GURU GHASIDAS VISHWAVIDYALAYA BILASPUR (C.G.

SESSION 2010-11
M.B.A.

SEMESTER I An Assignment On

SUBJECT PRODUCTION AND OPERATION MANAGEMENT

TOPIC STORE MANAGEMENT

Submitted to : PROF. H.L.YADAV (Lecturer)

Submitted by : SHEETAL GUJAR

MISS DIMPLE SUTARIA ANKITA SINGH SUNITA MISHRA

Definition of Stores
Dictionary defines store as a building where goods are kept. Stores is defined as supplies of goods. And storage is defined as the act of storing the goods. Some people use the term storekeeping which has the same meaning as storage. In popular usage the term stores is used to cover all aspects of presentation of goods i.e. building, supplies and the act of storing) Stores or storage is the function of receiving, storing and issuing materials. It involves supervision or the clearance of incoming supplies, to ensure that they are maintained in good condition, safely and in readiness for use when required while they are in storage and issuing them against authorized requisitions. In short, it is concerned with the physical handling and well-being of the stocks. It should be mentioned that stores is not meant for stocking purchased materials alone. Part-finished goods, finished goods, spares and consumables stores are also kept in stores. The emphasis here is on the storing of incoming materials. -

IMPORTANCE
Efficient storage of stores yields the following benefits: 1. Ready accessibility of major materials permitting efficient service - to users.
2. Efficient space utilization and flexibility of arrangement.

3. A reduced need for materials handling equipment.

4. A Minimization of materials deterioration and pilferage.

5. Ease of physical counting.

FUNCTIONS

The functions of stores may be listed as follows: 1. To receive raw materials and account for them. 2. To provide adequate and proper storage and preservation to the various items.
3. To meet the demands of the consuming departments by proper

issues and account for the consumption. .

4. To minimize obsolescence, surplus and scrap through proper

codification, preservation and handling. 5. To highlight stock accumulation, discrepancies and abnormal consumption and effect control measures. 6. To ensure good housekeeping so that materials handling, materials preservation, stocking, receipt and issue can be done adequately.
7. To assist in verification and provide supporting information for

effective purchase action. In some companies the store keeping function include "salvaging and retrieval of materials, disposal of scrap and surplus. In smaller companies the store department may be vested with the additional responsibility of inventory control and even purchasing.

Organization for Stores

Qualification and designation of the storekeeper, authority to whom the storekeeper reports and centralization vs. decentralization of stores are the issues relevant to the organization of stores. These aspects are discussed in detail.

Designation and Qualification of Storekeeper

Designation and qualification of storekeeper reflect the status accorded to the storekeeper in an organization. It is no secret that the significance of stores is least understood by the executives in industrial establishments. Staffs with no specialized knowledge or training in storekeeping and those who are not wanted in other departments are sent to head the stores department. Various titles are used to designate storekeepers. Starting from a title such as "Stores Assistant" the various designations in general use for the head of the stores is "Store Keeper", "Store Officer" "Stores Manager," "Controller of Stores", etc. To some extent, the term used indicates the size of the organization. For example, Controller of Stores is generally used only in very large organisations.5 In some organizations, the storekeeper's job is rated high carrying attractive remuneration, and entrusted with varied responsibilities. TVS Suzuki, for instance released an advertisement in Business India dated Jan 20-Feb. 7, 1988, inviting applications for the post of Stores Controller. The remuneration Responsibilities offered include was Rs.70,000/and per annum + perquisites. receipts, planning organizing material

inspection, material handling, inventory control, and accounting for on line stores and complying with statutory and government regulations. Mechanical engineering with 12 years experience was the qualification expected from the incumbent.

