demand & supply,
handling & transportation, inspection, proper storage & issue of
materials to the internal customers, inventory management,
vendor management & finally disposal of obsolete, surplus &
scrap materials etc. taken together is termed asIntegrated
Materials

Management.

For example , while inventory manager would like to have

minimum level of inventory to show of his performance ,
Purchasing manager would like to place bulk orders in order to
lessen his work load and show discounts as reductions. Both of
these acts may be little contradictory from the organisational
point of view. That is if some of the functions were to be handled
separately,

conflict

of

interests

may

occur.

Therefore, the conflicting objectives need to be balanced and

intertwined from a total organisational viewpoint so as to achieve
optimum

results

for

the

organisation

as

whole.

In an integrated set up, one materials manager (usually the

chief) is responsible for all such inter related functions and he is
in a position to exercise control and coordinate all the activities
with a view to ensure proper balance of the conflicting objectives

of the individual functions.

Integration also attains the synergetic advantage in terms of
eliminating water tight compartments that set in in a disjointed
environment of working. The resulting benefits can be seen in
terms of rapid transfer of data, through effective and informal
communication

channels.

This is crucial as the materials management function involves

handling vast amount of data. Therefore, integrating the various
functions identify themselves to a common materials management
department which in turn results in greater coordination and
better control.
In many tradition bound companies too, even the spare part
planning which hitherto was done by the operation people has
been brought under the umbrella of an Integrated materials
Management.
Better accountability ,better coordination, better performance,
better adaptability to EDP are some of the tangible advantages of
the Integrated Materials Management besides a perceptible team
spirit , morale and cooperation are the intangible gains.
Training

and

development

of

staf and executive through

rotation of people is another great advantage because of a bigger

canvas

produced

by

integration

of

Materials

function.

To carry out these functions efficiently, it is essential to have a

very good supplier base, order booking process & inventory

management system as well as expert Materials Management
(MM) professionals

Material Planning
In any integrated Materials Management environment, planning
for getting the materials is the starting point for the whole MM
function. Materials planning sets the procurement function and
the subsequent material functions rolling.

Material planning is a scientific way of determining the requirements starting wit

consumables, spare parts and all other materials that are required to meet the give
for a certain iod.
Material planning is derived from the over all organisational planning and hence it
of the broad organisational plan.
What it does is forecasting and initiating for procurement of materials

Factors afecting Material planning :

1) Macro factors : Global factors such as price trends, business
cycles, government's import and export policies etc are called the
Macro factors. Credit policy of the government is a critical factor

as banks follow these guidelines only while extending financial

support

to

business

entity.

2) Micro factors : These are essentially the factors existing within

the organisation such as corporate policy on Inventory holding,
production plan, investments etc. For any organisation, factors
such as Lead
time of procurement , acceptable inventory levels, working capital,
seasonality,

delegation

Techniques

of

of

power

planning

are

micro

factors.

materials

There are a few techniques used for planning material for the given
period. The following two are , however, commonly used :
1)

Materials

2)

Requirement

Requirement
based

on

Planning
past

(MRP)

consumption

MRP has ,as its starting point, the annual production plan of the
manufacturing concern. Once a firm

determines its annual

production plan , the over all material requirement , to meet the

given production plan, is worked out. It is a detailed analysis
encompassing the materials and quantities available for use,
materials with quantities not available and
hence needing procurement, the actual lead time of procurement
etc.

Since , it is always possible to have a situation where some parts

of an assembly are available and some others not available, Bill

of Materials is exploded. It is quantifying all the materials
(components) needed for various assemblies , all needed as per the
production plan. BOM is thus a list displaying the code,
nomenclature of an item , its unit and quantity , location of use
and also the estimated price of each component. An explosion
chart is a series of bills of materials grouped together in a matrix
form so that combining the requirements for different components
can be made.
Once the BOM is ready , the same is handed over to the
Purchasing wing which initiates the purchasing acivities. MRP
thus keeps in view the Lead time also. Using computers,
preparation of BOM through explosion of lists is quite easy and
smooth.

Inventory

Management - a

vital

cog

in

the

wheel

Inventory management or control refers to the management of idle

resources which have future economic value. Alternatively, Inventory may
be defined as usable but idle resources that have economic value.

