RY U N

ER IV
H

IC

ER
PONDICHERRY UNIVERSITY

POND

SITY
DIRECTORATE OF DISTANCE EDUCATION relks ek T;ks£rxe;%

Y
IT
S
R
Materials and

Materials and Store Management

E
IV
Store Management

N
U
Y
R
R
E
H
IC
D
RY U N
ER

N
H IV
IC

ER
POND

SITY

O
relks ek T;ks£rxe;%

Pondicherry University
P MBA – OPERATIONS & SUPPLY CHAIN MANAGEMENT
Directorate of Distance Education

R. Venkataraman Nagar, Pondicherry University, Kalapet, Puducherry 605014

Website: pondiuni.edu.in SEMESTER III MBSC3004
 Materials and

Y
Store Management

IT
S
R
E
MBA – OPERATIONS & SUPPLY CHAIN MANAGEMENT

IV
N
U
Authored By:
Y

Sanjive Saxena
Associate Professor
R

Jagan Institute of Management Studies

Ghaziabad
R
E
H
IC
D
N
O
P

Pondicherry University
Directorate of Distance Education
 Y
IT
S
R
© Copyright 2014 Publisher

E
IV
ISBN: 978-93-5119-704-1

N
This book may not be duplicated in any way without the written
consent of the publisher and Pondicherry University except in the form
U
of brief excerpts or quotations for the purpose of review. The
information contained herein is for the personal use of the DDE
Y

students, Pondicherry University and may not be incorporated in any

R

commercial programs, other books, databases, or any kind of

software without written consent of the publisher. Making copies of this
R

book or any portion, for any purpose other than your own is a violation
E

of copyright laws. The author and publisher have used their best
efforts in preparing this book and believe that the content is reliable
H

and correct to the best of their knowledge. The publisher makes no

IC

representation or warranties with respect to the accuracy or

completeness of the contents of this book.
D
N
O
P
 Introduction

Y
Materials are one of the key factors in deciding the overall budget of an organisation as they account for 60% of the total cost

IT
of the organisation. This includes the cost incurred on the procurement, storage, movement, handling, and transportation
of materials. In addition, materials play a critical role in enhancing and maintaining the quality of the final product. If the
materials used in the manufacturing of a product are not of good quality, the final product will also lack in quality. This will

S
further affect the goodwill of the organisation as well as its customer base. Thus, it is imperative for organisations to manage
materials efficiently in order to control costs and produce high-quality products at the same time.

R
Materials management is the process of planning, procuring, storing, and providing the right quantity and quality of

E
materials at the right time and place so that the production process of a product runs smoothly. However, managing materials

IV
efficiently is not an easy task. This is because most of the materials procured get damaged during their handling, storage,
and transportation. This mostly happens when organisations do not have the proper material handling equipment and
storage system.

N
Materials are generally kept in storehouses; they are taken out from the stores only when they are required for production
U
or consumption purposes. So, the handling and movement of materials mostly take place in a storehouse. Even when the
materials are transported from one place to another, they are loaded on a vehicle from a storehouse only. So, the storehouse
should have the required equipment for the transportation and handling of materials in order to minimise their damage. In
Y

addition, during the storage of materials, it is necessary to use a proper storage system. For instance, perishable materials
need to be stored in refrigerators or cool places only. The process of handling and storing materials efficiently is called store
R

management.
R

The book Materials and Stores Management describes different aspects that are considered while handling and storing
stock. Students are made aware of the importance of an effective material plan as well as need and different methods of
E

stock control. In addition, they are also acquainted with the latest trends in the storage of materials. Towards the end, the
H

book discusses performance measurement in terms of how effectively organisations manage their stores and materials, and
the issues faced in this regard.
IC
D
N
O
P
P
O
N
D
IC
H
E
R
R
Y
U
N
IV
E
R
S
IT
Y
  Syllabus

Syllabus
MBA (Operations & Supply Chain Management) – III Semester
PAPER - XIV

Y
MATERIALS AND STORE MANAGEMENT
Paper Code: MBSC3004

IT
Objectives
‹‹ To understand the concepts and principles materials and store management

S
‹‹ To appreciate the role of store management and forecasting

R
‹‹ To analyze the management aspects of health and safety in work

UNIT I

E
Determination of Stockholding Policy. Customer expectations – internal/external; supply market conditions; Categories

IV
of risks and their evaluation; Requirements of the business and the need for stock; Economics constraints; methods of
avoiding carrying stock; General control methods e.g. ABC analysis. Control of Stock Range Coding, classification and
categorization methods;

UNIT II
N
U
Variety reduction and standardization; Application and approval of new stock items; Control of slow moving; obsolete and
redundant stock; Role of and function in determining stock range, Control of Stock Levels Forecasting techniques in
relation to demand and lead times; Independent demand situations and the use of fixed order quantity and periodic review
Y

systems; Techniques for dealing with dependent demand.

R

UNIT III
The Kanban approach and Just in Time philosophy; Coping with uncertainty in achieving required service levels;
R

Suppliers contribution to controlling stock. Management of Storage Facilities. Identifying types of commodities to be
stored and their characteristics with regard to storage and handling needs; Materials requirements planning (MRP) and
E

manufacturing resource planning (MRPII) and distribution requirements planning (DRP); Pull systems.
H

UNIT IV
Physical Management of Stock Selection and operation of appropriate storage and materials handling equipment – general
IC

outline; Methods of stores layout to optimize the use of space and minimize picking costs; Outsourcing the activity and
vendor managed inventory; Maintenance of security and prevention of theft; Storage and disposal of redundant, obsolete
and scrap items; Environmental issues.
D

UNIT V
N

Management Aspects Health and Safety at work – operational issues: Health and Safety at work – management issues
interdependence and teamwork; Relationships with other functions. Relevant Techniques Use of operational research
O

techniques of queuing theory, network analysis, simple simulation techniques and decision trees; Identifying methods to
distinguish between stores efficiency and effectiveness; Benchmarking and measurement of performance.
P

REFERENCES
Jessop & Morrison, STORAGE AND SUPPLY OF MATERIALS,
Duru C. Innocent, PURCHASING AND STORES MANAGEMENT, Ken Printing Press, Terry Lucey, QUANTITATIVE
TECHNIQUES, Letts Educational, 5th Edition.
Dobler & Burt. PURCHASING & SUPPLY MANAGEMENT

DDE, Pondicherry University, Pondicherry v

P
O
N
D
IC
H
E
R
R
Y
U
N
IV
E
R
S
IT
Y
 Table of Contents

Unit I: Introduction to Materials and Store Management

Y
1. Materials Management............................................................................................................................................1
1.1 Introduction...................................................................................................................................................................................... 2

IT
1.2 Materials Management and its Role in Organisations........................................................................................................... 2
1.3 Stock Valuation................................................................................................................................................................................ 3

S
1.3.1 Need for stock valuation...................................................................................................................................................4
1.3.2 Methods of Stock Valuation............................................................................................................................................4

R
1.4 Classification and Codification of Stock.................................................................................................................................... 7
1.5 Summary........................................................................................................................................................................................... 9

E
1.6 Glossary...........................................................................................................................................................................................10

IV
1.7 Terminal Questions......................................................................................................................................................................10
1.8 Answers...........................................................................................................................................................................................10
1.9 Case Study: Stock Management at ABC Ltd..........................................................................................................................11

N
1.10 References and Suggested Reading...........................................................................................................................................12

2. Need for Stock.........................................................................................................................................................13

U
2.1 Introduction....................................................................................................................................................................................14
2.2 Stockholding ..................................................................................................................................................................................14
2.2.1 Benefits of Stockholding............................................................................................................................................... 15
Y

2.2.2 Factors Affecting Stockholding Policy....................................................................................................................... 16

2.2.3 Categories of Risks and their Evaluation.................................................................................................................. 18
R

2.2.4 Determination of the Stockholding Policy............................................................................................................... 20

R

2.3 Avoiding Carrying Stock.............................................................................................................................................................22

2.4 Methods of Inventory Control..................................................................................................................................................23
E

2.4.1 ABC Analysis.................................................................................................................................................................... 24

2.4.2 Stock Levels...................................................................................................................................................................... 26
H

2.4.3 Just-in-Time...................................................................................................................................................................... 28
2.4.4 Economic Order Quantity............................................................................................................................................. 28
IC

2.4.5 Vendor Managed Inventory.......................................................................................................................................... 29

2.5 Solved Illustrations ......................................................................................................................................................................30
2.6 Summary ........................................................................................................................................................................................33
D

2.7 Glossary...........................................................................................................................................................................................33
2.8 Terminal Questions......................................................................................................................................................................34
N

2.9 Answers...........................................................................................................................................................................................34
2.10 Case Study: Stock control at ABC Pvt. Ltd............................................................................................................................34
O

2.11 References and Suggested Readings.........................................................................................................................................35

P

Unit II: Planning and Need for Control of Materials

3. Materials Planning..................................................................................................................................................37
3.1 Introduction....................................................................................................................................................................................38
3.2 Concept of Materials Planning.................................................................................................................................................38
3.2.1 Factors Affecting Materials Planning........................................................................................................................ 39
 Materials and Store Management

3.2.2 Problems Faced in Materials Planning ..................................................................................................................... 40

3.2.3 Guidelines for Effective Materials Planning ............................................................................................................ 40
3.3 Determination of Stock Range..................................................................................................................................................41
3.4 Demand Forecasting.....................................................................................................................................................................42
3.4.1 Period of Forecasting .................................................................................................................................................... 43
3.4.2 Forecasting in Different Departments....................................................................................................................... 44

Y
3.4.3 Steps in Forecasting........................................................................................................................................................ 44
3.4.4 Limitations of Forecasting .......................................................................................................................................... 45

IT
3.4.5 Criteria for Efficient Forecasting................................................................................................................................. 45
3.5 Forecasting Techniques...............................................................................................................................................................46
3.5.1 Survey Techniques.......................................................................................................................................................... 47

S
3.5.2 Statistical Techniques..................................................................................................................................................... 48
3.6 Lead Time.......................................................................................................................................................................................65

R
3.7 Fixed Order Quantity and Periodic Review Systems ..........................................................................................................66
3.8 Dependent and Independent Demands of Stock...................................................................................................................67

E
3.9 Techniques to Deal with the Dependent Demand................................................................................................................68

IV
3.9.1 Materials Requirement Planning (MRP)................................................................................................................... 68
3.9.2 Capacity Requirements Planning (CRP).................................................................................................................... 73
3.9.3 Enterprise Resource Planning .................................................................................................................................... 74

N
3.10 Summary.........................................................................................................................................................................................75
3.11 Glossary...........................................................................................................................................................................................76
U
3.12 Terminal Questions......................................................................................................................................................................76
3.13 Answers...........................................................................................................................................................................................76
3.14 Case Study: Materials Planning at ABC Ltd..........................................................................................................................77
Y

3.15 References and Suggested Readings.........................................................................................................................................78

R

4. Need for Stock Control...........................................................................................................................................79

4.1 Introduction....................................................................................................................................................................................80
R

4.2 Variety Reduction..........................................................................................................................................................................80

4.3 Standardisation..............................................................................................................................................................................81
E

4.3.1 Relationship Between Variety Reduction and Standardisation............................................................................. 82

4.4 Control of Slow-Moving Items ................................................................................................................................................82
H

4.5 Control of Obsolete Items..........................................................................................................................................................85

4.6 Control of Redundant Items......................................................................................................................................................86
IC

4.7 Summary.........................................................................................................................................................................................86
4.8 Glossary...........................................................................................................................................................................................86
4.9 Terminal Questions......................................................................................................................................................................87
D

4.10 Answers...........................................................................................................................................................................................87
N

4.11 Case Study: Stock Control at PQR............................................................................................................................................88

4.12 References and Suggested Readings.........................................................................................................................................89
O

Unit III: Control Mechanisms

P

5. Just-in-Time..............................................................................................................................................................91
5.1 Introduction....................................................................................................................................................................................92
5.2 Fundamentals of Just-in-Time..................................................................................................................................................92
5.2.1 JIT: A Production Philosophy...................................................................................................................................... 93
5.2.2 Elements of JIT............................................................................................................................................................... 94
5.2.3 Elimination of Waste..................................................................................................................................................... 95

viii DDE, Pondicherry University, Pondicherry

 Table of Contents

5.3 The Kanban System......................................................................................................................................................................97

5.3.1 Three-Bin System of Kanban ..................................................................................................................................... 97
5.3.2 Benefits of Kanban ......................................................................................................................................................... 98
5.4 Problem Solving in JIT...............................................................................................................................................................99
5.5 Continuous Improvement in JIT.............................................................................................................................................101
5.6 Benefits of JIT.............................................................................................................................................................................102

Y
5.7 Summary.......................................................................................................................................................................................104
5.8 Glossary.........................................................................................................................................................................................105

IT
8.9 Terminal Questions....................................................................................................................................................................105
5.10 Answers.........................................................................................................................................................................................105
5.11 Case Study: JIT Implementation in Solid Base....................................................................................................................106

S
5.12 References and Suggested Readings.......................................................................................................................................107

R
6. Stock Control in Organisations........................................................................................................................... 109
6.1 Introduction..................................................................................................................................................................................110

E
6.2 Coping with Uncertainty .........................................................................................................................................................110
6.3 Suppliers Roles in Stock control..............................................................................................................................................112

IV
6.4 Materials Requirements Planning (MRP)............................................................................................................................112
6.5 Manufacturing Resource Planning (MRPII)........................................................................................................................114

N
6.6 Distribution Requirements Planning (DRP)........................................................................................................................115
6.7 Push and Pull Systems of Stock Control..............................................................................................................................116
6.8 Summary.......................................................................................................................................................................................117
U
6.9 Glossary.........................................................................................................................................................................................117
6.10 Terminal Questions....................................................................................................................................................................118
Y
6.11 Answers.........................................................................................................................................................................................118
6.12 Case Study: Implementation of MRP II System at ABC Ltd. ........................................................................................119
R

6.13 References and Suggested Readings.......................................................................................................................................119

R

Unit IV: Store Management

7. Physical Management of Stock........................................................................................................................... 121
E

7.1 Introduction..................................................................................................................................................................................122
H

7.2 Storage Management.................................................................................................................................................................122

7.2.1 Identification of Storage Materials...........................................................................................................................123
IC

7.2.2 Characteristics of Storage Materials........................................................................................................................123

7.2.3 Handling of Storage Materials..................................................................................................................................124
7.3 Selection of the Storage Handling Equipment....................................................................................................................125
D

7.4 Store Layout.................................................................................................................................................................................126

7.4.1 Store Planning................................................................................................................................................................127
N

7.4.2 Characteristics of Store Layout ................................................................................................................................128

7.4.3 Space Allocation.............................................................................................................................................................128
O

7.4.4 Types of Store Layout.................................................................................................................................................129

7.5 Security and Prevention from Theft.......................................................................................................................................130
P

7.6 Summary.......................................................................................................................................................................................131
7.7 Glossary.........................................................................................................................................................................................131
7.8 Terminal Questions....................................................................................................................................................................131
7.9 Answers.........................................................................................................................................................................................132
7.10 Case Study: Store Planning for a Watch Seller....................................................................................................................132
7.11 References and Suggested Readings.......................................................................................................................................133

DDE, Pondicherry University, Pondicherry ix

 Materials and Store Management

8. Trends in the Storage of Materials .................................................................................................................... 135

8.1 Introduction..................................................................................................................................................................................136
8.2 Storage of Slow-moving, Obsolete and Redundant Items................................................................................................136
8.3 Outsourcing the Inventory Needs...........................................................................................................................................137
8.4 Vendor Managed Inventory (VMI).........................................................................................................................................138
8.4.1 Process of VMI..............................................................................................................................................................140

Y
8.4.2 Implementation of VMI .............................................................................................................................................140
8.5 Environmental Concerns..........................................................................................................................................................141

IT
8.6 Summary.......................................................................................................................................................................................142
8.7 Glossary.........................................................................................................................................................................................142
8.8 Terminal Questions....................................................................................................................................................................142

S
8.9 Answers.........................................................................................................................................................................................143
8.10 Case Study: Outsourcing of Inventory by Dell...................................................................................................................143

R
8.11 References and Suggested Readings.......................................................................................................................................144

E
Unit V: Performance Evaluation and Issues in Material and Store Management
9. Performance Measurement in Materials and Store Management ............................................................... 145

IV
9.1 Introduction..................................................................................................................................................................................146
9.2 Store Efficiency and Effectiveness...........................................................................................................................................146

N
9.3 Queuing Theory..........................................................................................................................................................................147
9.3.1 Fundamentals of Queuing Theory...........................................................................................................................148
9.3.2 Performance Measures of Queuing Systems .........................................................................................................149
U
9.4 Network Analysis........................................................................................................................................................................149
9.4.1 Programme Evaluation and Review Techniques (PERT)...................................................................................150
Y
9.4.2 Critical Path Method (CPM)......................................................................................................................................151
9.5 Decision Tree Method for Measuring Inventory Performance.......................................................................................152
R

9.6 Simulation Optimisation for Measuring Inventory Performance....................................................................................153

9.7 Summary.......................................................................................................................................................................................157
R

9.8 Glossary.........................................................................................................................................................................................157
9.9 Terminal Questions....................................................................................................................................................................157
E

9.10 Answers.........................................................................................................................................................................................158
9.11 Case Study: Application of Simulation Technique at XYZ Organisation ....................................................................159
H

9.12 References and Suggested Readings.......................................................................................................................................160

10. Issues in Materials and Store Management..................................................................................................... 161

IC

10.1 Introduction..................................................................................................................................................................................162
10.2 Health and Safety at Work........................................................................................................................................................162
10.2.1 Operational Issues.........................................................................................................................................................166
D

10.2.2 Management Issues.......................................................................................................................................................167

10.3 Interdependence and teamwork...............................................................................................................................................168
N

10.4 Interdependence on Other Functions....................................................................................................................................168

10.5 Issues in Personnel Management............................................................................................................................................169
O

10.5.1 Development of Personnel..........................................................................................................................................170

10.5.2 Identification of Training Needs .............................................................................................................................170
P

10.6 Summary.......................................................................................................................................................................................171
10.7 Glossary.........................................................................................................................................................................................172
10.8 Terminal Questions....................................................................................................................................................................172
10.9 Answers.........................................................................................................................................................................................172
10.10 Case Study: Health and Safety Risk Assessment in XYZ Ltd..........................................................................................173
10.11 References and Suggested Readings.......................................................................................................................................174

x DDE, Pondicherry University, Pondicherry

chapter

1 Materials Management

Y
IT
S
R
E
Structure

IV
1.1 Introduction

N
Learning Objectives U
1.2 Materials Management and its Role in Organisations

1.3 Stock Valuation

Y

1.4 Classification and Codification of Stock

R

1.5 Summary

1.6 Glossary
R

1.7 Terminal Questions

E

1.8 Answers
H

1.9 Case Study: Stock Management at ABC Ltd.

IC

1.10 References and Suggested Reading

D
N
O
P
Materials and Store Management

Notes Learning Objectives

After completing this chapter, you will be able to:
 discuss the meaning of materials management and its role in organisations
 explain the concept of stock valuation
 identify different methods of stock valuation

Y
 discuss the classification and codification of stock

IT
1.1 Introduction
Materials contribute to a major cost component in any industry. The cost associated with

S
materials may comprise of 20-50% of the total cost of production. Therefore, efficient

R
procurement and handling of materials is vital to the successful completion of business
operations. Materials management refers to the process of planning, procurement, storage

E
and distribution of materials in an efficient manner.

The goal of materials management is to improve production efficiency by ensuring that the

IV
correct resources are obtained in the correct quantity, from the appropriate source, and at
the right time. In the end, this leads to better customer service, lower production costs, and
more sales for the company. Planning and controlling materials, purchasing, managing stores,

N
handling materials, and supply chain management are all part of it.
U
In this chapter, you will study the meaning of materials management and its role in
organisations. In addition, the meaning and need of stock valuation is discussed in the chapter.
Moreover, the chapter explains the methods of stock valuation. At the end, the chapter
Y

discusses the classification and codification of stock.

R

Materials Management and its Role

1.2
in Organisations
R

Efficient planning, identifying, acquiring, receiving, and distributing supplies are the
E

core competencies of materials management. Having the correct supplies on hand, in the
H

appropriate amounts, and at the right time is its primary goal. Common understandings of
materials management include the following:
IC

According to Ammer, “materials management is the process by which an organisation is supplied

with goods and services that it needs to achieve its objectives. It begins with a supplier and ends when
the materials are either consumed or incorporated in a product. The executives who engage in materials
D

management are concerned with three basic activities, namely buying, storing and moving materials.”
N

In the words of Lee and Dobler, “materials management is a union of traditional materials
activities bound by a common idea: the idea of the integrated management approach to planning,
O

acquisition, conversion, flow and distribution of production materials from the raw to the finished
product state.”
P

As per Bailey and Farmer, “materials management is the management of the flow of materials in
an organisation to the point where those materials are converted into its end products.”

In today’s competitive world, it has become important for an organisation to deliver quality
products on time to the customers; otherwise they can opt for other brands. For producing a
quality product, it is important that the materials used for its production are of high quality
and delivered at the right time to the production plant so that the final product reaches the

2 DDE, Pondicherry University, Pondicherry

 CHAPTER 1  Materials Management

Notes market as soon as possible. This is possible through efficient materials management.

Materials management helps in ensuring that the right material reaches the right place at the
right time so that a high-quality product can be produced as per the customers’ requirements.
This is done by preparing a realistic plan for the acquisition, conversion, handling and
distribution of materials and implementing this plan effectively in an organisation.

Effective materials management can bring a number of benefits to an organisation. Following

Y
are some of its important advantages:

IT
‹‹ Reduces the overall cost of materials
‹‹ Increases the inventory turnover
‹‹ Reduces the lead time and transportation costs

S
‹‹ Reduces the wastage of materials

R
‹‹ Facilitates a better field material control
‹‹ Reduces materials obsolescence

E
‹‹ Improves an organisation’s relationships with its suppliers

IV
Self-Assessment Questions
1. Name the process of planning, procuring and distributing materials effectively.

N
2. Materials management enables an organisation to ensure that the right material
U
reaches the right place at the right time. (True/False)

3. Which of the following is not an advantage of materials management?

Y

a. Materials management reduces the overall cost of materials.

b. It reduces the inventory turnover.
R

c. Materials management decreases the lead time and transportation costs.

R

d. It minimises the wastage of materials.

E

Activity
H

Using the Internet, determine the process of materials management in an Indian

manufacturing organisation of your choice.
IC

1.3 Stock Valuation

D

One of the main functions of the materials management team is to determine the exact value
N

of the material procured by a retailer for managing the materials effectively. The process of
ascertaining the monetary value of all items in the stock or inventory is called stock or inventory
O

valuation. Stock or inventory is an asset of an organisation and thus, is reflected in its annual
balance sheet. The value of inventory can vary. For example, the stock of a particular product
can be bought at differing prices, at different times. To explain, suppose that you, as a buyer of
P

a retail store, had bought 20 pieces of a product at ` 20 per piece. After sometime, when you
bought 20 pieces of the same product, it cost you ` 30 per piece. Later, when you bought another
10 pieces of the product, it cost you ` 40 per piece. These products can be valued based on their
actual price, last paid price, average paid price, current market price and so on. Each of these
prices will be different, based on the method of inventory valuation.

DDE, Pondicherry University, Pondicherry 3

Materials and Store Management

Notes Recently, the government has imposed a statutory control with respect to inventory valuation,
which states that an organisation can adopt any method of inventory valuation, but needs to
follow a consistent method for a minimum period of three years.

Accounting of stock stored in a warehouse or store requires a good system, which is also
useful in the preparation of accurate accounts and assessment of the performance of the
purchase department. It also indicates the quantity and value of the stock in hand without the

Y
requirement of doing the physical counting and helps in the preparation of materials budget.

IT
Accounting of transactions done by a store includes collecting information using the store’s
transaction documents, preparing category-wise summaries and reporting the data in
monetary terms.

S
When a material is purchased, received, inspected and placed in a store, an entry is made in a Goods
Receipt Note (GRN). The entry of the price of a product is complicated, as it should include the

R
invoice price, sales/octroi tax, VAT, excise/customer duty, insurance, cartage charges, etc.

E
1.3.1 Need for stock valuation

IV
Earlier, it was possible for small manufacturing organisations to hold the stock and maintain
a reasonable profit margin. Today, the management concept says that if the inventory is not

N
controlled, it affects the organisation’s profit margins. The larger the inventory, the bigger
will be the issues related to investment, procurement, transportation, handling, accounting
U
and obsolescence.

In today’s economic environment, it is essential to have high liquidity to avail better investment
Y

opportunities. In addition, the production process is continually focused on conversion of raw

materials into finished products, which involves labour, maintenance, power and fuel expenses
R

and other running expenses. Therefore, it can be said that inventory is also a vital part of
the total assets of an organisation and is shown on its balance sheet. In such a case, if the
R

valuation of inventory is incorrect, it will be shown on the balance sheet of an organisation

and will further affect its credibility in front of investors. This may lead to a decline in the
E

sales and growth of the organisation.

H

Some basic questions that should be considered are:

‹‹ In what amount the inventory should be bought?
IC

‹‹ At what time of the year should the inventory be bought?

‹‹ What will be the lead time for supply of a product? How much time will the supplier
D

require to deliver a product as required?

‹‹ What is the amount of work-in-progress? What is the production cycle time? What is
N

the percentage of machine utilisation?

‹‹ What is the quantity of finished goods in the stock?
O

‹‹ How much space is available to store products?

P

1.3.2 Methods of Stock Valuation

There are a few methods of valuing stock or inventory. Some of them are:
‹‹ First In First Out (FIFO): It is a way to value inventory that suggests issuing
production with the most recently stored items first. Products are issued at their real
cost using this procedure, ensuring that valuation does not result in a profit or loss. The

4 DDE, Pondicherry University, Pondicherry

 CHAPTER 1  Materials Management

Notes value of the product that is issued is same to the value of the product that is received.
The sequence of the prices of the issued and received products is same.
In case the price of a product falls, the price of the product issued to production (since
it is of the old price) will be higher. Similarly, if the price rises, the price of the product
issued to production will be lower than the current price. Table 1.1 shows the FIFO
method for stock valuation:

Y
Table 1.1: FIFO Method for Stock Valuation

IT
Date Units Received Unit Value Units Issued Unit Value
2.12.12 50 200
4.12.12 50 220

S
6.12.12 50 200

R
8.12.12 50 240
12.12.12 50 220

E
14.12.12 50 240

IV
‹‹ Last In First Out (LIFO): This method is opposite to the FIFO method. The products
received later are issued first to production, irrespective of their prices when receiving.

N
The previously received products continue to be in the inventory. In case the previously-
stocked products are at high prices and the current prices are falling, the old stock has
to be written off. For example, if the stocks are received in the same sequence as shown
U
in Table 1.1, they will be issued using the LIFO method as shown in Table 1.2:

Table 1.2: LIFO Method for Stock Valuation

Y

Date Units Received Unit Value Units Issued Unit Value

2.12.12 50 200
R

4.12.12 50 220
6.12.12 50 240
R

8.12.12 50 240
E

12.12.12 50 220
14.12.12 50 200
H

‹‹ Highest In First Out (HIFO): In this method, the products purchased at the highest
IC

price are issued first out of stores. For example, if the same product has been bought
in three lots at ` 200, ` 250 and ` 220, sequentially, the current stock will be issued at `
250. Table 1.3 shows the HIFO method for stock valuation.
D

Table 1.3: HIFO Method for Stock Valuation

N

Date Units Received Unit Value Units Issued Unit Value

2.12.12 50 200
O

4.12.12 50 220
6.12.12 50 250
P

8.12.12 50 250
12.12.12 50 220
14.12.12 50 200

‹‹ Next In First Out (NIFO): In this method, the replacement value of stock is considered
while issuing a product. For example, earlier, if the purchase cost of a product was `
250 and today, its market price is ` 260, the issued product will be valued at ` 260.

DDE, Pondicherry University, Pondicherry 5

Materials and Store Management

Notes ‹‹ Simple Average: This method involves recalculating the average price of the stock
every time a new shipment of products is received at a new price. For example, if the
existing stock is valued at ` 200 and the new stock is valued at ` 220, then the average
price is taken as ` 210. This figure is then used until the next price change occurs.
‹‹ The method of valuing inventory for the purpose of a annual balance sheet is different
from the methods explained above. While selecting a method of valuation, due
consideration must be given to the following aspects of the inventory:

Y
‹‹ Quantity of the inventory

IT
‹‹ Turnover of the inventory
‹‹ Physical nature of the inventory

S
‹‹ Frequency and amount of price fluctuation
‹‹ Tax laws of the country or state

R
‹‹ Profits that reflect in a balance sheet are affected by the way the inventory is priced.
The technique of valuation can also have a significant impact on the liquidity and

E
profitability of an organisation.

IV
‹‹ High inventory valuation may result in the following:
‹‹ Overestimation of earnings
‹‹ False sense of security about the working capital

N
‹‹ Possible high bonuses U
‹‹ Additional tax payments
‹‹ Low inventory valuation, on the other hand, results in the following:
‹‹ Reduced financial strength
Y

‹‹ Heavy taxes
R

Self-Assessment Questions
R

4. he process of calculating the monetary value of all items in the stock or inventory is
called __________.
E

5. Name the method of inventory valuation in which the inventory stored first should
H

be issued first for the production.

6. The__________ method is opposite to the FIFO method.

IC

7. Which of the following aspect is not considered while selecting a method of stock
valuation?
D

a. Quantity of the inventory

b. Turnover of the inventory
N

c. Physical nature of the inventory

O

d. Type of the product pricing used by an organisation

P

8. Which of the following is not the result of high inventory valuation?

a. Underestimation of earnings
b. False sense of security about the working capital
c. Possible high bonuses
d. Additional tax payments

6 DDE, Pondicherry University, Pondicherry

 CHAPTER 1  Materials Management

Notes
1.4 Classification and Codification of Stock
You might have seen that all products in a retail store contain some tags or labels that show
their selling prices and some codes. This is called product coding. Product coding is done for
the classification of a product so that salespeople can easily identify its category.

Product coding is the application of labels and/or codes to help retailers to classify, store,

Y
categorise and track the movement of these products from their receipt in a store to their
final exit as a sold product out of the store’s doors. Product codes also help track the rejected

IT
products.

This comprises mainly administrative functions of a store’s work, which involve:

S
‹‹ Ensuring that the right type and quality of items needed for production, sale and

R
distribution are always available when required

E
‹‹ Ensuring that the stock is issued in the correct sequence, that is, “First In First Out”,
so that the older stock does not deteriorate by storing it for a longer period of time

IV
‹‹ Recording the receiving and issuing details of the materials in store

‹‹ Ensuring that the stock levels of different materials are recorded with accuracy so that

N
their repetitive orders can be placed on time
U
To track the inventory effectively, bar codes (Universal Product Code) or the Radio Frequency
Identification Device (RFID) technology is used in progressive retail organisations. The
advantages of product coding using these techniques are:
Y

‹‹ Simplicity in ordering
R

‹‹ Accuracy of ordering
R

‹‹ Avoidance of duplication and over ordering

‹‹ Assistance in reordering/purchasing
E

‹‹ Simplification of requisitions
H

‹‹ Improvement in stock recording

IC

Coding can be done using colours or by grouping them according to the nature of items. The
forms of codes can be:
D

‹‹ Alphabetic

‹‹ Numeric
N

‹‹ Alphanumeric
O

‹‹ Random numeric Nature of item codes, stores catalogues and vocabularies

For example, a steel wire having a 4mm gauge with quality B is stored in rack no. 24. The
P

Store Manager can code this wire as SW4B/24, where SW stands for steel wire.

Proper classification and codification of different materials stored in stores is essential for an
effective storekeeping. Following are the main advantages of classification and codification:

‹‹ Makes the identification of materials easy by a systematic grouping of homogeneous

materials

DDE, Pondicherry University, Pondicherry 7

Materials and Store Management

Notes ‹‹ Avoids the duplication of materials

‹‹ Facilitates the standardisation of materials

For an effective classification and codification of materials, the following principles should be
adopted:
‹‹ Consider the same point of view while classifying different types of materials

Y
‹‹ Use the principle of mutual exclusiveness in which one code number is allotted to one
item only

IT
‹‹ Use a classification and codification system that is easily understandable and can easily
be adopted by a inexpert

S
Stock Range Coding, Classifying and Categorising Methods

R
Some of the methods for coding, classifying and categorising stocks are as follows:

E
‹‹ VED Analysis: Using a descending criticality scale, the VED analysis sorts inventories

IV
into three distinct groups. In this research, the letter V represents critical components
whose absence might impede manufacturing. So, to keep things running well, V goods
should be stored adequately. The letter E stands for things that are considered crucial

N
for running a company smoothly. As a result, it is imperative that businesses guarantee
sufficient supply of E products. D represents desired things that don’t have an immediate
U
impact on production but, when made more accessible, contribute to greater efficiency.
Industries that rely heavily on capital may find the VED study to be quite beneficial.
‹‹ FSD Analysis: The FSD analysis segregates items into three categories in the decreasing
Y

order of their usage rate. In this analysis, F stands for fast moving items that get exhausted
within a short period of time. S signifies slow moving items whose usage rate is low;
R

therefore, the existing stock of S items lasts for two years or more. D stands for dead items
whose usage rate is negligible because an organisation does not foresee any additional
R

demand of such products. Stocks of fast moving items must be taken care of constantly and
replenishment orders must be forwarded in time to prevent stock outs. Slow moving stocks
E

must be evaluated very cautiously before any replenishment orders are placed. The amount
H

of ordering such items again must be decided after considering their future demand. Dead
items of inventory signify the amount of money spent that cannot be realised. Therefore,
once such items are recognised, efforts must be made to find all substitutes used for it or
IC

else, it must be disposed of.

‹‹ Scarce, Difficult, Easy (SDE) Classification: It refers to a technique in which
D

inventory is classified based on the scarcity and availability of items. S includes those
items that are very scarce, D includes those items that are difficult to procure and have
N

high transportation costs and E includes those items that are easy to procure form
markets.
O

‹‹ Fast Moving, Slow Moving and Non-Moving (FSN) Classification: This is a way of
categorising things that relies on how objects are returned to retailers. The objects that
P

have become outdated may be more easily identified and managed with the aid of this
categorization. The amount of months that have passed since the previous transaction
is determined using the last date of issuance or last date of receipt for the FSN analysis.
Reviewing goods that are excess or rare becomes easier using this analysis. If you want
to know why N things aren’t moving, you have to look at them. There are a number of
possible explanations, such as a shift in technology, an alteration to the requirements for
a certain replacement component, or the item’s eventual obsolescence.

8 DDE, Pondicherry University, Pondicherry

 CHAPTER 1  Materials Management

Notes ‹‹ Government, Ordinary, Local and Foreign (GOLF) Classification: It refers

to a classification method that us based on the nature of market and suppliers. All
these suppliers have their own payment terms and administrative procedures. Items
are divided into G, O, L and F categories. In case of G items, the inventory control
techniques cannot be applied as quota is allocated by the government, while in case of
O items, material procurement is easy. In case of L category, items can be purchased
off the shelf, while in case of F items, they should be bought in bulk as the import

Y
procedure is involved.

IT
‹‹ High, Medium and Low (HML) Classification: Sorting things into high, medium, and
low categories is based on their unit value in this manner. Management has discretion
over the upper limit for each of the three groups, although the HML technique calls

S
for items to be ranked by unit value downward. To illustrate, it can choose to classify
things as H if their total value is more than 5,000, M if it’s between 1000 and 5000,

R
and L if it’s less than 1000. Based on this, upper management may give lower-level
personnel permission to buy petty cash.

E
Self-Assessment Questions

IV
9. Name the method of stock classification in which the products are segregated into
three categories in the decreasing order of their usage rate.

N
10. In the VED analysis, E denotes essential items that are regarded as indispensable for
efficient business operations. (True/False)
U
11. Which of the following is not an advantage of product coding?
a. Complexity in ordering
Y

b. Accuracy of ordering
R

c. Avoidance of duplication and over ordering

R

d. Assistance in reordering/purchasing
E

Activity
H

Using the Internet, identify the product classification and codification used by retailers in
India.
IC

1.5 Summary
D

‹‹ Materials management refers to the process of planning, identifying, procuring,

receiving and distributing materials in an efficient manner.
N

‹‹ The major objective of materials management is the reduction of cost and efficient
O

handling of materials at all stages and in all sections of an organisation.

‹‹ Materials management helps in ensuring that the right material reaches the right place
P

at the right time so that a high-quality product can be produced as per the customers’
requirements.
‹‹ Stock valuation is the process of determining the value of all items in the stock or
inventory.
‹‹ Organisations use various methods for the valuation of stock. Some of these methods
include FIFO, LIFO, HIFO, NIFO and simple average method.

DDE, Pondicherry University, Pondicherry 9

Materials and Store Management

Notes ‹‹ Classification and codification of stock helps in easy identification of items while
storage and dispatch. In addition, it helps in managing materials efficiently.
‹‹ Some of the methods used by organisations for classifying and codifying their stock are
VED, FSD, FSN and HML.

1.6 Glossary

Y
‹‹ First In First Out (FIFO): It is a method of inventory valuation wherein the inventory

IT
stored first should be issued first to the production.
‹‹ Highest In First Out (HIFO): It is a method of inventory valuation in which the
inventory purchased at the highest price is issued first out of stores.

S
‹‹ Last In First Out (LIFO): It is a method of inventory valuation in which the inventory

R
received later is issued first to the production.
‹‹ Materials management: It is a process of planning, identifying, procuring, receiving

E
and distributing materials in an efficient manner.

IV
‹‹ Next In First Out (NIFO): It is a method of inventory valuation wherein the
replacement value of inventory is taking into account while issuing a product.

N
‹‹ Product Coding: It is an approach used for identifying and managing stock in an
organisation. U
‹‹ Simple Average: It is a method of inventory valuation in which the average price of
the stock is calculated every time a new shipment of products is received at a new price.
‹‹ Stock Valuation: It is a process of determining the monetary value of the stock of an
Y

organisation.
R

1.7 Terminal Questions

R

1. Explain the meaning of materials management. List its advantages for an organisation.
E

2. Define stock valuation.

H

3. Why is stock valuation required in an organisation?

4. What are the different methods of stock valuation?

IC

5. Discuss the classification and codification of stock.

D

1.8 Answers
N

Q. Self Assessment Questions

O

1. Materials management
2. True
P

3. b. It reduces the inventory turnover.

4. Stock or inventory valuation
5. FIFO
6. LIFO
7. d. Type of product pricing used by organisation

10 DDE, Pondicherry University, Pondicherry

 CHAPTER 1  Materials Management

Notes 8. a. Underestimation of earnings

9. FSD
10. True
11. a. Complexity in ordering
Q. Terminal Questions

Y
1. Materials management enables an organisation to procure and deliver the right

IT
material at right place and right time. Refer to section 1.2 Materials management
and its Role in Organisations.

S
2. The process of ascertaining the monetary value of all items in the stock or
inventory is called stock or inventory valuation. Refer to section 1.3 Stock

R
Valuation.
3. Today, the management concept says that if the inventory is not controlled, it

E
affects the organisation’s profit margins. Refer to sub-section 1.3.1 Need for

IV
Stock Valuation.
4. The different methods of stock valuation are FIFO, LIFO, HIFO, NIFO and
simple average. Refer to sub-section 1.3.2 Methods of Stock Valuation.

N
5. Product coding is done for the classification of a product so that salespeople can easily
U
identify its category. Refer to section 1.4 Classification and Codification of Stock.
Y

1.9 Case Study: Stock Management at ABC Ltd.

R

ABC Ltd. is a retail organisation that owned two stores initially. Both of these stores provided
food and grocery items to its customers. The stock of these stores was effectively being
R

managed by the owner of ABC, Mr. Raghav, and his team of eight members. The sales and
profits of ABC were growing rapidly. As a result, Mr. Raghav decided to expand this business
E

by opening two new retail stores.

H

The new retail stores opened by Mr. Raghav contained a wide range of apparels, such as
men wear, women wear and children wear. Now, Mr. Raghav had four retail stores whose
IC

stocks could not be managed by the existing team. Therefore, the team size was increased to
20 members. However, even after increasing the team size, it was not possible to manage the
stocks effectively. As a result, the new stores of ABC started running into losses as the sales
D

were negligible.
N

To overcome the problem, Mr. Raghav appointed a stock planner to determine the reasons of
failure and manage the stock of the four stores. The stock planner identified that one of the
O

main reasons of the failure of new stores of ABC was that they were not able to provide the
latest trends of apparels to their customers. This is because ABC was unable to recognise that
P

the stock of an apparel store is different from that of a food and grocery store. Therefore,
the procurement processes of both the stocks are different. The procurement of apparels is
highly dependent on the season and the latest fashion trends, while the procurement of food
and grocery items is easy and similar throughout the year as the fluctuation in demand is very
low. In addition, the stock in apparel stores was not being properly displayed. As a result,
customers were not able to identify the product in the retail store that they wanted to buy.
Thus, they used to leave the store without purchasing the product.

DDE, Pondicherry University, Pondicherry 11

Materials and Store Management

Notes Thus, the stock planner prepared a separate plan for the sourcing of food and grocery stores
and apparel stores and provided it to Mr. Raghav. In addition, he prepared a plan for managing
and displaying the stock in the retail stores. After implementing the plan, ABC was able to
generate sales from all of its stores.

Discussion Questions

Y
1. Why was ABC Ltd. incurring losses in its newly opened stores?

IT
(Hint: ABC was incurring losses because of its inability to manage stock efficiently.)

2. Why is the management of stock important in a retail store?

S
(Hint: The management of stock is necessary for every sector to ensure that the right

R
quality of product reaches the right customer at the right time.)

E
1.10 References and Suggested Reading

IV
‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall of
India Pvt. Ltd.

N
‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi Publication
(P) Ltd. U
E-references
Y

‹‹ Materials Management. http://www.newagepublishers.com/samplechapter/001386.

pdf.
R

‹‹ Inventory. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/
R

inventory.html
‹‹ What is inventory valuation? http://www.accountingcoach.com/blog/what-is-
E

inventory-valuation.
H

‹‹ Inventory Valuation Methods Introduction. http://accountingexplained.com/

financial/inventories/valuation-methods
IC
D
N
O
P

12 DDE, Pondicherry University, Pondicherry

chapter

2 Need for Stock

Y
IT
S
R
E
Structure

IV
2.1 Introduction

N
Learning Objectives U
2.2 Stockholding

2.3 Avoiding Carrying Stock

Y

2.4 Methods of Inventory Control

R

2.5 Solved Illustrations

2.6 Summary
R

2.7 Glossary
E

2.8 Terminal Questions

H

2.9 Answers
IC

2.10 Case Study: Stock Control at ABC Pvt. Ltd.

2.11 References and Suggested Readings

D
N
O
P
Materials and Store Management

Notes Learning Objectives

After completing the chapter, you will be able to:
 discuss the concept of stockholding
 explain the determination of the stockholding policy
 explain the importance of avoiding carrying stock

Y
 identify the methods of inventory control

IT
2.1 Introduction

S
Inventory is the stock that you need to have in hand to ensure that when the requirement of
a product arises, you have the same product as a backup to use or sell.. A simple example is

R
your car. Most of the cars are equipped with a spare tyre. Suppose one of your car tyres gets
punctured. You change the punctured tyre with the spare tyre and then get the punctured one

E
repaired. This saves time and effort of finding a tyre repair person, while the car is immobile.
Moreover, the place where your car tyre got punctured may not have a tyre repair shop in the

IV
close vicinity. In this case, the spare tyre is your car’s tyre inventory. Another example is while
constructing a building, if a builder runs out of bricks, the work has to be stopped while the
site waits for additional bricks to arrive. This causes big losses to the builder. Therefore, it

N
always carries additional stock of bricks and they are replenished when they touch a reorder
level. This ensures that the work continues without any stoppages.
U
Similarly, when a retail store runs out of stock, the customer may have no choice but to go to
another store to buy the same product. In case, the other store is nearby, the customer may
Y

start visiting that store for its subsequent purchases. Thus, the first store loses not just the
day’s business, but the subsequent sales by the customer as well. Inventories are therefore
R

critical to run a business.