Authority to Whom Sub-ordinate

The store is either subordinated to the purchasing department or is grouped with purchasing in a materials management department. This is reasonable because the stores activity is a materials oriented activity and it must, therefore, report to department whose interest lies in materials. Besides, from the standpoint of total control of materials, stores should be included under materials management. The other practice is to lace stores under production department. Two arguments, support the arrangement 1. Production management is responsible for running the production operation smoothly and for meeting product delivery dates. Production should, therefore, have control of its immediate material supply group to ensure smooth delivery of material to the production work stations.
2. Receiving and stores should/not be supervised by the department

that buys and authorize payment for the materials they receive and disburse. Collusion and embezzlement of materials are discourages when stores receiving personnel report to a management outside the purchasing department. 3. Which of the two alternative arrangements is ideal? In making this decision the management's primary concern must be the fulfillment of three basic objectives. First-materials must be stored and managed so that they are immediate available, and in good condition when the production organization needs them. Second the order the order filling and delivery system must efficiently supply the production organization in accordance with the production schedules. Third, these and related activities mot be accomplished at a minimum cost? Under which manager (materials or production) will the three objectives in fact be realized to the fullest extent? The answer may vary with the basic orientation of a given company.

Centralized or Decentralized

Another aspect related to stores organization is whether the stores is centralized or decentralized. It is well known that production materials are stored within the plant building itself though materials like iron sheets and rods, or timber are thrown into the open yard. Inside the building materials may be stored in one area in which case it is called centralized storing, or they may be stored at the point of use in which case it is called decentralized storing Centralization or decentralization of storing is a matter of convenience of each organization. However, a large plant where several production department are locate in a sprawling complex, decentralize stores may be followed, wherein each production department will have a separate s ores attached to it. A careful consideration of merits of the systems is useful for planning an appropriate system.

Centralized Stores
Advantages:
1. A wider range of goods is provided for all users than is possible in smaller stores.
2. Inventor can be minimum. This is especially so in the case of tools,

fixtures, equipment and stores.

3. Better control is possible.

4. Economy in storage space is possible. 5. Bigger storehouses enable better and more modem handling methods (mechanical or automatic). 6. Delivery at a single point decreases cost of delivery.
7. Receipt and inspection of goods can be more efficiently organised. 8. Opportunities of standardization are improved.

9. Stock turnover is increased and the probability of deterioration during storage is correspondingly decreased.
10. Less personnel will be required for managing.

Some other advantages of centralized stores are: 1. Makes production planning easier.
2. Inventory control performed by experienced full time personnel. 3. Provides stronger control over damaged parts. 4. Easier to recall poor quality or obsolete parts.

Point of Use Storage

The point of use

decentralized storage have the following

advantages:
1. Minimizes production interruption due to delayed delivery of raw

material from central storage. 2. Provides easy visual inventory of stock.

3. Utilizes idle floor space in the production area. 4. Minimizes delays due to delivery to the wrong point.

Often to take advantages of both, a combined system, i.e., incorporating the elements of centralization and decentralization is followed in some organization. A combination of centralization and decentralization operates more or les on the following lines. Materials are first stored in the centralized stores which is also called the main stores. From the main stores, materials are drawn, usually on imprest basis, and taken to the point of use stores which are called substores. Materials are then issued to the user departments from the sub-stores

Main stores and sub-stores are generally created when:

(a) The material concerned is a bulk item used solely by one department, e.g. coal for boiler, sand for foundry etc. (b) The factor works more than one shift and the central stores works only one shift. In such cases items of stores which may be required urgently are kept in sub-stores.

Location and Layout of the Stores

The store-room is commonly described as a "place for everything and everything at its place." The first part of the phrase refers to the provisions of adequate space for the materials while the latter part highlights on the scientific location and layout of the store-room. The point of receiving the material and the point of use are not always the same. In between them, the materials are housed in the store-room. The store-room provides the space for materials. The storage space may be in the form of constructed buildings or godowns, temporary structures or even in the form of vast open yards. The size and the type of the storage space is dependent on varied factors such as number of items to be stored, quantity, characteristics of the materials to be stored such as liquid, fragile, weight, dimension, cost, chances of evaporation etc. While deciding the storage space, due consideration should also be given to the space required for the movement of material handling equipment inside the store area. The ways inside the store room are divided between the main tracks and side streets. The main track must provide for two way movements and the sides streets for one way.