Inventory

management is

one

important

aspect

of

the

total

management of an enterprise. It is ultimately the responsibility of the

top management to achieve trade offs among marketing, finance,
production and other functions so as to obtain, as far as possible, an
optimized and relatively balanced trade off so as to maximize the overall
performance

of

the

enterprise.

This has to be not only in the short-run but also keeping the long run
interests
of

the

Company

in

view.

Inventory Management refers to maintaining , for a given financial

investment, an adequate supply of something to meet an expected
demand

pattern.

It thus deals with determination of optimal

policies

and

procedures for

procurement. In

business

management,inventory consists of a list of goods and materials held or

available

in

stock.

Management of inventory or Inventory management is all about handling

functions related to the tracking and management of material. Inventory
management is very important in the case of Production Oriented
Enterprises. However, it is also relevant for the Service Sector. In India,
the emphasis in the early years was on production and on acquiring the
skills and capability to manufacture a host of items required to meet the
vast need of the country which had just achieved independence and had
embarked on a program of industrialization. Therefore, attention got
focused on marketing and on profitability.
However, now there is a gradual appreciation of the need to keep our
enterprises profitable. R&D, Corporate Planning, Productivity, etc., are
tightly

getting

their

due

importance.

In simple terms, productivity is the positive relationship of output viz-aviz inputs. Inventory management can be considered an important facet
of

output

&

input

management.

This includes the monitoring of material moved into and out of

stockroom locations and reconciling
the

inventory

techniques,

balances,

reporting

setting
actual

targets,
and

providing

projected

replenishment

inventory

status.

The task of ABC analysis, lot tracking, cycle counting support etc. can
even be a part of inventory management.
Inventory control is concerned with minimizing the total cost of

inventory. The three main factors in inventory control decision making

process are:

The cost of holding the stock (e.g., based on the interest rate).

The cost of placing an order (e.g., for row material stocks) or the
set-up

cost

of

production.

The cost of shortage, i.e., what is lost if the stock is insufficient to

meet all demand.

The third element is the most difficult to measure and is often handled
by establishing a "service level" policy, e. g, certain percentage of demand
will be met from stock without delay.
Terminology used in Inventory

management

control

Maximum Limit : When devising a suitable Inventory model ,the

Maximum limit establishes the upper limit to which the stock of an
inventory

item

shall

be

allowed.

Minimum Limit : It is the lower limit to which the stock can be allowed
to fall in course of replenishment of the stock of an item. Normally, this is
taken to be the safety stock also.

Safety Stock : This is the stock that is maintained to counter the

variation in demand of an item during the replenishment lead time.

Demand or Usage: Replenishment of stock and usage of an item is an

ongoing phenomenon in inventory control. Demand thus is the rate of
usage of an item. Over a period of time demand is considered to be
stable. However , demand can be seasonal or cyclical in nature
depending upon an item's nature.

ABC Classification / Analysis of Inventory

The ABC classification process is an analysis of a range of objects,
such as finished products ,items lying in inventory or customers into
three categories. It's a system of categorization, with similarities to Pareto
analysis, and the method usually categorizes inventory into three classes
with each class having a different management control associated :

A - outstandingly important; B - of average importance; C - relatively

unimportant as a basis for a control scheme. Each category can and
sometimes should be handled in a different way, with more attention
being devoted to category A, less to B, and still less to C.

Popularly known as the "80/20" rule ABC concept is applied to

inventory management as a rule-of-thumb. It says that about 80% of the
Rupee value, consumption wise, of an inventory
remains

in

about

20%

of

the

items.

This rule , in general , applies well and is frequently used by inventory

managers to put their efforts where greatest benefits , in terms of cost
reduction as well as maintaining a smooth availability of stock, are
attained.

The ABC concept is derived from the Pareto's 80/20 rule curve. It is also
known as the 80-20 concept. Here, Rupee / Dollar value of each
individual inventory item is calculated on annual consumption basis.

Thus, applied in the context of inventory, it's a determination of the

relative ratios between the number of items and the currency value of the
items purchased / consumed on a repetitive basis :

10-20% of the items ('A' class) account for 70-80% of the

consumption

the

next

15-25%

('B'

class)

account

for

10-20%

of

the

consumption and

the balance 65-75% ('C' class) account for 5-10% of the

consumption

'A' class items are closely monitored because of the value involved (7080% !).