R

In this chapter, you will study about the concept and benefits of stockholding. You will
also study about the factors affecting stockholding. In addition, the determination of the
E

stockholding policy is also discussed in the chapter. Moreover, you will be acquainted with
the importance of avoiding carrying stock. At the end, the chapter discusses the different
H

methods of inventory control.

IC

2.2 Stockholding
Having too much or too little inventory is unfavourable for an organisation. If the inventory
D

is too less, the organisation faces regular stockouts issues involving high ordering cost. On the
other hand, if the inventory level is too high, the situation of overstocking arises. Therefore,
N

it is important for an organisation to keep an optimum level of inventory or stock. This

process of holding an adequate amount of stock is called stockholding.
O

Generally, it is assumed that only the shortage of stock is a problem for an organisation, as it
P

leads to dissatisfied customers and may impact the goodwill of the organisation in the long
run. However, the excess inventory or stock is also a major problem for an organisation. It
not only increases the cost to the organisation related to inventory, but also leads to various
other problems.

The extra inventory or stock left with a retailer after satisfying the demands of its customers
is called excess inventory or stock. Excess inventory can be the result of changing demands
and preferences of customers, increasing competition and unfavourable economic conditions.

14 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes Such type of inventory is considered bad by retailers, as it negatively affect their businesses.
Some of the negative effects of excess inventory are as follows:
‹‹ Product obsolescence:This is one of the worst effects of excess inventory. This
is because once a product gets obsolete, the retailer cannot sell it in the market. For
example, floppy drives became obsolete due to the introduction of pen drives and CDs.
As a result, people are not ready to buy them and they became the part of excess

Y
inventory. Similarly, some apparels and fashion accessories became obsolete.
‹‹ Increased Cost to an Organisation: Excess inventory adds to the cost to a retailer.

IT
Some of the costs associated with excess inventory are storage, insurance, freight and
other expenses. As per the Retail Owners Institute, an industry information website,
“the additional cost of holding excess inventory is between 25 and 32 percent annually.”

S
‹‹ Decreased Cash Flow:Excess inventory leads to cash flow problems for retailers.

R
Retailers use the cash obtained by selling products to procure inventory. However,
excess inventory cannot generate cash or receivables. In such a case, a retailer cannot

E
meet its operating expenses. As a result, a retailer needs to borrow additional funds,
which increases the interest expenses and decreases the operational flexibility. This

IV
makes a retailer unable to meet the changing requirements of its customers on time,
which results in the loss of customersand market share.

N
‹‹ Reduced Profitability: As you just studied, excess inventory leads to high costs and
loss of sales opportunities for a retailer. This ultimately results in reduced profitability
for a retailer.
U
The problem of excess inventory can be overcome by better inventory planning, just-in-time
manufacturing and more accurate forecasting of customers demand.
Y
R

2.2.1 Benefits of Stockholding

R

An adequate level of stock helps in planning various organisational activities, such as

purchasing, producing and selling products. All these three activities are interrelated;
E

however, these can be carried out independently with the help of inventory. For example, if an
organisation possesses an ample reservoir of raw materials, it can manufacture finished goods
H

without encountering any limitations. In such a scenario, the organisation wouldn’t rely solely
on the sales of goods and services to procure raw materials for subsequent production. This
IC

highlights the advantage of maintaining inventory over an extended period. However, the
benefit of holding inventory in the short run is to meet the unexpected rise in the demands
of customers. Other benefits of maintaining inventory are as follows:
D

‹‹ Purchase Benefits: These are the benefits that arise by purchasing goods in large
N

quantities. If an organisation purchases raw materials or goods in large quantity, it

may avail discounts. This lowers the ordering and carrying costs. For example, if a car
O

manufacturing organisation purchases the steel required for manufacturing 100 cars
instead of 10 cars, the seller of steel may provide discount on this bulk purchase to
P

establish a good business relationship with the manufacturing organisation.

‹‹ Production Benefits: These benefits are related to the adequate level of inventory that
facilitates the smooth flow of production. If an organisation has asufficient amount
of inventory, it can increase or decrease the level of production to match the sales of
products. This is a special advantage to the organisations with a seasonal sales pattern.
Suppose, the sales volume of a cooler manufacturing organisation is higher in the
summer season and lower in the winter season. In such a situation, it is better for the

DDE, Pondicherry University, Pondicherry 15

Materials and Store Management

Notes organisation to maintain a sufficient level of inventory to avoid the situation of scarce
or excess production.
‹‹ Sales Benefits: These advantages stem from the fact that keeping track of stock allows
a company to boost its sales activities. Without a stockpile of completed items, sales
volume is directly proportional to output. An organisation cannot immediately satisfy a
larger demand in this scenario. The production process determines the duration of the

Y
delay. But if a company has stock on hand, the length of time it takes to make a product
is irrelevant to how much money they make. For instance, picture this: your company

IT
has the necessary goods on hand as spare inventory, and all of a sudden, demand for
that product skyrockets in the market. In this scenario, the company can easily handle
the unexpected surge in demand and boost product sales.

S
2.2.2 Factors Affecting Stockholding Policy

R
E
As discussed in the last section, stockholding is important for an organisation to maintain
the required level of inventory to avoid the problem of shortage or surplus of inventory.

IV
However, determining and maintaining this level of inventory is a crucial task, as there are
various factors that affect it. Some of these factors are shown in Fig. 2.1:

N
Customer Expectations
U
Business Requirements
Y
Economic Constraints
R

Fig. 2.1: Factors Affecting Stockholding

R

Thesefactors are discussed below:

E

Customer Expectations
H

No business can be successful without the satisfaction of customers. Therefore, nowadays,

most organisations focus on providing quality customer service to achieve maximum customer
IC

satisfaction. Today, customers are not only interested in the products they purchase, but also
expect to receive other additional services from a shop. These services may include home
delivery, credit facility, gift wrapping, repair, installation, etc. Thus, customers’ expectations
D

are increasing on a daily basis. In such a case, if an organisation cannot meet the expectations
of its customers, this may result in the loss of sales as well as a decline in the customer base.
N

One of the main criteria for meeting customer expectationsis to make the stock available in
O

the right quantity and at the right time and place. For example, consider a situation when
you visit a retail store to buy a particular product, but the retailer says that the product is
out of stock or is available but inlesser quantity than what you require. This will make you
P

move to another retailer in the search of the product. In this case, the retailer is losing its one
customer or one-time sale from you as a customer, as well as, resale from you as you might
have visited again if you expectation would have gotfulfilled the first time.

Apart from the stock availability, it is important for an organisation to hold the type of stock
demanded highly by customers. This not only helps meeting the customer expectations, but
increasesthe sales of an organisation.

16 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes Business Requirements

An organisation holds stocks based on the requirement of the business to fulfill its objectives.
In a manufacturing establishment, the idle time of labourand machines is an important
consideration. As the cost of idle labourand machinery increases, it becomes essential to keep
the stock in hand.

Y
On the other hand, every retailer considers it necessary to hold a specific amount of inventory.
This is because it is not possible to operate with only one unitfor each product. A reserve stock

IT
of the frequently sold merchandise is maintained, which is referred as inventory.

As an example, let us consider a non-sports footwear shop. There will be a variety of different

S
shoes, lace-ups, casual wear and boots on display, both in the shop’s windows and inside the
shop. If a customer asks for trying a product on the display, it would be timeconsuming for

R
the sales executive or shop assistant to remove the product from the display and place it back.
This would also make the only pair of those shoes shop-worn and old for the actual buyer

E
who wishes to purchase such a pair. Instead, if a customer is interested in a particular style
of footwear, the shop assistant would ask for the customer’s preferred colour and size and

IV
search for the required product in the stock. In most of the cases, products with common or
regular sizes and popular brands are stored inside the store, either in cabinets or shelves. The
uncommon sizes are mostly kept in another room in the store, from where the shop assistant

N
can bring the required product within a minimum time. This room is known as the store
room. When a pair of shoes is sold from those inside the shop, it must be replaced quickly by
U
another pair keptin the store or stock room.

No retailer can operate efficiently if a retailer has to order a replacement from the manufacturer
Y

or supplier every time an SKU is sold. An efficient stock control also minimises the probability
of a stock out when the stocks for the required SKU are no longer available. When the stock
R

is limited in a retail store, only one person is appointed to handle it. However, in case the
volume of stock is very large, more than one storekeeper ishired for monitoring the stock.
R

Organisations with large quantities of stocks must employ trained stores personnel.
E

The need to hold inventory comes from four essential business requirements, discussed below.
If you need to analyse inventory to arrive at optimum levels, you require to understand these
H

needs.
‹‹ Production of Inventory in Lot Size: Most of the manufacturing companies produce
IC

products in lot sizes, rather than depending on the rate at which productsare required.
The rationale is reduced production costs and increased efficiency. Therefore, the
D

inventory in excess of demand need to be carried.

‹‹ Variations in Inventory Levels: The level of inventory depends on the demand. The
N

demand fluctuates quite often. The inventory left as a result of such fluctuations is the
safety stock.
O

‹‹ Anticipation of Inventory: The anticipated inventory includes the products that are
developed in the anticipation of the future demand. The anticipatedinventory normally
P

builds up during the off season. This is done with the objectives of keeping the labour
employed and building up the stock levels for the products demand during the peak
season.
‹‹ Transportation of Inventory: The transport inventory is the inventory that lies in
the pipeline of the transportation system. Suppose a train delivers inventory every two
weeks. In this case,the transportation of inventory will take two weeks.

DDE, Pondicherry University, Pondicherry 17

Materials and Store Management

Notes Economics Constraints

Inventory is generated for two basic purposes, economy and protection. Protection from
delays is done by maintaining an adequate level of inventory to ensure that there are no work
stoppages due to the lack of stock. The economic reason is that the production costs are lower
if the production runs for longer. Thus, more raw materials are required to be in stock. In
addition, if a manufacturer purchases raw materials in bulk, it also gets discounted rates as

Y
compared to when it buys smaller quantities.

IT
There are various economic constraints that affect stockholding in an organisation. Some of
these constraints include:

S
‹‹ Availability of the required raw materials

R
‹‹ Availability of the adequate capital to invest in stockholding

‹‹ Fluctuations in inflation rates of materials and their transportation

E
‹‹ Amount of taxes charged on stock and its holding

IV
‹‹ Availability of the skilled labour to handle the stock efficiently

N
2.2.3 Categories of Risks and their Evaluation
U
The stock held by an organisation is subject to various risks falling under different categories.
These risks lead to the reduction in the amount of stock due to loss or damage. There are
many reasons of losses like shoplifting, theft, non-theft shrinkage, etc. Some of the common
Y

causes of inventory spoilage are:

R

‹‹ Wrong or irresponsible handling of merchandise: This can be managed by training

employees on proper handling techniques of merchandise.
R

‹‹ Water damage and presence of dampness or moisture around the area where
E

merchandise is stored: This can be managed by ensuring that no moisture seeps in

any area near the location where merchandise is stored. This may involve asking the
H

maintenance department to correct the moisture causing factors.

IC

‹‹ Dirt and dust in the storage areas: This can be managed by ensuring proper
housekeeping and making schedules to ensure regular cleaning.

‹‹ Undesirable temperature and humidity: This can be managed by ensuring proper air
D

conditioning and ventilation to control the temperature and humidity.

N

‹‹ Contamination of products by other products due to close proximity: This can be

managed by ensuring the segregation of products.
O

‹‹ Rodents, insects and other forms of infestation like fungus: This can be managed
P

by regular pest control and fumigation.

‹‹ Incorrect sequence of issuing merchandise: This can be managed by training staff

on proper processes related to the issue of merchandise.

‹‹ Fire incidents: These can be managed by training staff on fire prevention methods and
fire control techniques, including using fire extinguisher and measures to take in case
of a fire, usually done as a fire drill.

18 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes Apart from these causes, the risk of inventory loss may also arise due to the following reasons:

Employee theft
‹‹ Shoplifting

‹‹ Administrative error
‹‹ Vendor error

Y
‹‹ Unknown error/system errors

IT
Security Measures

S
By using appropriate fixtures, the theft of inventory can be prevented. These have a dual effect
on the potential criminals. They act as a prevention against the undesirable browsing elements

R
that look for premises of easier places to shoplift and help in capturing and identifying the
theft inventory. Such fixtures include:

E
‹‹ Secure doors

IV
‹‹ Secure windows and fanlights
‹‹ Closed-circuit TV

N
‹‹ Locks, chains and screens
‹‹ Secured merchandise
U
The control of inventory can be done through the following ways:
Y
‹‹ Applying electronic tags (electronic article surveillance)
‹‹ Numbering and labelling
R

‹‹ Controlling keys
R

‹‹ Maintaining a register of keys

‹‹ Limiting the access to stores
E

‹‹ Marking the target inventory

H

‹‹ Implementing lockable bins

IC

The prevention of shoplifting can be done through the use of:

‹‹ Mystery shoppers
D

‹‹ Plain clothes security

‹‹ Uniformed guards
N

‹‹ Observation booths
O

Checking Inventory
P

There are multiple methods of checking inventory. The method to be used depends on the
size and scale of inventory. Some techniques are described below:
‹‹ Perpetual Inventory Technique: In case the organisation’s size is big and a large
variety of quantities are stocked, a year-end stock taking is an extraordinary task.
The perpetual checking technique involves a team of two or three stock auditors to
check the stocks of a few items daily. Discrepancies are recorded and investigated

DDE, Pondicherry University, Pondicherry 19

Materials and Store Management

Notes immediately. Expensive products may need to be checked up to four times in a year. This
is beneficial, as the cost incurred by a retailer is lower than to check the inventory on an
annual basis. Moreover, pilferage is detected quickly, discrepancies are resolved faster as
the concerned persons remember the recent incidents more vividly, obsolete stocks are
detected easily and the stock performance is analysed on a regular basis.
‹‹ Annual Stock Taking: At the end of the financial year, stores are closed for a couple of

Y
days. During this time, stocks are checked by cross-functional teams comprising persons
from the audit, stores and accounts departments. The auditors must get satisfied that

IT
each product is stored. The disadvantages of this method are:
 It forces stores to be shut down for a few days, which affects the business.

S
 Losses are known only at the end of the year.

R
 This creates a load and pressure on the audit team.
‹‹ Periodic Checking: This technique is a mid way between the annual stock taking

E
method and the perpetual inventory method. Checking is done by the accounts and
stores departments at regular intervals, say, in every two or three months. The stores

IV
are not closed. This helps to avoid the end-of-the-year pressure and business loss.
‹‹ Daily Stock Taking: In this technique, the store executives randomly check 10 to

N
12 products daily. This enables stores to identify discrepancies, especially as the store
executives are familiar with the products in which discrepancies are likely to occur. This
U
also breeds a culture where malpractices can be avoided.
‹‹ Store in-charge Checking: This technique is similar to the one above, except that the
checking is done by the store manager. Discrepancies, if any, are immediately identified,
Y

analysed and resolved by the store manager.

R

Investigation of discrepancies involves analysing the stock records since the date of last
checking, ensuring that there are no manual or calculation errors, clarifying any confusion
R

over the issue of products, checking the supporting documents like GRN, transferring notes
of inventory, etc. Since the last stock taking, it also involves getting the physical stock count
E

verified by a senior official and checking if any stock has been issued or received without
documentation.
H

A disciplinary action should be taken only after the investigation has been conducted
IC

thoroughly and meticulously. Reconciled losses can be written off and stock records can be
adjusted accordingly after seeking due approvals.
D

2.2.4 Determination of the Stockholding Policy

N

For holding stock efficiently, organisations prepare the stockholding policy while considering
O

the abovementioned factors. This stockholding policy is determined using the safety stock.

The safety stockor buffer stock is the level of extra stock that is maintained by an
P

organisationagainst the risks of stock outs. These stock outs may arise due to the uncertainties
in demand and supply. It is a known fact that most of the businesses are supposed to supply
the finished goods in the market as per the demand and for this, organisations have to keep
sufficient stocks of inventories to keep the production processes running. All organisations do
the adequate amount of planning to meet the targets, but there always remains a chance of
variation due to some uncertainties. To meet these uncertainties, organisations keep a buffer
of the required inventories.

20 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes Uncertainties may also arise due to uneven fluctuations in the demand. In case of new
products being manufactured, the safety stock is utilised as a strategic tool that provides
an organisation ample time to judge the accuracy of its forecasts. If the level of accuracy is
low, an organisation requires more amount of the safety stock. An organisation has to decide
how much it will produce without taking the help of the buffer stock, provided the demand
is also met. The level of the safety stock reduces as the demand becomes more and more
predictable. At times, the buffer stock acts as a solution for the organisations withlowlevels of

Y
finances and are running on the lean manufacturing system, which is based on the principle
of waste elimination in a production process. In most of the cases, the amount of the safety

IT
stock affects the business at large. That is, the high level of the safety stock results in a high
carrying cost of inventory. Even the stock of the finished goods, if kept for a long time, is

S
liable to perish with time, which is again a loss to an organisation. On the other hand, the low
level of the safety stock may result in low sales. Therefore, it is essential to identify the right

R
amount of the safety stock to keep the business running.

The formula to calculate the level of the safety stock is as follows:

E
(Maximum usage rate – Average usage rate) * Lead time

IV
Where,

Usage rate = The rate at which inventory is used in an organisation(For example, if an

N
organisation uses 300 units of inventory every day, then the usage rate would be 300 units.) On
the other hand, the lead time is the time between the starting of a process and its completion.
U
The safety stock is upheld to prevent stock shortages. If there are frequent fluctuations in lead
time and usage rate, an organisation may encounter stockouts. In such instances, comprehensive
Y

protection against stockouts is necessary through the maintenance of a substantial amount of

safety stock. Additionally, an organisation keeps safety stock to address unforeseen delivery
R

delays. Therefore, in uncertain circumstances where safety stock is in place, the reorder point
can be established as follows:
R

Reorder point = (Lead time * Average usage) + Safety stock

E

Another method of making a provision for the safety stock is a simple formula in which the
safety stock varies directly with the square root of lead time. Consumption varies and is
H

adjusted according to the degree of the safety desired. The formula for calculating the safety
stock level is:
IC

S= K √D

Where,
D

S= Safety stock
N

K= A constant that varies from 1 to 4 depending on the degree of the safety desired
O

D= The average consumptionof inventory during lead time

P

Self-Assessment Questions
1. Excess inventory is good for organisations. (True/False)
2. Which of the following is not a need for holding inventory by an organisation?

a. Production of Inventory in Lot Size

b. Constant Inventory Levels

DDE, Pondicherry University, Pondicherry 21

Materials and Store Management

Notes
c. Anticipation of Inventory

d. Transportation of Inventory

3. The __________checking technique involves a team of two or three stock auditors to

check the stocks of a few items daily.

Y
4. Which of the following is not an economic constraint in holding inventory?

a. Availability of the warehouses for keeping inventory

IT

b. Availability of the adequate capital to invest in stockholding

S

c. Fluctuations in inflation rates of materials and their transportation

d. Amount of taxes charged on stock and its holding

R
E
Activity
Using the Internet, identify the reasons for holding inventory by a retailer.

IV
2.3 Avoiding Carrying Stock

N
Stock control or inventory control is a process that involves the supervision, storage and
U
accessibility of goods or items to avoid the holding or carrying of stock. Making ensuring a
company never runs out of products or has too much of them is the primary goal of inventory
control. Consequently, the goal of inventory control is to maximise revenues while minimising
Y

expenses by balancing the levels of under- and over-supply. Reason being, a company can end
R

up spending a pretty penny if it has a lot of inventory. Conversely, businesses risk falling
short of client demand if they fail to maintain adequate inventory levels.
R

Apart from this, inventory control helps an organisationdetermining when to order and
what to order. Placing an order is a crucial decision for any organisation. This is because if
E

the size of an order is too large (beyond the need), it may create financial difficulties to the
H

organisation. Moreover, if the organisation takes too much time to place an order, it may
result in the shortage of inventory before the arrival of the next shipment. Inventory control
IC

helps an organisation to determine and verify the overhead costs and the overall shipping
expenses.

Following are some of the main benefits of inventory control:

D

‹‹ Helps an organisation to maintain an adequate amount of stock so that it can fulfill the
N

demand of its customers

‹‹ Ensures the best rate of stock turnover for each item of an organisation
O

‹‹ Helps in reducing expenses and maximising profits

P

‹‹ Helps in maintaining a wide assortment of stock

Following are the important points that are considered in inventory control:
‹‹ Relevant Inventory Costs:It refers to one of the most important factors considered
in inventory control. Maintaining a particular level of inventory depends on various
relevant costs such as purchase cost, carrying (or holding) cost, ordering (or setup)
cost, shortage (or stock out) cost, customer service cost and total inventory cost.

22 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes ‹‹ Demand of Inventory Items:It refers to a factor that plays an important role in
determining an optimal inventory policy for an organisation. An organisation always
decides the amount of inventory to be kept on the basis of the demand of goods. The
size of demand may either be deterministic or probabilistic.
‹‹ Replenishment Lead Time:It refers to the total time taken for in-house production or
for the procurement of a good from an external source. In a manufacturing system, raw

Y
materials and semi-finished goods may be required either to keep them in a warehouse
for future needs or to be used for processing immediately on arrival. The replenishment

IT
of such items may be uniform or constant. These patterns of replenishment depend
upon lead time.

S
‹‹ Operating Decision Rules:This implies that an organisation needs to make a number
of decisions while formulating inventory policies. These decisions can be related to the

R
size of the replenishment order and the appropriate time to make this order.

E
‹‹ Length of the Planning Period:This refers to a planning period that defines the
duration for which a particular inventory level would be maintained. This period may

IV
be finite or infinite depending on the nature of the demand.
‹‹ Constraints on the Inventory System:This refers to the restrictions that directly
affect the performance of an organisation’s inventory system. These restrictions can

N
be the limited warehouse space, limited budget availability for inventory, the degree
of management attention towards individual items in the inventory and the customer
U
service level to be achieved.

Self-Assessment Questions
Y

5. Which of the following is not a benefit of inventory control?

R

a. Helps an organisation to maintain an adequate amount of stock so that it can fulfill
R

the demand of its customers

E

b. Ensures the best rate of stock turnover for each item of an organisation

c. Helps in reducing expenses and maximising profits
H

d. Helps in maintaining a narrow assortment of stock
IC

6. _______________is the total time taken for in-house production or for the
procurement of a good from an external source.
D

7. The planning period, which defines the duration for which a particular inventory
level would be maintained, may be finite or infinite depending on the nature of the
N

demand. (True/False)
O
P

2.4 Methods of Inventory Control

Inventory controlling methods are used to solve various inventory problems. These methods
can be developed by considering two aspects, namely how much to order at a time and when to
order so that the total cost is minimised. Inventory models help in deriving certain rules that
may suggest how to minimise the total inventory cost in case of the deterministic demand or
how to minimise the expected cost in case of the probabilistic demand.

DDE, Pondicherry University, Pondicherry 23

Materials and Store Management

Notes Fig. 2.2 shows some of the inventory control methods used by organisations:

ABC Analysis

Stock Levels

Y
Just-in-Time

IT
Economic Order Quantity

S
Vendor Managed Inventory

R
E
Fig. 2.2: Inventory Control Methods

IV
Let us discuss these inventory control methods in detail.

2.4.1 ABC Analysis

N
U
ABC analysis is an important technique of inventory control and can be applied to almost
all aspects of inventory management such as purchasing, receiving, inspecting, storing,
retrieving from stores, value analysis, etc.
Y

The ABC analysis method classifies inventory into three categories: A, B and C. It uses the
Pareto principle of 80–20, where approximately 80% of the store sales or profits are derived
R

from 20% of the products. The measurement criteria can vary from gross margin, sales value,
sales in units to Gross Margin Return On Investment (GMROI), which is the ratio used for
R

evaluating the profitability of inventory.

E

The small number of the highest selling or high value yielding products are put into the A
category. The medium selling or medium value yielding products are put into the B category.
H

The remainder, the low selling or low value yielding products are put into the C category.
IC

Thus, it becomes easy to distinguish which SKUs are contributing the highest in terms of
units or value to a retailer. A key performance measure in this analysis is the contribution
margin, which can be calculated as follows:
D

Contribution margin = net sales – cost of goods sold – other variable expenses
N

Other measures include GMROI, sales in units, sales in currency and gross margin.
O

There may be certain products with lower margins but high turnoversthat attract customers
to the store or complement other products with higher margins.
P

Another method is to apply the sales per square foot technique, where the amount of space
occupied by a product is used to calculate its performance in comparison to the total space
of the store. Normally, A category products contribute 60 to 70% of the sales, B category
contributes 20 to 25% of the sales and C category contributes 10 to 15% of the sales. In
addition to the A, B and C categories of products, there may be some products that are non-
moving. A retailer tries to sell such products by mark downs or other types of discounts or
schemes.

24 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes The objective of analysing the performance of merchandise is to:

‹‹ Reduce the inventory carrying costs in stores
‹‹ Provide access to better buying information, inventory availability and promotional
pricing and thus, improve operational margins through lower cost of sales
‹‹ Ensurebetter ROI by providing access to merchandising history

Y
Let us understand ABC analysis with the help of an example.

IT
Table-2.1 shows an example of the inventory records of an organisation:

Table 2.1: Inventory Records of an Organisation

S
Item Annual Usage Per Unit Annual Usage (in Rs.) Ranking
(in Units) Cost

R
10501 30,000 0.10 3,000 6

E
10502 280,000 0.15 42,000 1
10503 3,000 0.10 300 9

IV
10504 110,000 0.05 5,000 4
10505 4,000 0.50 200 10

N
10506 220,000 0.10 22,000 2
10507 15,000 0.05 750 8
10508 80,000
U 0.05 4,000 5
10509 60,000 0.15 9,000 3
10510 8,000 0.10 8,000 7
Y

Table-2.2 shows the ABC ranking of all items given in Table 2.1:
R

Table 2.2: ABC Ranking

R

Item Annual Usage Cumulative Annual Percent Ranking

(in Rs.) Usage (in Rs.)
E

10502 42,000 42,000 48.00 A

H

10506 22,000 64,000 73.1 A

10509 9,000 73,000 83.4 B
IC

10504 5,000 78,000 89.6 B

10508 4,000 82,000 94.1 B
10501 3,000 85,000 97.6 C
D

10507 750 87,050 99.4 C

N

10503 300 87,350 99.6 C

10505 200 87,550 100.00 C
O

Table 2.3 shows ABC analysis:

P

Table 2.3: ABC analysis

Class Item % Item Rs./group %
A 10502, 10506 20 64,000 73.1
B 10509, 10504, 10508 30 18,500 21.1
C All other 50 5,050 5.8

DDE, Pondicherry University, Pondicherry 25

Materials and Store Management

Notes 2.4.2 Stock Levels

The various stock levels maintained by an organisation are discussed as follows:
‹‹ Minimum Stock Level: It stands for the minimum amount of stock that a company must
have on hand at all times. The bare minimum ensures a certain degree of production
safety by allowing for the constant storage of supplies in the event of an unexpected

Y
event. Hence, the bare minimum amount is frequently called an emergency reserve
stock. In any event, the level must not go below zero. This is because the organization’s

IT
manufacturing process will be impacted by a lack of supplies if the inventory falls
below the minimal level. To determine the minimal amount of stock, use the following
formula:

S
Minimum Stock Level = Reordering level – (Normal consumption* Normal reorder

R
period)
Or

E
Minimum stock level = Reorder level – (Average Rate of Consumption × Lead time)

IV
‹‹ Reordering Level: The point at which a company decides to restock its resources is
called the inventory turnover rate. Put simply, a fresh order is placed to restock the
materials if the quantity of inventory drops below a specific threshold. Prior to the

N
quantity of raw materials running out, the order is sent out. The ordering or reordering
level is always somewhere between the two extremes of inventory. Here is the formula
U
to determine the reordering level:
Reordering level = Maximum consumption * Maximum reorder point
Y

Or
R

Reordering level = Lead time (in days) * Average daily usage

‹‹ Maximum Stock Level: It is the maximum quantity of stock that a company should
R

maintain on hand. Since exceeding the maximum stock level causes the inventory
holding cost to rise needlessly, the organisation should refrain from doing so. Here is
E

the formula to determine the highest possible stock level:

H

Maximum stock level = (Reordering level + Reordering quantity) – (Minimum

consumption * Minimum reordering period)
IC

The maximum stock level depends on the following factors:

 Rate of consumption of the materials
D

 Time required to receive deliveries

 Amount of capital available
N

 Storage space available

O

 Possibility of loss due to evaporation and deterioration

 Current market conditions
P

 Economic ordering quantity

 Government restrictions, for example in the case of explosive materials
 Staff and other facilities available for the maintenance of stores
 Total maintenance cost
 Need of buffer stock (safety stock) with respect to active stock

26 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes ‹‹ Danger Level: This is the point at which stock should never drop below a certain
threshold. Even if it costs more to arrange the resources, quick action should be done
to restock if the risk level grows. The following formula is used to establish the hazard
level:
Danger level = Average consumption * Maximum reordering point for emergency
purchases

Y
Exhibit

IT
Exhibit 1: Factors Affecting Stock Levels

In an organisation, stock levels are influenced by various factorsas shown in the following

S
figure:

R
Operational

E
Needs

IV
Factors
Availability of

N
Delivery Time Affecting Stock
Capital
U Levels
Y

Cost of Storage
R

Figure: Factors Affecting Stock Levels

R

The factors affecting stock levels are explained below:

E

‹‹ Operational Needs:These needs imply that the stock level of an organisation

depends on its level of production. For example, an organisationwitha high level
H

of production needs to maintain a maximum stock level. On the other hand, an

organisation that produces only after receiving orders from customers needs to
IC

maintain a minimum stock level.

‹‹ Delivery Time:It refers to the time when the ordered materials are dispatched.
D

Sometimes,organisations face delay in the delivery of materials due to various

reasons. These situations generally take place in festive seasons, poor climatic
N

conditions, wars and technology failure incidents. In such cases, an organisation

needs to maintain a sufficient stock level to meet the production and sales
O

requirements.
‹‹ Availability of Capital:This refers to one of the major factors that affects stock
P

levels. An organisation needs to maintain a level of inventory according to the

capital available. This is because if an organisation goes beyond the total capital
available, it would adversely affect the overall budget of the organisation.
‹‹ Cost of Storage:This indicates another crucial factor that influences the stock
level maintained by an organisation. Higher the level of stock maintained by an
organisation, the higher would be the storage cost.

DDE, Pondicherry University, Pondicherry 27

Materials and Store Management

Notes 2.4.3 Just-in-Time

As the name suggests, Just-In-Time (JIT) inventory management means ordering and
receiving the inventory for sales and production purposes only when it is needed and not
before. This implies that an organisation does not hold the safety stock and operates with a
minimum inventory level. The JIT approach helps an organisation reducing its ordering and

Y
carrying costs. The successful operation of the JIT inventory management has the following
requirements:

IT
‹‹ The organisation must have limited suppliers.
‹‹ The suppliers must be bound under long-term agreements and prepared to make

S
repeated deliveries in small lots.
‹‹ The organisation must develop a system of the total quality control.

R
‹‹ The poor quality of raw materials or parts should not be accepted.

E
‹‹ Workers must be multiskilled in the JIT environment.

IV
In the JIT inventory control technique, the inventories are obtained and introduced in the
production process at the right time. This involves proficient purchasing, dependable suppliers
and a well-organised inventory-handling system. One thing that has made JIT inventory

N
control a success is the introduction of the Internet.
U
2.4.4 Economic Order Quantity
Y

Although there are benefits to buying in bulk, the high carrying cost is one drawback.
Similarly, ordering in bulk increases the ordering cost but decreases the holding cost. When
R

it comes to material management, the EOQ method may assist an organisation tackle all of
its challenges. When it comes to EOQ, the letter “Q” represents the ideal order size quantity
R

that minimises overall cost, which includes both ordering and carrying costs. The technique
of EOQ is shown in Fig. 2.3:
E

Cost
H

Total Cost
IC

Inventory
D

Set up carrying
Cost cost
N

Order size
O

Fig. 2.3: Economic Order Quantity

P

Combining the holding and carrying costs on a graph reveals the exact location of the total
cost curve’s minimum, as seen in Figure 2.3. The linearity of the carrying cost curve basically
indicates that the holding cost increases as inventory levels rise over any given time period.
More acquisition and greater ordering expenses result from placing orders in small amounts.
With larger orders, the ordering expenses go down.

The EOQ of the optimal order quantity is the point where the holding cost and ordering cost
curves overlap, which reflects the least overall cost.

28 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes EOQ can be calculated with the help of a mathematical formula. Following assumptions are
implied in the calculation:
‹‹ The demand is uniform throughout the period.
‹‹ The order lead time is constant.
‹‹ The price per unit of a product is constant.

Y
‹‹ The inventory holding cost is based on the average inventory.

IT
‹‹ Ordering costs are constant.
‹‹ Every demand will be satisfied, which means that there will be no back orders.

S
The functional relationship between the total, holding and ordering costs can be represented
as follows:

R
DC Q
TC = DC + S+ H
Q 2

E
Where,

IV
TC= Total cost of inventory
D= Annual demand

N
C= Purchase cost per unit
Q = Quantity to be ordered (the optimum amount is termed the EOQ or Q opt)
U
S = Cost of placing an order
H = Holding cost per unit of average inventory per annum
Y

DC= Annual purchase cost for the units

R

D/QS= Annual ordering cost

(Q/2)H = annual holding cost.
R

These cost relationships are shown graphically in Fig. 2.3.

E

The second step in the method involves determining the order quantity (Q) at which the overall
cost is minimized. In the fundamental model, this can be achieved through straightforward
H

algebra, assuming that the distribution center (DC) is not a decision variable and therefore
does not influence the ordering decision. Referring to Figure 2.3, the point at which the total
IC

cost is at its minimum is where the ordering cost equals the carrying cost.
DS Q
= H
Q 2
D

This in turn is solved as follows:

N

Q2 2 DS
DS = OR 2 DS = Q 2 HORQ 2 =
H H
O

2DS
Q or EOQ =
H
P

2.4.5 Vendor Managed Inventory

Retailers and suppliers realise the benefits of collaboration with time. Thus, they start
collaborating their business activities to gain mutual benefit. In Vendor Managed Inventory,
a supplier needs to manage a buyer’s inventory levels. The VMI implementation helps an
organisation to increase the customer service level, reduce stocks, provide quick response to

DDE, Pondicherry University, Pondicherry 29

Materials and Store Management

Notes customer’s queries, reduce errors by limited paperwork, increase market visibility, improve
planning processes, improve risk management and increase sales opportunities.

VMI is one of the strategies of collaboration, which is also used as a replenishment model.
This is because in VMI, suppliers are responsible for the management of stock on the retail
store shelf.

The replenishment of products is also handled by suppliers. For this purpose, suppliers

Y
monitor the level of inventory in retail stores and gather the information about the demand

IT
of products from customers on a daily basis.

Self-Assessment Questions

S
8. The ABC analysis method uses the Pareto principle of ______to categorise inventory.

R
9. The organisation should not go beyond the maximum stock level because it
unnecessarily increases the inventory holding cost. (True/False)

E
10. ___________inventory management means ordering and receiving the inventory for

IV
sales and production purposes only when it is needed and not before.

Activity

N
Using the Internet, identify the methods used for controlling inventory by a service
organisation.
U
2.5 Solved Illustrations
Y

Illustration1: An organisation needs 2,50,000 pieces per year to manufacture equipment.

R

There will be a 6-week wait. A weekly standard deviation of 400 indicates a demand of 4810.
R

Keeping the service level at 95% (K=1.64) is the organization’s goal. The most recent lead
time was 10 weeks, and the cumulative chance of all possible lead times (i.e., 7, 8, 9, and 10
E

weeks) being equal to or greater than 6 weeks is 0.25. The ordering cost is sixty rupees, and
the carrying cost of inventory is thirty percent. Determine EOQ.
H

Solution:
IC

2DS 2 × 2,50,000 × 60
EOQ = =
H 1× 30/100

2 × 2,50, 000 × 60 ×100

D

1× 30
N

= 2,50,000 × 400 = 10,000 units

O

2DS
EOQ =
H
P

2 ×10, 000 ×150

=
0.12 × 75

Q = 577.35 units
Hence it is economical to order in batches of 578 units.

The number of orders per year is 578 units of parts of equipment.

30 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes The number of orders per year will be calculated as:

A 10, 000
EOQ = = = 17.3
Q 578

= 18 orders
A C
Total Cost = p+ Q
Q 2

Y
578
(18 × 150) + (0.12 × 75 × )
2

IT
= 2700 + 2601 = Rs. 5301

Illustration-2: For the fixed order quantity system, the parameters are given below:

S
Consumption A= 10,000 units

R
Unit cost C = Rs.1.00
Reorder cost U = Rs.12/order

E
Carrying cost I = Rs.0.24/unit

IV
If the past lead time is 15 days, 25 days, 13 days, 14 days, 30 days and 17 days, what is the
reorder level?
2DS

N
EOQ =
H
2 ×10000 ×12
=
U
=1000 units.
1× 0.24
Buffer stock = Maximum lead time - Normal lead time
Monthly consumption
Y

=
( 30-15 ) × 10,000 = 417
30 12
R

Here, the lead time is taken in months.

R

Lead time consumption = Normal lead time × monthly consumption

15 10,000
E

× =17
30 12
Reorder level R= Average lead time consumption + Buffer stock
H

= 417 + 417 = 834 units

IC

Illustration-3: The probability distribution of the annual demand for cycles is given as
follows:
D

Demand Probability
3000 0.1
N

5000 0.3
O

10000 0.5
15000 0.1
P

What is the economic manufacturing lot size if the set up cost is Rs. 1,000 per set up and the
carrying cost is Rs. 10 per cycle per year?

Solution:
Mean demand = 3000 × 0.1+5000 × 0.3+10000× 0.5+15000 × 0.1
= 300+1500+5000+1500=8300

DDE, Pondicherry University, Pondicherry 31

Materials and Store Management

Notes 2DS
Economic batch size =
H
2×8300×1000
=
10
Hence, the economic batch size is 1289 units.

Illustration-4:The daily requirement of oil in an industry is 170 liters and the inventory in

Y
work-in-progress is 250 days in a year. The carrying cost is 20% of the unit price. The unit
price is Rs. 2.50 per liter. The ordering cost is Rs. 50 per order. What is EOQ?

IT
Solution:

Demand A 120 × 150= 30,000 units/year

S
20 × 2.50
Carrying cost = = Rs.0.50/Litre/year

R
100
Ordering cost, U = Rs. 50

E
2DS
Q=

IV
H

2×30,000×50
=
0.5

N
= 2450 Liters U
Illustration-7: Two components, A and B are used for manufacturing a product. The usage
of the two components is given as follows:
Y
Normal usage = 50 units per week each component
Minimum usage = 25 units per week each component
R

Maximum usage = 75 units per week each component

R

Reorder quantity = A: 300 units;B: 500 units

Reorder Period = A : 4 to 6 weeks;B: 2 to 4 weeks
E

Calculate the following for each component:

H

 Reorder level
IC

 Minimum level
 Maximum level
D

For A component = 75 × 6=450 units

For B component = 75 × 4 = 300units
N

Solution:
O

 Reorder level = Maximum consumption × maximum reorder period

P

 Minimum level = Reorder level – (normal consumption × average reorder period)

For component A = 450 – (50×5)

= 450-250=200 units

For component B = 300 – (50 × 3)

= 300 –150=150 units

32 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes a. Maximum level = (Reorder level+ reorder quantity = minimum consumption ×

minimum reorder period)

For component A = 450 + 300 - (25 × 4)

= 450 + 300 – 100 = 650

For component B = 300 + 500 - (25 × 2)

Y

= 300 + 500 – 50 = 750 units

IT
2.6 Summary

S
‹‹ Holding of inventory is essential for an organisation to avoid the problems of shortage
and surplus of inventory.

R
‹‹ The extra inventory or stock left with a retailer after satisfying the demands of its
customers is called excess inventory or stock.

E
‹‹ Some of the negative effects of excess inventory are product obsolescence, increased

IV
cost to an organisation, decreased cash flow, and reduced profitability.
‹‹ An adequate level of stock helps in planning various organisational activities, such as
purchasing, producing and selling products.

N
‹‹ The factors affecting stockholding are customer expectations, business requirements
and economic constraints.
U
‹‹ The need to hold inventory comes from four essential business requirements. If you
need to analyse inventory to arrive at optimum levels, you require to understand these
Y

needs.
‹‹ The safety stock or buffer stock is the level of extra stock that is maintained by an
R

organisation against the risks of stock outs

‹‹ Stock control or inventory control is a process that involves the supervision, storage
R

and accessibility of goods or items to avoid the holding or carrying of stock.

E

‹‹ The inventory models help in deriving certain rules that may suggest how to minimise
the total inventory cost in case of the deterministic demand or how to minimise the
H

expected cost in case of the probabilistic demand.

‹‹ The inventory control methods include ABC analysis, stock levels, Just-In-Time,
IC

Economic Order Quantity and vendor managed inventory.

D

2.7 Glossary
N

‹‹ Excess Inventory: It is the extra inventory or stock left with a retailer after satisfying
the demands of its customers.
O

‹‹ Inventory Control: It is a process that involves the supervision, storage and accessibility
of goods or items to avoid the holding or carrying of stock.
P

‹‹ Minimum Stock Level: It is the level of inventory that must be maintained by an

organisation at any point of time.
‹‹ Reordering Level: It is the level of inventory at which an organisation places the
reorder of materials.
‹‹ Safety Stock: It is the level of the extra stock that is maintained by an organisation
against the risks of stock outs

DDE, Pondicherry University, Pondicherry 33

Materials and Store Management

Notes
2.8 Terminal Questions
1. Explain the concept of stockholding.
2. What are the factors that affect stockholding?
3. How is the stockholding policy determined?
4. Discuss the importance of avoiding carrying of stock.

Y
5. What are the methods of inventory control?

IT
2.9 Answers
Q. Self Assessment Questions

S
1. False

R
2. b. Constant Inventory Levels

E
3. perpetual
4. Availability of the warehouses for keeping inventory

IV
5. d. Helps in maintaining a narrow assortment of stock
6. Replenishment lead time

N
7. True
8. 80–20
U
9. True
10. Just-In-Time (JIT)
Y

Q. Terminal Questions
R

1. Holding an optimum level of inventory is essential for an organization to

avoid the problems of shortage and surplus of inventory. Refer to section
R

2.2 Stockholding.
2. The factors affecting stockholding are customer expectations, business
E

requirements and economic constraints. Refer to subsection 2.2.2 Factors

Affecting Stockholding Policy
H

3. One of the bases of determining the stockholding policy is calculating the safety
IC

stock. Refer to subsection 2.2.4 Determination of the Stockholding Policy

4. Stock control or inventory control is a process that involves the supervision,
storage and accessibility of goods or items to avoid the holding or carrying of
D

stock. Refer to section 2.3 Avoiding Carrying Stock.