Approaches to Stores Location

The problem of the materials inside the store-room is tackled with the help of the following three approaches: (1) Fixed location; (2) Random location; and (3) Zoned location.

(1) Fixed location: Under this approach, a specific fixed place is

assigned to each item of the material. The allocation of the space is made on any of the following basis: (i) On the basis of supplier. (ii) On the basis of similarity of the item. (iii) On the basis of the joint issue of the items. (iv) On the basis of the size and frequency of the use. The last basis is more efficient and economical. Under this approach, the fast moving items are stored nearest the point of issue, and the slow moves in the remote areas.

(2) Random location: Under this approach, the materials are stored at
any vacant place available in the store-room. This approach is workable where the stores function is operated by one or two persons and the storing is required for only few items. The location is memorized by the storekeeper. This is the most unscientific method with its many drawbacks.

(3) Zoned location: This approach divides the total storage space into
different zones. Popularly there can be three zones (i) for bulk stock, (ii) for reserve stock and (iii) indirect materials like spares and consumable stores. Zones can be devised on certain other basis also like liquid materials, metal, bars, inflammable materials, costly materials dangerous materials etc. Zone approach attempts to avail the maximum benefits out of the available space and other storing facilities.

Principles of Efficient Layout of the Stores

The following aspects should be considered while administering the layout of the stores:

1.

The floor area should be adequate and should suit to the specific characteristics of the materials stored. e.g liquid inflammable, fragile etc. (ii) The floor load must be adequate.

2.
3.

The gangways should be wide enough to take any stores trolleys and must allow articles to be withdrawn from bins and racks. Weighty items should be stores as low as possible. The items which are used most frequently should be located near the issuing windows. Obstructions such as poles, partitions, stair-cases etc. should be reduced or eliminated, The stores racking should not prevent the normal movement of air and temperatures distribution. Water proofing must be assured in the stores area. In the production area, a leaking roof is immediately observed while in the stores area, it may be so obscured that considerable damage might be done before it is discovered.

4. 5. 6.
7.

8.

In the vertical stacking, the load should be distributed evenly and should be broken by intervening shelves. It should not touch the ceiling height otherwise it will prove a hindrance in case of fire fighting.

9.

The stores area should be equipped with the handling equipments such as cranes, lifts, hoists etc and the computing and weighing scales.

10. In must provide safety to the personnel and security to the items stores.
11.

A location system should be devised so that it may pinpoint the position of any item stored inside the store room.

Identification system of materials:

When innumerable items are stocked in stores-room, it is essential to codify them for their quick identification. Codification is a technique of assigning brief names to the items stock in the stores-room, decided on some scientific basis, e.g., when "BS 24, 25" is used to be described "the round brass rod of 25 inch, in diameter", one can understand the importance of codification in describing the items. The materials codification is advantageous as under: (i) It describes the item briefly, thus saving the time in writing and describing. (ii) It facilitates the quick identification of the item in the stores-room, e.g. when we write BS, we talk of brass. The first digit "2" represents metal, second digit "4" speaks about round bars etc. When materials codification is accompanied by location codes, it facilitates exact location of the materials inside the stores-room. (iii) It facilitates the matching of mind between the production department, stores department and various divisions of the same organization. Generally, alphabets, numbers or combination of alphabets and numbers are used as the codes. In numerical codes, the 3 to 4 elements of numbers, the binary code with 1 and 0 element or the decimal codes are used. In the alphabetic codes twenty-six alphabets are used as elements. The alphabets are used as pure alphabetic symbol or as mnemonic code which serves as an aid to memory e.g. BS for Brass Screw. It is also possible to use both letters and numbers as 2 for general class (rod) and 4 for specific class (round) code elements e.g. BS 24.75 which describes the brass metal round rod with .25 inch diameter. It is also possible to use the colour scheme for the quick identification of materials. Generally, colour codes are used to distinguish the various grades of metals like steel, brass, copper, bronze. The objective of the codification is quickly identification and short description. However, the brevity should not be at the cost of clarity. This is achieved through the construction of the codes on some scientific basis. Generally, code construction is made on any of the following methods: (i) Mnemonic method:

Under the mnemonic method, the alphabets are based as an aid to memory e.g. BS for brass screw. They can be applied effectively only when the stock items are few in number of application becomes difficult as the number of items increases. (ii) Random method: Under this method, the numerical and/or alphabetic cores are assigned on random basis. It is flexible, as is possible to add the new number or letter in sequence in case of addition of new item. However, the codes are constructed arbitrarily rather than on any scientific basis. (iii) Scientific method: Under this method, the codification is done by dividing the total stock items into a number of groups or classes and then to assign a symbol to each class. The class is then divided and subdivided again until the individual item is identified. e.g first digit for metal (say I). Second digit for type of metal (say 3 for aluminum), Third digit for the shape (say 2 round rods). The additional digit with decimal point may describe the size of the metallic item. Thus coding will be done as under: 11- Steel 12 - Brass 13 - Aluminum. and 132.75 for aluminum round rods of .75 inch diameter. Generally, block system is used to describe the main class and the subclass e.g. 11 to 20 for metals, 21 to 30 for liquid items and so on.

CLASSIFICATION AND CODIFICATION

Its advantages are:

1.

Good storekeeping requires proper classification and codification of various items stored in stock. Proper classification and codification offer several advantages such as: -

2. 3. 4.

Systematic, grouping of similar items for correct identification of each and every Item. The usage of long descriptions is simplified and possible confusion avoided. Avoids duplicate socks of same item being held under different names, descriptions, brand names, part number, and different stores.

5. 6. 7. 8. 9.

Enables reduction in sizes and varieties. Helps in standardisation of materials and helps in finding substitutes. Can be used as a basic for setting up different stores. To arrange bin cards and records in stores, accounts and inventory control sections in the same uniform manner. Ensures accuracy in correspondence, records and posting of receipts and issues in appropriate records.

Principles of Classification and Codification

The following principles should be observed while establishing an effective classification and codification system: 1. There must be a consist in the point of view so that the basis of classification should remain unchanged for all items. 2. The system of classification must cover the entire range of item for which it is-devised and at the same time allow reasonable scope for extension. This principle is that of comprehensiveness 3. The third principle is that of mutual exclusiveness which mean that there must be only one code number possible for any item

4. The system developed should be simple enough to be understood and easily adopted by non-specialist personnel. This also mean that the codification basis when once understood, the code numbers should be selfexplanatory to a certain possible extent.

Location coding: As the materials' codification help in identifying and

describing various items of the materials, similarly the Inca t inn coding also helps in locating the specific material item in the stores area. Location coding is desirable especially where the large number of items arc stocked in big godowns located at different places, The same principles of code c1assifkation are followed while constructing the location code. The location is identified in terms of number of warehouse (if more godowns are maintained) row, column, racks, shelf, bin etc.

Storing of Materials
It is commonly observed that a store-room is "a place for everything and everything at its place." As we have noted that there exists a time-gap between the point of receiving and the point of the issue of materials, it becomes inevitable to store the materials. The materials are stored in the store-room and the storage space may be in the form of constructed godown, temporary structures or even open yards. Various types of stores equipments such as pallets, skids, shelves, bins, boxes, drums, tanks, racks are used for the purpose of economic use of the storage space and efficient handling of the materials. The materials are stored till they are requisitioned by the production departments or the specific jobs. The stored materials are issued to the respective production department against the authorized materials requisition. The stored materials are pending for issue. They should be preserved till they arc issued. The materials represent the money value, so they should be

safeguarded against fire, deterioration of quality, mixing, evaporation, theft, pilferage etc. Proper and adequate storage facilities should be provided f0r all types of materials according to their specific requirements. The materials should be physically verified periodically with the stores records, the storage space should be cleaned regularly, the storage facilities should be checked frequently and the entry to the storage area should be restricted to the authorized persons only.