High

value

(A),

Low

value

(C)

intermediary

value

(B)

20% of the items account for 80% of total inventory consumption

value (Qty consumed X unit rate)

Specific items on which efforts can be concentrated profitably

Provides a sound basis on which to allocate funds and time

A,B & C , all have a purchasing / storage policy - "A", most

critically reviewed , "B" little less while "C" still less with greater
results.

ABC Analysis is the basis for material management processes and

helps define how stock is managed. It can form the basis of various
activity

including

leading

plans

on

alternative

stocking

arrangements (consignment stock), reorder calculations and can

help determine at what intervals inventory checks are carried out

(for example A class items may be required to be checked more
frequently

than

class

stores

Inventory Control Application:

The ABC classification system is to grouping items according to
annual issue value, (in terms of money), in an attempt to identify
the small number of items that will account for most of the issue
value and that are the most important ones to control for effective
inventory management. The emphasis is on putting effort where it
will

have

the

most

effect.

All the items of inventories are put in three categories, as

below :

A Items : These Items are seen to be of high Rupee consumption

volume. "A" items usually include 10-20% of all inventory items,
and account for 50-60% of the total Rupee consumption volume.

B Items : "B" items are those that are 30-40% of all inventory
items, and account for 30-40% of the total Rupee consumption
volume of the inventory. These are important, but not critical, and
don't

pose

sourcing

difficulties.

C Items : "C" items account for 40-50% of all inventory items, but

only 5-10% of the total

Rupee consumption volume. Characteristically, these are standard,
low-cost and readily available items. ABC classifications allow the
inventory manager to assign priorities for inventory control. Strict
control needs to be kept on A and B items, with preferably low
safety stock level. Taking a lenient view, the C class items can be
maintained with looser control and with high safety stock level.
The ABC concept puts emphasis on the fact that every item of
inventory is critical and has the potential of affecting ,adversely,
production,

or

sales

to

customer

categorization helps in better

or

operations.

The

control on A and B items.

In addition to other management procedures, ABC classifications

can be used to design cycle counting schemes. For example, A
items may be counted 3 times per year, B items 1 to 2 times, and C
items only once, or not at all.
Suggested policy guidelines for A , B & C classes of items
A items (High cons. Val)

B items (Moderate cons.Val)

item (Low cons. Val)

Very

strict

cons.Moderate control

Loose control

control
No or very low safetyLow safety stock

High safety stock

stock
Phased delivery (Weekly) Once in three months

Once in 6 months

Weekly control report

Monthly control report Quarterly report
Maximum follow up
Periodic follow up
Exceptional
As many sources asTwo or more reliable
Two reliable
possible
Accurate forecasts
Estimates on past data Rough estimate
Central
purchasingCombination
Decentralised
/storage
purchasing
Max.efforts to control LT Moderate
To
be
handled
byMiddle level

Min.clerical efforts
Can be delegated

Sr.officers

Finally, ABC Analysis is an intrinsic part of Materials Management and is

the categorization of products into groups sorted by their spend volume.
Given Pareto analysis a typical ABC analysis might find that 20% of a
products equate for 70% of the value, these are termed As and are the
more expensive group (often comprised of complex assets) . Cheap
consumable (and often easily replaceable items) fall into the C class.

How to do ABC Analysis / Classification ?

ABC analysis is a basic supply chain technique, often carried out by
inventory controllers/materials managers, and is the starting point in
Inventory control.
ABC classification is a system of categorization, with similarities to
Pareto analysis and the method usually categorizes inventory into three
classes

with each class

associated.

having a

different

management

control

Although different criteria may be applied to each category the typical

method of scoring an inventory item is that of annual consumption
value of said item (Qty consumed X Cost of item) with the result then
ranked and
then scored (A, B or C). Classification may be specific to the industry but
typically follows a 70%, 90%, 100% banding in that A

class items

represent 70% of the value, B class items fall between 70% and 90% of
the annual value with C class the remaining. In practical terms the
complex high cost materials typically fall into the A class items, with the
consumable, low cost (and typically fast moving) classed as C class.

How to carry out the actual analysis ?