5. The inventory control methods include ABC analysis, stock levels, Just-In-Time,
N

Economic Order Quantity and vendor managed inventory. Refer to section

2.4 Methods of Inventory Control.
O
P

2.10 Case Study: Stock control at ABC Pvt. Ltd.

ABC Pvt. Ltd. is a retail organisation that procures a product PQ from a manufacturer.
However, ABC is facing losses in this procurement process, as it is unable to determine the
exact quantity of the product that should be purchased. As a result, sometimes ABC procures
extra products that get spoiled or damaged till the next season of the product arrives. Other
times, ABC faces the problem of stock outs, which led to customer dissatisfaction.

34 DDE, Pondicherry University, Pondicherry

 CHAPTER 2  Need for Stock

Notes For overcoming the problem and managing its stock effectively, ABC outsources its stock
management function. The organisation, LS, that looks after the stock management function
of ABC Pvt. Ltd., first determines the inventory cost involved in the procurement of product
PQ. It identifies that ABC requires 10,000 units of PQ every year. The cost of the product
is ` 5 per unit and its ordering cost is estimated to be ` 100 per order. The cost of carrying
inventory is 25%. The consumption rate of PQ in the organisation is uniform.

Y
LS uses the EOQ method for determining the amount of product needs to be ordered, which
should be:

IT
D = 10,000 units per year
C = ` 5 per unit

S
C0 = ` 100 per order
Ch = ` 25% of ` 5 = ` 1.25 per year

R
EOQ can be calculated as follows:

E
Q* = √ (2DC0/Ch) = √ (2 * 10,000 * 100)/1.25

IV
= 1,265 units

On the basis of this calculation, ABC orders the product PQ and the entire quantity is sold

N
without any customer complaint regarding the unavailability of product.
U
Discussion Questions
1. Why does ABC Pvt. Ltd. outsource its stock management function to LS?
Y

(Hint: ABC was unable to manage its stock efficiently and thus facing the problem
R

of spoilage and shortage of inventory. So, the organisation outsources its stock
management function.)
R

2. Is there any other technique of inventory control that can be used by LS? Discuss.
E

(Hint: Yes, LS can use the ABC analysis, stock levels or Just-In-Time for the inventory
control purposes.)
H

2.11 References and Suggested Readings

IC

‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall of
India Pvt. Ltd.
D

‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi Publication
(P) Ltd.
N

E-references
O
P

‹‹ Stock Determination in Inventory Management. Retrieved from http://it.toolbox.

com/wiki/index.php/Stock_Determination_in_Inventory_Management.
‹‹ Optimizing Safety Stock. Retrieved from http://www.inventoryops.com/safety_stock.
html.
‹‹ Inventory Control Methods: The Good, the Bad and the Ugly. Retrieved from https://
www.fishbowlinventory.com/articles/inventory-management/inventory-control-
methods/

DDE, Pondicherry University, Pondicherry 35

P
O
N
D
IC
H
E
R
R
Y
U
N
IV
E
R
S
IT
Y
chapter

3 Materials Planning

Y
IT
S
R
E
Structure

IV
3.1 Introduction

N
Learning Objectives U
3.2 Concept of Materials Planning

3.3 Determination of Stock Range

Y

3.4 Demand Forecasting

R

3.5 Forecasting Techniques

3.6 Lead Time

R

3.7 Fixed Order Quantity and Periodic Review Systems

E

3.8 Dependent and Independent Demands of Stock

H

3.9 Techniques to Deal with the Dependent Demand

IC

3.10 Summary

3.11 Glossary
D

3.12 Terminal Questions

N

3.13 Answers

3.14 Case Study: Materials Planning at ABC Ltd.

O

3.15 References and Suggested Readings

P
Materials and Store Management

Notes Learning Objectives

After completing the chapter, you will be able to:
 Explain the concept of materials planning
 Discuss the determination of stock range
 Explain the demand forecasting

Y
 Discuss the forecasting techniques
 Explain lead time

IT
 Discuss the fixed order quantity and periodic review systems
 Explain the dependent and independent demands of stock

S
 Identify the techniques to deal with the dependent demand

R
3.1 Introduction

E
An organisation needs to manage its materials effectively for a smooth functioning of its

IV
production process. For effective material management, an organisation needs to plan and
control its materials effectively. Material planning and control is performed based on the
production plan and sales forecasts of an organisation. Planning of material is a scientific

N
technique that determines the requirements of the raw materials, ancillary parts, components
and spares in advance. It is a sub-system of the overall planning activity.
U
The materials planning process involves the preparation of a plan for procuring, storing and
handling materials required for producing products. It helps an organisation to prevent over
Y
ordering and under ordering of materials. Over ordering incurs extensive materials handling
and storing costs to an organisation. On the other hand, under ordering leads to a shortage
R

of materials that ultimately results in unnecessary delays in production. Materials planning

should be done very carefully, as poor planning may lead to heavy losses to an organisation.
R

In this chapter, you will study about the concept of material planning. Next, the chapter
will discuss the determination of stock range. In addition, you will study about demand
E

forecasting and its techniques in detail. It will also explain the concept of lead time. Later, the
H

chapter will elaborate the concepts of fixed order quantity and periodic review systems. It will
also highlight the differences between the dependent and independent demand of the stock.
In the end, you will be acquainted with the techniques of dealing with the dependent demand.
IC

3.2 Concept of Materials Planning

D

Earlier, the purchasing function of an organisation was considered as a facilitating sub-

N

function for the production department. However, with the increase in the level of competition,
organisations started customising its various functions to provide the best products at the
O

minimum cost. Among these functions, one of the function is purchasing that became a
professional staff function and separate purchasing departments were formed to undertake
P

the activities of this function. Now, the purchasing function is regarded as the proactive
function instead of the reactive function.

Today, with the introduction of various advanced concepts, such as supply chain management
and integrated materials management, the materials managers have identified that the
material requirement in an organisation can be accurately forecasted in advance for a period
of one year. Therefore, materials managers started preparing annual buying plans for specific

38 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes materials. In the integrated materials management, materials planning, budgeting and control
play a vital role. Materials planning and budgeting help in motivating employees and act as a
device for controlling materials.

The materials planning process is mostly required either for the non-programmed decisions,
such as import policy, credit policy and foreign exchange availability, or for highly-programmed
decisions, such as inventory level and delivery schedules.

Y
The materials planning process plays a vital role in an organisation by procuring, storing and

IT
handling the materials required for the production of different products. The significance of
materials planning for an organisation is discussed as follows:
‹‹ Avoids the conditions of overordering and underordering of materials. Overordering

S
leads to a situation of overinvestment that results in the requirement of extra storage
houses for holding unnecessary inventories. Under-ordering results in the shortage of

R
materials, which may lead to unnecessary delays and increase in the cost of production.

E
‹‹ Avoids the sudden emergency of materials, which can lead to extra costs to an
organisation

IV
‹‹ Provides a buyer the position of a purchase manager who procures a good product at
the minimum rate

N
‹‹ Motivates employees and reduces the use of a control device
U
3.2.1 Factors Affecting Materials Planning
Y
As discussed earlier, planning of materials is a methodical approach to determining the needs
for production-related materials, components, and spares. In an organization’s big picture
R

strategy, the materials planning process is crucial. The planning of materials is influenced by
several aspects. Depending on how they affect the materials planning process, these elements
R

can be grouped into macro and micro factors. What follows is an analysis of these elements:
‹‹ Macro Factors: Includes the following factors:
E

 Price trends
H

 Business cycles
IC

 Government import policy

 Credit policy
 State of the health of the national economy
D

 Foreign exchange regulations

N

 International market conditions

O

‹‹ Micro Factors: Includes the following factors:

 Plant utilisation
P

 Rejection rates
 Lead times
 Inventory levels
 Working capital

DDE, Pondicherry University, Pondicherry 39

Materials and Store Management

Notes  Communication systems

 Corporate objectives
 Technology availability
 Demand of products
 Supply of products

Y
 Transportation losses
 Total procurement lead times

IT
 Storage capacity
 Seasonal variations

S
 Delegation of power

R
 Available information
 Plant location

E
 Cost, criticality, reliability and availability of products

IV
 Information with respect to substitute products
 Demand forecasting techniques used

N
3.2.2 Problems Faced in Materials Planning
U
Materials planning should be done very carefully, as poor planning leads to heavy losses to an
organisation. While preparing a materials plan, the professional planners encounter a number
Y

of problems. These major problems are discussed as follows:

‹‹ Decrease in the reliability of the sales forecast with the increase in time. As a result,
R

the planners always face a problem of the shortage or surplus of materials. Therefore,
organisations place their orders to their suppliers for the duration of one year but the
R

delivery schedules are prepared as per the requirement.

E

‹‹ Restrictions with respect to the import policies of government, foreign exchange and
credit policy affect the effectiveness of materials planning.
H

3.2.3 Guidelines for Effective Materials Planning

IC

An effective materials planning is essential for an organisation. Therefore, the material

planners have formulated certain guidelines for the effective materials planning. Some of
D

these guidelines are discussed as follows:

N

‹‹ Include the longest lead time anticipated for performing a job for the planning purposes,
so that the job can be completed within the stipulated time
O

‹‹ Analyse the business environment of an organisation, so that the demand fluctuation

and seasonal variation with respect to products can be determined and taken into
P

consideration while planning

‹‹ Use computers for materials planning, so that any fluctuation in the demand of a
product can be easily worked out in the computers and a new materials plan can be
prepared
‹‹ Prepare material plans for shorter durations to increase their reliability and feasibility

40 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes Self-Assessment Questions

1. Define materials planning.

2. Which of the following is not a macro factor that can affect materials planning?

a. Price trends

Y

b. Business cycles

c. Communication systems of organisation

IT

d. Credit policy
3. One of the guidelines of materials planning is to include the shortest lead time

S
anticipated for performing a job. (True/False)

R
Activity

E
Using the Internet, identify some Indian manufacturing organisations that are known for

IV
their effective materials planning processes.

3.3 Determination of Stock Range

N
U
Stock range is the different types of materials stored by an organisation. For determining the
stock range, organisations forecast the future demand of a material required for the production
Y

of a product. This helps in determining the type of materials need to be held by an organisation.
In addition to the type, an organisation needs to determine the amount of materials required
R

to be stored as the storage of excess materials that leads to an increase in the cost of the
organisation. For this purpose, an organisation needs to control the level of stock held by it.
R

In order to exercise stock control, you need to do a continuous review of the norms based on
the demand of products and the inventory assessed with respect to these norms. This helps in
E

exploring whether these norms are adequate or not. In this continuous process, you can take
certain corrective steps to achieve the objective of stock control. These steps are:
H

a. Identify the inventory Stock Keeping Units (SKUs).

IC

b. Decide the units of stock items and the procedure to measure them, whether by their
physical count or weight or by an observation.
D

c. Understand the consequences of a stock-out situation for each product and decide on
an action plan in such a situation.
N

d. Decide and activate control levels as per the decided process.

O

Once this is done, it is possible to measure the actual inventory levels of each product, compare
deviations from the control levels and initiate an action as required.
P

The inventory control systems of every organisation are unique. One inventory control
system cannot be applied across all the organisations. In certain organisations, the purchase
department is responsible for inventory control as well, while in others, the responsibility of
inventory control is with the production department. In some organisations, the inventory
control responsibility is with the stores department; however, in still other organisations,
inventory control is with the sales department.

DDE, Pondicherry University, Pondicherry 41

Materials and Store Management

Notes Efficient management of stock range is important for any organisation. This can be done as
follows:
‹‹ Assets are the tangible and intangible assets owned by an organisation. Frequently, the
values of the stocks of goods and/or materials held in an organisation’s store are equal,
if not greater than the total value of all its other possessions like plant, machinery,
motor vehicles, equipment, etc.

Y
‹‹ The items and/or materials in a store cost money. In case the stock held is more than
what is required, the capital is blocked. Retailers need to borrow funds from external

IT
financers when required and that too at high rates of interest. This capital can
alternatively be utilised in other operational expenses.
‹‹ In case improper inventory management leads to shortages and stock-outs, the store

S
loses precious clientele, resulting in loss of sales.

R
‹‹ In case inventory is damaged due to improper management, the store loses money.
Each product to be stocked must be reviewed carefully and periodically. This is essential

E
because costs, consumption, supply sources and availability of products vary, making previous
decisions redundant. In some cases, the products in stock can be eliminated using:

IV
Standardisation

N
Comparable Alternatives U
Simple obsolete redundancy, that is, products that are no longer in use
A primary consideration for deciding materials and their quantities to stock is the speed of
delivery and readiness of availability. In case the production is seasonal, the stored inventory
Y

is also seasonal.
R

Self-Assessment Questions
4. Which of the following is not a corrective step for achieving the objective of stock
R

control?
E

a. Identify the inventory Stock Keeping Units (SKUs).

b. Decide the units of stock items and the procedure to measure them, whether by
H

their physical count or weight or by an observation.

IC

c. Understand the consequences of a stock-out situation for each product and decide
on an action plan in such a situation.

d. Select a control plan.
D

5. Each product to be stocked should be reviewed periodically as costs, consumption,

supply sources and availability of a product may vary with time and make previous
N

decisions redundant. (True/False)

6. A primary consideration for deciding materials and their quantities to stock is the
O

speed of delivery and readiness of availability. (True/False)

P

3.4 Demand Forecasting

In today’s dynamic world, every business is full of risks and uncertainties. An organisation
can overcome these risks by anticipating various future events, such as the fluctuations in
demand, sales of products, expected capital expenditure, and materials required. The process
of estimating the events that may take place in an organisation is known as forecasting.

42 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes Forecasting enables managers to answer the following questions:

‹‹ How much profit will the organisation earn?
‹‹ What will be the demand of the organisation’s products or services?
‹‹ What will be the total cost to the organization to produce products or deliver services?
‹‹ What will be the total amount of funds that need to be raised by the organisation?

Y
When the demand of materials is forecasted by an organisation, it is called demand forecasting.

IT
The more an organisation is able to forecast the future demand for materials accurately, the
more it is prepared to encounter uncertainties. Therefore, an organisation should be careful
while demand forecasting, as any inaccuracy may pose a number of challenges for the

S
organisation. For example, if the demand of products is underestimated, the organisation
can lose its sales due to the inefficient supply of products. On the contrary, if the demand is

R
overestimated, there are surplus of products that can incur heavy losses to the organisation.

E
3.4.1 Period of Forecasting

IV
The period of forecasting refers to the time range selected for anticipating a future event. It
can range from a week to many years. On the basis of time period, forecasting is classified

N
into three types, namely short-term forecasting, medium-term forecasting and long-
term forecasting. Short-term forecasting may range from one week to two months, while
U
mediumterm forecasting may range from three to six months. On the other hand, long-term
forecasting may vary from one year to any time period. Generally, the period of long-term
forecasting is five years, which may extend to 10-15 years in some cases. Table 3.1 shows the
Y

objectives of the three types of forecasting:

R

Table 3.1: Objectives of Different Types of Forecasting

Short-Term Forecasting Medium-Term Long-Term Forecasting
R

Forecasting
E

‹‹ Determining the ‹‹ Determining the ‹‹ Estimating the future

expected capital budgetary control requirement of inventory
H

expenditure in the over expenses

‹‹ Predicting transport
future
‹‹ Framing the divided facilities required for
IC

‹‹ Predicting future cash policy the finished goods in the

flows through sales future
‹‹ Finding and
D

‹‹ Planning manpower controlling ‹‹ Deciding the work

requirements in the maintenance expenses performed by men and
N

future machines in the future

‹‹ Preparing the
‹‹ Preparing a schedule operations schedule ‹‹ Determining the required
O

for managing working capital

‹‹ Planning capacity
materials
modifications ‹‹ Establishing the
P

‹‹ Planning research and production run for

development activities products
‹‹ Estimating the sales quota
‹‹ Determining the overtime
required for meeting the
delivery targets

DDE, Pondicherry University, Pondicherry 43

Materials and Store Management

Notes 3.4.2 Forecasting in Different Departments

Different departments perform forecasting for different purposes. For example, the human
resource department of an organisation performs forecasting to estimate the requirement
of the number of employees in the future. On the other hand, the production and operations
department performs this to estimate the production capacity. The components of different

Y
departments of an organisation that are forecasted are shown in the following points:    
‹‹ Marketing: Includes the forecasting of:

IT
 Demand

 Market share

S
 Price trends

R
‹‹ Production: Includes the forecasting of:

E
 Materials required
 Material and labour cost trends

IV
 Maintenance required
 Capacity of a plant
‹‹ Finance:

N
Includes the forecasting of:
U
 Cash flows
 Rates of expenses
Y

 Revenues
R

‹‹ Personnel: Includes the forecasting of:

 Number of workers
R

 Absenteeism
E

 Labour turnover
H

3.4.3 Steps in Forecasting

IC

Systematic and scientific execution is essential for an organization’s forecasting process to be

effective. Several phases are involved, as seen in Figure 3.1:
D
N
O
P

Fig. 3.1: Process of Forecasting

44 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes The steps involved in forecasting are explained as follows:

1. Setting the Objective: Alludes to the first and initial stage of making a prediction.
Before beginning forecasting, a company should make its goals very clear.

2. Determining the Time Period: It comprises settling on the time horizon for making
predictions. Whereas the factors that influence an anticipated event tend to undergo

Y
substantial shifts over the long term, they are less likely to do so in the short term.
Consequently, the time duration is decided by the organisation in accordance with its

IT
objectives.

3. Selecting a Technique for Forecasting: The forecasting process would be incomplete

S
without this crucial stage. Several methods, detailed later in the chapter, can be used
to predict the outcome of an event. Depending on the aim of the forecast, the time

R
range, the data required, and its availability, the process of forecasting varies from
organisation to organisation. To save time and money while guaranteeing the data’s

E
trustworthiness, it’s important to use an appropriate approach.

IV
4. Collecting Data: Must collect either primary or secondary sources of information.
Primary data is information gathered by researchers for a specific study from various
sources, such as interviews, observations, and questionnaires. Conversely, secondary

N
data is information that has already been obtained but can be used in the current
situation or research. Later on in the chapter, we’ll talk about these two kinds of data.
U
3.4.4 Limitations of Forecasting
Y

The limitations of forecasting are explained as follows:

R

‹‹ Uneconomical: Refers to the fact that a large collection of data makes the whole process
of forecasting expensive. Therefore, it is very difficult for small-scale organisations to
R

carry out forecasting.

E

‹‹ Lack of Experts: Leads to wrong and inaccurate forecasts. Forecasts done by less
experienced individuals lead to incorrect estimates. Therefore, the availability of
H

efficient experts is the necessary condition for forecasting, which may not be always
possible.
IC

‹‹ Lack of Past Data: Affects the process of forecasting. If the past data is not available,
it is difficult to forecast a future event. This mainly occurs in the case of demand
forecasting of a new product.
D
N

3.4.5 Criteria for Efficient Forecasting

O

The success of a prediction hinges on the accuracy of the forecasting method chosen. Here
are the factors that should be taken into account while making an event prediction:
P

‹‹ Accuracy: Consequently, in order to ascertain the true nature of an event, it is imperative

that a company’s predictions be as literal as possible. An erroneous prediction might be,
for instance, that sales will rise in the next years. Conversely, it is reasonable to expect
sales to rise by 30% in the coming year.
‹‹ Durability: This means that a lot of work, time, and resources should go into making
projections so that they have a lengthy shelf life.

DDE, Pondicherry University, Pondicherry 45

Materials and Store Management

Notes ‹‹ Flexibility: It follows that predictions have to be flexible and open to alteration.
Whether it’s consumer tastes or technological advancements, everything is changing at
a breakneck pace in today’s unpredictable business climate. Consequently, it is important
for an organization’s predictions to take these developments into account. On top of
that, there are a number of potential business hazards that a company should think
about when generating predictions.

Y
‹‹ Acceptability: Alludes to a crucial criterion for making predictions. A business should
use straightforward methods to foretell future events. Furthermore, the procedures

IT
must be designed in a way that the business encounters zero complications. Advanced
statistical methods are often preferred by organisations, although they can be
challenging and complex to implement.

S
‹‹ Availability: It follows that predictions need access to sufficient and current data.

R
Timely forecasts are essential for making the required preparations.

E
‹‹ Plausibility: This means that predictions need to be realistic and easy to understand
for the people who will be putting them to use.

IV
‹‹ Economy: It follows that predictions have to be cost-effective. When making predictions,
it’s important to keep expenses to a minimum while maximising returns.

N
Self-Assessment Questions
U
7. __________ is a process of predicting the events that may take place in an organisation.

8. The period of forecasting is the time range selected for anticipating a future event.
Y

(True/False)

9. Experience does not matter while forecasting the demand of materials. (True/False)
R
R

3.5 Forecasting Techniques

E

Choosing an effective approach is the biggest hurdle when it comes to event forecasting. There
H

isn’t a magic formula that can help businesses foresee future risks and uncertainties. There
are two main ways to make predictions. Predictions based on data collected from surveys
IC

constitute the first strategy. Second, utilising statistical methods on historical data is one way
to predict future events. That is why it is possible to classify forecasting methods as either
survey or statistical. If you need a prediction for the near future, use survey methods; if you
D

need a prediction for the far future, use statistical methods. In Fig. 3.2, we can see these two
methods:
N

Techniques of
O

Forecasting
P

Survey Statistical
Techniques Techniques

Fig. 3.2: Forecasting Techniques

Let us discuss these techniques in detail in the next sections.

46 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes 3.5.1 Survey Techniques

When it comes to making short-term predictions, survey methods are among the most
popular and straightforward options. Consumers’ intentions and future buying plans are
covered by these strategies. Using these methods, a company may find out more about an
event by sending out questionnaires. Figure 3.3 displays three methods that fall within the

Y
category of survey techniques:

IT
Experts’
Opinion
Poll Technique

S
R
E
Survey Techniques

IV
Market
Delphi
Experiment

N
Technique
Technique
U
Fig. 3.3: Survey Techniques
Y
The techniques undertaken in the survey techniques are discussed as follows:
‹‹ Experts’ Opinion Poll Technique: Alludes to a method wherein knowledgeable
R

individuals are asked for their thoughts and feelings on a product. In a business setting,
for instance, sales reps are in a prime position to gauge product demand across various
R

geographies and urban centres. Since they are constantly interacting with customers,
salespeople know what those customers want, how they will respond to changes in the
E

market, and how they see rival products. They give a ballpark figure for how much
interest there is in the company’s goods. Compared to other methods, this one is easier
H

and cheaper. But, its own limits will be covered later on:
IC

 Giving estimations based on specialists’ market knowledge and expertise. People

have different sets of abilities in this area. As a result, it becomes more challenging
to make precise predictions.
D

 Assessor bias means that results could be skewed in any direction when it comes to
how well a product performs.
N

 Depending on salespeople’s estimates, which can not be up to scratch when it comes

O

to the market.
 Skips over potential useful predicting elements including changes in GDP, loan
P

availability, and industry prospects.

‹‹ Delphi Technique: Alludes to a method of making predictions as a group. This method
involves polling a panel of experts with specific questions about a potential future
occurrence. A consensus is reached by frequently asking these questions. Furthermore,
in this method, each specialist receives information concerning the assessments made
by other specialists in the group. This allows the specialists to adjust their assessments

DDE, Pondicherry University, Pondicherry 47

Materials and Store Management

Notes in relation to the estimates of their peers. For better decision-making, this method
involves experts checking each other’s predictions. Any expert can respond to or offer
advice on the estimates of any other expert. While sharing estimates allows for a fair
evaluation, experts’ identities are kept secret. This method’s key selling point is how
efficient it is in terms of both time and money; it allows one to quickly and cheaply
contact several specialists. Subjective decision-making, nevertheless, might result from
this method.

Y
‹‹ Market Experiment Technique: Include gathering relevant facts about an event,

IT
both past and present. This method conducts research and tests customer behaviour
in a real-world market setting. Using criteria including population, income, culture,
and consumer preferences, this method zeroes down on certain market segments

S
with shared characteristics. To measure the impact on an event, market researchers
manipulate pricing and expenditures in controlled trials. These findings contribute to

R
the process of event prediction.

E
There are various limitations of this technique as follows:
 Alludes to a pricey method; so, it may be out of reach for little organisations

IV
 Various social and economic factors, including strikes, political unrest, and natural
disasters, impact the outcomes of experiments.

3.5.2 Statistical Techniques

N
U
The statistical techniques are complex techniques of forecasting. These techniques are used
to forecast an event in the long term. In this technique, an event is forecasted on the basis
Y

of the historical and cross-sectional data. The historical data refers to the past data obtained
from various sources, such as previous years’ balance sheets and market survey reports. On
R

the other hand, the cross-sectional data is collected by conducting interviews with individuals
and performing market surveys. Unlike survey techniques, the statistical techniques are cost
R

effective and reliable as the element of subjectivity is very low. These techniques involve three
main techniques shown in Fig. 3.4:
E
H

Statistical
Techniques
IC

Trend Other
Barometric Econometric
Projection Statistical
D

Technique Techniques
Technique Techniques
N

Fig. 3.4: Techniques of Statistical Techniques

The different statistical techniques are explained in the next sections.

O

Trend Projection Technique

P

One of the most traditional methods of business forecasting is the trend projection or least
square methodology. A mountain of trustworthy data is needed for this method’s forecasting
purposes. Moreover, this method presupposes that the elements affecting previous trends,
such as sales and demand, will remain consistent in the future. This method predicts future
sales by looking at historical data extracted from the financial records of the prior year. For
startups, sales numbers are culled from companies that have been around for a while in the

48 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes same field. For example, let’s say that XYZ Company plans to predict product demand using
the trend projection method. In order to predict how much of a product people will want to
buy, this method analyses sales data over time. Table 3.2 displays the XYZ company’s time-
series data:

Table 3.2: Time-Series Data of the Sales of the XYZ Organisation

Year Sales ( In 1000 tones )

Y
2000 20

IT
2001 24
2002 22
2003 30

S
2004 36

R
2005 28
2006 40

E
2007 36
2008 42

IV
2009 50

The trend projection technique considers three more techniques in account as follows:

N
‹‹ Graphical Technique: Assists in predicting the future sales of an organisation using
a graph. The sales data is plotted on the graph, and a line is drawn connecting the
U
plotted points. Let us learn this through a graph of XYZ organisation shown in
Fig. 3.5:
Y

60
Sales (in 1000

S
R Tonnes)

40 P
R

20
0
E

1998 2000 2002 2004 2006 2008 2010

Year
H

Fig. 3.5: An Example of the Graphical Technique

IC

Fig. 3.5 shows a curve plotted by considering the sales data of the XYZ organisation (Table
3.2). Line P is drawn through the mid-points of the curve, whilst S is a straight line. These
D

lines are extended to forecast the future sales for the year 2010, which stands at approximately
47 tonnes. This method is straightforward and cost-effective; however, the forecasts produced
N

by this method might reflect the personal biases of the forecaster.

‹‹ Fitting Trend Technique: Utilises a least squares method wherein a trend line (curve)
O

is established within the sales time-series data using statistical methods. Within this
approach, two types of trends are considered, as detailed below:
P

 Linear Trend Technique: Represents a trend wherein sales exhibit an upward

trajectory. For the linear trend, the following equation for a straight line trend is
employed:

DDE, Pondicherry University, Pondicherry 49

Materials and Store Management

Notes S = A+BT
Where,
S = Annual sales
T = Time (in years)
A and B = Constants

Y
B = Measure of the annual increase in sales

IT
 Exponential Trend Technique: Indicates a trend wherein sales have been
increasing over the previous years at a growing or consistent rate:
Y = aTb

S
Where,

R
Y = Annual sales

E
T = time in years

IV
a and b = Constants
By converting this into logarithm, the equation is:

N
Log Y = Log a + bLog T
The primary advantage of this technique lies in its simplicity. Additionally, this
U
method has minimal data requirements, as only sales data is necessary, making it a
cost-effective approach. However, there are certain limitations associated with this
technique, outlined as follows:
Y

 Assumes that the past rate of changes in variables will remain the same in the
R

future, which may not be applicable in practical situations.

 Ineffective for short-term estimates and situations where the trend is cyclical with
R

significant fluctuations.
E

 Unable to gauge the relationship between dependent and independent variables.

‹‹ Box-Jenkins Technique: Refers to a technique utilized exclusively for short-term
H

predictions. This method forecasts an event solely based on stationary time-series

data, neglecting the long-term trend. It is employed in scenarios where the time-series
IC

data displays monthly or seasonal variations with a certain degree of regularity. For
instance, this method can be employed to estimate sales forecasts for woolen clothes
during the winter season.
D

Barometric Technique
N

In the barometric method, an event is anticipated based on past events or key variables present
O

at the moment. This method is also employed to predict various economic indicators, such as
savings, investment, and income. Introduced by the Harvard Economic Service in the 1920s
P

and subsequently revised by the National Bureau of Economic Research (NBER) in the 1930s,
this method aids in determining the general trend of business activities. For example, if the
government allocates land to the XYZ organization for constructing buildings, it suggests
a high demand for cement, bricks, and steel. The primary advantage of this method is its
applicability even in the absence of past data. However, it is not applicable for new products,
and its relevance diminishes when there is no time lag between the economic indicator and
the event.

50 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes Econometric Techniques

Econometric methods amalgamate statistical tools with economic theories to make forecasts.
The predictions generated by this method are more dependable than those from any other
approach. An econometric method comprises two types of techniques, namely regression
technique and simultaneous equations technique. These techniques are elucidated as follows:
‹‹ Regression Techniques: These are considered the most widely used forecasting

Y
methods. In regression techniques, an occurrence is estimated using dependent and
independent variables. In such instances, the occurrence serves as the dependent variable,

IT
and its determinants act as independent variables. If only one variable influences the
occurrence, it is termed a single-variable event, and simple regression techniques are

S
employed. Conversely, if multiple variables impact the occurrence, it is referred to as
a multi-variable event, and multiple regression is employed. The simple and multiple

R
regression techniques are explained as follows:
‹‹ Simple Regression Techniques: Involve examining the relationship between two

E
variables, where one is an independent variable, and the other is a dependent variable:

IV
Y = a + bx
Where, Y = Estimated value for a given value of X

N
b = Amount of change in Y produced by a unit change in X
a and b = Constants
U
The equations to calculate a and b are as follows:
a = Y- bX
Y

b = ∑xiyi/∑xi2
R

∑xi2 = ∑Xi2– nX2

∑xiyi = ∑XiYi- nXY
R

Let’s delve into the process of computing a basic regression using an illustration.
Imagine a researcher aiming to explore the correlation between employee satisfaction
E

(in the sales team) and the sales performance of an organization. The researcher has
H

gathered feedback from the employees through a questionnaire, requesting them to

assess their satisfaction on a scale of 1 to 10, where 10 signifies the highest satisfaction
and 1 indicates the lowest. Additionally, the researcher has compiled sales data from each
IC

member of the sales group, calculating the average monthly sales for each individual
over the course of a year. The collected data is arranged in Table 3.3:
D

Table 3.3: Data to Calculate Simple Regression

Number of Employee Sales(in Xi2 XiYi
N

Observations Satisfaction (Xi) Lacs), Yi

O

1 2 2 4 4
2 4 3 16 12
P

3 5 6 25 30
4 7 8 49 56
5 8 6 64 48
6 10 9 100 90
7 9 10 81 90

DDE, Pondicherry University, Pondicherry 51

Materials and Store Management

Notes Table 3.3: Data to Calculate Simple Regression

Number of Employee Sales(in Xi2 XiYi
Observations Satisfaction (Xi) Lacs), Yi
8 3 2 9 6
9 1 3 1 3
10 2 4 4 8

Y
11 4 5 16 20

IT
12 6 8 36 48
13 8 9 64 72
14 10 11 100 110

S
15 4 5 16 20
16 7 12 49 84

R
17 9 15 81 135

E
18 5 6 25 30
19 8 16 64 128

IV
20 9 20 81 180
21 10 20 100 200
22 7 6 49 42

N
23 6 5 36 30
24 8 14 64 112
U
25 9 19 81 171
Total 161 224 1215 1729
Y

The calculation of the mean of employee satisfaction (X) levels and sales is as follows:
R

Mean for X = ∑Xi/n Mean for Y = ∑Yi/n

X = 6.44Y = 8.96
R

The following equation is used to calculate the value of b:

E

∑xi2= ∑Xi2v– nX2 and

H

∑xiyiv= ∑XiYi- nXY

IC

The calculation of the value of b for the preceding data is as follows:

∑xi2 = ∑Xi2– nX2
∑xi2 = 1215-25*6.44*6.44
D

∑xi2 = 178.16
N

∑xiyi = ∑XiYi- nXY

∑xiyi = 1729-25*6.44*8.96
O

∑xiyi = 286.44
P

B = ∑xiyi/∑xi2
b = 286.44/178.16
b = 1.61
a = Y - bX
a = 8.96 – 1.61*6.44

52 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes a = -1.39
Y = a + bX
Y = -1.39 + 1.61X
This is the regression equation in which the researcher can take any value of X to find
the estimated value of Y. For example, if the value of X is 9, then the value of Y will
be calculated as follows:

Y
Y = -1.39 + 1.61X

IT
Y = -1.39 + 1.61(9)
Y = 13.1

S
With the help of the preceding example, it can be concluded that if an employee is

R
satisfied, then his/her output will increase.
‹‹ Multiple Regression Techniques: Involve examining the correlation between

E
multiple independent and dependent variables. When dealing with two independent
variables and one dependent variable, the following equation is employed to compute

IV
multiple regression:
Y = a + b1X1 + b2X2

N
Where, Y (Dependent variable) = Estimated value of Y for given values of X1 and X1
U
X1 and X2 = Independent variables
b1 = Amount of change in Y produced by a unit change in X1
b2 = Amount of change in Y produced by a unit change in X2
Y

a, b1 and b2 = Constants
R

The equations used to calculate a and b values are as follows:

R

∑Yi = na + b1∑X1i + b2∑X2i

∑X1iYi = a∑X1i + b1∑X21i + b2∑X1iX2i
E

∑X2iYi = a∑X2i + b1∑X1iX2i + b2∑X22i

H

The number of equations depends on the number of independent variables. If there are
two independent variables, then there would be three equations and so on.
IC

Let us learn to calculate multiple regression with the help of an example. Suppose a
researcher wants to study the relationship between intermediate percentage, graduation
D

percentage and MAT percentile of a group of 25 students. It is important to note

that intermediate percentage and graduation percentage are independent variables and
N

MAT percentile is a dependent variable. The researcher wants to find out whether the
percentile in MAT depends on the percentage of intermediate and graduation or not.
O

The collected data is shown in Table 3.4:

Table 3.4: Data to Calculate Multiple Regression

P

Number of Intermediate Graduation MAT Percentile

Observations Percentage (X1i) Percentage (X2i) (Yi)
1 60 72 78
2 61 75 75
3 63 78 80
4 66 80 85

DDE, Pondicherry University, Pondicherry 53

Materials and Store Management

Notes Table 3.4: Data to Calculate Multiple Regression

Number of Intermediate Graduation MAT Percentile
Observations Percentage (X1i) Percentage (X2i) (Yi)
5 70 85 84
6 72 86 82
7 74 84 80

Y
8 75 89 81
9 67 90 92

IT
10 69 75 93
11 68 74 96

S
12 65 72 86
13 64 71 87

R
14 63 70 88
15 62 86 85

E
16 79 85 94

IV
17 80 89 96
18 84 90 97
19 95 91 98

N
20 75 88 99
21 92 94 86
U
22 86 86 85
23 81 94 98
Y

24 85 99 99
25 95 99 99
R

Total ∑X1i=1851 ∑X2i=2102 ∑Yi=2223

R

The equations required to calculate multiple regression are as follows:

∑Yi = na + b1∑X1i + b2∑X2i
E

∑X1iYi = a∑X1i + b1∑X21i + b2∑X1iX2i

H

∑X2iYi = a∑X2i + b1∑X1iX2i + b2∑X22i

These equations are used to solve the multiple regression equation manually. However,
IC

you can also use SPSS (a software used for data analysis) to find out multiple regression.
If you use SPSS in the preceding example, you will get the output shown in Table 3.5:
D

Table 3.5: Summary of Variables used in Multiple Regression Technique

Variables Entered/Removed
N

Model Variables Entered Variables Removed Method

1 graduation, intermediate . Enter
O

a. All requested variables entered.

P

The summary of regression technique is shown in Table 3.6:

Table 3.6: Summary of Regression Technique

Model Summary
Model R R Square Adjusted R Square Standard Error of the Estimate
1 .982a .965 .962 1.96938
a. Predictors: (Constant), graduation, intermediate

54 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes In this table, R is the correlation coefficient between the independent and dependent
variables, which is very high in this case. R Square shows that a large part of variation in
the model is shown by employment opportunities in a state. Standard error of estimate
is quite low, that is, 1.97. It also indicates that the variation in the present data is less.
Table 3.7 shows the coefficients of regression technique:

Table 3.7: Coefficients of Regression Technique

Y
Co-efficientsa
Model Unstandardised Standardised t Significance

IT
Coefficients Coefficients
B Std. Beta
Error

S
1 (Constant) 55.704 12.771 4.362 .000

R
Intermediate .352 .201 .506 1.753 .093
Graduation .085 .250 .098 .340 .737

E
a. Dependent Variable: MAT

IV
Table 3.7 shows that the calculated value of t is greater than the Significance value
of t. Therefore, the coefficients show the cause and effect relationship between the
independent and dependent variables.

N
Table 3.8 shows the variation analysis for the two variables under study:

Table 3.8: Variation Analysis of Regression

U
ANOVAb
Model Sum of Df Mean Square F Significace
Y

Squares
1 Regression 2332.514 2 1166.257 300.702 .000a
R

Residual 85.326 22 3.878

Total 2417.840 24
R

a. Predictors: (Constant), graduation, intermediate

b. Dependent Variable: MAT
E

Table 3.8 displays the results of the model’s analysis of variation. The regression
H

approach is shown to be the cause of the variance in the Regression row. The Residual
row, however, reveals that this variance was entirely coincidental. Since the Regression
IC

row’s Sum of Squares is larger than the Residual row’s, the method is the sole source
of variance for the most part. There is a huge disparity between the computed F value
and the significance value. There is a high correlation between a student’s intermediate
D

and graduation rates and their MAT percentile.

‹‹ Simultaneous Equations Techniques: Feature a number of equations that must be
N

solved together. This method makes use of the following two categories of variables:
O

 Endogenous Variables: Think about the inputs that the method determines. These
factors are within control.
P

 Exogenous Variables: Refer to the inputs of the technique. Examples are time,
government spending and weather conditions. These variables are determined
outside the technique.

Determining the endogenous and exogenous factors is the first step in constructing a
comprehensive approach. Following that, all relevant data pertaining to both internal
and external factors are gathered. There are instances where the necessary data format
is not accessible, necessitating adjustments to the approach. The method is calculated

DDE, Pondicherry University, Pondicherry 55

Materials and Store Management

Notes using an appropriate approach when the essential data has been produced. At last, the
method is solved for all endogenous variables by relating them to an external variable.
We can now make a forecast.

Other Statistical Technique

Aside from the statistical methods covered in the previous section, there are more approaches

Y
to predicting as well. Only some datasets can make use of these methods because of how
specialised they are. Hence, it is not possible to generalise their use to all kinds of studies.

IT
Figure 3.6 illustrates these methods:

Other Types

S
of Statistical
Measures

R
E
Index Number Time Series Decision Tree Correlation Moving Average

IV
Measures Analysis Analysis Analysis Method

Fig. 3.6: Different Types of Statistical Techniques

N
The different types of statistical techniques are discussed as follows:
U
‹‹ Index Number Techniques: Alludes to the metrics employed for analysing the changes
in a variable or set of related variables relative to the time period/base period. Studies
in economics and finance frequently employ them to examine variables like product
Y

quantity and pricing. We figure out what the culprits are and what they’re responsible
for the issue. The following are the four most common kinds of index numbers:
R

 Simple Index Number: The relative change in one variable from the base year is
R

measured by this number.

 Composite Index Number: Refers to the number that measures a relative change
E

in a collection of linked variables with regard to the base year.

H

 Price Index Number: The relative change in the price of a commodity across
several periods is measured by this number.
IC

 Quantity index number: A relative change in the physical quantity of items

produced, consumed, or sold for a commodity across distinct times is measured by
this number.
D

‹‹ Time Series Analysis: Means looking at data collected at regular intervals. Examining
N

the development of a company from its inception to its current state is one such example.
Time series analysis has many potential uses, including in academia, government, and
O

economics. The following are some of the many parts of time series analysis:
 Secular Trend: Alludes to the prevailing tendency throughout a period of time,
P

represented by the letter T. A data series’ secular trend could go in either direction.
When one variable, like commodity prices, is going up, we see an upward trend;
when one, like illness rates or product sales, are going down, we see a downward
trend.

56 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes  Short Time Oscillation: Alludes to a fad that never really goes away. There are
essentially three distinct tendencies here:
„„ Seasonal Trend: Refers to the pattern marked by S and happens year after
year for a given time. Factors such as festivals, weather, and other traditions
contribute to these tendencies. The rising demand for woollens throughout
the winter and the spike in sales of sweets around Diwali are two examples of

Y
seasonal patterns.
„„ Cyclical Trend: Refers to the trend marked by C and lasts more than for a

IT
year. Neither seasonality nor continuity characterise the cyclical patterns. The
business cycle is a cyclical tendency that you can see in action.

S
„„ Irregular Trend: Alludes to the brief and erratic trend represented by the
letter I. Earthquakes, volcanic eruptions, and floods are all instances of erratic

R
patterns.