Record-keeping of Materials
Materials represent the money value. It is nothing but the application of financial resources and hence their proper records as regards the quantity as well as value should be maintained properly and efficiently. Proper record-keeping becomes inevitable even for accounting and costing purposes. Up-to-date stores records help in determining the quantity of respective material items on particular point of time which provides the guideline for the fresh purchase or disposal of the materials, the valuation of stock on any particular point of time representing the asset value locked up in stores items and provides the basis for charging the various production departments or jobs who have received the materials from the stores room against materials requisition. store records can broadly be classified into two: (1) The bin card and (2) the stores ledger

(1) The Bin Card: The bin card or the stock card is usually attached to
each bin, shelf or other form of containers. The bin cards of the items stored in the open yards like coal, are kept at the desk of the store-keeper. They are used as record of the quantities of each type of material received, issued and on hand each day. They contain only the quantity column and they are not considered for accounting the price of the materials. The pricing is recorded in the stores ledger card which is discussed in the following

paragraphs. Usually the bin card specifies the location; the description of materials, maximum, minimum and reorder level; date; receipt; issue and balance specifying only the quantity etc. It is used as basis for verifying the physical stock and the stores ledger accounts.

(2) The Stores Ledger: The objective of the stores ledger is to keep the
proper record of the respective materials specifying their quantity as well as value. It is a record which charges the respective departments or the job at the price of the materials issued to them. Generally, stores ledger is maintained on the loose-leaf card basis and separate card is kept for such material item. The stores ledger card specifies the account number, location, description of the materials, unit measurement, and maximum, minimum and reorder level, debit, credit and balance- columns under the description of receipt, issue and balance satisfying both the quantity and the rupee value. It is also a practice to keep the column such as outstanding order, units reserved or units appropriated for special jobs. The outstanding order column helps in reviewing the actual and the probably supply picture which serves as a guide in scheduling the production. The reserved column earmarks the materials for strategic needs and is not considered for ascertaining the stock in hand for the purpose of recording. The appropriated column ensures the execution orders without any interruption. The provision of these and other columns is decided on the basis of the need of the organization. When the store-keeper issues materials to any department or job against the material requisition, a copy of material requisition is sent to the stores ledger clerk. He makes entry in the "issue" section of the card, specifying the date, requisition number, the department or job. the quantity, the unit cost and the total cost. Finally, the new balance is calculated and entered in the balance column.

Issue of Materials

The materials stored in the stock-room are issued to various jobs or production departments against the authorized materials requisitions. The issues are recorded in the store ledger and the respective jobs or production departments are debited with the price of the material issued. As the time of purchase and the time of issues are mostly different and the market price of the materials tends to vary, the problem of pricing the materials issued necessitates certain policy formulation. It is an important consideration not only under stores management but also for costing and pricing policies. The fundamental consideration is whether to price the issues at historical price i.e. the original purchase price, at the replacement price i.e. the prevailing market price at the time of issue or at some other price. The various methods are used for pricing the materials issues which are based on different principles. The following are the important methods of pricing the materials issues:

(i) First in First out Method (FIFO METHOD): FIFO Method, as its
name suggests, is governed by the principle that the materials which are received first are issued first. The issues are priced at the cost price of the oldest consignments till it get exhausted. As soon as the oldest lot is exhausted, the issues are priced at the cost price of the next of older lot in the sequence e.g. the following transactions occurred during the first week of April 1993. The value of the closing stock of 400 units (Le. second lot 500 units less 100 units issued) will be casted @ Rs. 6 ie. the value of closing stock would be Rs. 2,400.