Carrying out ABC analysis is a bit tricky affair. What ultimately is done
is to segregate all the inventory items into three categories viz. A, B & C.
ABC analysis can be done for any given data that has money value as the
prime

factor.

For example classification of pending suppliers' bills, items of an MRO or

any type of inventory ,expenditure over a period of time, customers with
respect to sale value etc. Let us take a typical example of inventory which
we want to classify into A,B & C classes in respect to items.

Procedural steps :

1.First of all, collect all the data of the inventory and calculate the
consumption or sale value. For a Stores, maintaining inventory, this shall
be Quantity issued X unit rate of an item, say x1. Similarly , get the
values for all the remaining items, say , x2,x3,x4....x100 in the following
way :

Slno.

Item

Unit rate

Consumption
(Qty) issued)

1
2
3
4
5
6

x1
x2
x3
x4
x5
x6

10
12
15
20
30
5

7
8
9
10

x7
x8
x9
x10

4
16
13
35

10
10
12
5
2
100
80
12
22
6

2.Now, arrange all the consumption values in ascending or descending

order of values. Let us assume we have listed in descending order
(starting with highest consumption value item to lowest consumption
value

item).

3.Create next column and start adding the cumulative total of

consumption value, starting from the top and finishing with the last item
as given in the table below :

Consumption

Value

inCumulative Value Item

Class

Value
100
120
180

ascending order
60
100
100

560
1160
260

x5
x1

100
60
500
320
192
286
210

120
180
192
210
286
320
500

380
560
752
962
1248
1568
2068

x2
C
x3
C
x8 C
x10 B
x9 B
x7 A
x6 A

C
C

x4

From the last column it is clearly evident that the bottom 20 % of items
(x6 & x7) consume together nearly 70% of value, upper 70%
(x1,x2,x3,x4,x5,x8) items consume only 20% value and the remaining
10% items (x9) consume 10% value. Respectively, these are A,B and C
classes of items.

What is XYZ analysis of Inventory ??

XYZ analysis is one of the basic supply chain techniques, often used to
determine the inventory valuation inside a Stores.

It's also strategic as it intends to enable the Inventory manager in

exercising maximum control over the highest stocked item , in terms of
stock

value.

A system of categorization, with similarities to Pareto analysis, the

method usually categorizes inventory into three bands with each band
having a different management control associated. Although different
criteria may be applied to each category the typical method of scoring
an inventory item is that of annual stock value of said item (qty in stock
X cost of item) with the result then
ranked

and

then

scored

(X,

or

Z).

Bandings may be specific to the industry but typically follow a 70%, 90%,
100% banding in that X class items represent 70% of the stock value
(although they may account for 20% number wise), Y class items fall
between 70% and 90% of the annual stock value with C class the
remaining. In practical terms the complex high cost materials typically
fall into the X class items, with the consumable, low cost (and typically
fast

moving)

classed

as

class.

Not all stock is equally valuable and therefore doesnt require the same
management focus. The results of the XYZ analysis provide information
that helps evaluate how each inventory part should be monitored and
controlled.

These

controls

are

typically:

X class items which are critically important and require close monitoring
and tight control while this may account for large value these will
typically comprise a small percentage of the overall inventory count.
Y class are of lower criticality requiring standard controls and periodic
reviews

of

usage.

Z class require the least controls, are sometimes issues as free stock or
forward holding.
Classification of inventory in terms of XYZ is also quite strategic as It can
form the basis of various activity including leading plans on alternative
stocking arrangements (consignment stock), reorder calculations and can
help determine at what intervals inventory checks are carried out (for
example X class items may be required to be checked more frequently
than Z class stores.

Based on the ABC and XYZ analysis there is another control

mechanism , popularly known as AX control.

What is the AX category of items of Inventory

Inventory plays an important role for any organisation as it blocks the

working capital which otherwise would have earned the organisation
some

money.

While the need for having inventory can't be denied for any running
plant / machinery, its availability in controlled measures too is highly
desirable. Control techniques such as ABC and XYZ analyses though
done in different ways, try ,at the same time, to get maximum control
with

little

commitment

of

resources.