E
‹‹ Decision Tree Analysis: Alludes to the method by which a company makes its
judgments. To determine the optimal answer to an issue, decision tree analysis draws a

IV
structure similar to a tree. Finding potential solutions to an issue is the first step in this
study. The results of each selection may then be discovered. A square node represents
these choices or decisions, while a circular node shows the results. The proper order for

N
a decision tree’s branches is left to right. Figure 3.7 depicts the decision tree’s outline:

100% 100%
U 1.1
TRUE $0.00 $0.00
1 $0.00
$0.00 0% 0%
Y
New Decision Tree $0.00 1.2
$0.00 $0.00
R

FALSE 0%
2
$0.00 $0.00
R

Fig. 3.7: Format of Decision Tree Analysis

E

With an example, we can learn how a decision tree works. So, let’s say a business is
trying to select which segmentation strategy will bring in more customers. As seen in
H

Figure 3.8, the decision tree may be used to resolve this issue:
IC

0.4
Good 800000
$2,100,000.00
Demographic 0.5
Revenues (Pvs over 3y) Moderate 435000
Segmentation $950,000.00
D

$40,000
Type of 0.1
Poor (10000)
Segmentation $300,000.00
N

to increase
customer 0.6
base Good 740000
O

Geographical $1,350,000.00
Revenues (Pvs over 3y)
Segmentation $70,000 0.4
Poor 34000
$260,000.00
P

Fig. 3.8: Showing an Example of a Decision Tree

The decision tree in Fig. 3.8 displays two kinds of segmentation: geographical and
demographic. What follows is an analysis of the results from these two segmentations.
Costing the business forty grand, demographic segmentation analysis is a no-brainer
(estimated cost). The demographic segmentation might produce favourable, average, or

DDE, Pondicherry University, Pondicherry 57

Materials and Store Management

Notes bad results. For the three alternatives, good, middling, and bad, the predicted revenue
is as follows:
Good = $ 21500000
Moderate = $ 950000
Poor = $300000

Y
The probabilities allocated to the outcomes are 0.4 for excellent, 0.5 for moderate, and
0.1 for poor. Now, you must compute the results of the demographic segmentation as

IT
follows:
Good = 0.4*2100000 = 840000

S
Moderate = 0.5*950000 = 475000

R
Poor = 0.1*300000 = 30000
Similarly, concerning geographical segmentation, the incurred cost is $70,000

E
(estimated cost). The outcome of geographical segmentation can be either excellent
or poor. The projected revenue estimates for three years for the two options (excellent

IV
and poor) are as follows:
Good = $ 1350000

N
Poor = $ 260000 U
The probabilities assigned to the outcomes are 0.6 for excellent and 0.4 for poor. Now,
you can calculate the outcomes of geographical segmentation as follows:
Good = 0.6*1350000= $ 810000
Y

Poor = 0.4*260000= $ 104000

R

Now, you need to analyze the two outcomes to make a decision on selecting one
segmentation out of the two in the following manner:
R

For the demographic segmentation:

E

Good = 840000-40000= $ 800000

H

Moderate = 475000-40000= $ 435000

Poor = 30000-40000= $ (10000)
IC

Similarly, for the geographical segmentation:

Good = 810000-70000 = $ 740000
D

Poor =104000-70000 = $ 340000

N

As evident from the calculation, if you opt for demographic segmentation, the
maximum estimated profit would be $800,000. In demographic segmentation, there is a
O

possibility of incurring losses (10,000) if the product fails in the market. If you choose
geographical segmentation, the maximum estimated profit would be $740,000. In
P

geographical segmentation, you would earn a lower profit ($340,000) if the product is
not successful in the market. Therefore, it is preferable to use geographical segmentation
for marketing the product, as it does not involve any loss.
‹‹ Correlation Analysis: Pertains to the examination in which a researcher explores the
connection between various types of variables. It also gauges the extent to which one
variable influences other variables. The distinct forms of correlation are delineated as
follows:

58 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes  Simple Correlation: Denotes the tool employed to ascertain the degree of
relationship between two variables. It stands as the most commonly utilized metric
to characterize a relationship. Coined by Karl Pearson, it is referred to as Karl
Pearson’s coefficient of correlation. To compute simple correlation, the assumption
is made that a linear relationship exists between two variables, with one being
dependent and the other independent. The correlations can manifest in three types,
as depicted in Fig. 3.9:

Y
Positive Correlation Negative Correlation No Correlation

IT
S
R
E
Fig. 3.9: Different Types of Correlations

IV
The strength of association between two variables depends on the calculated value of
the correlation. The value of correlation coefficient lies between a range of -1 and +1.
If the calculated value of the correlation is close to -1, then there is a strong negative

N
correlation between the two variables. If the calculated value of the correlation is close
to +1, then there is a strong positive correlation between the two variables. However,
U
if the calculated value of the correlation is not close to -1 or + 1, then there is a weak
correlation between the two variables. For example, if the coefficient of the correlation
comes out to be 0.3/-0.3, then the association between the variables is weak; whereas if
Y

the coefficient of correlation is 0.8/-0.8, then the association between the variables is
strong. The formula used to calculate the correlation is as follows:
R

Correlation(r) = ∑(Xi-X)(Yi-Y)/n σxσy

R

Or
Correlation(r) = (n∑XiYi -∑ Xi∑Yi)/√n∑Xi2–(∑Xi)2 *√n∑Yi2 -(∑Yi)2
E

Where, Xi = ith value of X variable

H

X = Mean of X variable
Yi = ith value of Y variable
IC

Y = Mean of Y variable
N = Number of pairs of observations
D

σx = Standard deviation of X
σy = Standard deviation of Y
N

Let us learn to calculate the simple correlation between two variables with the help of an
O

example. Suppose a researcher wants to study the correlation between the age and weight of
a group to find the relation between the two. Table 3.9 shows the data:
P

Table 3.9: Data for Calculating Correlation

Number of Age (Xi) Weight (Yi) Xi*Xi Yi*Yi XiYi
Observations
1 18 35 324 1225 630
2 20 38 400 1444 760
3 25 50 625 2500 1250

DDE, Pondicherry University, Pondicherry 59

Materials and Store Management

Notes Table 3.9: Data for Calculating Correlation

Number of Age (Xi) Weight (Yi) Xi*Xi Yi*Yi XiYi
Observations
4 30 65 900 4225 1950
5 35 70 1225 4900 2450
6 24 50 576 2500 1200

Y
7 17 35 289 1225 595
8 16 39 256 1521 624

IT
9 49 76 2401 5776 3724
10 45 72 2025 5184 3240

S
11 50 85 2500 7225 4250
12 18 32 324 1024 576

R
13 20 34 400 1156 680

E
14 25 57 625 3249 1425
15 24 50 576 2500 1200

IV
16 17 35 289 1225 595
17 16 39 256 1521 624

N
18 23 44 529 1936 1012
19 22 45 484 2025 990
20 34
U 60 1156 3600 2040
21 36 65 1296 4225 2340
22 31 63 961 3969 1953
Y

23 43 70 1849 4900 3010

R

24 44 72 1936 5184 3168

25 16 35 256 1225 560
R

Total ∑Xi=698 ∑Yi=1316 ∑Xi =22458

2
∑Yi2=75464 ∑XiYi=40846
E

The calculation of correlation is shown as follows:

Correlation(r) = (n∑XiYi -∑ Xi∑Yi)/√n∑Xi2–(∑Xi)2 *√n∑Yi2 -(∑Yi)2
H

r = (25*40846-698*1316)/ √ (25*22458 - 698*698)(25*75464 - 1316*1316)

IC

r = 102582/√74246*154744
r = 0.96
D

The graphical representation of the age and weight variables is shown in Fig. 3.10:
N

90
80
Age of people observed
O

70
60 Series1

50 Series2
P

40 Linear (Series1)
30 Linear (Series2)
20
10
0
0 5 10 15 20 25 30
Weight of people observed

Fig. 3.10: Correlation between Age and Weight

60 DDE, Pondicherry University, Pondicherry
 CHAPTER 3  Materials Planning

Notes Fig. 3.10 shows the association between the two variables, age and weight. You can see from
the graph that the lines showing the weight and age of the group of people under study are
moving in a similar fashion. If one line is showing deep (down curve), the other line will also
show a down curve Similarly, if one line is showing a ridge, then the other line also shows a
ridge. This depicts that there is a strong correlation between age and weight. If the age of
a person increases, then his/her weight also increases. This shows the positive correlation
between age and weight.

Y
‹‹ Multiple Correlation: Represents the relationship between more than two independent

IT
variables and more than one dependent variable. It helps in finding out the effect of
independent variables on the dependent variable. The formula for multiple correlation,
when there are two independent variables and one dependent variable, is as follows:

S
Multiple Correlation(R) = √ b1∑ X1iYi-nYX1 +b2∑ X2iYi-nYX2/∑Yi2 -nY2

R
Where, X1 and X2 = two independent variables
Yi = ith item of dependent variable Y

E
Y = Mean of Y

IV
X1i = ith item of X1 variable
X2i = ith item of X2 variable

N
X1 = Mean of X1
X2 = Mean of X2
U
b1 = Constant for X1
b2 = Constant for X2
Y

To calculate multiple correlation, you need to first calculate the mean and values of
R

constants (b1 and b2) for the two independent variables. The general equation to
calculate b is as follows:
R

∑xi2 = ∑Xi2 - nX 2
E

∑xiyi = ∑XiYi- nXY

b = ∑xiyi/∑xi2
H

Calculation for b1 is as follows:

IC

∑x1i2 = ∑X1i2 - nX1 2

∑x1iyi = ∑X1iYi- nX1Y
D

b1 = ∑x1iyi/∑x1i2
Calculation for b2 is as follows:
N

∑x2i2 = ∑X2i2 – nX2 2

O

∑x2iyi = ∑X2iYi- nX2Y

b2 = ∑x2iyi/∑x2i2
P

Similarly, you can calculate b3, b4 and other b constants also by just changing the
independent variables X1 and X2 to X3 and X4 and so on in the preceding equations.

Let us learn to calculate multiple correlation with the help of an example. Suppose a researcher
wants to calculate the correlation between age, weight and height of a group of 25 people. In
this case, age and height are independent variables and weight is a dependent variable.

DDE, Pondicherry University, Pondicherry 61

Materials and Store Management

Notes Table 3.10 shows the data to calculate multiple correlation:

Table 3.10: Data for Calculating Multiple Correlation

Number of Age Weight Height X1i* X1i X2i* X2i Yi*Yi X1iYi X2iYi
Observa- (X1i) (Yi) (X2i)
tions
1 18 35 6 324 36 1225 630 210

Y
2 20 38 6.5 400 42.25 1444 760 247

IT
3 25 50 5.4 625 29.16 2500 1250 270
4 30 65 5.3 900 28.09 4225 1950 344.5
5 35 70 5.2 1225 27.04 4900 2450 364

S
6 24 50 5.1 576 26.01 2500 1200 255

R
7 17 35 5 289 25 1225 595 175
8 16 39 4.9 256 24.01 1521 624 191.1

E
9 49 76 6 2401 36 5776 3724 456

IV
10 45 72 6.1 2025 37.21 5184 3240 439.2
11 50 85 5.2 2500 27.04 7225 4250 442
12 18 32 5.3 324 28.09 1024 576 169.6

N
13 20 34 5.3 400 28.09 1156 680 180.2
14 25 57 5.5 625 30.25 3249 1425 313.5
U
15 24 50 5.4 576 29.16 2500 1200 270
16 17 35 6.2 289 38.44 1225 595 217
Y

17 16 39 6.3 256 39.69 1521 624 245.7

18 23 44 5 529 25 1936 1012 220
R

19 22 45 5.3 484 28.09 2025 990 238.5

R

20 34 60 5.7 1156 32.49 3600 2040 342

21 36 65 5.8 1296 33.64 4225 2340 377
E

22 31 63 5.9 961 34.81 3969 1953 371.7

23 43 70 5.1 1849 26.01 4900 3010 357
H

24 44 72 5.4 1936 29.16 5184 3168 388.8

25 16 35 5.3 256 28.09 1225 560 185.5
IC

Total ∑X1i ∑Yi = ∑X2i = ∑X1i2 = ∑X2i2 = ∑Yi = ∑X1iYi

2
∑X2iYi =
= 698 1316 138.2 22458 768.82 75464 = 40846 7270.3
D

The calculation of the mean of the three variables is as follows:

N

Mean for X1 = ∑X1i/n Mean for X2 = ∑X2i/n Mean for Y = ∑Yi/n

X1 = 27.92 X2 = 5.528 Y = 52.64
O

To calculate b1 and b2, the researcher uses the following equations:

P

The calculation for b1 is as follows:

∑x1i2 = ∑X1i2 - nX1 2
∑x1i2 = 22458-25*27.92*27.92
∑x1i2 = 2969.84
∑x1iyi = ∑X1iYi- nX1Y

62 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes ∑x1iyi =40846-25*27.92*52.64

∑x1iyi = 4103.28
b1 = ∑x1iyi/∑x1i2
b1 = 4103.28/2969.84
b1 = 1.38

Y
Similarly, the calculation for b2 is as follows:

IT
∑x2i2 = ∑X2i2 – nX2 2
∑x2i2 = 768.82-25*5.528*5.528

S
∑x2i2 = 4.85

R
∑x2iyi = ∑X2iYi- nX2Y
∑x2iyi =7270.3-25*5.528*52.64

E
∑x2iyi = 4.548

IV
b2 = ∑x2iyi/∑x2i2
b2 = 4.548/4.85

N
b2 = 0.94 U
Now, you can calculate the multiple correlation in the following manner:
Multiple Correlation (Ry. x1x2) = √ b1∑ X1iYi-nYX1 +b2∑ X2iYi-nYX2/∑Yi2 -nY2
Y

Ry. x1x2 = √1.38 (4103.28) + 0.94(4.548)/75464-25*52.64*52.64

Ry. x1x2 = √5666.805/6189.76
R

Ry. x1x2 = √0.9155

R

Ry. x1x2 = 0.96

E

Therefore, the age and height of an individual can affect the weight of the individual. There
is a positive correlation between the independent and dependent variables.
H

‹‹ Method of Moving Averages: Refers to another effective technique of measuring

trends. In this technique, a series of moving averages is obtained from the successive
IC

time periods. The movement in the time-series data is neutralised by taking an average
of the variables. In the technique, a constant is used to characterise the moving average.
This constant is called a period or extent of the moving average. For instance, the moving
D

average of ‘m’ period stands for the series of averages m consecutive overlapping time
N

periods, starting from the 1st, 2nd and 3rd values and so on. Let us discuss how to measure
trends using the method of moving averages with the help of examples.
O

Table 3.11 shows a time-series data of an organisation:

Table 3.11: Time-Series

P

Time t1 t2 t3 t4 t5 t6 t7 … tn
Values y1 y2 y3 y4 y5 y6 y7 … yn
Therefore, the moving average values of the series of ‘m’ periods would be as follows:
1st moving average = (y1 + y2 +…. +ym)/3, 2nd moving average = (y2 + y3 +….
+ym+1)/3,3rd moving average = (y3 + y4 +…. +ym+2)/3 and so on.  

DDE, Pondicherry University, Pondicherry 63

Materials and Store Management

Notes Example-1: Table 3.12 shows the time series data of 12 years, starting from 1998 to
2009:

Table 3.12: Sales Report

Year Sales
1998 20
1999 30

Y
2000 40
2001 50

IT
2002 30
2003 24

S
2004 30
2005 48

R
2006 30

E
2007 42
2008 30

IV
2009 48
Now, the moving average of three years of the series is calculated and shown in

N
Table 3.13:
Table 3.13: Calculation of Moving Averages
U
Year Sales Three Years Three Years
Moving Total Moving Average
1998 20
Y

1999 30 90 30
R

2000 40 120 40
2001 50 120 40
R

2002 30 104 35
2003 24 84 28
E

2004 30 102 34
2005 48 108 36
H

2006 30 120 40
IC

2007 42 102 34
2008 30 120 40
2009 48
D

After calculating them, moving averages need to be plotted on a graph. Fig. 3.11 shows
a graph containing the moving averages and trend line:
N

Y
O

50

40
P

30

20

10

X
1997 1999 2001 2003 2005 2007 2009

Fig. 3.11: Showing the Trend Line and Moving Averages

64 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes From Fig. 3.11, it can be seen that three points of moving averages have been joined to fit
the trend line of the curve. Following are the advantages of the method of moving averages:
‹‹ Involves simplicity in measuring trends
‹‹ Provides an accurate reflection of trends in a time series.

However, the technique does not provide any definite rule for deciding the period of moving

Y
average. Therefore, one needs to be careful while selecting the period of the moving average.
Apart from this, the future values of a series cannot be determined by using this technique.

IT
Self-Assessment Questions
10. _______________is a technique wherein experts are requested to provide their

S
opinions about a product.

R
11. Which of the following is not a survey technique?

E
a. Experts’ Opinion Poll Technique

IV

b. Delphi Technique

c. Market Experiment Technique

N

d. Moving Average Technique

12. The trend projection or least square technique is the technique of forecasting wherein
U
a huge amount of reliable data is required for forecasting. (True/False)
Y

3.6 Lead Time

R

When you place an order in a retail store using the Internet or through phone, you receive
the product after a specified duration of time. This time gap between placing an order and
R

receiving the product by the customer is called lead time. Lead time is further composed of
E

three components:
‹‹ Pre-processing Lead Time: This is the time required to release a purchase after
H

knowing about the requirement.

IC

‹‹ Processing Lead Time: This is the time required to procure or manufacture a product.
This may further be of two types, depending on the quantity of the order:
 Fixed Lead Time: This is the lead time that is independent on the quantity of the
D

products ordered.
N

 Variable Lead Time: This is the lead time that fluctuates depending on the
quantity of the order placed.
O

‹‹ Post-processing Lead Time: This is the time taken from the moment the product
is received to the moment it is made available in the inventory. This includes quality
P

inspection and entering of the received goods into the inventory of the organisation.

Based on the ability of a manufacturer to service an order, lead times are influenced by the
availability of the raw material. In case the raw material is available to manufacture a product,
the time taken by the manufacturer is called the cumulative manufacturing lead time. However,
in case the manufacturer has to order all the raw materials to make the product, the lead time
is referred as the cumulative total lead time.

DDE, Pondicherry University, Pondicherry 65

Materials and Store Management

Notes As you have studied in the previous chapters that there are three types of lead times that must
be addressed by the retail organisations seeking to compete in the retail business:

i. Time to market

ii. Time to serve

iii. Time to react

Y
A big challenge for a retailer is to ensure that the product is made available in the retail space

IT
quicker than the customer is prepared to wait for it. The difference between the logistics
ability to get the product on the floor and the customer’s order is the lead time gap. The
challenge thus for the distribution is to find the ways to reduce, if not eliminate, that gap.

S
Self-Assessment Questions

R
13 ______________ is the time required to release a purchase after knowing the

E
requirement.

14. The fixed lead time is the lead time that is independent on the quantity of the products

IV
ordered. (True/False)

15. ______________ is the time taken from the moment the product is received to the

N
moment it is made available in the inventory.
U
Fixed Order Quantity and Periodic
3.7
Review Systems
Y
R

There are two different approaches to the inventory system: a fixed order quantity system is
called a Q system and a fixed order periodic system called a P system.
R

Let us discuss these two approaches.

E

‹‹ Fixed order quantity system (Q system): Refers to a system in which a fixed order
quantity is ordered whenever the stock in hand reaches the reorder point. The fixed
H

quantity of material that ordered each time is called as Economic Order Quantity
(EOQ). The advantages of this system are as follows:
IC

 Achieves procurement of material in the most economical quantity

 Devotes attention when the material is required
D

 Maintains a desired level of inventory

N

‹‹ The disadvantages of Q system are as follows:

 Raise orders at the inconvenient intervals that are not convenient to the suppliers
O

 Fails to group items as the reorder point occur irregularly

P

 Calls for a cumbersome job to fix a new order quantity and new order point on a
regular basis
‹‹ Fixed Order Period System (P system): Reviews the stock position on a regular basis.
When the stock fails to continue the production operation, an order is placed to restock.
The review varies from material to material within the organisation that depends upon
the importance of materials and production schedules.

66 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes The advantages of P system are as follows:

 Low ordering and inventory costs
 Attractive discounts from suppliers as sales are guaranteed
 Good for materials that are used irregularly
The disadvantages of P system are as follows:

Y
 Makes a system inefficient as it demands a periodic review

IT
 Tends to peak the purchasing work around the review dates
 Call for the actual order quantity to deviate from the optimum quantity as there are
limited numbers of ordering cycles

S
The differences between the Q and P systems are shown in Table 3.14:

R
Table 3.14:

E
Point of difference Q system P system
Order initiation When the stock in hand reaches the Order is placed on the basis

IV
reorder point of the review period
Period of order Order is placed anytime when the Order is placed only after a

N
stock reaches the reorder point predetermined period
Order quantity Quantity remains constant
U Quantity varies with each
order
Size of inventory Less than P system More than Q system
Y

3.8 Dependent and Independent Demands of Stock

R

Who or what generates the need for a company’s goods or services, and how can that demand
R

be controlled? The two main ways in which demand is generated are through dependent and
independent demand. The desire for one good or service can influence the demand for another,
E

a phenomenon known as dependent demand. A company would require 1,000 front wheels
and 2,000 rear wheels, for instance, to produce 1,000 tricycles. A prediction is unnecessary for
H

this sort of internal demand; all that is required is a table showing the potential sales volume
of tricycles. Demand for this product cannot be clearly linked to demand for other items; thus,
IC

it is referred to as independent demand.

A dependent demand is difficult for an organisation to meet. A conditional meeting must be

satisfied (although A product or service can be purchased rather than produced internally).
D

However, in response to an individual request, a company may accomplish quite a bit. It is

possible for the company to:
N

1. Take an active role to influence the demand: It is possible for the company to exert
O

pressure on its sales team. Customers and employees alike can be incentivized. It has
the ability to lower pricing and run advertising campaigns to sell things. The demand
P

may be raised by taking these measures. Reducing sales efforts or raising prices are two
ways to lower demand.

2. Take a passive role and simply respond to the demand: An organisation may choose
to accept the current demand rather than attempt to alter it for a number of reasons.
A company may be unwilling to take action to meet demand if it is operating at full
capacity. In addition to being passively accepted by the market, there are additional
considerations such as competitiveness, legality, ethics, and morality.

DDE, Pondicherry University, Pondicherry 67

Materials and Store Management

Notes
3.9 Techniques to Deal with the Dependent Demand
As discussed in the last section, a dependent demand is the demand of the sub-items used in
the production of other items. These sub-items are used as sub-assemblies. The dependent
demand items are dependent on the demand of high-level parts and components, including
the master production schedule. The final goods are brought together with the help of

Y
different items. In other words, the final goods are manufactured by combining various
small components, also known as the sub-assemblies. The demand of these sub-assemblies

IT
is dependent on the number of finished goods to be produced. These items are dependent
demand items. MRP is used for planning the future requirements of dependent demand items.
Thus, it can be said that the demand for independent goods is based on customer orders,

S
forecasts and the past historical data, whereas the demand for dependent items is managed
through MRP, CRP and ERP.

R
Let us discuss the different techniques to deal with a dependent demand in detail in the next

E
sections.

IV
3.9.1 Materials Requirement Planning (MRP)
MRP is a process of identifying the requirements of materials used for producing finished

N
products. It also involves determining the appropriate timing when these materials should
be ordered so that delivery schedules mentioned in MPS can be met. MPS provides the
U
information related to the availability of raw materials, components and demand for raw
materials. Such information helps an organisation to complete the production as per the plan,
make timely delivery of products and minimise the investment in inventory. Following are
Y

the main objectives of MRP:

R

‹‹ Prevents excessive build-up of

inventory by determining the requirements of materials
and procuring them as and when needed to meet MPS
R

‹‹ Reduces the manufacturing and delivery lead time by determining the exact quantity
of materials and timing when they need to be procured
E

‹‹ Helps in meeting the delivery commitments by providing an accurate and timely

H

information related to delivery schedules

‹‹ Increases the efficiency ofthe production system by maintaining an uninterrupted flow
IC

of materials through the production line

The efficiency of MRP depends on the quality of inputs. Fig. 3.12 shows the structure of
D

MRP and inputs used in it:

N

Master Production Schedule

(MPS)
O

Materials Requirement Bill of Materials

P

Inventory Status File

Planning (MRP) (BOM)

Order Release
Order Rescheduling Planned Orders (Future)
Requirements

Fig. 3.12: The MRP Structure

68 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes From Fig. 3.12, it can be seen that MRP requires three types of inputs, namely, MPS, BOM
and inventory record files. Let us discuss these three inputs in detail in the next sections.

Master Production Schedule (MPS)

The master production schedule is the key input that drives the MRP program. MPS tells the
MRP program what an organisation intends to produce. As an illustration, let us consider a

Y
portion of the MPS for ABC organisation, given in Table 3.15:

IT
Table 3.15: MPS for ABC Organisation
Week Number
End item
1 2 3 4 5 6 7 8 9 10 11 12

S
001-3 Drawer 200 200 200

R
Filing Cabinet
002-4 Drawer 120 120 240 120

E
Filing Cabinet
003-Desk 300 300 180

IV
The preceding values show the MPS of the ABC organisation, which manufactures office
equipment and furniture. MPS is prepared for one quarter (12 weeks period) and the time

N
bucket in the planning horizon is one week. The quantities indicated in MPS may include both
plans: to produce end items that have been ordered by customers (customer's organisation
U
orders) and to produce end items for forecasting sales.

The minimum planning horizon for each product must usually be greater than the cumulative
time required for the procurement of raw materials and components and performance of
Y

all other production operations, such as fabrication, sub-assembly and final assembly. This
minimum planning horizon may be considered as a “time fence” within which changes to the
R

MPS are not permitted, except in the case of extreme situations.

R

The maximum length of the time planned in MPS depends on the organisation's ability to
forecast the demand and its requirements, but a one-year span is usually common.
E

MPS: Inputs and Outputs

H

MPS guides the top management of an organisation. It helps in planning and controlling the
IC

manufacturing operation. An effective MPS helps an organisation in the following ways:

‹‹ Ensures the on-time product delivery to customers
D

‹‹ Limits trade-offs between marketing and manufacturing

N

‹‹ Integrates the financial plan with the production budget

Table 3.16 shows the inputs and outputs of MPS:

O

Table 3.16: MPS Inputs and Outputs

P

MPS Input MPS Output

Demand forecasts Quantity of products to be produced
Inventory levels Available materials to meet the demand
Lot size Level of staffing for production and operations
Production lead time Projected available capital
Capacity and customer orders

DDE, Pondicherry University, Pondicherry 69

Materials and Store Management

Notes Order Promising

An organisation prepares MPS based on the sales department commitments called “order
promising”. In simple terms, order promising implies fulfilling a commitment related to the
delivery of a product. It involves verifying the availability of products for shipping. Order
promising represents the lead time between placing and receiving an order. MPS aligns
the order promise goal made by the sales department with the order fulfilment goal of the

Y
production department. In case the production department cannot fulfil the promise made
by the sales department, it becomes necessary for the organisation to change the due date of

IT
order promise and communicate the same to customers. However, this situation may create
dissatisfaction among customers. Therefore, to avoid such situations, an organisation adopts a
concept called Available To Promise (ATP).

S
ATP supports order promising and order fulfilment goals of an organisation by checking

R
the available inventory with respect to the planned production, purchases, transfers and
sales returns. Therefore, it helps in providing the exact delivery dates to customers. ATP

E
calculation is a key component of MPS.

IV
Bill of Materials (BOM)
Often referred to as the product structure file, the bill of materials (BOM) is where material
requirements planning (MRP) gets its information. The bill of materials (BOM) not only

N
details every component but also the process flow that went into making the final product.
The bill of materials (BOM) is hierarchical, with each level representing a different step in the
U
production process. The sub-assemblies that comprise the final assembly might be depicted
at the level below. The pans required to manufacture the subassemblies may be depicted on
the lower level immediately adjacent to this one, and the raw materials could be shown on the
Y

lowest level.
R

Every item in a bill of materials (BOM) has its own distinct part number. “Explosing” the
requirements of BOM means finding all the lower-level components needed to manufacture
R

a parent item. You may find out what products will not be created if certain components are
not available on time by looking at a “where-used list” that shows the next assembly where a
E

component or part is utilised. This information is provided in Table 3.17:

H

Table 3.17: Description of Raw Materials

Part No. Quantity Description
IC

001 1 no. 3 drawer filing cabinet

101 1 no. Case assembly
102 1 no. Lock
D

103 3 nos. Drawer assembly

101 1 Case assembly
N

201 6 Drawer slides

202 1 Formed case
O

103 1 Drawer assembly

203 1 Formed drawer
P

204 1 Handle
205 2 Support rollers
202 1 Formed case
301 150 sq.cm. Steel sheet
203 1 Formed drawer
302 65 sq.cm. Steel sheet

70 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes For the BOM, there is a drawer assembly that consists of a formed drawer, one handle and two
support rollers. The formed case and formed drawer are made of steel sheet. The cabinet case
assembly contains one case assembly and three drawer assemblies. The cabinet case assembly
consists of a formed case, six slides and one lock.

Inventory Status File

Y
Details like what needs to be ordered and when it needs to be released may be found in the
inventory status file. You can find out how much stock will be accessible in each time bucket

IT
by looking at the inventory status file, which records information on the expected usage and
receipt of each item. In the event that the anticipated stock on hand is insufficient to fulfil
the needs within the specified time frame, the MRP software suggests placing an order for

S
the item. The inventory record for the file cabinet drawer assembly is displayed in Table 3.18:

R
Table 3.18: Inventory Record for the Drawer Assembly for Filing Cabinets

E
Item 103 Week
Lead time = 2

IV
weeks. Drawer 1 2 3 4 5 6 7 8 9 10 11 12
Assembly
Gross reqmnts. 600 600 600

N
Scheduled
800
receipts
U
On hand 40 40 840 840 840 840 240 240 240 -360 -360 -960 -960
Net reqmts. 360 600
Y
Planned order 360 600
release
R

The inventory status record includes information on the following items:

R

‹‹ Gross Requirements (“GR”): It is the total demand of a stock in a given time period.
‹‹ Scheduled Receipts (“SR”): These are receipts of orders that are placed but not yet
E

completed/received. It is also called "open orders".

H

‹‹ Projected on Hand (“POH”): It is an estimated amount of inventory available each

week after satisfying the gross requirements.
IC

‹‹ Planned Order Receipts (“POR”): It is the quantity determined required for receipt at
the beginning of a period. This helps in minimising the chances of dropping of POH
below the safety stock.
D

‹‹ Planned Order Releases (“PORL”): It is the planned amount needs to be ordered in

N

each period. This amount should be equal to the POR offset by the lead time.
O

Calculations in MRP
P

Calculations in an MRP system proceed from one item to another, that is, from the calculation
of GR > POH > POR>PORL. SR is not calculated as it is already given. These items should
be processed based on the level structure of the BOM. The calculations are performed as
follows:
‹‹ Calculation of GR: Add the requirements for every parent item. In case of a finished
product, the requirements are determined from MPS, whereas requirements are the
PORL for an intermediate product.

DDE, Pondicherry University, Pondicherry 71

Materials and Store Management

Notes ‹‹ Calculation of POH and POR: POH is calculated for every week using the following
equation:
‹‹ POH = POH (from previous week) – GR + SR + POR
‹‹ If the value of POH is below the level of safety stock, an adjustment should be made by
scheduling a POR for the week. POR is determined based on the lot sizing rules. This
POR is used for the recalculation of POH. The calculation of POH continues till the

Y
next shortage occurs and at this point, next POR is calculated.

IT
‹‹ Calculation of PORL: PORL is determined by moving forward each POR by the lead
time.

Let us take some examples to understand the working of MRP.

S
Example 1: An organisation manufactures product P, which is produced using four parts of

R
Q and three parts of R. Further, Q is made up from one part of S and two parts of T. On the
other hand, R is made up of three parts of S and three parts of U. In this case, the structure

E
of the product would appear as the one shown in Fig. 3.13:

IV
Product P

N
U Q (4) R (3)

S (1) T (2) S (3) U (3)

Y

Fig. 3.13: Product Structure

R

It is assumed that the organisation wants to produce 200 units of product P. In this case, it
R

will require:
Parts Q = 4*200 = 800
E

Parts R = 3*200 = 600

H

For producing part Q, the number of units of S and T required will be:
Part S = 1*800 = 800
IC

Part T = 2*800 = 1600

For producing part R, the number of units of S and U required will be:
D

Part S = 3*600 = 1800

N

Part U = 3*600 = 1800

O

In this case, the total number of units of part S required for producing part Q and R are as
follows:
P

Total number of units of S = 800 + 1800 = 2600

The lead time or procurement time for these items is as follows:

P = 1 week
Q = 2 weeks
R = 2 weeks

72 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes S = 3 weeks
E = 1 week
F = 1 week

Solution: Using the preceding data, the MRP chart for 200 units of the product P can be
prepared as shown in Table 3.19:

Y
Table 3.19: MRP Chart

IT
Week
1 2 3 4 5 6 7
P Required date 200 P = lead time = 1 week

S
Order placement 200

R
Q Required date 800 Q = lead time = 2 weeks
Order placement 800

E
R Required date 600 R= lead time = 2 weeks
Order placement 600

IV
S Required date 2600 S = lead time = 3 weeks
Order placement 2600

N
T Required date 1600 T = lead time = 1 week
Order placement U 1600
U Required date 1800 U= lead time = 1 week
Order placement 1800
Y
From Table 3.19, it can be concluded that MRP chart helps determining which items are
required and at what time intervals. It also shows the production of product P and the time
R

required for producing its different parts.

R

3.9.2 Capacity Requirements Planning (CRP)

E

CRP is all about planning and determining future inventory capacity to meet the demand.
H

Sometimes, it becomes necessary for an organisation to readjust the capacity when the materials
requirements plan is not feasible due to the capacity limitations. CRP is an important part of
IC

the manufacturing process, as it helps determining whether the work centre is overloaded or
undervloaded. Fig. 3.14 shows the CRP system:
D

Initial MPS specifies

production schedule
N

Chance or increase RA
When MR > RA,
O

MRP system
regenerates MR
P

Match MR to RA MR > RA

MR  RA Here, RA stands for Resource Availability

MR indicates Material Requirements
Finalize MPS & MRP

Fig. 3.14: CRP System

DDE, Pondicherry University, Pondicherry 73

Materials and Store Management

Notes 3.9.3 Enterprise Resource Planning

MRP II, the updated version of MRP, is not only confined to materials planning rather
the technique focuses on enhancing the overall manufacturing process of an organisation.
However, there are certain drawbacks of MRP II, such as repetitive production setups and
ineffective budgetary and costing controls. These drawbacks of MRP II led to the evolution

Y
of ERP in the 1990s. ERP is a computerised software application that controls and integrates
all the business functions of an enterprise. According to Nah and Lau (2001), “ERP is a

IT
packaged business software system that enables a company to manage the efficient and effective use
of resources (materials, human resources, finance, etc.) by providing a total, integrated solution for
the organisation’s information-processing needs.” ERP helps an organisation by providing the

S
following information:
‹‹ When an order should be placed

R
‹‹ The quantity of materials required

E
‹‹ Cost of materials

IV
‹‹ List of suppliers
‹‹ Actual time of delivering the final product

N
Manufacturing is not only concerned with materials and resources, but also requires
information sharing among interrelated departments through a single platform. An ERP
U
system facilitates a free flow of information among different departments, which results in
effective business decision making. Apart from this, it provides the following benefits to an
organisation:
Y

‹‹ Integrates business processes, which, in turn, saves time and cost

R

‹‹ Improves business decision making by providing meaningful information

‹‹ Makes order tracking easier from acceptance to fulfilment
R

‹‹ Matches the purchase records or orders with inventory receipts

E

‹‹ Centralises the business data

‹‹ Protects sensitive and confidential data
H

However, ERP also has certain limitations as follows:

IC

‹‹ Requires huge cost, time and efforts

‹‹ Requires extensive training of employees
D

‹‹ Does not fit with the business plan of every organisation

Implementing an ERP system is a costly affair for an organisation. Therefore, an organisation

N

should consider the following points before implementing an ERP system:

O

‹‹ Identifying the requirements for implementing an ERP system

‹‹ Aligning the ERP objective with the overall organisational goals
P

‹‹ Understanding the reaction of workforce before implementation

‹‹ Determining the probable outcomes
‹‹ Finding the right ERP vendor
‹‹ Mapping the requirements covered by the package offered
‹‹ Providing adequate training to employees for its proper usage

74 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes ‹‹ Testing software till it provides the desired results

‹‹ Evaluating the impact of test runs

Self-Assessment Questions
16. __________is a process of identifying the requirements of materials used for
producing finished products.

Y
17. The master production schedule is the key output that drives the MRP program.

IT
18. BOM not only lists all the required parts but also reflects the sequence of steps
required to produce the end product.

S
19. ___________is a computerised software application that controls and integrates all
the business functions of an organisation.

R
E
3.10 Summary

IV
‹‹ Materials planning refer to a process of procuring, storing and handling the materials
required for the production of different products.

N
‹‹ The process of materials planning helps an organisation to avoid the sudden emergency
of materials, which can lead to extra costs.
U
‹‹ In order to exercise stock control, you need to do a continuous review of the norms
based on the demand of products and the inventory assessed with respect to these
norms. This helps in exploring whether these norms are adequate or not.
Y

‹‹ The process of estimating the events that may take place in an organisation is known
as forecasting.
R

‹‹ The period of forecasting refers to the time range selected for anticipating a future
R

event. It can range from a week to many years. On the basis of time period, forecasting
is classified into three types, namely short-term forecasting, medium-term forecasting
E

and long-term forecasting.

‹‹ Forecasts done by less experienced individuals lead to incorrect estimates. Therefore,
H

the availability of efficient experts is the necessary condition for forecasting, which
may not be always possible.
IC

‹‹ Generally, there are two approaches of forecasting. The first approach involves
forecasting by collecting information through surveys. On the other hand, the second
D

technique to forecast an event is by using the past data through statistical techniques.
‹‹ Lead time refers to the time gap between placing an order and receiving the product
N

by the customer.
‹‹ In the fixed order quantity system, a fixed order quantity is ordered whenever the stock
O

in hand reaches the reorder point. On the other hand, in the fixed order period system,
the stock position on a regular basis is reviewed and when the stock fails to continue the
P

production operation, an order is placed to restock.

‹‹ The dependent demand is the demand for a product or service caused by the demand
of other products or services while the independent demand cannot be derived directly
from that of other products.
‹‹ The different techniques used for dealing with dependent demand include MRP, CRP
and ERP.

DDE, Pondicherry University, Pondicherry 75

Materials and Store Management

Notes
3.11 Glossary
‹‹ Dependent Demand: It is the demand of products that is caused by the demand of
other products.
‹‹ Lead Time: It is the time gap between placing of an order and receiving the product
by the customer.

Y
‹‹ Materials Planning: It is the process involving the procurement, storage and handling
of materials required for the production of different products.

IT
‹‹ Statistical Techniques: These are the techniques wherein an event is forecasted on the
basis of the historical and cross-sectional data.

S
‹‹ Survey Techniques: These are the forecasting techniques that encompass the future
purchase plans of consumers and their intentions.

R
E
3.12 Terminal Questions

IV
1. Discuss the concept of materials planning.
2. Explain the steps involved in the forecasting process.
3. What are the different techniques included in the survey techniques?

N
4. Discuss the fixed order quantity and periodic review systems.
U
5. Explain the concept of MRP in detail.

3.13 Answers
Y

Q. Self Assessment Questions

R

1. The materials planning process refers to a process of procuring, storing and

handling the materials required for the production of different products.
R

2. c. Communication systems of organisation

E

3. False
4. d. Select a control plan
H

5. True
IC

6. True
7. Forecasting
D

8. True
9. False
N

10. Experts’ Opinion Poll

11. d. Method of Moving Average
O

12. True
P

13. Pre-processing Lead Time

14. True
15. Post-processing Lead Time
16. MRP
17. False

76 DDE, Pondicherry University, Pondicherry

 CHAPTER 3  Materials Planning

Notes 18. True

19. ERP
Q. Terminal Questions
1. The materials planning process refers to a process of procuring, storing and
handling the materials required for the production of different products. Refer to

Y
section 3.2 Concept of Materials Planning.
2. The steps involved in forecasting are setting the objective, determining the time

IT
period, selecting a method for forecasting and collecting data. Refer to sub-section
3.4.3 Steps in Forecasting.

S
3. The different techniques included in the survey techniques are experts’ opinion
poll technique, Delphi technique and market experiment technique. Refer to sub-

R
section 3.5.1 Survey Techniques.
4. In the fixed order quantity system, a fixed order quantity is ordered whenever

E
the stock in hand reaches the reorder point, while reorder is made in fixed order
period system when the stock fails to continue the production operation. Refer to

IV
section 3.7 Fixed Order Quantity and Periodic Review Systems.
5. MRP is a process of identifying the requirements of materials used for producing
finished products. Refer to section 3.9.1 Materials Requirement Planning (MRP).

N
U
3.14 Case Study: Materials Planning at ABC Ltd.
ABC Ltd. is a multi-channel retailer that provides pet products and services. It also provides
Y

pet supplies and pet care information online. The retailer has four different divisions and all
of them executed some type of planning. However, the timing of preparing plans was neither
R

synchronised nor integrated in a single planning calendar. In addition, the measures used in
the plans were not similar in all the divisions. As a result, ABC was not able to determine the
R

exact amount of materials required by the different divisions and was not able to perform the
business processes effectively.
E

Therefore, the head of ABC appointed a team to develop a materials planning process for all
H

the divisions in the organisation. The process formed involved the following main activities:
‹‹ Preparing a planning strategy and high-level planning processes
IC

‹‹ Making the organisation ready to receive the materials

‹‹ Developing a roadmap to perform different business processes
D

After implementing the process, ABC generated $50 million through reduced inventory
N

carrying costs and increased sales volume.

O

Discussion Questions
P

1. Why did ABC need to develop a materials planning process for all the divisions?
(Hint: Materials planning in the different divisions of ABC was not synchronised that
made it difficult to determine the exact requirement of materials.)
2. What should ABC do to determine the requirement of materials?

(Hint: ABC can implement the MRP system for ascertaining the demand for materials
in the organisation.)

DDE, Pondicherry University, Pondicherry 77

Materials and Store Management

Notes
3.15 References and Suggested Readings
‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall of
India Pvt. Ltd.
‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi Publication
(P) Ltd.

Y
E-references

IT
‹‹ Materials Management. http://www.newagepublishers.com/samplechapter/001386.

S
pdf.
‹‹ Inventory. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/

R
inventory.html

E
‹‹ Materials Requirement Planning. Retrieved from http://productivity.tn.nic.in/
knowledgebase/Material%20Management/Materals%20requirement%20planning.

IV
pdf

N
U
Y
R
R
E
H
IC
D
N
O
P

78 DDE, Pondicherry University, Pondicherry

chapter

4 Need for Stock Control

Y
IT
S
R
E
Structure

IV
4.1 Introduction

N
Learning Objectives U
4.2 Variety Reduction

4.3 Standardisation
Y

4.4 Control of Slow-moving Items

R

4.5 Control of Obsolete Items

4.6 Control of Redundant Items

R

4.7 Summary
E

4.8 Glossary
H

4.9 Terminal Questions

IC

4.10 Answers

4.11 Case Study: Stock Control at PQR

D

4.12 References and Suggested Readings

N
O
P
Materials and Store Management

Notes Learning Objectives

After completing the chapter, you will be able to:
 explain the concept of variety reduction
 discuss the standardisation
 explain the control of slow-moving items

Y
 elaborate the control of obsolete items
 discuss the control of redundant items

IT
4.1 Introduction

S
Stock control is a primary requirement of every organisation. This is because storing stock

R
for a longer duration or holding unwanted stock leads to an increase in the cost of holding
and maintenance of such stock. In such a case, the revenue generated from this stock is nil

E
as compared to the cost incurred on it. These situations can be overcome by eradicating the

IV
unwanted stock and determining the optimum amount of stock required by an organisation.
For this purpose, most of the organisations apply the concepts of standardisation and variety
reduction.

N
Variety reduction is the process of reducing the number of types of products/materials/
U
parts that falls in a particular range and serving the same purpose by eliminating the least
profitable and least demanding materials in the market. This helps in reducing the unwanted
materials and procure the required materials in more quantity. In this process of variety
Y

reduction, slow-moving, obsolete and redundant items are either eliminated or minimised in
a manner that the cost can be saved and productivity can be increased. One of the criteria for
R

variety reduction is the standardisation of materials.

R

Standardisation is a process wherein organisations establish standards to bring consistency in

the quality of its products and processes that further helps in delivering high-quality products
E

to customers. In stock control, standardisation enables organisations to set specifications

and guidelines for accepting materials from its suppliers. These guidelines are pertaining
H

to the quality, physical characteristics and functional characteristics of materials. Therefore,

the standardisation of materials helps in procuring materials that are good in quality and
IC

required by an organisation, which ultimately leads to variety reduction and stock control.

In this chapter, you will study about variety reduction. In addition, you will also learn about
D

standardisation and its benefits. The chapter also discusses the relationship between variety
reduction and standardisation. Next, the control of slow-moving and obsolete items is also
N

explained in the chapter. At the end, the chapter discusses the control of redundant items.
O

4.2 Variety Reduction

P

Variety reduction is one of the techniques used by organisations for controlling their stocks.
Organisations purchase different materials in significant quantities to meet the urgent
requirements of production, administration, etc. As a result, these materials start accumulating
in the warehouses or storerooms of organisations, as urgent requirements do not arise daily
and if they arise, the amount of materials purchased for this purpose is not fully consumed.
Therefore, these piled up materials become slow moving or even totally ’dead stock’ items in

80 DDE, Pondicherry University, Pondicherry

 CHAPTER 4  Need for Stock Control

Notes a short period. In such a case, it becomes important for an organisation to eliminate or utilise
this stock, as it increases the cost of the organisation as well as consumes the space that can
be used for the materials that are required by the organisation in high quantities. This is done
through reducing the stock items used for the same purposes and this process is called variety
reduction.