(2) Last in First out Method (LIFO METHOD): LIFO method

reverses the procedure as followed under FIFO. The cost of the last lot of materials received is used to price the issues until that consignment is

exhausted, then the next lot of pricing is used and so on through the successive lots. This method is based on the premises that the materials which are issued to the jobs should carry the cost of the most recently purchased materials, and that is why it is also known as the "replacement cost" method. It should be noted that like FIFO method, the actual physical handling of the material in the bins and shelves in the sequence of purchases is imaginary. It is considered only for pricing the issues made from the stores, e.g. the. following transactions occurred in the stores department during the first week of April, 1991.

April April April 1086

1 3 6

: : :

500 units purchased @ Rs. 5 300 units purchased @ Rs. 6 400 units issued to Job Order Nov.

The issue of 400 units on April 6, will be priced as under First 300 units @ Rs. 6 = Rs. 1,800 Remaining 100 units @ Rs. 5 = 500 Rs. 1800 Rs. 500 Rs. 2,300 The closing stock of 400 units wiII be priced @ Rs. 5 i.e. Rs. 2,000.

(3) Average Cost Method: Under this method, the issues are charged
at a price ascertained from the common pool made up of the varied prices of a several lots. It is advantageous to use this method when the prices arc subject to constant changes. In the periods of rise or fall of materials prices, an average cost tends to even out the extreme price changes. The upward and downward trends are moderate as contrasted with the steep rise or fall under the FIFO and LIFO methods. The average price is calculated in different ways as under:

(1) Simple average of the stock on hand at the price of the issues. (2) On the basis of the simple average cost of each kind of mineral on hand at the close of month, and to apply it for all issues made during the following month. (3) On the basis of the simple moving average wherein the earliest price is dropped the moment the new purchases arc made and cost of such fresh purchases will be included while arriving at the new average. It should be noted that instead of the simple average wherein only the unit cost is considered for calculating the average cost to be charged to the issues, weighted average cost can also be used. Under the weighted average cost, along with the unit cost the quantity of the units is also considered, e.g. the following two lots were purchased during April, 1993 : (1) 1,000 units @ Rs. 3 (2) 5,000 units @ Rs. 5 The simple average cost would be Rs. 4 only (i.e. Rs. 3 + Rs. 5+2) while the weighted average cost would as under: Unit Cost (1) (2) Rs. 3 5 Weight 1000 5000 6000 = = Weighted Cost 3000 25000 28000 28000/6000 4.67

Weighted Average Cost

(4) Replacement Price Method: This method is also known as market

price method under which the material issues are priced at the prevailing market price on the date of the issue. This method is based on the principle that the materials issued for any job on a particular day should be charged at the rate at which they could be replaced immediately from the fresh purchases on the same day. In short, material issues are priced at the

prevailing market price on the date of its consumption. This method is applicable to the raw materials of standardized grades which are traded at the commodity exchanges such as cotton, cereals, certain metals etc., because the prices of such items are quoted in the newspaper and. it is relatively easier to ascertain the current market price. The main advantage of this method is that it considers the current market price which is more significant for the purpose of pricing policies. It enables the comparison of the operating efficiencies with those of the competitive units. The comparison between the purchases price and the issue price the market price) reflects on the efficiency or otherwise of the purchase department. The main drawback of this method is that it distorts the data for the accounting purpose which necessitates the adjustments in the Stores Ledger. There is bound to be a discrepancy between the purchase price and the issue price. The difference between the market price and the purchase price is adjusted to the 'Price fluctuation reserve account' which indicates -the efficiency or inefficiency of the purchase department.

(5) Standard Price Method: Under this method, the material issues
are charged at a predetermined, budgeted or estimated price which rel1ects a normal or an effected future price. Generally standard price is fixed after the careful examination of the current market price, trend of the price, market conditions that a fairly correct average standard price may be predetermined. The standard price is made applicable for a definite period say a month, a quarter or a year. The material receipts are recorded at the actual price while the material issues are casted at the predetermined standard price. So there -is bound to be the discrepancies between the standard and the actual price. The difference between the actual price paid and the standard price charged is recorded to a separate 'Price Variance Account'. The standard price is revised periodically, if the discrepancies go beyond a particular limit. The main advantage of this method is that the pricing of issues becomes a simplified function. Like FIFO, LIFO and

average cost method, the issue price need snot be ascertained after each receipt or issue of materials. However, it is not advised if the materials involve frequent and substantial price fluctuation.