One of the ways to have still better (tight) control over the inventory with
still less commitment of resources is by determining the AX category of
items in a given inventory. Once ABC and XYZ analyses have been done
and a list of A and X classes of items are drawn then AX category is a
combination of the two categories. Going by the definition of A and X
separately , AX category of items , normally, display a high consumption
(A) as well as a high stock value (X). Essentially, these items are high
value , in terms of overall procurement cost including their being costly.
Obviously , the measures that need to be taken to keep AX inventory
under control is similar to that of A or X items, viz stock less number at
any given time, have tight consumption control, more sources so that

supply doesn't become a constraint when needed etc.

Material Requirements planning system

Material Requirement Planning (MRP) happens to be the best model of
dependent demand pattern of Inventory.
Under it , the requirement of an item is predetermined as it depends
upon the actual need of it, triggered by certain production schedule.
Obviously, MRP has two main characteristics , the known requirement
and

the

known

period

of

requirement

(time).

Materials Requirements Planning (MRP) also known as MRP I, little

MRP, mrp, or the original MRP is a set of techniques that takes the
Master Production Schedule and other information from inventory
records and product structure records as inputs to
determine the requirements and schedule of timing for each item.

Based on a master production schedule, a Material Requirements

Planning

system

Creates schedules identifying the specific parts and materials

required to produce end items

Determines exact numbers needed

Determines the dates when orders for those materials should be

released, based on lead times

MRP , by its nature, does not need carrying of any inventory ahead of
requirement. It starts with the finalisation of the production plan in a
firm.
The production plan then is used by the Materials management
professionals to explode the "Bill of material" which is a complete
detailing of the materials needed including their various components. It
is exploded for the number of units to be produced, to obtain that
product's exact requirement.

Since a given common part is used in many items , sub-assemblies etc,

total requirement of that part is summed up to draw a consolidated
requirement.

Since this exercise is done for a great number of materials computers

become very useful for the purpose. After the Bill of material is finalised
it's taken over by the Materials professionals of the firm who check the
availability

of

any

item.

A detailed action plan indicating the materials , quantity to be procured

and most importantly the time these are required at is prepared.

Accordingly, the orders are placed and the suppliers are asked to match
the given delivery period.

In practice , under this system, the production material requirement are

calculated on weekly basis. It then generates requisitions for each
material to be delivered in the required quantity a given number of days
prior to the start of manufacturing operation. Obviously, it puts more
pressure on purchasing and production planning rather than on
maintenance
In

MRP

system

of
master

production

inventory.
schedule

which

is

updated

periodically is the force that directly initiates and drives subsequent

activities of the purchasing and manufacturing functions.

Applicability of the MRP system :

It is best suited where production is not done on a continuous

basis. It is ideally suited for the job shop operations environment.

Where the demand id directly dependent on the production of

other specific inventory items or finished products. It is used
where the demand of the individual components are dependent on
the requirement of the main product.

It can be used where the flexibility is possible in placement of

orders or delivery releases is to be done on short term basis

Inputs for MRP

MRP process is triggered by the Master Production Schedule
(MPS) which indicates the production volume of finished products
on weekly basis. MPS is the primary input. Therefore , for a
successful run of the MRP , MSP must have a time schedule that
is greater than the total lead time of the finished product.

Bill of Materials (BOM) which is a detailed item wise requirement

document is the second input for MPR. It may contain multistage
type of products that may require several stages of a number of
components to be fitted or converted into leading to the making of
the final or finished product.

Inventory record file (IRF) is the third input for MRP. It contains
the status of an inventory item. It indicates the current stock
position, the past timing and sizes of all orders , including the
open orders for the item, the lead time for each item. IRF basically
happens to be the past experience and serves as a good reference
point for planning for the future MRP

How

does

MRP

work?

There are two important questions to ask here. How much of an item is
needed? When is an item needed to complete a specified number of
units, in a specified period of time? The MRP process involves the
following

steps:

Determine the gross requirements for a particular item

Determine the net requirements and when orders will be released

for fabrication or subassembly

Net Requirements = Total Requirements Available Inventory

Net Requirements = (Gross Requirements + Allocations) (On

Hand) + Scheduled Receipts

Develop a master production schedule for the end item (this is the
output of the aggregate / production planning). The MPS is adjusted
accordingly,

as

follows:

Create schedules identifying the specific parts and materials required

to produce the end items. The bill of materials will be useful here

Determines

the

exact

numbers

needed

Determines the dates when orders for those materials should be

released, based on lead times
Outputs

of

MRP

The basic outputs of the MRP system are the planned orders from the
planned order release row of the MRP matrix which details the timing
and the quantity of subassemblies, parts and raw materials used to plan
purchasing

and

manufacturing

actions.