Reduction in variety of stock:

Y
‹‹ Helps in the management and control of items in a better way, as their quantities reduce

IT
‹‹ Reduces the conditions of stock-outs and improves the level of service
‹‹ Reduces the inventory carrying cost, as the amount of inventories declines

S
‹‹ Decreases the procurement cost. as the number of items reduces

R
‹‹ Enables an organisation to get better quantity discounts and decreases the unit cost, as
the quantity per item increases

E
Self-Assessment Questions

IV
1. ______________is a stock control technique wherein the items in the inventory
serving the same purpose are minimised.

N
2. Variety reduction enables organisations to reduce the carrying cost of their
inventories. (True/False)
U
3. How does the procurement cost of inventory decrease through variety reduction?
Y

4.3 Standardisation
R

A standard can be defined as a model or general rule that is established by an authority or

R

custom and used by different people for different purposes. It can be applied to a number of
industries like engineering, textile, chemicals, pharmaceuticals, agriculture, education, etc. It
E

specifies the criteria for accepting or rejecting a product, part or any other item.

Most of the organisations define their standards for rejecting or accepting raw materials, spare
H

parts, etc. This helps them to obtain good quality of materials and reduce the amount of huge
variety of stocks used for the same purposes. The process of developing and implementing
IC

standards is called standardisation.

Standardisation helps an organisation in the following ways:

D

‹‹ It brings consistency in quality of products and services. This helps in enhancing the
goodwill of the organisation, as its customers trust the quality of its products and
N

services.
O

‹‹ Standardisation enables an organisation to use differential pricing for its products and
services, as these are categorised into different grades.
P

‹‹ It also helps in increasing the demand of a product or service as it brings uniformity

in the size, form, quality and utility of all products or services of an organisation that
makes its customers loyal to these products.
‹‹ It enables an organisation to get finance from various financial bodies and lenders easily,
as these prefer to provide loans to the organisations dealing in standard goods.
‹‹ It helps in decreasing the inventory items in an organisation.

DDE, Pondicherry University, Pondicherry 81

Materials and Store Management

Notes 4.3.1 R
 elationship Between Variety Reduction and
Standardisation
Variety reduction is the result of standardisation. In this process, reduction in some necessary
varieties of stock takes place. In addition, the process involves the standardisation of stock to
the most economical sizes, grades, shape, colors, types of parts, etc. This process is discussed

Y
as follows:
1. Create a list including all the items used for the development of a final product. This

IT
list can be prepared using the blue print of the product design, if the production is not
started. On the other hand, if the production has started, then it can be made using the
actual records of the consumption of items.

S
2. Categorise the items included in the list based on their performance and dimensional

R
characteristics.

E
3. Group the categorised items with similar functional characteristics. Next, make
subgroups from the grouped items based on their major dimensional values. For

IV
example, all the brushes with about 5 cm of diameter are grouped together. Under this
group, a subgroup can be formed that contains brushes with about 3 cm of diameter.
4. Study the dimensional features of the groups with similar functional characteristics.

N
If a group contains a large number of items and the functional requirements of
these items are same, then their dimensional features are also similar. In addition, if
U
the performance characteristics of the items are satisfactory, the items of the same
dimensions are produced. This is an important step in variety reduction.
Y

5. Standardise the items based on the National or International standards if the

performance of the items is acceptable. In case the performance is not satisfactory, a
R

local standard is used for their standardisation, wherein the dimensions of the items are
representative values.
R

Self-Assessment Questions
E

4. A standard can be defined as a_______________.

H

5. Standardisation facilitates differential pricing for the products and services of an

organisation. (True/False)
IC

6. If the production is not started, the list of items required for the production is
prepared using the_______________,.
D

Activity
N

Using the Internet, identify some examples of organisations that are known for the
standardisation of their materials.
O
P

4.4 Control of Slow-Moving Items

Slow-moving items are defined by different organisations in different ways for different
purposes. In the context of requirements determination, these items are the ones that are
demanded by customers only during the first six months of their storage. On the other hand,
with respect to Maintenance, Repair and Operations (MRO), most of the stock items like
spare parts are considered as slow-moving items. Therefore, slow-moving items are the ones

82 DDE, Pondicherry University, Pondicherry

 CHAPTER 4  Need for Stock Control

Notes that cannot be forecasted like other inventory items, as the demand and requirement of these
items is very less in the market.
It is essential for organisations to handle or control the slow-moving inventory, as the cost
incurred in purchasing and handling these items increases and the return on this inventory
is obtained after a very long duration. In addition, these items consume space of a storeroom
that further results in the reduction of storage space for other items. Therefore, some methods,

Y
policies, procedures and systems are adopted to handle these items in a manner that the cost
can be saved and the items can be utilised in the best possible way.

IT
Dawson Consulting has developed a structured approach to deal with slow-moving items.
This approach includes three steps, discussed as follows:

S
1. Segmentation: It is not necessary that an inventory item that is considered slow
moving by an organisation will be considered the same by other organisations as well.

R
In addition, the quantity of slow-moving items held also varies from organisation to
organisation.

E

Therefore, while controlling slow-moving items, the first step is to determine:

IV
 The amount of slow-moving items need to be held by an organisation
 How slow-moving items should be segmented, for example, critical slow-moving
items and non-critical slow-moving items

N
 Where the critical items should be stored so that they are made available immediately
U
Generally, slow-moving items are the ones that are demanded only during the first six
months of their storage. Therefore, the forecasting techniques used for identifying the
service level and replenishment requirements of slow-moving items are different from
Y

those used for other inventory items.

2. Guidance: Using the forecasting techniques, an organisation can determine the optimal
R

amount of slow-moving items required. After determining the required amount,

organisations analyse what can be done with these items. In some organisations, say
R

retail, these items are quickly removed from the inventory. This is because the revenue
generated by these items is negligible as compared to the cost of holding and managing
E

them. However, in some organisations, these items form a major portion of their
H

inventories. Therefore, it is not appropriate for them to simply remove these items from
their inventories. Such organisations formulate policies and procedures to handle them.
IC

Some of these policies include:

 Segmentation Policies: These policies include the criteria for grouping or
segmenting inventory items into logical lots. They also include the details of each
D

group or segment, reason of their existence, and the ways of managing them.
 Service-level Policies: These policies include the details of service levels to be
N

applied on various slow-moving items.

O

 Introduction of New Items into Inventory Policies: These include the guidelines
for the introduction of new items into inventory. They involve the order quantities
that should be used or their parameters that need to be configured.
P

 Review Policies: These contain the guidelines on the requirement and purpose of
inventory reviews, which include the need to investigate the price, segmentation
and service level of slow-moving items.
 Performance Policies: These define the parameters for measuring the inventory
performance and benchmarks used for determining the acceptable performance of
slow-moving items.

DDE, Pondicherry University, Pondicherry 83

Materials and Store Management

Notes 3. Deployment: The policies and procedures defined in the above step help in optimising
the performance of slow-moving items. However, it is difficult for organisations to
forecast and identify the amount of these items manually due to the fluctuations in
their demand and quantity. Therefore, organisations require a system support for this
purpose. One of the systems employed for managing slow-moving items is Distribution
Resource Planning (DRP). Instead of DRP, a spreadsheet or database system can be used
that involves an appropriate technique for back loading the replenishment information

Y
into the organisation's inventory management system.

IT
Exhibit
Handling Slow-moving Items

S
After examining its management processes, a prominent Australian truck shop discovered

R
the true advantages of slow-moving commodities. Over half a hundred thousand of this
store’s light-to-medium vehicles are in use in Australia. An inventory of about 20,500

E
distinct parts was needed to serve this number of cars.

The company’s investigation revealed that around 85% of these components were

IV
sluggish. There were about 13,000 components that had been sitting in the inventory for
quite some time and had a worth of less than $100 each. Also, customer service levels
might be affected since 1,300 goods were understocked. There were over 6,300 goods and

N
over 5,300 things that were stocked incorrectly. Plus, nearly 3,000 of the surplus products
were considered outdated. The merchant just required 17,500 distinct stock items instead
U
of 20,500.

The missing pieces were addressed with an investment of about $75,000 by the
Y

organisation. About $470,000 was the amount of the overstocked component. Standard
operating procedures (SOPs) were inadequate for SMI since they were based on FMI
R

procedures.
R

New rules, procedures, and algorithms were implemented by the truck retailer in response.
Part of this reply was:
E

‹‹ Organizing the stock into categories and assigning corresponding service levels to
each
H

‹‹ Keeping track of the steps used to add new products to stock, including the factors
IC

used to determine order quantities.

‹‹ Finding the best replenishment variables (reorder point and reorder amount) to use
for the goods that aren’t moving quickly enough
D

The truck store saved a tonne of money after completing this exercise, which took around
N

12 weeks.
(Source: http://www.inboundlogistics.com/cms/article/slow-moving-inventory-all-dressed-up-and-nowhere-to-go/)
O

Self-Assessment Questions
P

7. Slow-moving items are the items that are_______________.

8. Name the three steps of the structured approach developed by Dawson Consulting
for dealing with slow-moving items.
9. Segmentation policies include the criteria for grouping or segmenting inventory
items into logical lots. (True/False)

84 DDE, Pondicherry University, Pondicherry

 CHAPTER 4  Need for Stock Control

Notes
4.5 Control of Obsolete Items
Obsolete items or inventory include the items that cannot be used. These items can be raw
materials and work-in-progress or finished goods. Inventory becomes obsolete because of the
following reasons:
‹‹ The demand of the inventory is nil.

Y
‹‹ The inventory is purchased in excess.

IT
‹‹ The development of a new technology has eliminated the requirement of the inventory.
‹‹ The life of the inventory is short.

S
For handling the obsolete inventory, organisations can perform the following functions:
‹‹ Return the inventory to the original supplier, if possible

R
‹‹ Sell the inventory online through an auction

E
‹‹ Use the inventory for replacements and repairs of products, if possible
‹‹ Donate the inventory to a charity and claim tax deduction

IV
‹‹ Throw away the inventory

Organisations can reduce or control the obsolete inventory by:

N
‹‹ Scheduling the reviews of the obsolete inventory at regular intervals of time
U
‹‹ Reviewing the perpetual records including the last date of usage of the inventory
‹‹ Reviewing the inventory in work-in-progress to recognise the old items or inventory
‹‹ Reviewing the methods of the physical storage of the inventory
Y

‹‹ Reviewing the bills of material for determining the item withdrawal and its purpose
R

‹‹ Comparing the inventory in-hand with its historical usage

‹‹ Comparing the purchase requisitions with the reorder points
R

‹‹ Stopping automatic reordering

E

‹‹ Transferring the obsolete inventory to a designated area

H

Self-Assessment Questions
10. __________items include the items that cannot be used by organisations either for
IC

the production or any other purpose.

11. One of the reasons for obsolete item is that the demand for the item is nil. (True/
D

False)
N

Activity
O

Using the Internet, study the control process of obsolete items of an organisation and
prepare a report on the basis of your study.
P

DDE, Pondicherry University, Pondicherry 85

Materials and Store Management

Notes
4.6 Control of Redundant Items
Redundant items are the ones that are in excess with an organisation. This is the result of
the following:
‹‹ A customer cancels a large order.
‹‹ A vendor offers a moderate discount to double an order of the products you might sell

Y
over the next 12 months.

IT
‹‹ There has been an incorrect sales forecast of inventory.

Some of the measures adopted for controlling surplus inventory are as follows:

S
‹‹ Remove the inventory for eliminating the cost of surplus inventory
‹‹ Identify the amount of surplus inventory to eliminate it completely

R
‹‹ Make accurate forecasts for the inventory

E
‹‹ Review and change the company policies for minimising the level of surplus inventory

IV
‹‹ Sell the excess inventory

Self-Assessment Questions

N
12. __________items are the ones that are in excess with an organisation.
U
13. One of the measures for controlling redundant items is reviewing and changing the
company policies for reducing the level of surplus inventory. (True/False)
Y

4.7 Summary
R

‹‹ Variety reduction is one of the techniques used by organisations for controlling their
stocks. It is the reduction of stock items used for the same purposes.
R

‹‹ Reduction in the variety of stock helps in the management and control of items in a
E

better way, as their quantities reduce.

‹‹ A standard can be defined as a model or general rule that is established by an authority
H

or custom and used by different people for different purposes. The process of developing
and implementing standards is called standardisation.
IC

‹‹ Standardisation enables an organisation to use differential pricing for its products and
services, as these are categorised into different grades.
D

‹‹ It is essential for organisations to handle or control the slow-moving inventory, as the

cost incurred in purchasing and handling these items increases and the return on this
N

inventory is obtained after a very long duration.

‹‹ Obsolete items include the items that cannot be used. These items can be raw materials
O

and work-in-progress or finished goods.

P

‹‹ Redundant items are the ones that are in excess with an organisation.

4.8 Glossary
‹‹ Variety Reduction: It is the reduction of stock items used for the same purposes.
‹‹ Standard: It is a rule established by an authority or custom to maintain consistency in
the processes and outputs delivered by them.

86 DDE, Pondicherry University, Pondicherry

 CHAPTER 4  Need for Stock Control

Notes ‹‹ Standardisation: It is the process of developing and maintaining standards in an

organisation.
‹‹ Slow-moving Items: These are the items that are in demand only during the first six
months of their storage.
‹‹ Obsolete Items: These are the items that are not usable for an organisation.
‹‹ Redundant Items: These are the items that are in surplus with an organisation.

Y
IT
4.9 Terminal Questions
1. Explain the concept of variety reduction.

S
2. Elaborate the concept of standardisation and its relationship with variety reduction.

R
3. Discuss the concept of slow-moving items.
4. Explain obsolete items.

E
5. Discuss the control of redundant items.

IV
4.10 Answers
Q. Self Assessment Questions

1. Variety reduction
N
U
2. True

3. Variety reduction leads to a decline in the quantity of inventory and thus, the
Y

cost of procurement reduces.

R

4. model or general rule that is established by an authority or custom and used by

different people for different purposes.
R

5. True
E

6. blue print of the product design

H

7. demanded by customer only during the first six months of their storage

8. segmentation, guidance and deployment

IC

9. True

10. Obsolete
D

11. True
N

12. Redundant
O

13. True

Q. Terminal Questions
P

1. Variety reduction is one of the techniques used by organisations for controlling

their stocks. Refer to section 4.2 Variety Reduction.

2. Standardisation enables an organisation to use differential pricing for its products

and services, as these are categorised into different grades. Refer to section
4.3 Standardisation.

DDE, Pondicherry University, Pondicherry 87

Materials and Store Management

Notes 3. It is essential for organisations to handle or control the slow-moving inventory,

as the cost incurred in purchasing and handling these items increases and the
return on this inventory is obtained after a very long duration. Refer to section
4.4 Control of Slow-moving Items.
4. Obsolete items include the items that cannot be used by organisations. Refer to
section 4.5 Control of Obsolete Items.

Y
5. Redundant items are the ones that are in surplus with an organisation. Refer to

IT
section 4.6 Control of Redundant Items.

S
4.11 Case Study: Stock Control at PQR

R
PQR Pvt. Ltd. is a large-scale manufacturing organisation that owns a central warehouse

E
in a city, from where materials are distributed to its four production plants. As it is a large-
scale organisation, the quantity of materials stored in its warehouse is also very high. The

IV
organisation did not tak its warehouse very seriously. It considered it as a mere storage facility.

At the time of recession, PQR wanted to reduce the cost of its products to maintain its profit

N
margins. For this purpose, it analysed its various business processes so that it can eliminate
the operations that were not adding any value to the business. In this analysis, it was found
U
that the organisation was not effectively able to manage the materials stored in its warehouse.
As a result, most of the materials got obsolete, damaged or spoiled, which led to an increase
in the total cost of PQR.
Y

To overcome this problem, PQR made a team for managing and controlling the stock stored in
the warehouse. This team analysed the items in the warehouse, categorised them into different
R

types and identified some measures for controlling each of the types of items:
R

‹‹ Required Inventory Items: These items were stored as it is in the warehouse and no
control method was applied for these items.
E

‹‹ Slow-moving Items: The optimum level of slow-moving items required by the

H

organisation was determined using the forecasting techniques.

‹‹ Obsolete Items: These items were eliminated by providing discounts on these items
IC

and using them for replacement and repair purposes.

‹‹ Redundant Items: These items were sold by the organisation.
D

These measures enabled PQR to eliminate the unwanted stock from the warehouse that
N

helped in increasing the efficiency of the warehousing operations, as the quantity of stock
got declined. In addition, it also helped in reducing the cost of the organisation to a greater
O

extent.
P

Discussion Questions

1. Identify some benefits of variety reduction in PQR.

(Hint: Variety reduction helps in getting high-quantity discounts from the suppliers, as
the amount of required inventory items increased.)

88 DDE, Pondicherry University, Pondicherry

 CHAPTER 4  Need for Stock Control

Notes 2. How will PQR be able to maintain this stock control in its warehouse?

(Hint: PQR should establish certain standards for procuring and storing inventory in
its warehouse. This will help in reducing the storage of unnecessary and unwanted
inventory items in the warehouse.)

4.12 References and Suggested Readings

Y
‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall of

IT
India Pvt. Ltd.
‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi Publication

S
(P) Ltd.

R
E-references

E
‹‹ Variety Reduction. Retrieved from http://www.managers-net.com/variety_reduction.

IV
html.

N
U
Y
R
R
E
H
IC
D
N
O
P

DDE, Pondicherry University, Pondicherry 89

P
O
N
D
IC
H
E
R
R
Y
U
N
IV
E
R
S
IT
Y
chapter

5 Just-in-Time

Y
IT
S
R
E
Structure

IV
5.1 Introduction

N
Learning Objectives U
5.2 Fundamentals of Just-in-Time

5.3 The Kanban System

Y

5.4 Problem Solving in JIT

R

5.5 Continuous Improvement in JIT

5.6 Benefits of JIT

R

5.7 Summary
E

5.8 Glossary
H

5.9 Terminal Questions

IC

5.10 Answers

5.11 Case Study: JIT Implementation in Solid Base

D

5.12 References and Suggested Readings

N
O
P
Materials and Store Management

Notes
Learning Objectives
After completing the chapter, you will be able to:
 Explain the fundamentals of Just-in-Time
 Discuss the Kanban system
 Explain problem solving in JIT

Y
 Discuss the continuous improvement in JIT

IT
 Explain the benefits of JIT

S
5.1 Introduction

R
Just-in-Time (JIT) is considered to be on the leading edge of technological advancement.
It is an integrated set of activities designed to achieve ideal production. A JIT system is

E
designed to improve an organisation’s return on investment by eliminating wastes throughout
the production process from the acquisition of raw materials to the delivery of products. It

IV
focuses on producing products only when the demand occurs, thereby reducing the inventory
levels and storage costs.

N
A properly implemented JIT system helps an organisation to produce products as per the
requirements of customers with the desired quality. It allows an organisation to make efficient
U
utilisation of its resources and reduce scrap and rework. Moreover, a JIT system eliminates
all unnecessary lead times and reduces setup costs. For the successful implementation of a JIT
Y
system, an organisation uses the Kanban technique.

In this chapter, you will study about the fundamentals of Just-in-Time (JIT). In addition, you
R

will study about the Kanban system and its benefits. The problem-solving approach in JIT
will also be discussed in the chapter. It will also explain the continuous improvement in JIT.
R

In the end, the chapter will discuss the benefits of JIT.

E

5.2 Fundamentals of Just-in-Time

H

Just-in-time (JIT) production is a mindset that aims to reduce inventory levels and eliminate
IC

waste in order to continuously increase productivity. According to The Association for

Operations Management (APICS), JIT is “a philosophy of manufacturing based on the planned
elimination of all wastes and continuous improvement in productivity.” JIT aims at getting the
D

right amount of inventory for producing the right quantity of final products at the right time.
N

However, it requires a careful scheduling of resources so that they can be used as and when
required in the production process.
O

The JIT philosophy was introduced by Toyota Motor in Japan in the 1950s. Later in the
1980s, it was adopted by many US organisations. Among them, General Electric was the
P

earliest adopter of the philosophy. The JIT philosophy is based on three main aspects that are
central to the Japanese culture. These aspects are as follows:
‹‹ Removing the extra work systematically from different business processes
‹‹ Eliminating wastes (MUDA), un-evenness (MURA) and unreasonableness (MURI)
from the production process

92 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes ‹‹ Increasing the productivity

JIT is generally considered as a system for repetitive production where same products are
produced over and again. It encompasses all the aspects of the production system from the
product design to the aftersales services.

JIT is defined in two terms namely, Little JIT and Big JIT. Little JIT encompasses the concept
that the basic aim of manufacturing a product is to meet the needs of the actual demand

Y
and materials during each stage of production by obtaining the materials just in time before

IT
starting the next stage of production. On the other hand, Big JIT holds the concept that the
entire range of an organisational production is designed and organised in such a way that
constant improvement can be done by eliminating waste.

S
5.2.1 JIT: A Production Philosophy

R
E
The principle of just-in-time manufacturing underpins JIT. To rephrase, a JIT-practicing
business waits to make a product until there is a clear need for it. The idea also stresses the

IV
requirement of producing only the best quality goods and services. Expanding JIT’s scope to
include distribution, sales, marketing, and financing expands its use beyond manufacturing.
The manufacturing and service sectors may both benefit from it. Quality, price, and timeliness

N
of delivery are three criteria that a JIT manufacturing system strives to fulfil for customers. If
there are any inefficient or wasteful elements that impact these needs, they should be removed.
U
Things like storing huge inventory and superfluous equipment tend to drive up expenses
and should be removed. JIT is a very efficient production strategy. Fig. 5.1 illustrates a JIT
system:
Y

What is JIT ? What Does JIT do?

R

Elimination of all wastes Attacks wastes (Time, Inventory, Scrap, etc.)

R

Pull system through plant Exposes problems and bottlenecks

It is a Management Philosophy Achieves Streamlined Production
E
H

Main Mantras of JIT

Elimination of waste Lot size reduction
IC

Pull-typ system Zero defects

D

What is Required in JIT? What is Assumed in JIT?

N

Employee Participation Stable Environment

O

Small Lot Size Commitment to quality and reduction

Total Quality Control of waste
P

Basics of Industrial Engineering Involvement at all levels of organisation

Fig. 5.1: A JIT System

(Source:http://www.transtutors.com/homework-help/industrial-management/just-in-time-production-system/jit-philosophy.aspx)

A properly implemented JIT system should:

‹‹ Produce products that customers want

DDE, Pondicherry University, Pondicherry 93

Materials and Store Management

Notes ‹‹ Produce products at the rate that customers want

‹‹ Produce products with perfect quality

‹‹ Produce products with zero lead time

5.2.2 Elements of JIT

Y
A JIT system is designed to produce products with the minimum lead time and lowest total

IT
cost. This can be done by eliminating all forms of wastes from the production process.
Following are the three elements of a successful JIT system:

S
‹‹ Waste and Variability Reduction: Refers to one of the major elements of a JIT

R
system. Waste can be defined as something that does not add any value to a product,
process or service. In other words, waste refers to any action or element that adversely

E
affects value proposition. Under JIT, waste can be of various types, such as stored
products, defective products and products waiting in a queue. Therefore, eliminating

IV
waste is one of the most important elements of JIT.

Variability reduction is another major condition for the successful implementation of

N
a JIT system. Variability can be defined as deviation from the desired process, which
U
leads to defects in the manufacturing process or delays in the production schedule.
For example, consider a steel manufacturing organisation, in which a process has been
designed for producing a steel rod of length 6 feet. However, the final product, i.e.,
Y

the steel rod obtained from this process, is 5.5 feet. This is the result of the deviation
from the desired process. Such deviations are caused due to various internal and
R

external factors. Some of these factors include inaccurate specifications, low-quality

R

raw materials, unskilled employees, machine breakdowns and ever-changing customer

demands.
E

‹‹ Push vs. Pull System: Refers to another important element of a JIT system. Production
H

starts with scheduling resources and activities to be performed and progresses with
pushing the generated output to the next stage as an input. This is the push or classical
IC

approach of production. In the classical approach, production normally takes place in

accordance with the projected demand. This implies that the demand that is likely to
occur in the near future is forecasted. This forecast determines the production lead
D

times required for satisfying the pre-defined demand. Materials are ordered and other
N

production activities are scheduled as per the pre-determined demand. In addition,

in the classical approach, the execution of each production activity depends on the
O

completion of the previously executed activity.

However, JIT or the pull approach differs from the classical approach, as it does not
P

consider the demand forecast. It focuses on refilling only those stocks that are short.
Under JIT, when the inventory level drops to a certain level, it can be recognised from
the final production stage, as the scarcity of that item is found at this stage. When
the needed item is withdrawn from the stock, the final stage provides a signal to the
preceding stages about the requirements of more inputs. This signal goes to the first
stage. After that, the procurement department places purchase orders. Here, the final

94 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes stage pulls the required input from the preceding stages. Therefore, it is known as the
pull approach of production, which is not based on forecasting but represents the actual
or assured demand.

The pull or JIT approach differs from the push or classical approach in terms of lot
sizes. The classical approach of production lays emphasis on using large lot sizes based
on the economic order quantity. On the other hand, the pull approach focuses on using

Y
small lot sizes, thereby reducing cost and making the production system receptive to

IT
the changing demand. These small lot sizes are transferred to another processing stage
before the entire process is completed at the first stage.

S
‹‹ Manufacturing Cycle Time: Refers to the period between the acquisition of raw
materials and delivery of final products. It is also known as throughput time. Under

R
JITthis time refers to the total time required by a worker to complete one operational
cycle, including walking, loading or unloading and inspecting. An effective JIT

E
production system helps in reducing the manufacturing cycle time, thereby reducing
the wastage of resources.

IV
5.2.3 Elimination of Waste

N
A JIT system provides organisations an efficacious production system and also facilitates the
U
delivery of only the necessary sub parts in the appropriate quantity and at the right time
and place by using minimum facilities. JIT is achieved through work simplification and waste
reduction. Shiego Shingo, the Japanese authority for JIT at Toyota Motor, identifies seven
Y

wastes, listed as follows:

R

‹‹ Waste of Defects: Every organisation should strive to make its production process
better for preventing defects from being produced and hence, to eliminate inspection.
R

This can be achieved by implementing the thumb rule of neither making nor accepting
any mistakes at any stage of production. This quantifiable system helps to yield quality
E

products.
H

‹‹ Waste of Overproduction: Organisations can do away with the waste of

overproduction by reducing setup times, arranging quantities and decreasing the time
IC

between processes. Accordingly, only those items are produced that are required at the
current time.
D

‹‹ Waste of Transportation: Organisations establishe layouts and locations in such a

manner that handling and transportation problems can be minimised.
N

‹‹ Waste of Waiting: Generally, there is a waiting or idle time between two processes.
O

As this waiting time adds no value to processes, it should be eradicated completely. This
also helps in balancing uneven loads by using flexible workforce and equipment.
P

‹‹ Waste of Inventory: By reducing all the abovementioned wastes, organisations can

reduce stocks.

‹‹ Waste of Motion: In order to economise and maintain consistency in the quality of

products, motions are improved, mechanised or automated. This eliminates the fear of
automating waste.

DDE, Pondicherry University, Pondicherry 95

Materials and Store Management

Notes ‹‹ Waste of Overprocessing: Organisations question the reasons for the existence of a
product and then the necessity of each process.

Fig. 5.2 shows the examples of seven types of wastes in a hospital:

Type of Waste Brief Description Hospital Examples

Y
Defects Time spent doing something Surgical case cart missing and
incorrectly, inspecting for errors, item; wrong medicine or wrong
or fixing errors dose administered to patient

IT
Doing more than what is needed Doing unnecessary diagnostic
Overproduction by the customer or doing it sooner

S
procedures
than needed

R
Unnecessary movement of the Poor layout, such as the catheter
Transportation “product” (patients, specimens, lab being located a ling distance

E
materials) in a system form the ED

IV
Employees waiting because
Waiting for the next event to
Waiting workloads are not level; patients
occur or next work activity
waiting for an appointment

N
Excess inventory cost through Expired supplies that mist be
Inventory financial costs, storage and disposed of, such as out-of-date
U
movement costs, spoilage, wastage medications
Unnecessary movement by Lab employees walking miles
Motion employees in the system per day due to poor layout
Y

Doing work that is not valued by

R

the customer or caused by Time/date stamps put onto

Over processing
definition quality that are not forms, but the data are never used
R

aligned with patient needs

E

Fig. 5.2: Examples of Seven Wastes

(Source: http://cdn.leanblog.org/wp-content/uploads/2013/03/8-types-of-waste-lean-hospitals.png)
H

Self-Assessment Questions
IC

1. What is JIT?

2. Define Little JIT.

D

3. Which of the following points is not an important aspect of a properly implemented

N

JIT?

a. Produce products that customers want
O

b. Produce products at the rate that manufacturers want
P

c. Produce products with perfect quality

d. Produce products with zero lead time

4. Reduction in setup times and time between processes is one of the ways to minimise
the waste of overproduction. (True/False)

96 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes Activity
Using the Internet, identify some of the Indian manufacturing organisations that are
implementing the concept of JIT. Also, identify the problems they are facing during this
implementation.

Y
5.3 The Kanban System

IT
In order for JIT to produce goods according to client specifications, a scheduling system is
required that can effectively relay consumer demands to the delivery system. The Kanban
method is a useful tool for doing this. The Japanese word “kanban” literally means “card.”

S
Information on this card can be used as a work order to facilitate product manufacture. Thus,
Kanban reveals details on what to manufacture, when to create it, how much to produce,

R
the tools to generate it, and how to transport the finished product. Thus, Kanban aims to
minimise the demand for storage facilities by delivering components to the manufacturing

E
line on an as-needed basis. Kanban requires the following to be in place:

IV
‹‹ Ensuring that the components delivered to the production line are not defective
‹‹ Pulling materials and components as and when they are required in the production

N
process
‹‹ Producing the exact quantity of products that can fulfill the immediate demand of
customers
U
‹‹ Standardising the work methods
Y

‹‹ Maintaining strong relationships between an organisation and its suppliers

‹‹ Gaining commitment from the top management
R

‹‹ Making employees aware about the benefits of Kanban

R

The Kanban system involves the use of two types of cards, namely transport card and
E

production card. The transport card provides information related to the movement of
materials and components in the production process. On the other hand, the production card
H

provides information related to when a particular activity should be completed by a specific

work centre in the production line.
IC

5.3.1 Three-Bin System of Kanban

D

The three-bin system is the foundation of the Kanban method for feeding the assembly line
with supplies and components. There are three bins: one on the factory floor (the demand
N

point), one at the factory store, and one at the supplier’s shop (supply point). Detachable
cards with product descriptions and other pertinent information are typically included in
O

these containers. The factory store receives the empty bin and Kanban card whenever there
is a demand for materials on the production floor. Then, using the Kanban card, the factory
P

store returns the full bin to the production floor, swapping out the empty one. At this point,
the manufacturing store will deliver the supplier’s store the empty bin along with the Kanban
card. Using the Kanban card, the supplier returns the empty bin to the manufacturing storage.
With this, the Kanban three-bin system is finished. This ensures that all necessary materials
and components are always available during manufacturing.

DDE, Pondicherry University, Pondicherry 97

Materials and Store Management

Notes Fig. 5.3 shows the working of the three-bin system of Kanban:

Y
IT
S
R
E
IV
Fig. 5.3: Working of the Three-Bin System of Kanban
(Source: http://www.ebah.com.br/content/ABAAAfxV8AA/nb013-cap-8-modelo-japones-a2013-s1)

5.3.2 Benefits of Kanban

N
U
Kanban is a simple and easy-to-understand process that provides quick and accurate
Y

information related to the movement of materials in the production line. It reduces paper
work, since it is a visual system,. Apart from this, following are some of the main benefits of
R

Kanban:
‹‹ Reduces the level of inventory
R

‹‹ Reduces complexity in the production process

E

‹‹ Decreases the storage and material handling costs

H

‹‹ Shortens the manufacturing cycle time

‹‹ Improves the quality of final products
IC

‹‹ Provides higher system flexibility

‹‹ Boosts the morale of employees
D

Self-Assessment Questions
N

5. What is the meaning of the term Kanban?

O

6. Kanban contains the information with respect to what to produce, how much to
produce, when to produce, what means to produce and how to transport the final
P

output. (True/False)

7. Which of the following is not a prerequisite of the Kanban system?

a. Ensuring that the components delivered to the production line are not defective

b. Pulling materials and components as and when they are required in the production
process

98 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes
c. Producing the quantity of products that can fulfill the future demand of customers

d. Standardising the work methods

8. In the three-bin system of Kanban, the first bin is located at the supplier’s store
(supply point), the second bin is at the factory store and the third one is at the factory
floor (demand point). (True/False)

Y
Activity

IT
Using the Internet, identify some of the Indian organisations that has successfully
implemented Kanban system.

S
R
5.4 Problem Solving in JIT

E
Problem solving is an activity performed by an individual on a daily basis. Some of the
problems can be like while going to the office, your vehicle stops working or you want to

IV
purchase a product on an urgent basis, but it is not available in the market or you forget to
submit EMI of your loan or insurance. All these problems need to be resolved by individuals
themselves by identifying the ways to handle them. Therefore, problem solving is required by

N
individuals for making their lives easy and comfortable.
U
Apart from individuals, organisations also need to perform problem solving to take accurate
decisions. For instance, if an existing product of an organisation is not working well, it
becomes a problem for the organisation to be solved. Problem solving helps an organisation
Y

to:
R

‹‹ Perform its processes effectively

‹‹ Determine the root cause of the problem related to a process, which helps eliminating
R

it completely
E

‹‹ Increase the quality of products by improving the production process and minimising
the defects in products
H

‹‹ Improving the processes continuously by resolving the related problems

IC

The JIT mindset remains consistent across all plant sizes, types of facilities, and produced
goods. The following factors form its basis:
D

‹‹ Design Products for Economical Production: Products must be designed with the
ability to be mass-produced within the parameters of feasible and reasonably priced
N

manufacturing methods and infrastructure. We should simplify things as much as

possible and make them as cheaply as possible. The engineer ought to adhere to the
O

principles of modularity and simplicity.

‹‹ Change Plant Layouts to Facilitate “Flow” Manufacturing: Material movements
P

can be reduced or eliminated by rearranging plant layouts. The time spent on activities
other than production accounts for 90% of overall manufacturing lag times. It would
be wise to devise ways to lessen the impact of this time loss.
‹‹ Develop Worker Involvement Program (Quality Circles): There must to be
programmes in place that encourage staff to come up with ways to eliminate waste in
whatever way possible by drawing on their understanding of the production process.

DDE, Pondicherry University, Pondicherry 99

 Materials and Store Management

Notes ‹‹ Improve Data Accuracy: Accuracy should be measured and people should be held
responsible for it. No matter how it is entered, “bad data” will not be useful.
‹‹ Reduce Paper Work: Upon printing, hard copy reports become obsolete. Making
decisions based on online, real-time data updates, retrievals, and interactions is crucial.
‹‹ Reduce Scrap: Scrap is costlier than the material cost put into it. Therefore, scrap
should be completely avoided.

Y
‹‹ Reduce Inventories: Fig. 5.4 shows that inventory not only adds unnecessary expense

IT
but also obscures other issues. Large lines, several safety stock types, and “just-in-
cash” inventory should all be eliminated. For the “Flow” production processes to
work, you must also minimise lot sizes to a bare minimum. On top of that, you should

S
form “Partnership” relationships with all of the important suppliers. In order to keep
manufacturing moving forward with little inventory on hand, it is necessary to negotiate

R
pricing based on long-term commitments when purchasing parts after placing an order.
How JIT aids in solving problems is seen in Fig. 5.4:

E
IV
N
U
Y
R
R
E
H
IC
D

Fig. 5.4: JIT Exposes Problems

In Fig. 5.4, it can be seen that JIT helps in reducing the inventory level, which further enables
N

organisations to recognise the main problems related with the materials management. When
the actual problems are identified, it becomes easy for organisations to solve these problems
O

effectively.
P

Self-Assessment Questions
9. Problem solving helps an organisation to increase the quality of products by
improving the production process and minimising the defects in products. (True/
False)

10. JIT system enables organisations to reduce the inventory levels and recognise the
problems at an early stage of production. (True/False)

100 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes
5.5 Continuous Improvement in JIT
The term continuous improvement is made up of two words, namely continuous and
improvement. A continuous activity can encompass any task or activity carried out without
interruption, in a sequential or unbroken manner. Throughout the completion of the work,
there is an ongoing assessment of the work pattern. Therefore, the term ‘continuous’ is

Y
influenced by the process evaluation within the work cycle.

Improvement refers to a process of making something better by bringing certain changes.

IT
Since the implemented changes have an overall impact on a product or service, the term
improvement, however small, impacts the entire process. Hence, the word “improvement” is
aligned with the word “continuous”and word “process’” Therefore, the continuous improvement

S
process or continuous improvement is a progressing efforts to improve processes, products

R
and services of an organisation.

Following are the main aspects of continuous improvement:

E
‹‹ Understanding the tools and techniques required for the continuous improvement, such

IV
as six sigma, JIT and Lean manufacturing
‹‹ Building and nurturing a strong continuous improvement culture in an organisation
across the organisational hierarchy
‹‹ Building

N
customer focus, which is the ability to anticipate customer needs and
requirements
U
‹‹ Showing s strong commitment and leadership across all departments
Y

‹‹ Focusing on quality
‹‹ Defining and scheduling breakthrough improvements in systems
R

‹‹ Linking business strategies and results towards continuous improvement

R

JIT focuses on improving the flow of work. This goal is achieved by managing physical
changes in the manufacturing process. These changes are introduced in the following three
E

forms:
H

‹‹ Reduction of Setup Times: This change process can be achieved by following steps,
which include:
IC

1. Untying the internal setup from the external one

2. Converting the internal setup to the external one with the maximum possibility
D

3. Eradicating the adjustment processes

N

4. Ending the setup step itself

Reducing setup times not only helps in increasing the efficiency of machines, but also
O

decreases the lead time, batch size and inventory levels. It also creates consistency in
setups and reduces the waste related to a setup activity.
P

‹‹ Preventive Maintenance: The reduction of inventory creates problems for machinery.

This means that if a machine breaks down, the subsequent machines should be available
to start the work. For the implementation of preventive maintenance, a program is
needed to ensure high process reliability. By using flow lines, work can flow easily from
one process to another in a shorter period. The flowing process also reduces the lead
time. A long lead time reduces flexibility and creates disturbance, as it increases the
buffer stock and the risk of uselessness.

DDE, Pondicherry University, Pondicherry 101

 Materials and Store Management

Notes ‹‹ Planning for JIT: This change process can be achieved by following steps, which
include:
1. Involving the top management
2. Identifying all the JIT elements
3. Aligning the organisational goal with the JIT process

Y
5.6 Benefits of JIT

IT
As discussed earlier, JIT aims at eliminating wastes and reducing inventory levels, thereby
bringing down the storage and material handling costs and improving the overall efficiency of

S
an organisation. Many organisations have implemented the JIT system successfully. Some of
them are Toyota, Dell and Harley Davidson. Toyota is one of the organisations that brought

R
this system to a conspicuous position by implementing it successfully. The main reason for

E
the success of JIT in Toyota was the accuracy of the forecasting of the requirement of raw
materials. The other reason was that a very small amount of raw material inventory was kept

IV
at each node in the production to make the production process smooth and efficient. The JIT
system of manufacturing also lays emphasis on acquiring materials for producing products
only when the demand occurs. In addition, there are some more benefits of a JIT system,

N
discussed next. Fig. 5.5 shows some of the benefits of JIT:
U
Improved
Organisational
Efficiency
Y
R

High On-Time
R

Employee Delivery of
Morale Materials
E

Benefits of
H

JIT
IC

Reduced Costs Reduced Machine

Breakdowns
D
N

Improved
Quality
O
P

Fig. 5.5: Benefits of JIT

Various benefits of JIT are explained as follows:

‹‹ Improved Organisational Efficiency: Organisational efficiency represents how well
an organisation uses its available resources. It is an organisation’s ability to maximise
the profits by minimising the costs. JIT improves organisational efficiency in the
following ways:

102 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes ‹‹ By ensuring the availability of materials: JIT ensures the availability of raw materials
for producing products and scheduling work activities only when there is a demand for
them. In this manner, a JIT system helps to synchronise demand with production. This,
consequently, brings down the need for storage facilities and also helps in maintaining
a smooth flow of production.

‹‹ By eliminating wastes: A JIT system helps to eradicate wastes and redundant activities

Y
from the production process, thereby reducing the production cost.

IT
‹‹ By manufacturing products on time: JIT facilitates the manufacturing of products
or product components without any delays. It also ensures timely manufacturing of
even a single product. However, in the traditional manufacturing process, products are

S
produced in lots or batches.

R
‹‹ By achieving zero defects: JIT helps to achieve zero defect count in the final product.
This helps in reducing the manufacturing time and improving the product quality

E
tremendously.

IV
‹‹ On-time Delivery of Materials: A JIT system works with the minimum level of
inventory. In this case, there always remains a possibility of the paucity of raw materials,
which can impede the smooth functioning of the entire production process. Therefore,

N
it is very crucial for suppliers to make an on-time delivery of good-quality materials.
This is possible only when an organisation has cordial relationships with its suppliers.
U
‹‹ Reduced Machine Breakdowns: Poor maintenance of machines or equipment is likely
to cause failures and breakdowns, which further results in production halts and quality
Y

defects. Therefore, the successful implementation of JIT requires proper maintenance

of machines and equipment so that the immediate demand of products can be fulfilled
R

on time. A JIT system encompasses the concept of Total Productive Maintenance

(TPM), which is a maintenance process developed for improving productivity by
R

making processes more reliable and less wasteful..

E

‹‹ Improved Quality: A JIT system enables an organisation to produce high-quality

products by eliminating wastes and reducing defects. In a JIT system, processing is
H

conducted in small batches. Therefore, defects can be easily identified and rectified at
any stage of production.
IC

‹‹ Reduced Costs: JIT not only reduces inventory, but also brings down the storage
costs. In addition, it eliminates the opportunity cost incurred on excessive inventory. As
D

per the JIT philosophy, the source of raw materials should always be in close proximity
to the manufacturing facility, which helps slashing the transportation costs. Apart from
N

this, JIT aims at decreasing the cost that is spent on rework by achieving zero defects
in the final output. This ultimately maximises the overall profits to an organisation.
O

‹‹ High Employee Morale: JIT necessitates the participation of all the employees of
an organisation in the production process. As it is a collective endeavour, it makes
P

employees feel more responsible for the overall performance of the organisation, rather
than just their team or department. Apart from this, JIT also encourages employees to
participate in decision making, so that they can provide useful insights and suggestions
for the betterment of the production system and working conditions. This ultimately
results in high employee morale and reduction in staff turnover. Employees with
multiple skills are used more efficiently.