(6) Actual Price Method: Under this method the material issues are
priced at the actual acquisition cost of the respective materials. This method is applicable where the purchases are made for the specific jobs and are kept physically separate in the store room. Each material receipts is recorded in separate stores ledger card and the material issues are casted at the actual acquisition cost. This method is relatively. awkward, however, it is advised where few costly items are used in the processing and where non-standardized materials are purchased to meet the customer's specification. It is more suitable to the jobbing industries.

(7) Inflated Price Method: This method of pricing is based on the

principle of uniform spreading of normal wastage on the residual units. There are certain types of normal wastage which are incidental to materials usage e.g. loss of breaking the bulk, evaporation etc. The cost of such normal wastage is absorbed by the good units through chagrin the material issues at inflated price: e.g. 100 units at Rs. 15 were purchased. In the conclusion it should be noted that the material pricing should be on the basis of the acquisition cost of the materials. The acquisition cost should consider the net invoice price of the supplier and the transportation charges which are 'the visible costs.' They should also consider certain invisible costs like the cost of ordering, receiving, unpacking, inspection, insurance, storing etc. The precise cost analysis of these aspects requires exhaustive treatment which is beyond the scope of this hook.

Replacement of Materials

Receiving and issuing of inventories arc the common and recurring phenomena in a manufacturing organization. When the inventories fall below a particular level, they are replenished by the fresh purchases. The prescription of reorder level (ROL) an important technique of inventory control. If fundamentally deals with "when to order" to replenish the inventories. Reorder level is a predetermined point, and when the existing stock of inventories reaches this point or falls below it, the purchase action is initiated to replenish them. The ROL is mentioned in the bin-card of each inventory item. What should be the quality of replenishment order is also a matter of policy. Generally, size of the order is determined on I he basis of the economic ordering quantity (EOQ), which is also an important technique of inventory control. The reorder level is decided for each important item or inventory on the basis of the following considerations: (i) Lead time, (ii) Average periodic consumption (say, daily consumption), (iii) Safety stock. Recorder level is decided as under: ROL = (Lead time x average daily consumption) + Safety stock. Illustration: The following data relate to one basic raw material item: Average daily consumption Lead time Safely stock Solution ROL = (Lead time x average daily consumption) + Safely stock = (4 days x 50 units) + 100 units = 300 units. The minimum level of the inventory will be the safety stock. The re-order level (300 units) is 200 units above the safety stock (i.e. 100 units). 50 units 4 days average 2 days consumption

The order will be placed to 500 units when the stock reaches to 300 units i.e. ROL. As it takes four days to get materials after placing an order, the fresh-stock of 500 units will arrive at a time when the stock had reached to 100 units, Le. the safety stock. Thus, the safety stock will be the minimum level of inventory. The maximum level of inventory would be as under: Maximum level = Safety stock + Reordering quantity . = 100 units + 500 units. The ordering level is controlled through the following techniques:

(1) Two-Bin System: Under this system, the inventory item is divided
into two parts. One part is active one from which issues are made. The other part is kept reserved and touched only when the active part is exhausted. It is also known as the "bin reserve" system. When the reserve part is touched, a fresh order is placed to replenish the stock. The reserve part becomes active and the earlier active part which is exhausted is replenished with the fresh stock. The fresh order is placed for the fixed quantity. The quantity in the reserve part serves as a reordering leveL It is not necessary to provide for two separate bins. It is a notional presentation. The two parts can be segregated even by the line. This method is applicable to low-cost, high-volume items which have consistent usage. This method does not involve any record keeping.