Specifically, these outputs include:

Purchase orders - sent to outside suppliers

Work orders - to be released to the shop floor for in-house

production

Action notices or rescheduling notices - issued for items that are

no longer needed as soon as planned or for quantities that may
have changed

Benefits

of

MRP

The MRP is a framework for providing useful information for decision

makers. The key to realizing the benefits from any MRP system is the
ability of the inventory planner to use the information well. The specific
benefits of MRP include the following:

Increased customer service and satisfaction

Improved utilization of facilities and personnel

Better inventory planning and scheduling

Faster response to market changes and shifts

Reduced inventory levels without reduced customer service

The MRP is also a very powerful tool since it takes into consideration
changes in certain assumptions especially under uncertain conditions,
especially when the inputs to the MRP system change because of the
following realities in the production area:

Delays in scheduled receipts

Changes in planned order sizes because of capacity constraints

Changes in gross requirements which dictate changes in lot sizes

at sub-component levels

Unavailability of raw materials for one sub-component which

negates the need for a fellow subcomponent as both must be ready
for the parent production

Utilization of same parts at different levels indicating the need to

restructure the bill of materials and

Presence of price discounts or some other features which makes it

advisable to purchase more than the anticipated need

Thus MRP can be summarise as being a system which is solely

dependent upon three concepts:

Dependent demand

Inventory / Open order netting and

Time phasing on the basis of requirement

period and the Lead time for each item

MRP system , thus , generates a complete set of planned orders for all
manufactured parts and purchased materials based on information
inputs. Accurate forecast and a timely lead time happen to be the main
determinant of its success in a run.

Process (steps) in Inventory Management

The primary and foremost step in inventory management is acquiring
accurate information for inbound operations. The information so gained
in advance can be a crucial factor in improving the inbound
productivity. Setting up of an advanced inbound strategy and execution
framework can be done without too much of re-engineering effort for the
supply chain. The perfect way to commence is to make the best use of

information available to you and establish a set of rules and regulations

to harness the information efficiently.
In order to better your work and progress further you can conduct a
survey by asking supply chain executives to name the five most
important area for improvement in operations support systems. The
outcome of your survey will reflect better inventory planning as one of
the target areas. You must pay special heed to establish an effective way
to maintain inventory data integrity or setting up higher productivity
and capacity utilization.

Lack of efficient inventory data integrity can lead to large amount of

non-productive labor, underutilized distribution center capacity and
diminished customer service levels due to incomplete or late orders.
From past few years distributors were looking forward for a device that
can help them control and manage their largest asset, inventory. As a
result

several

computer

software

companies

have

developed

comprehensive inventory management modules and systems. These

fresh packages enable the distributor to effectively manage his
warehouse

stock.

Tough the software technique is a beneficial aid yet it cannot provide

solutions to inventory management problems. In order for the
inventory management system to live upto its potential and perform its
best, make sure that you follow quite a few basic and extremely
significant

ways

of

good

inventory

management.

To begin with, ensure that your company is protected against theft.

There should be no pilferage problem at your place. While ordering,
order only the amount of non-stock or special order items that your
customer has approved of. If you wish to add an inventory, you must
get a purchase commitment from your customer. Make sure that you
assign and use bin sites. Establishment and usage of proper bin sites
make order picking a hassle free job in your warehouse. Don't ever
forget to make an entry of the material leaving your warehouse. Try to
get rid of the no charge/no paperwork material swaps. You should
charge the product samples to a salesperson account until they are
either returned to stock or charged to the customer. Effective inventory
management also requires paper work (picking documents to be filled
by the end of the day, entry of every single stock receipt in computer
etc.) that is upto the mark, determination of the
most beneficial replenishment strategy for each item in each warehouse,
setting up some lucrative offers and awards for the buyers, specifying
guidelines for setting the reorder method and setting up of an on-going
dead stock and excess inventory control program.