DDE, Pondicherry University, Pondicherry 103

 Materials and Store Management

Notes Self-Assessment Questions

11. Define continuous improvement.

12. Which of the following is not an aspect of continuous improvement?

a. Understanding the tools and techniques required for continuous improvement,
such as six sigma, JIT and Lean manufacturing

Y

b. 
Building and nurturing a strong continuous improvement culture in an

IT
organisation across the organisational hierarchy

c. Building customer focus, which is the ability to anticipate customer needs and

S
requirements

d. Showing strong commitment and leadership in the manufacturing department

R
only

E
IV
5.7 Summary
‹‹ JIT is a manufacturing philosophy that focuses on continuous improvement in

N
productivity by eliminating wastes and reducing the level of inventory.
‹‹ Little JIT encompasses the concept that the basic aim of manufacturing a product is to
U
meet the needs of the actual demand and materials during each stage of production by
obtaining the materials just in time before starting the next stage of production. On
the other hand, Big JIT holds the concept that the entire range of an organisational
Y

production is designed and organised in such a way that constant improvement can be
done by eliminating waste.
R

‹‹ Waste can be defined as something that does not add any value to a product, process
R

or service.
‹‹ Shiego Shingo, the Japanese authority for JIT at Toyota Motor, identifies seven wastes.
E

These wastes are waste of overproduction, waste of waiting, waste of transportation,

waste of processing, waste of stocks, waste of motion and waste of defects.
H

‹‹ Kanban is a Japanese term meaning ‘card.’ This card contains information that serves as
IC

a work order for the production of products. Kanban focuses on delivering components
to the production line as and when they are needed, thereby reducing the need of
storage facilities.
D

‹‹ The Kanban system is based on the three-bin system for supplying materials and
components to the production line. The first bin is located at the factory floor (demand
N

point), the second bin is at the factory store and the third one is at the supplier's store
(supply point).
O

‹‹ Problem solving is an activity performed by an individual on a daily basis. Organisations

also need to perform problem solving to take accurate decisions.
P

‹‹ The continuous improvement process or continuous improvement is a progressing

efforts to improve processes, products and services of an organisation.
‹‹ JIT provides several benefits to an organisation. Some of these benefits include
improved organisational efficiency, reduced machine breakdowns, improved quality,
reduced costs, high employee morale and on-time delivery of materials.

104 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes
5.8 Glossary
‹‹ Continuous Improvement: It is a process of improving processes, products and
services of an organisation using various tools and techniques like JIT, lean production
system,etc.
‹‹ JIT: It is a manufacturing philosophy emphasising on continuous improvement in

Y
productivity through elimination of waste and reduction in the inventory level.

IT
‹‹ Kanban: It is a system that contains the information about the various aspects of
production, such as what to produce, how much to produce, when to produce, what
means to produce and how to transport the final output.

S
‹‹ Manufacturing Cycle Time: It is the time period between the procurement of raw

R
materials and delivery of final products.
‹‹ Variability: It is the deviation of a process from its desired form, which leads to product

E
defects or delays in the production schedule.

IV
‹‹ Waste: It is something that does not add any value to a product, process or service.

5.9 Terminal Questions

N
1. Discuss the fundamentals of Just-in-Time.
U
2. Explain the Kanban system.

3. Discuss problem solving in JIT.

Y

4. Elaborate continuous improvement in JIT.

R

5. What are the benefits of implementing JIT in an organisation?

R

5.10 Answers
E

Q. Self Assessment Questions

H

1. JIT is a manufacturing philosophy that focuses on continuous improvement in

productivity by eliminating wastes and reducing the level of inventory
IC

2. Little JIT involves meeting the needs of the actual demand and materials during
each stage of production by obtaining the materials just in time before starting
the next stage of production.
D

3. b. Produce products at the rate that manufacturers want

N

4. True
5. Kanban is a Japanese term meaning ‘card.’
O

6. True
P

7. c. Producing the quantity of products that can fulfill the future demand of
customers
8. False
9. True
10. True

DDE, Pondicherry University, Pondicherry 105

 Materials and Store Management

Notes 11. Continuous improvement process or continuous improvement is a progressing

effort to improve processes, products and services of an organisation.
12. d. Showing strong commitment and leadership in the manufacturing department
only
Q. Terminal Questions

Y
1. JIT is a manufacturing philosophy that focuses on continuous improvement in
productivity by eliminating wastes and reducing the level of inventory. Refer to

IT
section 5.2 Fundamentals of Just-in-Time.
2. Kanban focuses on delivering components to the production line as and when
they are needed, thereby reducing the need of storage facilities. Refer to section

S
5.3 The Kanban System.
3. Organisations use JIT for problem solving to take accurate decisions. Refer to

R
section 5.4 Problem Solving in JIT.

E
4. The continuous improvement process or continuous improvement is a progressing
efforts to improve processes, products and services of an organisation. Refer to

IV
section 5.5 Continuous Improvement in JIT.
5. The benefits of implementing JIT in an organisation are improved organisational
efficiency, reduced machine breakdowns, improved quality, reduced costs, high

N
employee morale and on-time delivery of materials. Refer to section 5.6 Benefits
of JIT.
U
5.11 Case Study: JIT Implementation in Solid Base
Y

Solid Base is a cement manufacturing organisation in Patna. The organisation started its
R

operations in the mid 1990s. Initially, it used to manufacture only dry cement with the capacity
range of 150t/d to 330t/d, but the increasing demand in the field of construction encouraged
R

Solid Base to manufacture dry cement with the capacity of 5000t/d. The organisation also
started providing a series of services, such as material crushing, clinker burning and aluminum
E

pipe manufacturing.
H

Over a time, the client base of Solid Base increased tremendously. However, the production
system of the organisation was not so efficient, which led to unnecessary delays in the product
delivery and defects in the final output. This ultimately resulted in customer dissatisfaction. To
IC

overcome the ongoing problems, the organisation planned to implement the JIT system. Solid
Base set four main objectives for implementing JIT, which are shown in the following Fig.:
D
N

Continuous Low
Product Level of
O

Flow Inventory
P

Reduction Quick
in Setup Delivery of
Time Products

Fig.: JIT Objectives

106 DDE, Pondicherry University, Pondicherry

 CHAPTER 5  Just-in-Time

Notes However, even after the implementation of the JIT system, the situations were not stable
in Solid Base. After conducting a research for three days, Solid Base identified the following
problems in the implementation of JIT:
‹‹ Improper information system
‹‹ Lack of cooperation among employees

Y
‹‹ Obsolete inventory

Now, the organisation re-determined the objectives of JIT and re-implemented it. The newly

IT
introduced JIT system helped the organisation in understanding the flow of production and
fulfilling the current demand. The following graph reflects the impact of JIT implementation
on the overall performance of Solid Base:

S
R
E
IV
N
U
Y

Moreover, the newly-implemented JIT helped the organisation in reducing wastes and
producing products as per the expectations of customers.
R

Discussion Questions
R

1. What were the reasons of the failure of JIT in Solid Base?

E

(Hint: Obsolete inventory was one of the reasons of the failure of JIT in Solid Base.)
H

2. According to you, what should have been the objectives of JIT?

IC

(Hint: Producing quality products as per the requirements of customers should have
been one of the objectives of JIT.)
D

5.12 References and Suggested Readings

N

‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall
O

of India Pvt. Ltd.

‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi
P

Publication (P) Ltd.

‹‹ Buffa,S.E., Sarin, R. K. (1987), Modern Production/Operations Management. Daryaganj,
New Delhi: Wiley India (P.) Ltd.
‹‹ Meredith, J. R., Shafer, S. M. (2007), Operations Management for MBAs. Daryaganj, New
Delhi: Wiley India (P.) Ltd

DDE, Pondicherry University, Pondicherry 107

 Materials and Store Management

Notes E-references
‹‹ What is JIT? Retrieved from http://www.inventorysolutions.org/def_jit.htm
‹‹ Just-In-TimeManufacturing (JIT). Retrieved from http://www.tutorialspoint.com/
management_concepts/just_in_time_manufacturing.htm
‹‹ Just-In-Time- Philosophy of complete elimination of wastes. Retrieved from http://www.

Y
toyota-global.com/company/vision_philosophy/toyota_production_system/just-in-
time.html

IT
‹‹ Just-In-Time Manufacturing (JIT Manufacturing). Retrieved from http://whatis.
techtarget.com/definition/just-in-time-manufacturing-JIT-manufacturing

S
R
E
IV
N
U
Y
R
R
E
H
IC
D
N
O
P

108 DDE, Pondicherry University, Pondicherry

chapter

6 Stock Control in

Y
Organisations

IT
S
R
E
Structure

IV
6.1 Introduction

N
Learning Objectives U
6.2 Coping with Uncertainty

6.3 Suppliers Roles in Stock Control

Y

6.4 Materials Requirements Planning (MRP)

R

6.5 Manufacturing Resource Planning (MRPII)

6.6 Distribution Requirements Planning (DRP)

R

6.7 Push and Pull Systems of Stock Control

E

6.8 Summary
H

6.9 Glossary
IC

6.10 Terminal Questions

6.11 Answers
D

6.12 Case Study: Implementation of MRP II System at ABC Ltd.

N

6.13 References and Suggested Readings

O
P
 Materials and Store Management

Notes Learning Objectives

After completing the chapter, you will be able to:
 Explain the concept of stock control in organisations
 Discuss how stock control assists in the management of uncertainty
 Explain the role of suppliers in ensuring stock control

Y
 Elaborate the concept of Materials Requirements Planning
 Discuss Manufacturing Resource Planning

IT
 Explain Distribution Requirements Planning
 Discuss the concept of push and pull systems of stock control

S
6.1 Introduction

R
E
In today’s competitive and cutthroat competition, business units are forced to maintain
adequate stock to ensure that customers’ needs are met on continual basis. Therefore, stock

IV
control in organisations forms a core activity for managers to ensure that the continuity of
business is maintained without any threat to production being halted or stopped for the need
of stock.

N
Stock control in organisations involves the following broad-level activities:
U
‹‹ Determining the current stock level
‹‹ Determining the anticipated requirements of stock based on the market conditions
Y

‹‹ Determining the cost factors need to be considered so that stock can be procured within
the cost considerations
R

‹‹ Determining the impact of various government policies on the type of business unit
R

Therefore, stock control considers several parameters, each of which is required to be

managed effectively and efficiently to ensure that this activity is executed on continual basis.
E

In this chapter, you will study about stock control in organisations. In addition, you will
H

study how to deal with uncertainties related to stock control. The suppliers’ role in stock
control will also be discussed in the chapter. Next, the chapter will explain different stock
IC

control techniques. These techniques include Materials Requirements Planning (MRP),

Manufacturing Resource Planning (MRPII) and Distribution Requirements Planning (DRP).
In the end, the push and pull systems of stock control will be explained in the chapter.
D

6.2 Coping with Uncertainty

N

The business world is known to operate under uncertain conditions on account of a fact that
O

businesses are driven by several impacting forces. Each of these forces has a potential to
contribute significantly to the uncertainty factor, leading to the cascading effect on the control
P

of stock.

Some of the factors responsible for injecting uncertainty in stock level are:
‹‹ Customers demands are rarely stable, which means that the requirements posed by
customers are always changing due to several factors such as changes in lifestyle,
priority and technology.

110 DDE, Pondicherry University, Pondicherry

 CHAPTER 6  Stock Control in Organisations

Notes ‹‹ The projections made for determining the stock levels are based on experience or in
some cases, based on advanced mathematical formulae and statistical calculations. These
factors consider some assumptions, which may or may not be applicable in particular
scenarios and situations, leading to calculations going haywire and therefore, injecting
uncertainty.
‹‹ The introduction of delays by vendors in supplying the stock or inventory items results

Y
in uncertainty.
‹‹ The design and structure of the production system also induces uncertainty, such as

IT
the batch processing system followed by on-demand processing by the manufacturing
systems.

S
‹‹ The issue of hoarding and short of the stock items also induces uncertainty, leading
the management to a panic situation.

R
Fig. 6.1 depicts several causes responsible for inducing uncertainty in an organisation:

E
Need

IV
Management:
Principles for planning and control

N
information and communication
tools organization
U
Customer Supplier
Y
Transaction:
Structure
Lead time
Complexity - levels
Frequencies
Complexity-Points
R

Uncertainness
Divisibly Predictability
Expected demand
R

Delivery
E

Fig. 6.1: Causes of Uncertainty in an Organisation

H

(Source: Adapted from Persson (1995)

IC

Despite the uncertainty based on some of the factors mentioned above, business units are
required to manage the same. Therefore, the management of uncertainty in a business forms
one of the core areas for executives.
D

Self-Assessment Questions
N

1. The projections made for determining stock levels are based on only experience.
(True/False)
O

2. Which of the following is not a factor that leads to uncertainties in stock level?
P

a. Delay by vendors in supplying stock

b. Design and structure of the production system

c. Incorrect or invalid projections

d. Consistent customer demand

DDE, Pondicherry University, Pondicherry 111

 Materials and Store Management

Notes
6.3 Suppliers Roles in Stock control
Having understood the various factors responsible for inducing uncertainty in business
operations, let us now discuss the role of suppliers in the management of stock control.
In simple words, a supplier is an organisation responsible for supplying basic materials to
another business unit. Basic materials are also known as raw materials or goods for a business

Y
unit. Therefore, the role of suppliers becomes essential for the management and control of
stock units.

IT
The role of suppliers is enumerated in the following points:
‹‹ Reducing lead time while supplying items: This is the most important role of a
supplier. A supplier, if it delays the supply of items, bears disastrous consequences. On

S
the other hand, if it supplies items before hand, it involves the storage and handling

R
issues of goods, leading to cost implications. Therefore, adequate lead time is required
to be maintained.

E
‹‹ Supplying the quality of goods: A supplier should ensure that goods supplied should
be as per the quality norms as outlined in the contract or agreement. Any goods of

IV
lower quality have implications and any goods supplied with higher quality have
compatibility issues and cost implications, as the customer may not be willing to buy
the goods at a high price.

N
‹‹ Adhering to the service level agreements: This is another vital role that a supplier
U
is required to play. Any deviation leads to cascading effects and the possible loss of the
production time and manufacturing of goods of inferior quality.
‹‹ Educating the customers about the changing market dynamics: This is the most
Y

important role that a supplier is required to play on account of the fact that a supplier
is in touch with several customers and vendors and therefore, is able to educate the
R

customers very well.

R

Self-Assessment Questions
3. Define a supplier.
E

4. Which of the following is not the role of a supplier in stock control?

H

a. Reducing the lead time while supplying items

b. Supplying quality goods
IC

c. Adhering to the service level agreements

d. Educating sales people about the changing market dynamics
D
N

6.4 Materials Requirements Planning (MRP)

O

Materials Requirements Planning (MRP) is a type of production system integrated with the
inventory management system to ensure that the manufacturing process is able to work on
P

continual basis. Therefore, MRP systems are designed to meet the following objectives of
business units:
‹‹ To plan for the manufacturing activities with regard to the delivery schedules and
purchasing activities related to the manufacturing process
‹‹ To ensure the continuity of the manufacturing process
‹‹ To maintain the inventory or stock at the minimum cost considerations

112 DDE, Pondicherry University, Pondicherry

 CHAPTER 6  Stock Control in Organisations

Notes Therefore, MRP is the most important activity required to be taken care by the executive
management.

Following are the basic issues that are readily observed in the MRP systems:
‹‹ There are functions related to the inventory control that has the end objective of
maintaining inventory at the lowest cost. This also considers the activities and
operations related to planning for inventory by taking into account the lead times for

Y
the supply of items, the delivery schedule and other similar factors.

IT
‹‹ Managers are forced to consider the concepts of 5w (what, when, where, why and who)
and 1H (how) for asking questions regarding a situation to take an effective decision.
Some of these questions with respect to stock are:

S
 What are the required items?

R
 How many of them are required?
 When are they supposed to be required?

E
 Who is the vendor who will supply the items at the lowest cost?

IV
 What is the quality level of the required items?

The MRP activity results in the outputs pertaining to the recommended production and

N
purchasing schedules. On the basis of these outputs, business units are able to adequately
control the inventory stock to meet any situations arising out of emergency.
U
Fig. 6.3 depicts an overview of an MRP system:
Y
Open Open Open
Sales Purchase Work
Orders Orders Orders
R

Order Modules

MRP
R

Mass Order Release

Inventory Inventory Plan Master
Summary Shortage Inquiry Schedule
E

Date Shortage
MRP Message Inquiry
MRP System Setup
H

Inventory Modules Planning Modules

Product Structures
IC

Item Bills of Forecast

Master Material Master
D

Fig. 6.3: An MRP System

(Source: http://erp123.biz/erp-guide/erp-flowcharts-of-data/mrp-overview)
N

Fig. 6.3 shows that MRP has wide-ranging implications and covers a large area of an
organisation.
O

Self-Assessment Questions
P

5. What is MRP?

6. One of the objectives of MRP is to maintain the inventory or stock at the minimum
cost considerations. (True/False)

7. The output of an MRP activity is pertaining to the recommended production and

__________schedules.

DDE, Pondicherry University, Pondicherry 113

 Materials and Store Management

Notes Activity
Using the Internet, identify some of the Indian organisations that have implemented an
MRP system.

6.5 Manufacturing Resource Planning (MRPII)

Y
MRP II is another production system used in business units. It has its origin from Material

IT
Resource Planning discussed in the above section. MRP II considers additional data inputs
such as the financial requirements and employee needs. MRP II is designed to centralise and
integrate the operations related to designing, scheduling and the engineering activities in

S
addition to other activities such manpower scheduling and determining financial constraints.

R
Fig. 6.4 depicts an MRP II system in detail:

E
Strategy, markets, Business planning
development, diversification

IV
Budgeting, forecasts, Stock
levels, Customer orders Master schedule
General
planning

N Resources
U OK?
No

Yes
Y
MRP I
Quantity date of independent Production
requirements per product programme
R

Bill of materials, Stocks, Material Detailed planning

work in progress, handing requirements (programming)
R

rules, lead times

Schedules, routeing, Calculation

E

workstations, Capacity, of workloads

efficiency Extended MRP II
H

Resources
IC

OK?
No

Yes
D

Available materials, available, Release of manufacturing Execution

capacity, suppliers performance and purchase orders and control
N

Movements in and Monitoring

out, rejects, times of execution
O

Internal and external Priority

P

priorities, workshop, scheduling control

Measurement
of performance Control

Around 1980, over-frequent changes in sales forecasts, entailing continual readjustments in production, as well as
the unsuitability of the parameters fixed buy the system, led MRP (Material Requirement Planning) to evolve into
a new concept: Manufacturating Resource Planning or MRP||

Fig. 6.4: An MRP II System

114 DDE, Pondicherry University, Pondicherry

 CHAPTER 6  Stock Control in Organisations

Notes Self-Assessment Questions

8. _________is designed to centralise and integrate the operations related to designing,
scheduling and the engineering activities in addition to other activities such manpower
scheduling and determining financial constraints.

9. MRP II considers additional data inputs such as the financial requirements and

Y
employee needs. (True/False)

IT
Activity
Using the Internet, identify the difference between MRP and MRP II systems.

S
R
6.6 Distribution Requirements Planning (DRP)

E
Distributed Requirement Planning (DRP) is a system or process used by business units for
planning the inventory items. This system is designed to let a user define certain inventory

IV
parameters like safety stock level and threshold limit. The main purpose of DRP is to ensure
that:

N
‹‹ The required quantity of goods needed at the start of the production cycle
‹‹ The limitations considered for ensuring the availability of a product
U
‹‹ The proposed quantity of goods at the beginning of the production cycle.
‹‹ The amount of the inventory left at the end of a period
Y

In order to function efficiently, DRP needs the following information:

R

‹‹ The information pertaining to the future period of the production cycle

‹‹ The information pertaining to the schedule or receipts at the beginning of a period
R

‹‹ The information pertaining to the in-hand inventory items at the beginning of a period
E

‹‹ The threshold limit of the stock requirements

Fig. 6.5 depicts an overview of a DRP system:

H

Raw Material Manufacturers Manufacturers Distributors Customers

IC

Suppliers of Intermediates of Finished

Good
Forecasts
DRP and Plans
D

Forecasts
N

MRP MRS DRP and Plans

MRP MRS
O

MRP MRS
P

Forecasts
MRP MRS DRP and Plans

Forecasts
DRP and Plans

Fig. 6.5: A DRP System

(Source: http://www.mdcegypt.com/Pages/Operation%20Management/Production%20&%20Operation%20Management/
Distribution%20Requirements%20Planning/Supply3.gif)

DDE, Pondicherry University, Pondicherry 115

 Materials and Store Management

Notes Self-Assessment Questions

10. Define DRP.

11. Which of the following information is not required for the functioning of DRP?

a. The information pertaining to the current period of the production cycle

Y
b. The information pertaining to the schedule or receipts at the beginning of a

period

IT

c. The information pertaining to the in-hand inventory items at the beginning of a
period

S

d. The threshold limit of the stock requirements

R
6.7 Push and Pull Systems of Stock Control

E
IV
When it comes to the process of controlling the stock of business units, the inventory
managers need to:
‹‹ Choose the process of ordering the stock levels based on the process of forecasting
‹‹ Choose

N
the process of ordering the stock and inventory items based on the demands
of customers
U
The abovementioned activities can be performed using two systems, namely push and pull
Y
systems of stock control. They have the potential to ensure that the business continuity is
maintained with the lowest cost implications. However, both of these systems have their
R

advantages as well as disadvantages.

R

Push System
E

The push system involves the forecasting of the inventory items based on the anticipation
H

of the requirements anticipated on account of several factors such as government policies

and changing market dynamics. However, this system increases the cost of the storage of
IC

inventory items on account of the facts that this is based on a forecast; inventory is required
to be stored and therefore, involves cost. MRP is an example of a push system.
D

Pull System
N

The pull system of stock control is based on a customer placing an order and then making a
O

requisition to fulfil the order of the customer. This system has the advantage that the cost of
maintaining inventory is the lowest. However, there is a major disadvantage that the lead time
P

may increase, which sometimes leads to the cancellation of orders.

An example of a pull system is the JIT system.

However, when it comes to the process of choosing a system to adopt, it all depends on the
type of the product and the business model in which the organisation is.

116 DDE, Pondicherry University, Pondicherry

 CHAPTER 6  Stock Control in Organisations

Notes Fig. 6.6 depicts the push and pull systems:

Pure Push
Stock Stock
Point Point

Y
Pure Pull

IT
Stock Stock
Point Point

S
R
Authorization Signals Full Containers

E
Fig. 6.6: Push and Pull Systems
(Source: http://www.factoryphysics.com/principle/station/asynch/open/infinopen/InfinOpenImages/image228.gif)

IV
Self-Assessment Questions
12. The _________system involves the forecasting of the inventory items based on the

N
anticipation of the requirements anticipated on account of several factors such as
government policies and changing market dynamics.
U
13. An example of a push system is the JIT system. (True/False)
Y

6.8 Summary
R

‹‹ Business units nowadays are being forced to maintain adequate stock levels so that
R

there is no hindrance between the demand and supply of the items placed by customers.
‹‹ In the absence of the adequate balance between the demand and supply, uncertainty of
E

stock arises in the business units that need to be managed.

H

‹‹ These uncertainties arise due to several factors such as changing market dynamics and
government policies.
IC

‹‹ MRP I, MRP II and DRP are the popular means and measures commonly used to
control stock items.
‹‹ The push and pull systems are the two systems used by business units to ensure the
D

controlling of stock.
N

‹‹ The push system is based on the concept of forecasting, while the pull system is based
on the concept of placing an order when the customer has made the demand.
O

6.9 Glossary
P

‹‹ Manufacturing Resource Planning: It is an integrated system that considers factors

such as financial and manpower needs.
‹‹ Push System: It is the method in which inventory is maintained on the basis of
forecasting.
‹‹ Pull System: It is the method in which inventory is maintained on the basis of a
customer placing an order.

DDE, Pondicherry University, Pondicherry 117

 Materials and Store Management

Notes ‹‹ Supplier: It is the person or business unit responsible for supplying raw materials or
goods to a business unit.

6.10 Terminal Questions

1. How do businesses cope with uncertainty?

Y
2. Discuss the role of suppliers in stock control.
3. Explain the concept of Materials Requirements Planning (MRP).

IT
4. Discuss Manufacturing Resource Planning (MRPII).

S
5. Explain Distribution Requirements Planning (DRP).
6. Elaborate the push and pull systems of stock control.

R
6.11 Answers

E
Q. Self Assessment Questions

IV
1. False
2. d. Consistent customer demand

N
3. A supplier is an organisation responsible for supplying basic materials to another
business unit.
U
4. d. Educating the sales people about the changing market dynamics
5. Materials Requirements Planning (MRP) is a type of production system integrated
Y

with the inventory management system to ensure that the manufacturing process
is able to work on continual basis.
R

6. True
R

7. Purchasing
8. MRP II
E

9. True
H

10. Distributed Requirement Planning (DRP) is a system or process used by business

units for planning the inventory items.
IC

11. a. The information pertaining to the current period of the production cycle
12. push
D

13. False
N

Q. Terminal Questions
1. The business world is known to operate under uncertain conditions on account
O

of a fact that businesses are driven by several impacting forces. Refer to section
6.2 Coping with Uncertainty.
P

2. A supplier is an organisation responsible for supplying basic materials to another

business unit. Refer to section 6.3 Suppliers Roles in Stock Control.
3. Materials Requirements Planning (MRP) is a type of production system integrated
with the inventory management system to ensure that the manufacturing process
is able to work on continual basis. Refer to section 6.4 Materials Requirements
Planning (MRP).

118 DDE, Pondicherry University, Pondicherry

 CHAPTER 6  Stock Control in Organisations

Notes 4. MRP II is designed to centralise and integrate the operations related to designing,
scheduling and the engineering activities in addition to other activities such
manpower scheduling and determining financial constraints. Refer to section
6.5 Manufacturing Resource Planning (MRPII).
5. Distributed Requirement Planning (DRP) is a system or process used by business
units for planning the inventory items. Refer to section 6.6 Distribution

Y
Requirements Planning (DRP).
6. Both pull and push systems have the potential to ensure that the business

IT
continuity is maintained with the lowest cost implications. Refer to section
6.7 Push and Pull Systems of Stock Control.

S
Case Study: Implementation of MRP II

R
6.12
System at ABC Ltd.

E
Manufacturing household appliances is ABC Ltd.’s specialty. The company’s clientele spans

IV
the globe. Regarding product physical qualities, material quality, etc., each of its clients has
special requirements. Consequently, the company should save the client information in a
way that makes it easy to access when needed. Having said that, the company’s operations

N
management is reliant on paperwork and an unconnected legacy system, both of which are
difficult to integrate and alter.
U
For managing its operations effectively, ABC wanted to implement an MRP II system. Before
taking this decision, the organisation evaluated various ERP systems available in the market
and found that they required lot of customisation.
Y

ABC Ltd. purchased an MRP II system from one of the reputed vendors and installed it.
The system integrated all the functions of the organisation’s manufacturing plant, such as
R

materials receipts, inventory management, production, marketing, finance and shipping.

R

The organisation received following benefits after the implementation of the MRP II system:
E

‹‹ Reduction in costs incurred on the paperwork

‹‹ Integration of different departments
H

‹‹ High Return on Investment (ROI)

IC

‹‹ Quick response to customers’ queries

Discussion Questions
D
N

1. What was the need to replace the existing system of ABC with an MRP II system?

(Hint: The existing system of ABC was unable to manage its business operations
O

effectively.)

2. What were the benefits received by ABC after the installation of the MRP II system?
P

(Hint: The MRP II system helped ABC in reducing the paperwork.)

6.13 References and Suggested Readings

‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall
of India Pvt. Ltd.

DDE, Pondicherry University, Pondicherry 119

 Materials and Store Management

Notes ‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi
Publication (P) Ltd.

E-references
‹‹ Material Requirements Planning. Retrieved from http://www.inventorysolutions.org/

Y
def_mrp.htm
‹‹ Manufacturing Resource Planning (MRP II). Retrieved from http://www.ifm.eng.cam.

IT
ac.uk/research/dstools/mrp-ii/
‹‹ Distribution requirements planning (DRP). Retrieved from http://www.apics.org/

S
industry-content-research/publications/ombok/apics-ombok-framework-table-of-
contents/apics-ombok-framework-5.7.

R
‹‹ Push System Vs. Pull System Inventory Control. Retrieved from http://smallbusiness.

E
chron.com/push-system-vs-pull-system-inventory-control-12650.html.

IV
N
U
Y
R
R
E
H
IC
D
N
O
P

120 DDE, Pondicherry University, Pondicherry

chapter

7 Physical Management

Y
of Stock

IT
S
R
E
Structure

IV
7.1 Introduction

N
Learning Objectives U
7.2 Storage Management

7.3 Selection of the Storage Handling Equipment

Y

7.4 Store Layout

R

7.5 Security and Prevention from Theft

7.6 Summary
R

7.7 Glossary
E

7.8 Terminal Questions

H

7.9 Answers
IC

7.10 Case Study: Store Planning for a Watch Seller

7.11 References and Suggested Readings

D
N
O
P
 Materials and Store Management

Notes Learning Objectives

After completing this chapter, you will be able to:
 explain the concept of the physical management of stock
 discuss storage management
 explain the selection of the storage handling equipment

Y
 discuss the concept of store layout
 describe the security and prevention from theft

IT
7.1 Introduction

S
During the process of maintaining stores and their operations, the physical management

R
of stock plays the main role. This is due to the fact that the documents that contain the
inventory or stock information may not be updated from time to time or they may have run

E
of their lives and therefore, are incapable of providing materials as per the quality norms
of customers. Sometimes for no apparent reason, there may be variations in documents and

IV
the actual material stored due to several factors such as the incorrect placement of stock in
a storeroom. For example, the raw materials meant for the manufacturing of chairs may be
placed with the stock material required for manufacturing office tables with a superior quality

N
. This is because the space meant for chairs was unavailable hence, it was clubbed with the
tables to be later transferred to its correct destination.
U
Therefore, the physical verification of stock becomes mandatory so that it can be managed
efficiently and therefore, achieves the objective of the business unit. Note the fact that the
Y
physical management and verification of stock provides several advantages, some of which
are listed as follows:
R

‹‹ Physical management of stock items that saves the time and cost of the business unit
R

‹‹ Efficient and efficacious environment for performing management activities; for

example, the management of perishable stock items which are no longer capable of
E

serving the intended purpose

‹‹ Efficient utilisation of space to save the cost involved in the storage and handling of
H

stock items
IC

‹‹ Savings in the form of utilising resources and forecasting the demand of the items
involved in the processing of raw materials
D

7.2 Storage Management

N

The word “storage” in general terms means a place where stocks are kept for onward
processing. In other words, storage is a repository. While the main emphasis is on the storage
O

of the stock items, storage must be carefully designed so that it can be managed efficiently and
effectively. With this objective, it is conceived, designed, developed and managed accordingly.
P

Once materials are purchased by an organisation, they need to be preserved safely for the future
use. An act of storing materials for the production purpose is called storage management.
Storage management is one of the important components of materials management. It
involves receiving, recording, storing, preserving, issuing and controlling of materials.

122 DDE, Pondicherry University, Pondicherry

 CHAPTER 7  Physical Management of Stock

Notes From the discussion so far, it can be said that storage management is vital to materials
management. Therefore, the stores department of an organisation should have an effective
information and record system that is able to track the incoming and outgoing of materials.

The main objective of storage management is to store materials for the production purpose.
Apart from this, following are the other objectives of storage management:
‹‹ Safeguarding materials against risks such as spoilage

Y
‹‹ Making materials available for a prompt delivery

IT
‹‹ Checking the quality and quantity of incoming and outgoing materials
‹‹ Recording the flow of materials

S
This section discusses the basic concepts of storage management

R
7.2.1 Identification of Storage Materials

E
IV
When it comes to the process of storage management, the most important and crucial step
is the process of the identification of storage materials. Any wrong processing or inaccurate
facts and Fig.s defeats the whole purpose of the storage management of materials.

N
Following are some of the factors required to be considered while identifying storage
materials:
U
‹‹ The frequency of the usage of raw materials required for onward processing
‹‹ The type of the product that a business provides
Y

‹‹ The ease of movement of storage materials from one place to another place
R

‹‹ The changing market dynamics

‹‹ The complexity of the business processes
R

‹‹ The lead time of suppliers and the rate of production

E

‹‹ The cost of the storage of items

H

Therefore, it is observed that the process of the identification of storage materials is of

paramount importance and needs careful strategic planning to ensure that the store is
IC

managed and not mismanaged.

7.2.2 Characteristics of Storage Materials

D
N

While designing the management program for stores, certain parameters are considered
for storage materials. Following are some of the characteristics taken into consideration to
O

manage storage materials effectively:

‹‹ Items with similar characteristics are stored together. For example, storage items that
P

require refrigeration are placed together so that they can be managed effectively.
‹‹ Items that require same regulatory compliance are stored under the same cabinet
or racks.
‹‹ Items that have low frequency of consumption are stored at a secluded location so that
they do not interfere with the regular movement of goods.

DDE, Pondicherry University, Pondicherry 123

 Materials
Materials and
and Store
Store Management
Management

N
Notes
otes
‹
‹‹‹ For
For goods
goods that
that require
require very
very high
high frequency
frequency of
of movement
movement for for onward
onward processing
processing are
are
stored near the place where loading and unloading is easier.
stored near the place where loading and unloading is easier.
‹
‹‹‹ Storage
Storage items
items that
that are
are hazardous
hazardous in
in nature
nature are
are stored
stored in
in places
places far
far away
away from
from the
the main
main
stream
stream of
of the
the storage
storage of
of goods.
goods. Such
Such items
items include
include supported
supported materials
materials required
required for
for
dealing
dealing with
with emergencies,
emergencies, for
for example,
example, fire
fire extinguishers
extinguishers and
and sand
sand boxes.
boxes.
‹
‹‹‹ Storage
Storage items
items whose
whose shelf
shelf lives
lives have
have expired
expired and
and are
are meant
meant for
for disposal
disposal are
are stored
stored at
at separate
separate

Y
locations. In this manner, the management of these items is done in an efficient manner.
locations. In this manner, the management of these items is done in an efficient manner.

IT
Note
Note that
that these
these characteristics
characteristics are
are generic
generic in
in nature
nature and
and they
they may
may require
require customisation
customisation
according
according to
to the
the nature
nature and
and type
type of
of the
the product
product being
being manufactured
manufactured by
by the
the concerned
concerned
business unit.
business unit.

S
7.2.3 Handling of Storage Materials

R
E
The
The handling
handling of
of storage
storage materials
materials is
is another
another important
important aspect
aspect considered
considered while
while managing
managing
stock. In essence, following are the main points taken care while handling stock:
stock. In essence, following are the main points taken care while handling stock:

IV
‹
‹‹‹ The
The type
type of
of the
the material
material and
and stock
stock being
being handled
handled during
during the
the transportation
transportation phase
phase
‹
‹‹‹ The
The type
type of
of the
the basic
basic requirements
requirements to
to be
be considered
considered while
while managing
managing stock
stock during
during

N
transportation and non-transportation. For example, the stock or materials that require
transportation and non-transportation. For example, the stock or materials that require
refrigeration
refrigeration during
during transit
transit and
and non-transit
non-transit
U
‹
‹‹‹ The
The requirements
requirements pertaining
pertaining to
to the
the handling
handling of
of goods
goods during
during transportation
transportation such
such as
as
fragile
fragile materials
materials need
need proper
proper marking
marking and
and signage,
signage, clearly
clearly indicating
indicating that
that the
the goods
goods are
are
liable
liable to
to be
be damaged
damaged asas they
they are
are fragile.
fragile. Hence,
Hence, they
they must
must be
be handled
handled with
with care
care during
Y
during
loading
loading and
and off-loading
off-loading operations
operations
R

The
The storage
storage materials
materials that
that need
need insurance,
insurance, protection
protection and
and prevention
prevention from
from dust
dust and
and other
other
environmental factors that are responsible for handling goods
environmental factors that are responsible for handling goods
R

Fig.
Fig. 7.1
7.1 depicts
depicts some
some other
other points
points of
of considerations
considerations need
need to
to be
be considered
considered while
while handling
handling
E

storage items:
storage items:
H
IC

E
M

D
AT
A
N

E
L

R
A

FIRE
EC
IC
EM

EI
V
H

ED
C
D

HEALTH REACTIVITY
N

R
BE
M
U
M

N
A

SPECIAL
E
N

N
U
O

O
FA

PH

HAZARD
C
TU

Y
C
R

EN
ER

G
ER
P

EM

Fig. 7.1: Points to be Considered while Handling Storage Items

Fig. 7.1 depicts the factors responsible for ensuring efficient handling and storage of items.
From the Fig., it is evident that the points pertain to health, fire, reactivity and the like needs
and should be considered while handling storage items.

124 DDE,
DDE, Pondicherry
Pondicherry University,
University, Pondicherry
Pondicherry
 CHAPTER 7  Physical Management of Stock

Notes Self-Assessment Questions

1. __________ involves receiving, recording, storing, preserving, issuing and controlling
of materials.

2. Which of the following factor is not considered while identifying storage materials?
a. The frequency of the usage of finished goods required for backward processing

Y
b. The type of the product that a business provides

IT
c. The ease of movement of storage materials from one place to another place
d. The changing market dynamics

S
3. Items that have low frequency of consumption are stored at a secluded location so
that they do not interfere with the regular movement of goods. (True/False)

R
E
Activity
Using the Internet, study the storage management of an Indian manufacturing

IV
organisation.

N
7.3 Selection of the Storage Handling Equipment
U
The previous sections dealt with the discussion on the management of storage of goods.
Equally important is the discussion on the storage handling equipment. This section discusses
Y
the selection of the storage handling equipment.

The storage handling equipment is the key component in the management of goods during
R

day-to-day operations. Goods are required to be “moved” within the premises or boundary to
its final destination and all these operations are required to be performed through equipment.
R

For example, the finished goods are required to be moved from the factory premises into the
warehouse and from there they are launched into the market. All this must be carried out by
E

the means of equipment.

H

Therefore, the selection of the storage handling equipment becomes the major activity, as any
slip of erroneous decision can be a disaster for the organisation.
IC

Following are the key points required for consideration while selecting the storage handling
equipment:
D

‹‹ Selection of the type of goods to be moved from one place to another depending on
their state is important. For example, the perishable goods should be handled carefully,
N

as their rate of deterioration is quite fast. Therefore, selecting the equipment, such as
the refrigeration required for the storage of these goods, needs to be taken into account.
O

‹‹ The capacity of the equipment and operational cost involved in moving the goods from
one place to another is equally important. For example, if goods with the entire shelf
P

weighing 300 kgs. are required to be moved from one place to another, the machine
required for the same must be capable of handling more than 300 kgs; otherwise, it will
involve cost considerations.
‹‹ The storage cabinet must be able to meet the full capacity ofgoods. In other words, the
capacity must be utilised to the maximum, else the cost would be too high.

DDE, Pondicherry University, Pondicherry 125

 Materials and Store Management

Notes ‹‹ The machines required for transporting goods must be regularly serviced and
maintained or else; they increase the chances of mishap and heavy risk.
‹‹ The people handling the storage equipment must be properly trained.

Fig. 7.2 depicts some of the equipment used in the material handling and storage:

Y
IT
S
R
E
IV
N
U
Fig. 7.2: Material and Storage Handling Equipment

Self-Assessment Questions
Y

4. Goods are required to be “moved” within the premises or boundary to its final
destination and all these operations are required to be performed by the labour only.
R

(True/False)
R

5. Which of the following point is not considered while selecting the storage handling
equipment?
E

a. Selection of the type of goods to be moved from one place to another depending on
H

their quantity only.

b. The capacity of the equipment and operational cost involved in moving the goods
IC

from one place to another is important.

c. The storage cabinet must be able to meet the full capacity of goods.
D

d. The machines required for transporting goods must be regularly serviced and
maintained.
N
O

7.4 Store Layout

P

The previous sections dealt with the various aspects of managing the storage of goods.
However, the layout of the store is also required to be managed to achieve the objective of
efficient management of business operations. An inefficient store layout not only hampers
the day-to-day operations, but also ensures loss to the business. Therefore, the store layout
becomes a core activity for the executive management.

126 DDE, Pondicherry University, Pondicherry

 CHAPTER 7  Physical Management of Stock

Notes Store layout is the basic factor that has a significant impact on the performance of the
stores department. The storage facilities of an organisation are generally in the form of
warehouses or open yards; however, they vary across organisations depending on the type of
products produced by them. For example, Fast-Moving Consumer Goods (FMCG) require
refrigeration facilities for their storage, while explosives and other inflammable commodities
require highly-protective storage facilities. The storage facilities of an organisation are usually
located near the operating departments. An organisation should consider the following points

Y
while planning for its stores layout:

IT
‹‹ Making provisions for easy receipt, storage and payment of materials
‹‹ Minimising the handling and transportation of materials

S
‹‹ Making provisions for the satisfactory capacity along with the flexibility for future
expansion

R
‹‹ Deciding the total floor space required for the storage of materials

E
‹‹ Making the identification of materials easy

IV
‹‹ Arranging storage facilities for fast and easy customer order processing
‹‹ Using good lighting in the storage for avoiding theft, parts damage and mistakes
in stocking

N
‹‹ Planning the storage for easy rotation
U
‹‹ Segmenting the stock on the basis of rebuilt, remanufactured, used and new merchandise
‹‹ Including safety as an essential component of the facility plan
Y

‹‹ Developing a periodic housekeeping and rearrangement plan

R

7.4.1 Store Planning

R

In common words, store planning is the process that comprises of several activities, all of
E

which culminate in an output that results in a “planned store”. This means that the store
must be planned with detailed specifications so that the storage and management of goods is
H

efficient, meaning that the business objective is achieved.

While planning for the storage, there are certain points of consideration that must be taken
IC

into account. If these points are not taken into account, the management of the stores
becomes difficult.
D

The points of consideration while store planning are as follows:

‹‹ Setting the objective of the storage management, that is, what the management
N

wants to achieve: This must gel with the type of goods to be stored, for example,
perishable or inflammable goods. Some of the considerations are:
O

 Is it a proper storage of goods?

P

 Is it a faster retrieval of goods?

 Is it a cost factor?
‹‹ Setting the objective of safety and health points in consideration: This is another
important point of consideration for which the store must be planned. In the absence
of this important point, it can be disastrous for the business. For example, every store
must have the provision for fire exit and emergency door.

DDE, Pondicherry University, Pondicherry 127

 Materials and Store Management

Notes ‹‹ Setting the objective of classifying goods based on their lives, perishable factors,
rate of consumption and movement: For example, the FMCG goods are required
to be stored in locations near to the entrance, so that they can be easily loaded and
unloaded onto vehicles used for transportation.
‹‹ Planning for waste, return and disposable goods: This is an essential process so
to plan goods.

Y
7.4.2 Characteristics of Store Layout

IT
While the last section dealt with the planning aspect of a store, this section deals with the

S
characteristics of a store layout.

Following are some of the points typical to a store:

R
‹‹ A single entry and exit system: This is the most important point for any store

E
management system. In any store, there is typically a single entry and single exit
system with the provision for an emergency exit system. This is essential due to the

IV
fact that this approach focuses on the safety and security at a single point of system.
‹‹ The segregation of the store on the basis of types of goods: For example, a store

N
is divided into different sections such as spare parts and raw materials. This helps the
store staff to identify and locate the materials easily and provide them to the concerned
person or department on time.
U
‹‹ A single point of check in and checkout of items related to the movement of
goods: For example, when a customer enters a retail store, it is assisted in depositing
Y

the goods it is carrying just near the entrance and at the end, it pays at the billing
counter and walks off the store after collecting the goods deposited earlier near the
R

entrance gate. In the similar manner, in a warehouse, the vehicles entering the premises
are required to make appropriate entries in a register and while leaving, they are
R

required to make an entry in a different register pertaining to the goods carried by

them from the warehouse.
E

‹‹ The store has ample space for movement: For example, in an organised store, there
H

is ample space for customers to move and in a warehouse, there is ample space for
vehicles to move and carry out their work like loading and unloading.
IC

7.4.3 Space Allocation

D

Space allocation is another important factor to be taken into account. There are certain points
that must be taken into account while allocating space for the material storage in a store.
N

These are as follows:

O

‹‹ More emphasis on the allocation of space to the selling area: This means that not
the entire space available in a store is used for selling. Some of the space is reserved for
P

payment, returns and discarded items.