(2) Mini-Max System: Under this system, when the inventory item
reaches to a predetermined minimum level, it is replenished by the fresh purchase up to the predetermined maximum level. The minimum level serves as a reordering point. The fresh order is placed for that such quantity which shows deficiency in maximum level. Thus, the size of the order is variable rather than fixed. Like the two-bin system, this method is applicable to low-cost, high-volume parts with consistent usage.

(3) Imprest System: Under this system, the reordering is made at

regular time intervals. The maximum level of each item is predetermined. At a particular fixes period, say after one week, a fresh collective order for all the items will be placed. The size of the order will be decided on the basis of the shortage indicated by the existing stock in relation to the maximum level. Thus, the quantity of replenishment will exactly equate the quantity consumed during the period. The size of the order will vary considerably. Physical verification of materials: Proper stock records are kept in the bincard as well as the stores ledgers. When the materials are received or issued, they are properly recorded and the new balance is struck at the end of every transaction. Principally, the bin must contain the quantity which is shown in "balance" column of the bin-card. But sometimes, the bookbalance and the quantity physical does not tally. The important reasons for such discrepancies are as under: (1) Wrong recording in the bin-card. (2) Placement of the material in the wrung bin. (3) Mixing in adjacent bin. (4) Loss due to breaking the bulk. (5) Evaporation of alcoholic materials. (6) Pilferage etc. However, such situation emphasizes the need for physical verification of the materials stocked in the stores-room. There are the following two popular methods or the stock verification: (A) Periodic inventory 'verification, and (B) Perpetual inventory verification.

(A) Periodic inventory verification: Under this method, all items of

the stores-room are verified through counting, weighing, measuring etc. at the end of the specific period, usually the last day of the accounting year. They can also be verified at the end of every quarter or six months.

However, in the light of the huge task of verification, usually they are verified only once and that too on the last day of the accounting year. It is also required by the accounting system to value the stock-in-hand on the last day of the year for the purpose of preparing the annual accounts. The issues are not made during the verification to the size of the inventory. Additional staff is employed for the huge verification task This method gives correct picture of the stock-m-hand on the last day of the accounting year.

(B) Perpetual inventory verification: Under this method, the

verification function becomes a continuous function rather than a yearend function. All the items are verified rotatively on the continuous basis. Under this system all items are not verified at a time like year-end verification. Generally, those items which have reached a minimum level are selected for the verification. This policy reduced the burden of verification. The verification work is arranged in such a way that every item is verified twice or thrice during the year on rotation basis. This system does not necessitate the employment of any special staff for verification. The storekeeper carries on the verification work according to his convenience. Moreover, it is easy to locate the reasons for the discrepancies promptly. In fact, it serves as deterrent to pilferage. Such control is not possible under year-end verification. The main limitation of this method is that thevaluation of the ending inventory is made on the basis of book figures rather than on the basis of actual physical verification.

Disposal of waste and scrap

The waste and scrap consist of the following: (a) Spoiled raw-materials. (b) Rejected components. (c) Defective parts. (d) Obsolete stores and equipment.

(e) Wastes from the production departments, like cut-pieces of metals, scraps, chips, etc. (f) Non-returnable containers and packing cases. Such wastes and scraps involve some commercial values. They should be disposed of periodically and proper credit of the amount realized should be taken in the books of the accounts. Such disposal also releases the space in the stores-room.

Bibliography: -K. ASWATHAPPA -INTERNET CONTENTS:

1. Definition of stores 2. Importance 3. Functions 4. Organisation for stores 5. Location and layout of stores (a) Factors of stores layout (b) Approaches to stores management (c) Types (d) Principles of efficient layout of stores 6. Classification and codification (a) Identification system (b) Advantages (c) Principles 7. Storing of material

8. Record keeping 9. Issue of materials 10. Replacement of material 11. Physical verification of materials 12. Disposal of waste 13. Conclusion 14. Bibliography