Material Control & Inventory Management

Material Management

1. Material Procurement

   • Bill of Materials

   • Material Requisition Note

   • Purchase Requisition

   • Goods Received Note

   • Material Returned Note

2. Valuation of Materials Received

3. Material Storage & Records

   • Bin Cards

   • Stores Ledger

   • Stock Control Cards

4. Inventory Control

   • Setting of various stock levels

   • Economic Order Quantity (EOQ)

   • Techniques of Inventory Control

5. Valuation of Material Issues

   • Cost Price methods (FIFO, LIFO, etc.)

   • Average Price methods

   • Market Price methods

   • Notional Price methods

6. Accounting & Control

   • Waste, Scrap, Spoilage, Defectives

7. Consumption of Materials

Flowchart

Material Flowchart

1. Engineering/Planning Department

   • Creates Bill of Materials

2. Production Department/Workshop

   • Generates Material Requisition

   • Submits Purchase Requisition to Purchase Department

3. Purchase Department

   • Issues Tender or Request for Proposal

   • Selects Supplier(s)

   • Sends Purchase Order

4. Supplier(s)

   • Provides Proforma Invoice

   • Receives Payment

   • Delivers Goods with Challan/Invoice

5. Store Department

   • Receives Goods Received Note

   • Issues Material Abstract

   • Processes Material Returned Note if needed

6. Cost/Accounting Department

   • Verifies Invoice

   • Handles Payments & Accounts

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Material Control

Material Control is the systematic management of procurement, storage, and usage of materials to ensure a smooth production process while avoiding excessive investment in inventory.

Key Documents in Material Management

• Material Requisition Note – Authorizes and records the issue of materials from the store.

• Purchase Requisition Note – Created by the storekeeper to initiate the purchase process.

• Purchase Order – A formal request to the supplier for specified materials at agreed rates within a set timeframe.

• Goods Received Note – Prepared by the receiving department to verify received materials.

• Material Transfer Note – Documents material transfer between departments.

• Material Return Note – Issued when materials are returned from production to stores.

Inventory Records & Control

• Bin Card – A stock record tracking quantity on an in/out/balance basis in designated storage areas.

• Stores Ledger – Maintains a separate account for each material, tracking receipts, issues, and balances in both quantity and value.

Stock Levels & Reorder Points

• Minimum Level – The lowest stock level that must be maintained.

  • Formula: Minimum Level = Reorder Level – (Avg. Consumption × Avg. Lead Time)

• Maximum Level – The highest permissible stock level.

  • Formula: Maximum Level = Reorder Level + Reorder Quantity – (Min. Consumption × Min. Lead Time)

• Reorder Level (ROL) – The stock level at which a new order should be placed.

  • Formula: Maximum Lead Time × Maximum Usage

• Average Inventory Level

  • Formula: (Minimum Level + ½ Reorder Quantity)

• Danger Level – The stock level at which normal material issuance stops, and only emergency materials are issued.

  • Formula: Danger Level = Average Consumption × Lead Time for Emergency Purchases

Inventory Management Systems

• Stock-out – A situation where an inventory item is unavailable due to insufficient stock.

• Just-in-Time (JIT) – A system aiming for zero inventory, purchasing materials only when needed for production.

Inventory Classification Techniques

1. ABC Analysis – Categorizes inventory based on value and quantity:

   • A Category: <10% quantity but >70% value

   • B Category: <20% quantity but ~20% value

   • C Category: ~70% quantity but <10% value

2. Fast, Slow & Non-Moving (FSN) Inventory – Classification based on frequency of usage.

3. Vital, Essential, and Desirable (VED) Inventory – Categorization based on criticality in production.

4. High, Medium, and Low Cost (HML) Inventory – Classification based on individual item cost rather than total inventory value.

5. Two-Bin System – A stock replenishment method where consumption from one bin triggers a new order while using materials from the second bin.

Material Issue & Valuation Methods

• First-in, First-out (FIFO) – Oldest stock is issued first; closing stock is valued at the latest purchase price.

• Last-in, First-out (LIFO) – Newest stock is issued first; closing stock is valued at the oldest purchase price.

• Simple Average Method –

  • Formula: Material Issue Price = (Total of Unit Prices of Purchases) ÷ (Total Number of Purchases)

• Weighted Average Price Method – Considers both quantity and price.

  • Formula: Weighted Average Price = (Total Cost of Materials) ÷ (Total Quantity of Materials)

Material Losses in Inventory

• Wastage – Loss of raw material during processing with no recoverable value.

• Scrap – Residual material from manufacturing with low recoverable value.

• Spoilage – Damaged goods beyond rectification, sold without further processing.

• Defectives – Goods requiring rectification before becoming usable.