‹‹ Allocation of space to goods or items that are fragile in nature and are likely to
be broken: Such items are kept in places where there is a less movement of customers
or vehicles . For example, in an organised retail store, the fragile items are stored in
cabinets that are aligned with the wall fixtures.

128 DDE, Pondicherry University, Pondicherry

 CHAPTER 7  Physical Management of Stock
CHAPTER 7  Physical Management of Stock
Notes ‹‹ Allocation of space to items such as food CHAPTER products 7and that require
 Physical refrigeration:
Management of Stock
Such items are kept in clean and hygienic places within the store itself.
‹‹ Allocation of space to items such as food products and that require refrigeration: This means that
Notes
Notes ‹some
‹Such space
itemsisare
Allocation reserved
of kept that
spaceintocleanisand
items free from
hygienic
such dust andwithin
places
as food otherand
products impurities
the in the
storerequire
that itself. atmosphere.
This means that
refrigeration:
some
Such space
items is
arereserved that isand
kept in clean free from dust
hygienic andwithin
places other the
impurities in the
store itself. atmosphere.
This means that
Allocation of space for handling large volume of customers.
some space is reserved that is free from dust and other impurities in the atmosphere.
Allocation of space for handling large volume of customers.
Allocation of space for handling large volume of customers.
7.4.4 Types of Store Layout

Y
7.4.4 Types of Store Layout
7.4.4 Types of Store Layout

IT
While you have studied the various aspects of a store layout, let us now discuss the types of
While you
a store layout. have studied the various aspects of a store layout, let us now discuss the types of
aWhile you have studied the various aspects of a store layout, let us now discuss the types of
store layout.
Thea storage facilities vary across organisations, depending on the types of products produced
store layout.

S
The storage facilities vary across organisations, depending on the types of products produced
by them. However, comb type layout and tree type layout are the two main types of stores
The
by storage
them. facilities
However, varytype
comb across organisations,
layout depending
and tree type layouton arethe
thetypes
twoofmain
products
types produced
of stores
layouts mostHowever,
commonly used by layout
organisations. In a comb type store layout, the entire stock is

R
by them. comb type and tree type layout are the two main
layouts most commonly used by organisations. In a comb type store layout, the entire stock types of storesis
keptlayouts
on onemost
sidecommonly
of aisle (space for moving), as shown in Fig. 7.3:
kept on one side of aisle used(spacebyfor
organisations.
moving), as In a comb
shown type 7.3:
in Fig. store layout, the entire stock is

E
kept on one side of aisle (space for moving), as shown in Fig. 7.3:
Stock

IV
Stock
Aisle
Aisle

N
Fig.7.3:
Fig. Comb Type
7.3:Comb Type Store
Store Layout
Layout
Fig. 7.3: Comb Type Store Layout
U
OnOn thethe
On the
other
other
other
hand,inina atree
hand, tree typestores
hand, in a treetype
stores layout, the
type storeslayout,
the stock is
layout, the stock
kept
iskept
stock is
on
kepton both
onboth sides
bothsides ofofaisle
sidesof as shown
aisle
aisle as as shown
shown
in Fig.
in Fig. 7.4:
7.4:
in Fig. 7.4:
Y
R
R

Stock
Stock
E

Aisle
Aisle
H
IC

Fig. 7.4: Tree Type Store Layout

Fig.7.4:
Fig. Tree Type
7.4:Tree Type Store
Store Layout
Layout
Self-Assessment Questions
Self-AssessmentQuestions Questions
D

Self-Assessment
6. An inefficient store layout not only hampers the day-to-day operations, but also
6. An inefficient store layout not only hampers the day-to-day operations, but also
6. Anensures
inefficient
loss tostore layout not
the business. only hampers the day-to-day operations, but also
(True/False)
N

ensures loss to the business. (True/False)

ensures loss to the business. (True/False)
7.7. __________is the process that comprises of several activities, all of which culminate
__________is the process that comprises of several activities, all of which culminate
O

7. __________is
in an output thatprocess
in an output the
that result inthat
result in comprises
aa “planned
“planned of several activities, all of which culminate
store”.
store”.
in an output that result in a “planned store”.
8.8. Which
Which of of the
the following
following isis not
not aa point
point of consideration while
of consideration while store
store planning?
planning?
P

8. Which of the following

a. Setting the objectiveis notofathe
point of consideration
storage managementwhile store planning?
a. Setting the objective of the storage management
a. b.b.Setting
Setting the
Setting the
objective
the objective
objective of
ofsafety
the storage
of safety and management
and health points in
health points in consideration
consideration
b. c.c.Setting the
Setting
Setting theobjective
the objectiveofof
objective of safety and health
classifying
classifying goods points
goods intheir
based on
based on consideration
their origin
origin
c. d.d.Setting the for
Planning
Planning objective
for waste, of classifying
waste, return
return and goods based
and disposable
disposable goods on their origin
goods
d. Planning for waste, return and disposable goods
DDE, Pondicherry
DDE, Pondicherry University,
University,Pondicherry
Pondicherry 129
129
DDE, Pondicherry University, Pondicherry 129
 Materials and Store Management

Notes
7.5 Security and Prevention from Theft
Appropriate security and theft prevention measures are deployed in stores to ensure that the
theft is kept at the minimum.

Some of the important points of managing the security and prevention from theft are:

Y
‹‹ Deployment of CCTV cameras at strategic locations so that the entire space is covered
‹‹ Deployment of RFID devices to ensure that the RFID (Radio Frequency Identification

IT
device that is used as a tag on the products for their easy identification while their
storage and transportation.) tag on the stolen goods should beep when a customer
walks out of the premises

S
Apart from this, the methods for the detection and prevention from theft are as follows:

R
‹‹ Using a Store Design: Security issues need to be considered while planning the

E
merchandise placement near store entrances, delivery areas and dressing rooms. For
example, small products that are prone to pilferage should never be kept near the

IV
entrance. By having an open line of sight to the entrance and exits, the store employees
can watch for telltale signs of shoplifters.
‹‹ Providing Employee Training: Store employees can be trained to be effective in

N
detecting shoplifting. They should be trained to be aware, visible and alert to possible
shoplifting. Some training inputs include:
U
 Not to assume that all well-dressed walk-ins cannot be shoplifters.
 Method to spot loiters and distinguish them from potential customers.
Y

 Being cautious of groups. Youngsters planning to shoplift often travel in groups.

R

Some members of the group divert the attention of the store staff, while others do
the shoplifting.
R

 Characteristics of people prone to shoplifting. Spot loose clothing, which easily

hides shoplifted goods. A person wearing a jacket in a warm day may be a suspect.
E

 Watching and interpreting the body language. Shoplifters are more focused on
H

eyeing the sales staff than looking for the merchandise. The shoplifters movements
may be unusual, as they hide the products and walk.
IC

‹‹ Reducing Employee Theft: This includes creating a trusting and supportive work
environment to reduce the incidences of employee theft. When employees feel a part of
the team, they identify their goals with those of the retailer. They go out of their way
D

to prevent stealing by others. Screening prospective employees is the point where the
retailer can determine whether it is hiring a trustworthy employee.
N

‹‹ Establishing Security Policies and Control Mechanisms to Control Theft: These

O

can include the following:

 Randomly searching the garbage bins
P

 Specifying that the store employees enter and leave the store through a designated area

 Providing customer receipts for all transactions

 Changing locks periodically

130 DDE, Pondicherry University, Pondicherry

 CHAPTER 7  Physical Management of Stock

Notes Self-Assessment Questions

9. Security issues need to be considered while planning the merchandise placement near
store entrances, delivery areas and dressing rooms. (True/False)

10. For security purposes, store employees can be trained to be effective in

detecting___________.

Y
11. One of the ways to reduce employee theft is to make the employees feel a part of the
team. They identify their goals with those of the retailer. (True/False)

IT
Activity

S
Using the Internet, identify the places in a store where the security equipment should be
installed.

R
E
7.6 Summary

IV
‹‹ Storage management is one the key differentiators in the modern business.
‹‹ An efficient storage management improves the efficiency and productivity of a business

N
unit, while an inefficient one incurs loss.
‹‹ Storage management comprises of the activities such as store layout, flow of
U
customers, etc.
‹‹ A store has a certain characteristics to be managed.
Y

‹‹ While managing a store, the safety and security features are taken into account.
R

7.7 Glossary
R

‹‹ Store: It is the repository where goods are kept for selling or transhipment.
E

‹‹ Store management: It is the method deployed for managing stores. It comprises of

planning, layout and other management controls deployed to achieve the business
H

objective.
IC

‹‹ Store layout: It is the arrangement of the goods, moving place and other required
instruments in the store.

7.8 Terminal Questions

D
N

1. Discuss storage management.

2. How are the storage handling equipment selected?

O

3. Explain the concept of store layout.

P

4. Elaborate on Space Allocation

5. Discuss security and prevention from theft in a store.

DDE, Pondicherry University, Pondicherry 131

 Materials and Store Management

Notes
7.9 Answers
Q. Self Assessment Questions
1. Storage management
2. a. The frequency of the usage of finished goods required for backward processing

Y
3. True
4. False

IT
5. a. Selection of the type of goods to be moved from one place to another
depending on their quantity only.

S
6. True

R
7. Store planning
8. c. Setting the objective of classifying goods based on their origin

E
9. True

IV
10. Shoplifting
11. True

N
Q. Terminal Questions
1. Storage management involves receiving, recording, storing, preserving, issuing
U
and controlling of materials. Refer to section 7.2 Storage Management.
2. The selection of the storage handling equipment becomes the major activity, as
Y

any slip of erroneous decision can be a disaster for the organisation. Refer to
section 7.3 Selection of the Storage Handling Equipment.
R

3. Stores layout is the basic factor that has a significant impact on the performance
of the stores department. Refer to section 7.4 Store Layout.
R

4. Space allocation is another important factor required to be taken into account

E

while managing a store. Refer to sub section 7.4.3 Space Allocation.

5. Appropriate security and theft prevention measures are deployed in stores to
H

ensure that the theft is kept at the minimum. Refer to section 7.5 Security and
Prevention from Theft.
IC

7.10 Case Study: Store Planning for a Watch Seller

D

Darwin is a businessman who runs a business of selling customised watches. He mainly

N

targets corporate organisations as his customers. However, individual users of watches are
also his potential target audience, on a condition that they order 100 or more watches at a time.
O

Individuals make such purchases occasionally such as on their Golden wedding anniversary or
at the arrival of a new member in their family.
P

Darwin is planning to set up a retail store, targeting the clients who can visit the store to see
some of the designs and samples before they order. The material and variety that he has to
offer would also be displayed at the same time. He is also planning to set up the store with a
collection of other accessories like batteries and straps that people do not usually find at other
watch stores.

132 DDE, Pondicherry University, Pondicherry

 CHAPTER 7  Physical Management of Stock

Notes Darwin would primary focus on sales through outbound sources and put extra efforts towards
in-store sales. Nevertheless, it all depends on how large he would be able to make it.

The businessman has four options of locations to choose for his to-be-opened store. All the
four options offer quite different features in terms of the cost and expected revenue:
‹‹ Option 1: A standalone store offering an area of 600 sq. ft. near a prominent shopping
centre. Other specialty standalone stores of the same size are also located in the same

Y
shopping centre. This is available on a rent of ` 80,000/- a month.

IT
‹‹ Option 2: A store of anarea of 500 sq. ft. inside a mall located next to the primary
entrance of the mall. This is available on a rent of ` 50,000/- a month.
‹‹ Option 3: A store ofarea of 1200 sq. ft located at the second floor of a commercial

S
building in a business district. Although this would be about ½ kilometer away from the

R
parking, the rent to be paid would be ` 30,000/- per month only.
‹‹ Option 4: A store ofan area of 1000 sq. ft. located at the basement of a busy building.

E
This building has recently been converted into a commercial premises being a residential
one earlier. As this store is located on the outskirts of the city, ample parking space

IV
would be available in the same building at a rent of just ` 15,000/- a month.

N
Discussion Questions U
1. Which option would be the most profitable for Darwin to choose?

(Hint: Option 1 will be the most profitable for Darwin.)

Y

2. If Darwin also plans to sell other electronic items at his store, what would be the
impact on the selection of the location?
R

(Hint: Darwin needs to change the store location if he includes more electronic items
R

in the store.)
E

7.11 References and Suggested Readings

H

‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall
of India Pvt. Ltd.
IC

‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi
Publication (P) Ltd.
D

E-references
N

‹‹ The Basic Concepts of Supply Chain Management. Retrieved from http://www.ecrasia.

O

com/the-basic-concepts-of-supply-chain-management/.
P

‹‹ Overview of Supply Chain Management, Supply Chain Process, Supply Chain

Information System. Retrieved from http://www.fibre2fashion.com/industry-
article/29/2893/an-overview-of-supply-chain-management1.asp.
‹‹ What is Supply Chain Management? - SCM Retrieved from http://scm.ncsu.edu/scm-
articles/article/what-is-supply-chain-management.

DDE, Pondicherry University, Pondicherry 133

P
O
N
D
IC
H
E
R
R
Y
U
N
IV
E
R
S
IT
Y
chapter

8 Trends in the Storage

Y
of Materials

IT
S
R
E
Structure

IV
8.1 Introduction

N
Learning Objectives U
8.2 Storage of Slow-moving, Obsolete and Redundant Items

8.3 Outsourcing the Inventory Needs

Y

8.4 Vendor Managed Inventory (VMI)

R

8.5 Environmental Concerns

8.6 Summary
R

8.7 Glossary
E

8.8 Terminal Questions

H

8.9 Answers
IC

8.10 Case Study: Outsourcing of Inventory by Dell

8.11 References and Suggested Readings

D
N
O
P
 Materials and Store Management

Notes
Learning Objectives
After completing this chapter, you will be able to:
 explain the storage of slow-moving, obsolete and redundant materials
 discuss the concept of outsourcing the inventory needs

Y
 explain vendor managed inventory

IT
 elaborate the concept of environment concerns in the process
of the storage of materials

S
8.1 Introduction

R
The last chapter dealt with the various issues related to store management. However, in actual

E
practice, the handling and storage of materials is performed on the basis of the trends depicted
in its ongoing process. By the term “trend”, it means the pattern that is easily discernible by

IV
the modus operandi, of the movement of goods or materials across and out of the premises
of a store. This movement is based on several factors such as increase in the demand of
goods on account of the popularity of products or changes in the policies announced by the

N
government. While these trends may be sporadic in nature, but nevertheless there are some
of other factors that are visibly observed. In such materials, the movement is very slow, while
U
in other cases, the movement is quite fast. Therefore, these trends force the management to
adopt some tactics for the storage of materials on the basis of their movement.
Y

Storage of Slow-moving, Obsolete

8.2
R

and Redundant Items

R

As discussed in the previous units, the management of store is one of the most important and
complex task for any store manager. This is due to the facts that several aspects are required
E

to be considered and no universal strategy or means and methods can be applied to perform
H

the store management operations.

Further, you also learned that the storage management is performed on the basis of the
IC

classification of goods, which may be based on several factors. For example, goods may be
classified according to the material type such as food items or the movement type, such as
slow-moving goods or fast-moving goods also known as FMCG goods.
D

This section covers the management concepts of slow-moving, obsolete and redundant
N

materials. These materials are required for business processes and are also responsible for the
cost of their storage and handling operations.
O

Some points of consideration that necessitate the storage of slow-moving, obsolete and
P

redundant items are given below:

‹‹ One of the most important points is that they are stored as a part of a contractual
agreement.
They are stored as a part of serving their customers with whom the sellers would
have developed long-term business relations. They are stored as a part of antique items
that yield good amount of money, as and when required. Even though the cost of the

136 DDE, Pondicherry University, Pondicherry

 CHAPTER 8  Trends in the Storage of Materials

Notes storage of these items is quite high, yet they being antique are always in demand. One
of the examples is storing furniture of the ancient period.
They are stored as a result of the business objectives in anticipation of the future
demand and yet this demand leads to the storage of redundant items.. Examples include
stocking gas lighters as the government decides to do away with match sticks within
a week’s time. Though the government might have announced the policy earlier, its

Y
implementation might have been delayed, leading to the storage of redundant items.
‹‹ They are stored as redundant materials to ensure the adequate supply of materials is

IT
maintained.

Therefore, it is observed that the storage of slow-moving, obsolete and redundant items needs

S
to be adequately taken care to meet the business objectives.

R
Further, the process of classifying items or materials as slow moving, fast moving or
redundant is based on several factors and no item at any given point of time can be classified

E
slow moving or fast moving, as they may be influenced by market dynamics.

IV
Self-Assessment Questions

1. Sometimes, slow-moving and redundant items are stored as a part of a contractual

N
agreement between the supplier and organisation. (True/False)

2. Why do organisations store antique items if they involve high cost?

U
3. Slow-moving and redundant items are stored to ensure the adequate supply of
materials during the production process. (True/False)
Y
R

8.3 Outsourcing the Inventory Needs

R

During the process of handling the storage of materials, the most commonly observed trend in
today’s business world is the outsourcing of the inventory needs. This essentially means that
E

the inventory needs are fulfilled through an outsourcing organisation that is responsible for
the maintenance of the inventory. This approach has several advantages for the organisations
H

outsourcing the needs.

IC

Some of the notable advantages of outsourcing inventory needs are:

‹‹ It saves the cost involved in the handling and storage of inventory items.
D

‹‹ The organisation to which the requirements have been outsourced is responsible for
the maintenance and storage of inventory items, which saves the cost of holding the
N

inventory.
‹‹ The concerned service provider, to whom the inventory is outsourced, is responsible for
O

the transportation of inventory items. Thus, it is also responsible for the cost savings
involved in the handling of materials during the shipment process.
P

‹‹ By outsourcing the inventory needs, an organisation can focus on other core issues of
the business such as venturing into new initiatives or areas, instead of resolving minor
issues related to the inventory management. One of these issues can be ensuring the
material quality up to the standards. The outsourced organisation is responsible for
supplying the materials as per the agreed quality norms.

DDE, Pondicherry University, Pondicherry 137

 Materials and Store Management

Notes ‹‹ The outsourced organisation is responsible for providing the materials required in day-
to-day operations to the organisation that has outsourced the inventory.

Therefore, outsourcing plays a very crucial role in the management of the storage of materials
Materials and Store Management and this trend has nowadays gained a wide acceptance, as huge savings are involved.

Fig. 8.1
Fig. 8.1 depicts
depicts the
the various
various benefits
benefits of
of outsourcing
outsourcing from
from the
the perspective
perspective of
of managers:
managers:
Notes

Y
Liberate Staff

IT
Reduce
Operating Costs Time and
Resources

S
Gain Visibility
and Control over Allocate Funds

R
Expenses to Other Uses

E
IV
Access Specific Increase
Skill Sets Outsourcing Process
Without Hiring Efficiency

N
U
Fig. 8.1: Benefits
Fig. 8.1: Benefits of
of Outsourcing
Outsourcing the
the Inventory
Inventory Needs
Needs
Y

Self-Assessment
Self-Assessment Questions
Questions
4.
4. The inventory needs of
The inventory needs of an
an organisation
organisation are
are fulfilled
fulfilled through
through anan _________
R

_________
organisation
organisation that
that is
is responsible
responsible for
for the
the maintenance
maintenance of
of the
the inventory.
inventory.
R

5.
5. Outsourcing
Outsourcing inventory
inventory needs
needs helps
helps an
an organisation
organisation to
to concentrate
concentrate on
on inventory
inventory
issues more deeply. (True/False)
issues more deeply. (True/False)
E
H

8.4
8.4 Vendor
Vendor Managed
Managed Inventory
Inventory (VMI)
(VMI)
IC

Vendor
Vendor Managed
Managed Inventory
Inventory (VMI)
(VMI) is is aa process
process or
or system
system inin which
which aa vendor
vendor provides
provides or
or
supplies
supplies items to a customer on the basis of the order specified by the customer. This
items to a customer on the basis of the order specified by the customer. This entire
entire
supply
supply and
and demand
demand is is based
based on
on aa signed
signed contract
contract or
or an
an agreement
agreement between
between the
the supplier
supplier or
or the
the
D

vendor and the customer.

vendor and the customer. This process of providing inventory based on the order received has
several advantages, enumerated below:
N

This process of providing inventory based on the order received has several advantages,
‹‹ The vendor is responsible for the supply of inventory items as and when the customer
enumerated below:
O

demands or makes a requisition. This approach thus makes the customer free from the
The vendor
‹‹ need is responsible
to maintain a minimum forinventory
the supplyandof ainventory itemsAll
safety stock.. asthese
and when the customer
approaches have a
demands or makes a requisition.
severe impact on the cost savings. This approach thus makes the customer free from the
P

need to maintain a minimum inventory and a safety stock.. All these approaches have a
‹‹ The
severecustomer
impact on benefits from
the cost the reduced purchasing costs, as the materials are at the
savings.
cost level based on the agreement between the vendor and customer.
‹‹ The customer benefits from the reduced purchasing costs, as the materials are at the
‹‹ The
cost manufactures
level based ontoo thegains from this
agreement approach,
between as they have
the vendor the access to the trends and
and customer.
data generated and are able to plan ahead and take decisions and actions appropriately.
‹‹ The manufactures too gains from this approach, as they have the access to the trends and
data generated and are able to plan ahead and take decisions and actions appropriately.

138 DDE, Pondicherry University, Pondicherry

 CHAPTER 8  Trends in the Storage of Materials

Notes Under this arrangement, the purchaser requests that the vendor or supplier shoulder all
inventory-related responsibilities. Typically, this takes place where the consumer is, such at a
retail store.

Another potential worry of a third-party logistics provider is controlling the demand and
supply gaps to ensure that the buyer has an adequate amount of inventory. VMI is a methodical
approach to stock management and order fulfilment. The traditional ordering procedure is

Y
altered by a relationship between suppliers and consumers, such as distributors, retailers,
OEM, and product end users.

IT
Shared risk is one of the key factors to make VMI work. In some cases, if the inventory of
the buyer/retailer does not get sold off, the vendor/supplier purchases it back. In other cases,

S
the inventory may be held physically by the retailer but is not actually owned by the retailer,
unless the sale has taken place. This suggests that the retailer merely possesses the inventory

R
and facilitates its sale in return of a pre-arranged commission. Such stocks are known as
consignment stocks.

E
A consignment stock is provided by many suppliers in retail. For example, H2O, a cosmetic

IV
product company provides its stock on a consignment basis to Lifestyle, a chain of retail
stores. Similarly, some garment and footwear brands also provide their stock on a consignment
basis to retailers, with an objective of providing visibility to their products. Internationally,

N
Wal-Mart and Home Depot sell products using such relationships to manage their inventory
levels and investment therein.
U
The aim of VMI is to support the business objectives and reorganise the supply chain functions
for both suppliers and their customers. The value of the business is an obvious consequence
of an improved flow of information, which is possible if the following objectives are
Y

fulfilled:
R

‹‹ Improved inventory turns

‹‹ Improved service
R

‹‹ Increased sales
E

Leading manufacturers are determined to become more receptive to the demands of the
H

customers for a wide range of products, without requiring holding huge inventories.
Many manufacturers are striving to extend their demand-driven supply systems, where
IC

they can promptly ‘sense and respond’ to the actual demand. Some organisations are even
using this methodology to ‘shape’ the demand on the basis of the incessant visibility of
market commotion.
D

VMI associates suppliers immediately with the actual demand of the customers. In
alteration from the ‘push’ method of supply chain management to the demand-driven
N

‘pull’ attitude, unfiltered demand indications are crucial elements. VMI offers these
indications. The goal of VMI is to ensure that the appropriate items are always available
O

at the right places at the right times by continuously replenishing them at the point
of sale or consumption. Incorporating VMI into a manufacturer’s demand-driven
P

supply chain plan is as simple as following the pull strategy and keeping an eye on
the market.

DDE, Pondicherry University, Pondicherry 139

 Materials and Store Management
Materials and Store Management

Notes
Notes
8.4.1
8.4.1 Process
Process of
of VMI
VMI
In order to understand the processes involved in VMI, let us refer to Fig. 8.2, shown below:
In order to understand the processes involved in VMI, let us refer to Fig. 8.2, shown below:

Cost Management
Costs and generates

Y
(increase only)
accounting entries for
consumed stock

IT
VMI Business Unit
(customer’s warehouse
Customer’s defined as a VMI unit) Create Billing-Only
Physical EIP messages Orders process

S
Warehouse Consigned storage (decrease only)
location

R
Replenishment Auto-putaway Order Management
process creates process updates Business Unit

E
interunit stock quantity in Creates bill-only
request storage location sales order

IV
Stock shipped Inv Business Unit
to customer (your company
Interunit Expected warehouse
fulfill and ship interunit

N
Receipt EIP notifies
customer of shipment stock order

Customer’s
Accounts
U Invoice for consumed goods Billing Business Unit
Payable Creates invoice
Department
Y

Fig. 8.2: VMI

Fig. 8.2: VMI Process
Process
R

Fig. 8.2 illustrates

Fig. 8.2 illustrates the
the VMI
VMI process.
process. The
The VMI
VMI organisations
organisations store
store its
its stock
stock at
at the
the customer’s
customer’s
warehouse, store or any other location as per the agreed terms and conditions.
warehouse, store or any other location as per the agreed terms and conditions. The The customer
customer
R

communicates
communicates the the consumption
consumption of of the
the stock
stock to
to the
the vendor
vendor onon aa regular
regular basis.
basis. The
The stock
stock levels
levels
in the VMI organisations are fixed at the rate of consumption of the customer.
in the VMI organisations are fixed at the rate of consumption of the customer. Further, the Further, the
E

cost manager determines the cost of the consumed items and records it.
cost manager determines the cost of the consumed items and records it. Next, the managerNext, the manager
creates
creates bill-only
bill-only sales
sales orders
orders that
that are
are further
further used
used for
for the
the preparation
preparation of of invoices.
invoices. The
H

The
VMI
VMI organisations thus generate intraunit transfers to stock the customer location to
organisations thus generate intraunit transfers to stock the customer location to the
the
appropriate
appropriate stock
stock levels.
levels.
IC

8.4.2
8.4.2 Implementation
Implementation of
of VMI
VMI
D

The
The implementation
implementation of
of VMI
VMI involves the following
involves the following processes:
processes:
N

‹‹ Fulfilment: This process is used to process sales orders based on the orders received
‹‹ Fulfilment: This process is used to process sales orders based on the orders received
from
from customers.
O

customers.
‹‹ Receiving: It
‹‹ Receiving: It provides customers the
provides customers the option
option of
of giving
giving receipts
receipts confirmation
confirmation of
of the
the
P

consigned goods.
consigned goods.
‹‹ Consumption: This process is used to depict the rate of consumption
‹‹ Consumption: This process is used to depict the rate of consumption of
of materials
materials by
by
customers.
customers.
‹‹ Return: It
‹‹ Return: It is
is used
used to
to keep
keep aa track
track of
of the
the items
items returned
returned by
by customers.
customers.
‹‹ Physical and Cycle Count: It is used to keep a track of the count of the inventory
‹‹ Physical and Cycle Count: It is used to keep a track of the count of the inventory
items
items physically.
physically.

140
140
DDE, Pondicherry University, Pondicherry
DDE, Pondicherry University, Pondicherry
 CHAPTER 8  Trends in the Storage of Materials
CHAPTER 8  Trends in the Storage of Materials

Notes Fig.
Fig. 8.3
8.3 depicts
depicts the
the implementation
implementation of
of VMI:
VMI:
Notes
VMI Business Unit
(customer’s warehouse
Customer’s defined as a VMI unit)
Physical EIP messages Replenishment process
Warehouse Non-consigned creates a sales order
storage location

Y
Auto-putaway Order Management
process updates Business Unit
quantity in sales order
storage location (optional)

IT
Stock shipped Inv Business Unit
to customer (your company
warehouse Sales order
Interunit Expected
fulfill and ship interunit sent to inventory

S
Receipt EIP notifies
customer of shipment stock order
OMBILL process

R
picks up
shipped goods
information
Cost Management

E
Costs and generates
accounting entries for
consumed stock

IV
Customer’s
Accounts Billing Business Unit
Invoice for consumed goods
Payable Creates invoice
Department

N
U Fig. 8.3:
Fig. Implementation of
8.3: Implementation of VMI
VMI

Self-Assessment Questions
Self-Assessment Questions
6. _____________
6. _____________ isis aa process
process or
or system
system in
in which
which aa vendor
vendor provides
provides or
or supplies
supplies items
items
Y
to aa customer
to customer on
on the
the basis
basis of
of the
the order
order specified
specified by
by the
the customer.
customer.

7. The
7. The stock
stock levels
levels in
in the
the VMI
VMI organisations
organisations are
are _________at
_________at the
the rate
rate of
of consumption
consumption
R

of the customer.
of the customer.
R

8. Which
8. Which of
of the
the following
following processes
processes isis not
not included
included in
in VMI
VMI implementation?
implementation?

a.a. Fulfilment
Fulfilment
E

b.b. Receiving
Receiving
H

c.c. Storing
Storing
IC

d. Return
d. Return
D

8.5 Environmental
8.5 Environmental Concerns
Concerns
N

In the
In the process
process of
of handling,
handling, managing,
managing, and
and storing
storing materials,
materials, environmental
environmental concerns
concerns have
have
taken a lead role on account of the following factors:
taken a lead role on account of the following factors:
O

‹‹
‹ Issues related
‹Issues related to
to the
the waste
waste and
and disposal
disposal of
of the goods
the goods that
that are
are no
no longer
longer required
required
‹‹ Issues related
‹Issues related to
to the
the health
health and
and safety
safety of
of the
the workforce
workforce while
while working
working inin factories
factories (for
(for
P

‹
example, issues arising from pesticides and dangerous
example, issues arising from pesticides and dangerous materials)materials)
Issues related
‹‹ Issues
‹ ‹ related to
to combustible
combustible materials,
materials, such
such as
as oil
oil and
and kerosene,
kerosene, that
that are
are dangerous
dangerous to to
the environment and locality and are thus required to be adhered to the safety
the environment and locality and are thus required to be adhered to the safety concerns concerns
adopted by
adopted by the
the global
global agencies
agencies such
such as
as HIPPA
HIPPA andand ISO
ISO

 Recycling of
‹ Recycling of materials
materials

 Banning of
‹ Banning of plastic bags
plastic bags and
and materials
materials made
made from
from plastic
plastic

DDE, Pondicherry University, Pondicherry

DDE, Pondicherry University, Pondicherry 141
141
 Materials and Store Management

Notes Therefore, it is observed that the environmental concerns have taken the front seat and thus
organisations are forced to adapt to the safety concerns.

Self-Assessment Questions
9. One of the reasons for considering environmental concerns while managing materials
is that some of the materials like pesticides and other chemicals are hazardous for the

Y
environment and locality. (True/False)

10. It is observed that the environmental concerns have taken the front seat

IT
and thus organisations are never forced to adapt to the safety concerns.
(True/False)

S
R
8.6 Summary

E
‹‹ The storage management is performed on the basis of the classification of goods, which
may be based on several factors. For example, goods may be classified according to the

IV
material type such as food items or the movement type, such as slow-moving goods or
fast-moving goods also known as FMCG goods.
‹‹ During the process of handling the storage of materials, the most commonly

N
observed trend in today’s business world is the outsourcing of the inventory needs.
This essentially means that the inventory needs are fulfilled through a vendor who is
U
responsible for the maintenance of the inventory.
‹‹ By outsourcing the inventory needs, an organisation can focus on other core issues of
Y
the business such as venturing into new initiatives or areas, instead of resolving minor
issues related to the inventory management
R

‹‹ Vendor Managed Inventory (VMI) is a process or system in which a vendor provides or

supplies items to a customer on the basis of the order specified by the customer
R

‹‹ The aim of VMI is to support the business objectives and reorganise the supply chain
E

functions for both suppliers and their customers.

‹‹ The stock levels in the VMI organisations are fixed at the rate of consumption of the
H

customer.
IC

‹‹ It is observed that the environmental concerns have taken the front seat and thus
organisations are forced to adapt to the safety concerns.
D

8.7 Glossary
N

‹‹ Outsourcing: It is a process wherein an organisation passes one of its business

processes to another organisation specialised in that process.
O

‹‹ Vendor Managed Inventory (VMI): It is a process in which a vendor supplies items to

a customer on the basis of the order specified by the customer.
P

8.8 Terminal Questions

1. Discuss the storage of slow-moving, obsolete and redundant items.

2. Explain the outsourcing of inventory needs.

142 DDE, Pondicherry University, Pondicherry

 CHAPTER 8  Trends in the Storage of Materials

Notes 3. Elaborate on Vendor Managed Inventory (VMI).

4. What are the different processes included in the implementation of VMI?

5. Discuss the environmental concerns with respect to materials management.

8.9 Answers

Y
Q. Self Assessment Questions

IT
1. True
2. Antique items are always in demand and are sold at high prices.

S
3. True
4. outsourcing

R
5. False

E
6. Vendor Managed Inventory (VMI)

IV
7. fixed
8. c. Storing

N
9. True
10. False
U
Q. Terminal Questions
1. The storage management is performed on the basis of the classification of goods,
Y

which may be based on several factors. Refer to section 8.2 Storage of Slow-
moving, Obsolete and Redundant Items.
R

2. The inventory needs are fulfilled through an outsourcing organisation vendor

R

who is responsible for the maintenance of the inventory. Refer to section

8.3 Outsourcing the Inventory Needs.
E

3. Vendor Managed Inventory (VMI) is a process or system in which a vendor

provides or supplies items to a customer on the basis of the order specified by the
H

customer. Refer to section 8.4 Vendor Managed Inventory (VMI).

4. The different processes included in the implementation of VMI are fulfilment,
IC

receiving, consumption, return and physical and cycle count. Refer to sub section
8.4.2 Implementation of VMI.
D

5. It is observed that the environmental concerns have taken the front seat and
thus organisations are forced to adapt to the safety concerns. Refer to section
N

8.5 Environmental Concerns.

O

8.10 Case Study: Outsourcing of Inventory by Dell

P

In 1995, Dell Computers had developed “Dell Direct Model” after realising the benefits of
outsourcing inventory needs. This model included high velocity, cheaper distribution system
with direct customer relationships and build-to-order manufacturing. Dell was able to save
significant cost and time after implementing collaborative supplier relationships. In addition,
it got competitive edge for several years.

DDE, Pondicherry University, Pondicherry 143

 Materials and Store Management

Notes For achieving this, Dell had first trimmed down the number of its suppliers from
204 to 47. The suppliers were advised to have their warehouses at a distance of 15 minutes
from the Dell factories. This was done to implement Just-In-Time (JIT) system for managing
the inventory. The JIT system had reduced the inventory costs of the organisation and led
to a 6% profit advantage in components. This enabled the organisation to reduce the delivery
time of products to end customers from 30 to 13 days.

Y
In addition, the JIT system led to easy customisation of Dell products, reduced wastage of
inventory and increased ability to adjust the production levels. Moreover, the collaborative

IT
supply chain enabled Dell to manage its product orders effectively by sharing information,
costs, risks and joint decision making.

S
As a result, the inventory turnover of the organisation reduced by 57% and the production
space increased due to the decreased inventory storage area. Consequently, Dell registered

R
more than 50% growth rate for three consecutive years and its annual sales reached $12
billion by 1997.

E
Discussion Questions

IV
1. What were the benefits that Dell Computers received after implementing the

N
collaborative supply chain?

(Hint: The outsourcing of inventory enabled Dell to reduce its inventory turnover by 57 %.)
U
2. Apart from VMI, list some of the ways that organisations can use to meet their
inventory needs.
Y

(Hint: Synchronised Supply (SS) is one of the strategies that can be used by organisations
R

for managing their inventories. In this strategy, a supplier uses the information from
customers to plan their supply and production activities.)
R

8.11 References and Suggested Readings

E

‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall
H

of India Pvt. Ltd.

IC

‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi
Publication (P) Ltd.
D

E-references
N

‹‹ Store Management-II. Retrieved from http://www.slideshare.net/birubiru/store-

management-ii.
O

‹‹ Vendor-Managed Inventory in the Retail Supply Chain. Retrieved from http://www.

datalliance.com/vmi_retail_sc.pdf.
P

144 DDE, Pondicherry University, Pondicherry

chapter

Performance Measurement
9 in Materials and Store

Y
IT
Management

S
R
E
Structure

IV
9.1 Introduction

N
Learning Objectives U
9.2 Store Efficiency and Effectiveness

9.3 Queuing Theory

Y

9.4 Network Analysis

R

9.5 Decision Tree Method for Measuring Inventory Performance

9.6 Simulation Optimisation for Measuring Inventory Performance

R

9.7 Summary
E

9.8 Glossary
H

9.9 Terminal Questions

IC

9.10 Answers

9.11 Case Study: Application of Simulation Technique

D

at XYZ Organisation

9.12 References and Suggested Readings

N
O
P
 Materials and Store Management

Notes Learning Objectives

After completing this chapter, you will be able to:
 discuss the store efficiency and effectiveness
 explain the concept of queuing theory
 elaborate the concept of network analysis

Y
 discuss the concept of decision tree as an inventory performance measure
 explain the concept of simulation in the process of a store performance optimisation

IT
9.1 Introduction

S
The previous chapters dealt with the basic concepts of materials and store management. You

R
also studied the techniques involved in the management of a store such as store classifications
of goods on the basis of their movement and the store layout on the basis of the customers’

E
movement around stores. You also learned about the various security and safety measures that
need to be implemented in the store premises to ensure that the issues that arise due to lack

IV
of safety, security and other factors affecting the health of employees are taken care while
managing a store.

N
However, when it comes to the management of materials and stores, there must be an element
of a measurable entity. Without measurement, management cannot happen and for it to be
U
effective and efficient, the measurement parameter must be practically feasible to implement
and monitor. Therefore, measurement forms the basis of performance in the management of
materials and stores.
Y

In this chapter, you will study about the performance measurement in materials and stores.
In addition, you will learn about the store efficiency and effectiveness. It will also discuss
R

the queuing theory in detail. Network analysis will also be explained in the chapter. Next,
the decision tree method will be discussed as an inventory performance measure. In the
R

end, the chapter will explain the concept of simulation optimisation for measuring the
inventory performance.
E
H

9.2 Store Efficiency and Effectiveness

IC

When it comes to the process of managing materials and a store, two important concepts
invariably come into the picture. These are called store efficiency and effectiveness.
D

Before you study these basic concepts of store and materials management, let us clarify the
definition of efficiency and effectiveness.
N

In simple words, efficiency means doing or completing a wok within a boundary, which is
usually defined in terms of time. For example, in case of store management, efficiency means
O

loading or unloading the entire materials within a time frame of say 2 hrs, whereas the target
was of 2.5 hrs. Efficiency can be defined in terms of the cost of managing a store also. For
P

example, efficiency means negotiating with a vendor for purchasing materials at a reduced
cost, which is10% lower than the quoted price.

On the other hand, effectiveness means the impact of a work performed based on the
consequences. For example, in the above case, the negotiator might have procured the items at
a rate 10% less than the quoted price, but the vendor might have supplied the items below the
quality standards, which would have an impact on the overall product and customer satisfaction.

146 DDE, Pondicherry University, Pondicherry

 CHAPTER 9  Performance Measurement in Materials and Store Management
CHAPTER 9  Performance Measurement in Materials and Store Management

Notes Fig. 9.1 depicts the outcomes of an effective stock control:

Notes Fig. 9.1 depicts the outcomes of an effective stock control:

Outcomes of Effective Stock Control

Assess the Monitor Maintain

Y
performance and limit stock in good
of products shrinkage condition

IT
Maintain

S
Monitor
customer stock
preferences security

R
E
Fig. 9.1: Outcomes
Fig. 9.1: Outcomes of
of an
an Effective
Effective Stock
Stock Control
Control
Fig.
Fig. 9.2
9.2 depicts
depicts an
an effective
effective and
and efficient
efficient store
store and
and materials
materials management:

IV
management:

N
U
Y
R
R

Fig. 9.2: An
Fig. 9.2: An Effective
Effective and
and Efficient
Efficient Store
Store and
and Materials
Materials Management
Management
E

(Source:
(Source: http://www.buyfluorescents.com/images/store_lighting_systems.jpg)
http://www.buyfluorescents.com/images/store_lighting_systems.jpg)

In
In Fig.
Fig. 9.2,
9.2, you
you can
can observe
observe thatthat the
the store
store is
is effective
effective as
as it
it enables
enables its
its customers
customers toto move
move
H

around
around the store freely and comfortably and at the same time, provides a glimpse of the
the store freely and comfortably and at the same time, provides a glimpse of the
materials
materials displayed.
displayed. ItIt is
is efficient
efficient as
as it
it allows
allows the
the management
management of of the
the store
store to
to use
use an
an effortless
effortless
IC

mechanism
mechanism to to refill
refill materials
materials inin the
the appropriate
appropriate bay
bay smoothly.
smoothly.

Self-Assessment
Self-Assessment Questions
Questions
D

1.
1. Define
Define efficiency.
efficiency.
N

2.
2. Store
Store effectiveness
effectiveness is
is the
the impact
impact of
of aa work
work performed
performed based
based on
on its
its consequences.
consequences.
(True/False)
(True/False)
O
P

9.3 Queuing Theory

When
When it
it comes
comes toto the
the process
process of
of the
the management
management of of materials
materials and
and aa store,
store, the
the concept
concept of
of
queuing theory comes into the picture. This concept is the basic structure. The concept
queuing theory comes into the picture. This concept is the basic structure. The concept of theof the
management
management of of materials
materials and
and people
people is
is such
such that
that no
no manger
manger can
can manage
manage thethe store
store operations
operations
without
without this
this basic
basic concept.
concept.

DDE, Pondicherry University, Pondicherry

DDE, Pondicherry University, Pondicherry 147
147
 Materials and Store Management

Notes Customers, whether they be physical objects or living people, often find themselves in line
when they have to wait for a service that is either not available or takes too long to complete.
Waiting in line is commonplace in many places; some examples are banks, customer service
centres, and train ticket desks. In cases when the service provider’s and consumers’ arrival
rates are unpredictable, the queuing theory can be used to make sense of the issue.

Use it to find the sweet spot between these two expenses when pricing a service:

Y
‹‹ Cost of offering the service: Includes all that goes into maintaining and running the
service facilities.

IT
‹‹ Cost incurred due to a delay in offering the service: Involves the cost associated
with the customers’ waiting time

S
In 1903, the Danish engineer A. K. Erlang proposed the queuing theory. The issue of heavy

R
phone traffic was immediately apparent to him, and he proposed solutions to increase efficiency
and decrease wait times. But eventually, people began using queuing theory to figure out how

E
long lines typically lasted and how many consumers were in each line.

IV
In simple terms, a queue is a line formed by people waiting for a particular service.. In case
of materials management, the concept is the same. In this case, the customer is the materials
lined up to be transported to another location or division and the server is the vehicle to

N
transport these materials.
U
9.3.1 Fundamentals of Queuing Theory
When it comes to the process of managing stores and materials on the basis of the
Y

queuing theory, there are certain fundamental concepts need to be understood. These are
enumerated below:
R

‹‹ There can be several queues and servers. In addition, there can be several materials need
to be transported to different locations and several vehicles to transport or tranship
R

them. This model is known as many-server many-clients model.

E

‹‹ There can be several materials from different locations to be transported but there
is only one vehicle to transport them. This model is known as single-server many-
H

clients model.
IC

‹‹ Sometimes, queues are required to be reshuffled depending on the exigencies of the

situation.
‹‹ The material originally lined up to be transported may be transported through another
D

vehicle, as this vehicle may have less number of materials and the cost aspect. This
process is known as jockeying.
N

‹‹ Sometimes, the number of materials to be transported is so large that the manager may
not want to put another lot into the queue or decides to put them later. This is known
O

as balking.
P

‹‹ Sometimes, due to an urgency of the transportation of materials, the manager keeps on

placing the materials into one queue and then the other queue and then the next. This
process is known as reneging.

148 DDE, Pondicherry University, Pondicherry

 CHAPTER 9  Performance Measurement in Materials and Store Management

Notes Therefore, you can observe that the process of managing materials by the queuing theory
depends in a large extent on the priority of the materials to be transported. This may involve
jumping the queue and not joining the queue as it too large. This decision of joining the queue
or not depends on factors such as time, cost and handling goods during transportation.

9.3.2 Performance Measures of Queuing Systems

Y
Having understood the fundamental concepts of queuing systems, let us now discuss the

IT
performance measures of a queuing system.

Following are some of the measures of queuing systems:

S
‹‹ The amount of materials, i.e., the quantity of materials in a queue

R
‹‹ The average amount of time spent by materials waiting in a queue before they are served
‹‹ The average amount of the arrival time taken by materials to join a queue, i.e., the

E
arrival rate

IV
‹‹ The average amount of time required by a server to process materials
‹‹ The average idle time of materials in a queue

N
These measures are definitely considered while processing the materials transportation from
one place to another place.
U
In the absence of these measures, materials handling becomes difficult, especially if the
materials are perishable in nature, as perishable materials cannot afford to spend too much
Y
time or idle time waiting in a queue to be transported.
R

Self-Assessment Questions
3. ____________ are formed when customers, who require a service, wait either due to
R

the lack of service facilities or inefficient and time-consuming service facilities.

E

4. Explain the meaning of jockeying.

5. When a manager does not want to put another lot of material into a queue or decides
H

to put them later as the number of materials to be transported is very large, it is

called____________.
IC

Activity
D

Using the Internet, identify a real-life example of the queuing theory in a manufacturing
organisation.
N
O

9.4 Network Analysis

P

When it comes to the process of managing stores, another important approach that is widely
used is the network analysis approach. This is again a full-blown branch of operations research
that is used widely for day-to-day problems and analysis to sort out the issues related to
the transportation and transhipment of materials.

DDE, Pondicherry University, Pondicherry 149

 Materials and Store Management

Notes In a nutshell, network analysis is applied to parallel operating processes. For example, consider
a situation when materials are to be transported by a single vehicle to destination A but the
vehicle has to move to destination B to pick up another lot of materials. Network analysis
deals with concepts like the earliest start time and least start time. In this particular case,
the earliest start time would be when the vehicle has delivered the materials to destination
A and can now pick the materials from location B. Network analysis is performed to derive
the information regarding the time required to complete a project, its key activities and the

Y
activities that can be delayed without delaying the overall project.

IT
This information is used for managing and monitoring the progress of the component
activities of the overall project. Network analysis can be efficiently performed by using
different models. CPM and PERT are the most widely used network analysis models. These

S
two models are similar in many respects although they were developed independently. Both
the models are based on the concept of critical path and laying maximum emphasis on critical

R
activities. However, there are some noticeable differences between the two. PERT is more
probabilistic in nature as compared to CPM. In addition, PERT primarily focuses on the

E
completion time of the project and puts less importance on cost.

IV
The most important feature of PERT is that it considers the variability in the completion
times of individual activities and the overall project. PERT is more useful in non-repetitive
projects and research and development-based projects. On the other hand, CPM is more

N
objective in nature. CPM is very useful in repetitive and standardised projects in which the
activity durations are certainly known. CPM is activity oriented and lays more emphasis on
U
the cost of the project.

9.4.1 Programme Evaluation and Review Techniques (PERT)

Y
R

PERT is one of the techniques widely used by managers in the process of executing their
work. This technique is used to breakdown the various tasks in a project and the time taken
R

by these tasks to get completed. Therefore, by combining the time taken to perform each task,
managers are able to get the accurate time for the completion of the entire task. The main
E

task of the PERT technique is to schedule the tasks and not to find the best or shortest time
taken to complete a task.
H

When it comes to the process of managing through the PERT technique, it connects or links
IC

the broken down tasks into a proper sequence and thus provides a network-like structure.
This structure then helps managers to keep a track of the events or activities to complete the
entire task.
D

For example, suppose some goods are required to be picked up from destination A and it takes
3 days to deliver to destination B and then from B, the vehicle has to pick up another lot of
N

goods to be delivered to destination C and it takes 4 days. However, as destination D is on the

way, it can load goods to be delivered to destination D and for which, it takes 1/2 a day. PERT
O

deals with scenarios like this.

P

One easy way to reduce potential negative outcomes is by using the PERT method, which
takes into account not only the best and worst case scenarios for a task estimate but also the
most probable and strongly weighted estimate. Arrows indicate successive occurrences in
an event-based network that it employs. A PERT estimate is the average of three separate
estimates calculated using the PERT formula. At the heart of every PERT study is a network
diagram. All tasks are estimated three times: once for the best case scenario, once for the worst
case scenario, and once for the most likely scenario.

150 DDE, Pondicherry University, Pondicherry

 CHAPTER 9  Performance Measurement in Materials and Store Management
CHAPTER 9  Performance Measurement in Materials and Store Management

Notes The worst-case and best-case schedules are created independently based on the worst-case
Notes The best-case
and worst case schedule isrespectively.
projections, developed using only job,
For every the worst caseaestimates
we create and the The
PERT estimate. best next
case
schedule
step is to is developed
use the PERT using only theto
estimations best caseaestimates.
create A PERT
PERT project estimate is determined for
timeline.
each task. A PERT project schedule is then set using the PERT estimates. Fig. 9.3 shows an
Figure
example9.3of illustrates
PERT: a PERT example:

40

Y
t=1 mo t=3 mo
D F

IT
t=3 mo t=2 mo
10 30 50
A E

S
B C
t=4 mo t=3 mo

R
20

E
PERT network chart for a seven-month project with five
milestones (10 through 50) and six activities (A through F)

IV
Fig. 9.3:
Fig. A Typical
9.3: A Typical PERT
PERT Network
Network
(Source: http://www.tutorialspoint.com/images/pert_chart.jpg)
(Source: http://www.tutorialspoint.com/images/pert_chart.jpg)

9.4.2 Critical
9.4.2 Critical Path
Path Method
Method (CPM)
(CPM)
N
U
CPM is
CPM is the
the derived
derived component
component of of the
the PERT
PERT technique.
technique. It
It is
is used
used toto determine
determine thethe longest
longest
path or
path or time
time taken
taken byby persons
persons to
to get
get the
the work
work done.
done. Any
Any delay
delay in
in the
the intervening
intervening path
path has
has
Y

aa cascading
cascading effect
effect on
on thethe completion
completion path.
path. In
In the
the above
above example,
example, the
the critical
critical path
path is
is 7.5
7.5 days.
days.
However, if if there
there is
is aa delay
delay of
of say
say 1/2
1/2 day
day at
at destination
destination D
D due
due to
to aa breakdown
breakdown of of the
the vehicle,
vehicle,
R

However,
the critical
the critical path
path will
will become
become 88 days.
days.
R

CPM
In was
1956 developed
and 1957, theindependently by the Du
DuPont corporation in Pont company
the United in the
States US in 1956-57
invented CPM on to address
their own
the scheduling issues in industrial organisations.
to solve scheduling problems in manufacturing organisations.
E

CPMmain
The is primarily
focus ofconcerned with theabalance
CPM is finding happy or trade-off
medium between
between cost
time andmoney.
and time. The
Thistechnique
method
H

is mostly applied to projects employing a stable technology and that are relatively
is often reserved for low-risk initiatives that make use of established technologies. risk free.

CPM
To is the
find usedquickest
to determine
way tothefinish
shortest time possible
a project to complete
or its phase, CPM isa utilised.
project or
Inits phase.
order to The
find
IC

method analyses the every possible sequence of tasks, based upon the network
the longest series, the approach examines all potential task sequences using the network diagram, to
determine the longest sequence. This sequence is termed as the critical path because
diagram. The critical route is the sequence that defines the bare minimum of time needed it sets the
minimum time in which the project can be completed.
D

to finish the project.

A critical
All path resources
necessary assumes that allbe
must resources
availablerequired are present
at all times at all path
for a critical times.to be valid.
N

To determine
Making a networkthe map
critical path,
of the a network
project with the diagram is created
most parallel for theone
jobs allows project with the
to identify the
maximum amount of parallel tasks. premise
Task durations are estimated with estimates
a basic assumption
O

crucial path. The most fundamental upon which task duration are based
that the tasks will have the desired resources available when needed.
is the availability of the requested resources at the time of task execution. With the durations
The networkand
relationships fromtothe networkthe diagram,
earliesttheprobable
earliest start
possible
andstart
end date
datesand
forfinish
each date for
P

diagram is used determine activity

each task is calculated. The calculations are normally done through the project
based on their durations and linkages. In most cases, the project management tool will management
software.the
perform Themath.
sequence of tasks
A crucial pathwith
is a the longest
sequence of path
jobsand
that,that can be having
although completedthe on time
longest
is the can
path, critical path.
nevertheless be finished on time.

DDE, Pondicherry University, Pondicherry 151

DDE, Pondicherry University, Pondicherry 151
 Materials and Store Management
Materials and Store Management

Notes Fig. 9.4 shows an example of CPM:

Notes Fig. 9.4 shows an example of CPM:
Critical path is the longest path = 9 days
Critical path is the longest path = 9 days

Task 1 Task 2
Task 1 Task 2
Start 2 days 3 days Task 3 End
Start 2 days 3 days Task 3 End
4 days
Task 4 Task 5

Y
4 days
Task 4 Task 5
1 days 2 days
1 days 2 days

IT
This path is 7 days
This path is 7 days
Task 4 or Task 5 could, between them, start or finish up to 2 days late
Task delaying
without 4 or Taskthe
5 could,
end ofbetween them,
the project. start
This or finish
path up 2todays
thus has 2 days latein it.
slack
without delaying the end of the project. This path thus has 2 days slack in it.

S
Fig. 9.4
Fig. Critical Path
9.4 Critical Path Method
Method
Fig. 9.4 Critical Path Method
(Source: http://syque.com/quality_tools/tools/TOOLS16_files/image001.gif)
http://syque.com/quality_tools/tools/TOOLS16_files/image001.gif)
(Source:

R
(Source: http://syque.com/quality_tools/tools/TOOLS16_files/image001.gif)
It is
It is possible
possible to
to reduce
reduce the
the critical
critical path
path of
of aa project
project by
by rearranging
rearranging some
some tasks
tasks with
with an
an optional
optional
It is possible to reduce the critical path of a project by rearranging some tasks with an optional

E
sequence or
sequence or by
by moving
moving the
the key
key people
people to
to the
the tasks
tasks in
in the
the critical
critical path
path so
so that
that the
the time
time of
of these
these
sequence or by moving the key people to the tasks in the critical path so that the time of these
tasks can
tasks can be
can be reduced.
be reduced.
reduced.
tasks

IV
Self-Assessment Questions
Self-Assessment Questions
Self-Assessment Questions
6. __________
6. __________ analysis
analysis helps
helps in
in deriving
deriving information
information regarding
regarding the
the time
time required
required to
to

N
6. __________ analysis helps in deriving information regarding the time required to
complete aa project,
complete project, its
its key
key activities
activities and
and the
the activities
activities that
that can
can be
be delayed
delayed without
without
complete a project, its key activities and the activities that can be delayed without
delaying the
delaying the overall
the overall project.
overall project.
project.
delaying
U
7. PERT
7. PERT isis more
more objective
objective inin nature
nature asas compared
compared toto CPM.
CPM. (True/False)
(True/False)
7. PERT is more objective in nature as compared to CPM. (True/False)
8. ________
________ primarily
primarily focuses
focuses onon the
the completion
completion time
time of
of the
the project
project and
and puts
puts less
less
Y
8.
8. ________ primarily focuses on the completion time of the project and puts less
importance
importance onon cost.
on cost.
cost.
importance
R

9. CPM
9. CPM isis mostly
mostly used
used in
in repetitive
repetitive and
and standardised
standardised projects
projects as
as ________________.
________________.
9. CPM is mostly used in repetitive and standardised projects as ________________.
R

Decision Tree
Decision
Decision Tree Method
Tree Method for
Method for Measuring
for Measuring Inventory
Measuring Inventory
Inventory
E

9.5
9.5
9.5 Performance
Performance
Performance
H

A decision
A decision tree
tree is
is a mathematical
mathematical technique
technique usedused to
to make
make generalisations
generalisations based
based on
on the
the facts
facts
A decision tree is aa mathematical technique used to make generalisations based on the facts
and Fig.s available to managers. It is a mathematical model that uses alternatives in the form
IC

and Fig.s
and Fig.s available
available toto managers.
managers. It It is
is aa mathematical
mathematical model
model that
that uses
uses alternatives
alternatives in
in the
the form
form
of Boolean
of Boolean values
values (1(1 or
or 0)
0) and
and thus
thus makes
makes generalisations
generalisations about
about particular
particular tasks
tasks or
or events.
events.
of Boolean values (1 or 0) and thus makes generalisations about particular tasks or events.
The decision
The decision tree
tree method
method refers
refers toto a model
model used
used to
to take
take decisions
decisions in in an
an organisation.
organisation.
to aa model
D

The decision tree method refers used to take decisions in an organisation.

In this,
In this, a tree-type
this, aa tree-type structure
tree-type structure
structure isis drawn
is drawn
drawn to to decide
to decide the
decide the best
the best solution
best solution of
solution of a problem.
of aa problem. The flow
problem. The
The flow
In flow
of aa decision
of decision tree
tree should
should bebe from
from left
left to
to right.
right. The
The format
format of
of a decision
decision tree
tree is
is shown
shown in in
of aa decision
N

of a decision tree should be from left to right. The format tree is shown in
Fig. 9.5:
Fig. 9.5:
9.5:
Fig.
O

100% 100%
1.1 100% 100%
TRUE 1.1 $0.00 $0.00
1 TRUE $0.00 $0.00 $0.00
P

1 $0.00 $0.00 0% 0%
New Decision Tree $0.00 $0.00 1.2 0% 0%
New Decision Tree $0.00 1.2 $0.00 $0.00
$0.00 $0.00
FALSE 0%
2 FALSE 0%
2 $0.00 $0.00
$0.00 $0.00
Fig. 9.5: Format of a Decision Tree
Fig.
Fig. 9.5:
9.5: Format
Format
(Source: of
of aa Decision
Decision Tree
http://www.epmptools.com/) Tree
(Source:
(Source: http://www.epmptools.com/)
http://www.epmptools.com/)

152 DDE, Pondicherry University, Pondicherry

152 DDE, Pondicherry University, Pondicherry
 CHAPTER
CHAPTER99
Performance
Performance Measurement in Materials
Measurement in Materialsand
andStore
StoreManagement
Management

Notes Fig. 9.69.6

Fig. shows
showsananexample
exampleofof aadecision
decisiontree
tree and
and its
its application:
application:
Notes

A glass factory specializing in crystal is experiencing a substantial

backlog, and the firm’s management is considering three courses of
action:
A) Arrange for subcontracting
B) Construct new facilities
C) Do nothing (no change)

Y
The correct choice depends largely upon demand, which may be low,
medium, or high. By consensus, management estimates the respective

IT
demand probabilities as 0.1, 0.5,,and 0.4.
Given the payoffs on the next page, manually create and solve this
problem using a decision tree.

S
A Glass Factory: The Payoff Table

R
The management estimates the profits when choosing from the
three alternatives (A, B, and C) under the differing probable levels
of demand. These profits, in thousands of dollars are presented in

E
the table below:
0.1 0.5 0.4

IV
Low Medium High
A 10 50 90
B -120 25 200

N
C 20 40 60
U
Fig.9.6:
Fig. Example of
9.6:Example of aa Decision
Decision Tree
Tree
(Source:
(Source: https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&sqi=2&ved=0CC4QFjAD&url=http%
https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&sqi=2&ved=0CC4QFjAD&url=http%
3A%2F%2Fwww.andrew.cmu.edu%2Fuser%2Frpadman%2FDecision%2520Making%2520-%2520day2%2520slides.ppt&ei=knoRVJPPB
3A%2F%2Fwww.andrew.cmu.edu%2Fuser%2Frpadman%2FDecision%2520Making%2520-%2520day2%2520slides.ppt&ei=knoRVJPPB
MaxuATO8oGwDg&usg=AFQjCNF40qgtxCzNNOM3ki2OwMI3OFqCcw&bvm=bv.74894050,d.c2E)
MaxuATO8oGwDg&usg=AFQjCNF40qgtxCzNNOM3ki2OwMI3OFqCcw&bvm=bv.74894050,d.c2E)
Y

Self-AssessmentQuestions
Self-Assessment Questions
R

10.10. ________________
________________ method involves the use of a tree-like model for taking decisions
method involves the use of a tree-like model for taking decisions
in an organisation.
in an organisation.
R

11. The flow of a decision tree should be from right to left. (True/False)
11. The flow of a decision tree should be from right to left. (True/False)
E

Simulation Optimisation for Measuring Inventory

H

9.6 Simulation Optimisation for Measuring Inventory

9.6 Performance
Performance
IC

A simulation is a representation of a real-life situation. It is a method in which a replica of

A ascenario in real
real-world life can
process be represented
or system is developedby aover
simulation.
a period.This techniquemodel
A simulated entails gradually
acts in the
creating an exact copy of an existing process or system. A simulated model mimics the real-
D

same manner as the selected physical or abstract system behaves in reality. For example,
world behaviour
aircraft ofgiven
pilots are the chosen
trainingphysical
throughorsimulation
abstract models
system.asAsreal
real aircraft
aircraft training
training canmay
incurbe
extremely expensive and various
fraught risks.
with danger, forininstance, pilots sector,
are trained usingaresimulation
N

huge costs and involve Similarly, the education teachers trained

models. Similarly,
on simulated in theoffield
models of education,
students (a group dummy students
of individuals whoserve as the
imitate as basis for teacher
students). This
training (a group
avoids the risk of of individuals
spoiling whoofimitate
the future studentsas ifstudents).
the teacherThis way,
is not ableif tothe instructor
teach properly.is
O

incompetent, the pupils models

Therefore, simulation won’t have
havetheir
provedfutures
to be ruined.
useful forThat is why
training trainingSimulations
purposes. using simulation
used
for training purposes are divided
models has been so fruitful. There are into three categories, which are as follows:
main types of training simulations, and they are
P

as follows:
‹‹ Live Simulation: Refers to a simulation in which equipment is used to imitate a real
system.
‹‹ Live For example,
Simulation: testing
Alludes to athe battery
model of a car
wherein with the help
apparatuses areofemployed
an electrical tester. an
to mimic
actual
‹‹ system.
Virtual An electrical
Simulation: Refers tester might beinuseful
to a simulation whichfor checking
real the health
people operate of a car’s
on simulated
battery, forFor
systems. instance.
example, a pilot flying a simulated jet.
‹‹ Virtual Simulation: Alludes to a game where actual players control virtual machines.
As an illustration, consider a pilot operating a Pondicherry
DDE, virtual plane.
University, Pondicherry 153
DDE, Pondicherry University, Pondicherry 153
 Materials and Store Management

Notes ‹‹ Constructive Simulation: Alludes to a game where computer-generated characters

interact with digital environments. In a military game, for instance, players direct the
movement of troops and other pieces of equipment as they traverse the board.

So far, we’ve established that when faced with uncertainty, simulation models work best. An
analyst can create potential solutions, test them, and determine their efficacy through the use
of a simulation, which allows them to include problem-related constants and variables. One

Y
of the most common ways to describe anything is via a simulation. An analyst can use it to
better understand how a system will react in specific scenarios. But it doesn’t come up with

IT
the best possible answers. Consequently, it is up to the analyst to come up with solutions for
the things they wish to test.

S
Simulation models find extensive use in the industrial industry. You may use these models to
figure out how much of an impact new machinery, buildings, storage facilities, and distribution

R
hubs will have. In addition, the performance of both current and future systems may be
ascertained through the use of simulation models.

E
Among the many uses of simulation models in production are the following:

IV
‹‹ Determining the throughput under average and peak loads
‹‹ Calculating the system cycle time

N
‹‹ Making an efficient utilisation of resources such as men, raw material, money and
machines
U
‹‹ Identifying bottlenecks and shortcomings in the production process
‹‹ Solving the problems of queuing in a work environment
Y

‹‹ Identifying staffing requirements

R

‹‹ Determining the effectiveness of scheduling and control systems

R

In materials and stores management, a simulation is used to simulate or in other words,

provide a manager a tool to perform or carry out the basic operations as they are using the
E

same in a real-life scenario. With the help of a simulation, managers are able to optimise the
performance of inventory materials.
H

Proper inventory management entails keeping a sufficient quantity and storage of goods on
hand, as mentioned earlier in this chapter. With the use of a simulation, a company may choose
IC

an inventory strategy that minimises expenditures like carrying and stock-out charges as well
as yearly inventory costs. Inventory issues including demand and lead time uncertainty are
commonly addressed using the Monte Carlo simulation method. First, the demand distribution
D

throughout the lead time is estimated by empirical study of prior data or computer simulation
using random numbers. This is done in order to solve inventory problems using the Monte
N

Carlo simulation approach. Next, we use the cumulative probability distribution of demand
throughout the lead period to determine the yearly inventory and stock-out costs for different
O

safety stock levels.

P

Let us understand the application of a simulation in inventory control with the help of an
example.

154 DDE, Pondicherry University, Pondicherry

 CHAPTER 9  Performance Measurement in Materials and Store Management

Notes Example 1: An organisation wants to control the annual inventory costs for one of its
products. Table 9.1 shows the demand distribution of the product during the lead time:
Table 9.1: Demand Distribution During Lead Time
Quantity Demanded 0 1 2 3
During Lead Time         
Probability Distribution 0.10 0.45 0.30 0.15

Y
Table 9.2 represents the distribution of lead time of the product:

IT
Table 9.2: Distribution of Lead Time
Lead Time 2 3 4

S
(in Weeks)

R
Probability 0.20 0.65 0.15

E
The organisation reorders the product when its quantity reaches to 5 units and the quantity
of order placed is 12 units every time. Assume that the supplier delivers the exact quantity of

IV
the product required by the organisation. The ordering cost, holding cost and stock-out cost
of the product are Rs. 120 per unit, Rs. 5 per unit per week and Rs. 75 per unit, respectively.

N
Let us now illustrate the manual simulation for 15 weeks using the following random numbers:

82, 89, 78, 24, 53, 61, 18, 45, 04, 23, 50, 77, 27, 54 and 10
U
Solution: The cumulative probability of the product is calculated and random numbers are
assigned for each value of the demand, which is shown in Table 9.3:
Y

Table 9.3: Calculation of the Cumulative Probability of the Product

R

Demand Probability Cumulative Probability Random Numbers Assigned

R

0 0.10 0.10 00-09

1 0.45 0.55 10-54

E

2 0.30 0.85 55-84

H

3 0.15 1.00 85-99

IC

The cumulative probability and assigned random numbers for the lead time are shown in
Table 9.4:
D

Table 9.4: Cumulative Probability and Assigned Random Numbers

for the Lead Time
N

Lead Time Probability Cumulative Probability Random Numbers

O

Assigned
2 0.20 0.20 00-19
P

3 0.65 0.85 20-84

4 0.15 1.00 85-99

Assume that the stock in hand at the start of the simulation process is 10 units and all orders
are placed at the beginning of the week. In addition, assumed that all orders are received at
the end of the same week.

DDE, Pondicherry University, Pondicherry 155

 Materials and Store Management

Notes Table 9.5 shows the simulated inventory cost of the product:
Table 9.5: Simulated Inventory Cost of the Product

Demand
Stock in Hand at the Beginning of the Week

Stock

Lead
time
out
Stock in Hand at the End of the Week

Y
Inventory Carrying Costs
Quantity Received

IT
Simulated Lead Time
Week

Random Numbers
Quantity Demand
Random Number

S
Quantity

Costs
R
E
IV
1 10 82 2 - 8 8x5=40

N
2 8 89 3 U - 5 5x5=25
3 5 78 2 - 3 3x5=15 84 3
4 3 24 1 - 2 2x5=10
Y

5 2 53 1 - 1 1x5=5
6 1 61 2 12 11 11x5=55
R

7 11 18 1 - 10 10x5=50
R

8 10 45 1 - 9 9x5=45
E

9 9 04 0 - 9 9x5=45
H

10 9 23 1 - 8 8x5=40
11 8 50 1 - 7 7x5=35
IC

12 7 77 2 - 5 5x5=25
13 5 27 1 - 4 4x5=20 79 3
D

14 4 54 1 - 3 3x5=20
N

15 3 10 1 - 2 2x5=10
O

The total inventory costs can be calculated as follows:

P

Inventory carrying costs = 440

Ordering cost (1 order x 120) = 120

Stock-out cost = 0

Total inventory cost = 440+120+0 = 560

156 DDE, Pondicherry University, Pondicherry

 CHAPTER 9  Performance Measurement in Materials and Store Management

Notes Self-Assessment Questions

12. A _____________is a method wherein a replica of a real-world process or system is
developed over a period.

13. ___________simulation refers to a simulation in which equipment is used to imitate

a real system.

Y
14. In materials and stores management, a simulation is used to simulate a tool to perform
the basic operations as they are using the same in a real-life scenario. (True/False)

IT
Activity

S
Using the Internet, identify some of the examples of manufacturing organisations that

R
have used simulations for managing their inventories

E
9.7 Summary

IV
‹‹ During the course of store management, issues related to efficiency and effectiveness
comes to the forefront

N
‹‹ Store effectiveness refers to the improvement in the functioning of stores, i.e., whether
there was an improvement in productivity or not
U
‹‹ Store efficiency refers to the process ofdoing tasks within certain bounds. For example,
within a time frame or within the cost control measures.
‹‹ In the management of materials and a store, the queuing theory, PERT , decision trees
Y

and a simulation are widely used.

R

‹‹ These techniques assist a manager in the scheduling of tasks and also enable a manager
to determine the critical path so that the effective controls can be incorporated in the
R

management system.
E

9.8 Glossary
H

‹‹ PERT: It is a technique that is deployed by managers during the process of scheduling

of activities or events by breaking down the entire structure into manageable parts.
IC

‹‹ CPM: It is used to determine the longest path in a network hence it is used to determine
the maximum time it will take to complete the work.
D

‹‹ Queuing Theory: This is a mathematical model used to schedule materials for

transportation.
N

‹‹ Simulation: This is another technique that uses a mathematical model to bring out the
real scenario onto a machine by deploying mathematical models.
O

9.9 Terminal Questions

P

1. Explain store efficiency and effectiveness.

2. Discuss the queuing theory.
3. Explain network analysis.
4. Discuss the concept of decision tree method.
5. Elaborate on simulation optimisation as a measure of inventory performance.

DDE, Pondicherry University, Pondicherry 157

 Materials and Store Management

Notes
9.10 Answers
Q. Self Assessment Questions

1. efficiency means doing or completing a wok within a boundary, which is usually

defined in terms of time.

Y
2. True

IT
3. Queues

4. Jockeying is the process of transporting material through another vehicle

S
instead of the vehicle selected previously for transportation due to less number
of materials and the cost aspect in that vehicle.

R
5. balking

E
6. Network

IV
7. False

8. PERT

9.

N
in these projects the activity durations are certainly known
U
10. decision tree

11. False
Y

12. Simulation
R

13. Live
R

14. True
E

Q. Terminal Questions
H

1. Store efficiency means doing or completing a store operation within a boundary,

which is usually defined in terms of time. Refer to section 9.2 Store Efficiency
IC

and Effectiveness.

2. The queuing theory can be applied to the situations when it is not feasible to
D

anticipate the arrival rate of customers and the service rate provided by a service
provider. Refer to section 9.3 Queuing Theory.
N

3. Network analysis is performed to derive the information regarding the

time required to complete a project, its key activities and the activities
O

that can be delayed without delaying the overall project. Refer to section
9.4 Network Analysis.
P

4. The decision tree method refers to a model used to take decisions in an

organisation. Refer to section 9.5 Decision Tree Method for Measuring
Inventory Performance.

5. A simulation is a representation of a real-life situation. Refer to section

9.6 Simulation Optimisation for Measuring Inventory Performance.

158 DDE, Pondicherry University, Pondicherry

 CHAPTER 9  Performance Measurement in Materials and Store Management

Notes
Case Study: Application of Simulation Technique
9.11
at XYZ Organisation
XYZ organisation manufactures 40 cars per day. The cars are sold as per their demand. The
probability distribution of cars is shown in the table below:

Y
Table: Probability Distribution of Cars
Sale of Cars 37             38            39            40            41            42

IT
Probability .10            .15           .2             .35           .15           .05

S
The production cost and sales price of each car are Rs. 4 lakh and Rs. 5 lakh respectively. If
there is an unsold car, it is disposed at a loss of Rs. 2 lakh per car. In case the demand is not

R
fulfilled, Rs. 1 lakh is taken as penalty. For managing the inventory effectively, XYZ estimates
its total profit/loss for the next ten days using the following random numbers:

E
9, 98, 64, 98, 94, 01, 78, 10, 15, 19

IV
The following data is given:

Profit = Sale Price - Production Cost = 5 - 4 = Rs. 1 lakh

N
Loss of unsold car = Rs. 2 lakh
U
The penalty of a car if it does not meet the demand = Rs. 1 lakh

The random numbers for cars are shown in the table below:
Y

Table: Probability Distribution for Cars

R

Cumulative
Sales of Car Probability Random Number
Probability
R

37 0.10 0.10 00-09

E

38 .15 .25 10-24

39 .20 .45 25-44
H

40 .35 .80 45-79

IC

41 .15 .95 80-94

42 .05 1.00 95-99
D

Based on the given random numbers, the estimated sales can be simulated. The profit/loss
N

can be calculated on the basis of specified units of production by using the following formula:
O

Profit = (Estimated Sales * Unit Profit) – [(Short Sale * 2 lakh) or (Excess Sale * 1 lakh)]

The profit/loss of the organisation is shown in the table below:

P

Table: Profit/Loss of the Organisation

Random Estimated Profit (Production 40 Profit (Production 39
Day
Numbers Sales Cars/Day) Cars/Day)
1 9 37 37x1-3x2= 31 37x1-2x2= 33
2 98 42 40x1-2x1=38 39x1-3x1= 36

DDE, Pondicherry University, Pondicherry 159

 Materials and Store Management

Notes Table: Profit/Loss of the Organisation

Random Estimated Profit (Production 40 Profit (Production 39
Day
Numbers Sales Cars/Day) Cars/Day)
3 64 40 40x1= 40 39x1-1x1= 38
4 98 42 40x1-2x1= 38 39x1-3x1= 36

Y
5 94 41 40x1-1x1= 39 39x1-2x1= 37
6 01 37 37x1-3x2= 31 37x1-2x2= 33

IT
7 78 40 40x1= 40 39x-1x1= 38
8 10 38 38x1-2x2= 34 38x1-1x2= 36

S
9 15 38 38x1-2x2= 34 38x1-1x2= 36
10 19 38 38x1-2x2= 34 38x1-1x2= 36

R
Total =   359 Total = 359

E
From the above table, it can be observed that there is no additional profit or loss if the
organisation decides to reduce the production to 39 cars per day from 40 cars per day.

IV
Therefore, the owner of XYZ decides to reduce the daily production of cars to 39 to minimise
the cost while managing the inventory.

Discussion Questions
N
U
1. If the organisation decides to produce 38 cars per day, how would it affect profitability?
Y

(Hint: Use the following formula for calculating profit:

Profit = (Estimated Sales * Unit Profit) – [(Short Sale * 2 lakh) or (Excess Sale * 1 lakh)])
R

2. Which other approach can be used by XYZ for taking the decision of reducing the daily
production of cars?
R

(Hint: XYZ can use decision trees for taking such decisions.)
E
H

9.12 References and Suggested Readings

‹‹ Datta, A.K. (2006). Materials Management. Phase-II Extension, Noida: Prentice Hall
IC

of India Pvt. Ltd.

‹‹ Singh, Dr. A.K. (2008). Materials Management. Daryaganj, New Delhi: Laxmi
D

Publication (P) Ltd.

N

E-references
O

‹‹ Basic Queuing Theory. Retrieved from http://irh.inf.unideb.hu/~jsztrik/education/16/

SOR_Main_Angol.pdf.
P

‹‹ Network Analysis. Retrieved from http://www.managers-net.com/network_analysis.html.

‹‹ Decision Tree. Retrieved from http://www.mindtools.com/dectree.html.

‹‹ Simulation (Optimisation) in Inventory Theory. Retrieved from https://www.tu-
chemnitz.de/informatik/ModSim/Publikationen/Simulation_in_Inventory_Theory.pdf

160 DDE, Pondicherry University, Pondicherry

chapter

10 Issues in Materials and

Y
Store Management

IT
S
R
E
Structure

IV
10.1 Introduction

N
Learning Objectives U
10.2 Health and Safety at Work

10.3 Interdependence and Teamwork

Y

10.4 Interdependence on Other Functions

R

10.5 Issues in Personnel Management

10.6 Summary
R

10.7 Glossary
E

10.8 Terminal Questions

H

10.9 Answers
IC

10.10 Case Study: Health and Safety Risk Assessment in XYZ Ltd.

11.11 References and Suggested Readings

D
N
O
P
 Materials and Store Management

Notes
Learning Objectives
After completing the chapter, you will be able to:
 Explain health and safety issues at work
 Elaborate the interdependence and teamwork involved in the materials and stores
management

Y
 Discuss the issues involved in the personnel management

IT
10.1 Introduction

S
During the process of maintenance of stores and their operations, there are certain risks that

R
are invariably a part of the day-to-day operations. These risks affect the functioning of daily
store operations. These risks arise due to:

E
‹‹ Operational issues

IV
‹‹ Safety issues related to the storage of goods and maintenance of buildings
‹‹ Basic operations being performed by trained persons and workforce

N
‹‹ Wrong policies of the executive management
‹‹ Inadequate maintenance of machines
U
In such scenarios, risks are required to be managed. This is because a risk has a tendency
to severely hamper business operations and inflict severe damages in the form of loss of
Y

business opportunities and customer good will.

R

To manage the issues arising due to several operations, the executive management is required
to take care of the health and safety issues and the associated components at work by providing
R

related training to the personnel.

E

In this chapter, you will study about health and safety issues at a workplace. In addition,
you will study about the interdependence and teamwork involved in the materials and
H

stores management. In the end, the chapter will discuss the issues involved in the personnel
management.
IC

10.2 Health and Safety at Work

D

As discussed in the last section, risks are invariably involved in the management of various
operations and hence required to be managed at every point of the basic operations related to
N

the management of stores and materials.

O

Health and safety at work is one of the most important issues that the management must
adequately address. The absence of handling this most important factor leads to other issues
P

that severely hamper business operations.

Health and safety at work deals with the issues related to workforce. The workforce must
have the confidence that safety is invariably provided by the executive management. This
point is also applicable to workforce health issues. For example, the workforce must have the
confidence that health is the requisite component that needs to be provided and is provided
by the business unit.

162 DDE, Pondicherry University, Pondicherry

 CHAPTER 10  Issues in Materials and Store Management

Notes Fig. 10.1 depicts the safety features installed for the management of materials and stores:

No
Fire alarm
smoking
call point Eye
protection

Y
Keep
Locked
shut must be
IRRITANT
No worn

IT
Danger n this area
Live wires
entry

S
This area must
Fire
be kept clear exit

R
at all times

E
Fig. 10.1: Safety Features Installed for the Store and Materials Management

IV
Ensuring the well-being and protection of those employed by an organisation is the primary
goal of occupational safety and health (OSH), a multi-disciplinary activity. The goal of
every company’s health and safety policy should be to provide a workplace free from hazards.

N
There are ethical, legal, and economical reasons why an organisation should prioritise OSH.
Maintaining a safe working environment for employees is everyone’s business. Companies
U
have a responsibility to ensure the safety of their personnel. Organizations are required by law
to implement OSH practises due to the preventive and compensating impacts of legislation
enacted to safeguard the health and safety of workers. Organizations can save money on
Y

medical bills, sick days, and disability benefits paid out to employees by implementing OSH
practises.
R

When it comes to health and safety, a number of disciplines may come into play, including
R

industrial engineering, hygiene, hygiene and safety, chemistry, ergonomics, and even
occupational health psychology.
E

The following is a definition of occupational health provided by the International Labor

Organization (ILO) and the World Health Organization (WHO):
H

“Occupational health should aim at the promotion and maintenance of the highest degree of
IC

physical, mental and social wellbeing of workers in all occupations; the prevention amongst workers
of departures from health caused by their working conditions; the protection of workers in their
employment from risks resulting from factors adverse to health; the placing and maintenance of workers
D

in an occupational environment adapted to their physiological and psychological capabilities; and, to

summarise, the adaptation of work to man and of each man to his/her job.
N

‹‹ The main focus of occupational health is on three different objectives:

O

‹‹ The maintenance and promotion of workers’ health and working capacity

‹‹ The improvement of working environment and work to become conducive to safety
P

and health

The evolution of work organizations and working cultures towards fostering health and
safety at work not only contributes to a positive social environment but also ensures the
smooth operation and potential improvement of productivity within the endeavors.

In this context, the term “working culture” denotes a manifestation of the fundamental value
systems embraced by the relevant undertaking. This culture is manifested in practical terms

DDE, Pondicherry University, Pondicherry 163

 Materials and Store Management

Notes through managerial systems, personnel policies, participation principles, training policies, and
the quality management of the undertaking.Hazards at the Workplace

One of the most common sources of injury in many industries is physical hazards. In some of
industries, such types of injuries are unavoidable like in construction and mining industries.
However, in these industries also certain safety methods are developed for minimising the risk
of physical injury at the workplace.

Y
Some of the major hazards at a workplace are:

IT
‹‹ Falls: These are the most common causes of injury in construction, mining,
transportation and healthcare industries.

S
To overcome this hazard, Personal Protective Equipment (PPE) is required to be issued
to any worker who is engaged in a hazardous work. For example, in a fabrication and

R
welding workshop, a worker should be provided face and eye protection wear, safety
footwear and other necessary PPE.

E
‹‹ Machines: It acts as a hazard in manufacturing, mining, construction and agriculture

IV
industries. This is because most of the machines have moving parts, sharp edges and
hot surfaces that can crush, burn, cut and stab the body parts of the workers, if not
used safely. Various safety measures exist to minimise these hazards, including lockout-

N
tagout (LOTO) procedures for the machines maintenance and roll over protection
systems for vehicles.
U
‹‹ Confined Spaces: It also proves as a work hazard. The National Institute of
Occupational Safety and Health defines a confined space as a space with limited
Y
openings for entry and exit and unfavourable natural ventilation and the one that is not
intended for continuous employee occupancy. Some of the examples of these places are
R

storage tanks, ship compartments and pipelines. Confined spaces are not only a hazard
for workers but also for the people who rescue them.
R

‹‹ Noise: It is also one of the most common work hazards. One of the major results
of this hazard is the occupational hearing loss that occurs in the workers exposed to
E

hazardous noise levels at work.

H

‹‹ Temperature: Extreme temperatures can also pose a danger to workers. Heat-related

stress can cause heat stroke, exhaustion, cramps and rashes. A high temperature can
IC

result in sweaty palms of workers that make their hand slippery and can also lead to
dizziness. Workers who perform their jobs near hot surfaces or steam are exposed to
the risk of getting burned. Dehydration is one of the side effects of working in a high-
D

temperature environment.
N

‹‹ Extreme cold temperature is also dangerous for workers. It can cause hypothermia,
frostbite and chilblains.
O

‹‹ Electricity: It poses a danger to many workers. Electrical injuries can be divided into
four types: fatal electrocution, electric shocks, burns and falls caused by a contact with
P

the electric equipment.

‹‹ Biological Infections: These include infections caused by bacteria, virus, fungi, blood
borne pathogens and tuberculosis.
‹‹ Chemicals: These include hazardous chemicals like acids, bases, heavy metals like lead,
solvents, petroleum products, particles from silica, asbestos, noxious fumes or gases and
highly-reactive chemicals. The exposure can result in deteriorating health, respiratory

164 DDE, Pondicherry University, Pondicherry

 CHAPTER 10  Issues in Materials and Store Management

Notes problems, skin injuries, explosions and fire.

‹‹ Psychological and Social Issues: These include work-related stress, violence, bullying,
verbal abuse, sexual harassment and mobbing.

Roles and Responsibilities of OSH Professionals

Y
The duties and obligations of OSH professionals differ depending on the region. Nevertheless,
some of the standard roles and responsibilities include evaluating work environments, creating,

IT
endorsing, and promoting measures that could prevent injuries and illnesses, disseminating
OSH information to employers, employees, and the public, conducting medical examinations,
and assessing the effectiveness of worker health programs.

S
‹‹ Evaluate the working environment systematically

R
‹‹ Endorse preventive measures that eliminate the reasons for illness in the workplace
‹‹ Provide information on the subject of employees’ health

E
‹‹ Provide information on occupational hygiene, ergonomics, environmental safety and

IV
safety risks at the workplace
‹‹ Assess services, outcomes, methods, equipment and procedures by using qualitative and

N
quantitative methods to recognise the hazards and measure the related risks
U
Identifying Safety and Health Hazards
The terminologies used in OSH vary between countries. However, some of the general terms
are explained below:
Y

‹‹ A hazard is something that can cause harm, if not controlled.

R

‹‹ The outcome is the harm that results from an uncontrolled hazard.

R

According to OSH, “hazard and ‘risk’ generally describe the direct or indirect degradation, temporary
or permanent, of the physical, mental or social wellbeing of workers. For example, repetitively carrying
E

out the manual handling of heavy objects is a hazard. The outcome could be a musculoskeletal (MSD)
or an acute back or joint injury.”
H

A risk can be represented in the following ways:

IC

‹‹ Numerically like a 0.5 or 50/50 that represents the chance of the outcome occurring
during a year
D

‹‹ Relatively terms like high/low

‹‹ A multi-dimensional classification scheme like situation-specific risks
N

Hazard Assessment
O

Hazard analysis or hazard assessment is a procedure wherein specific hazards within a

P

workplace are recognized, evaluated, and managed/eliminated as near as practicable to the

origin/location of the hazard, as is reasonable and feasible. With the change in technology,
resources and regulatory requirements, hazard analysis is more focused on the determination
and control of the source of a hazard. Therefore, you can say that hazard control is a dynamic
programme for avoiding hazards at a workplace.

DDE, Pondicherry University, Pondicherry 165

 Materials and Store Management

Notes A hazard-oriented program may not completely eliminate all risks. Typically, it is the
responsibility of managers to calculate and oversee risks, while individuals exposed to these
risks usually belong to a distinct group of workers.

10.2.1 Operational Issues

Y
Operational issues are those issues that arise from the processes of various operations used
in the management of materials and store. The operational issues must adhere to the safety

IT
and health issues that arise from time to time. Notable health and safety issues that arise due
to operational causes include:

S
‹‹ First aid materials that must be available at a workplace where the work is performed.
‹‹ Materials that are used during the handling of critical operations such as dealing with

R
explosive materials, that is, adequate and sufficient materials must be kept at visible
places to handle critical situations such as fire.

E
‹‹ Adequate instructions must be made visible to workforce regarding the handling of

IV
mishaps.

Fig. 10.2 depicts the safety and health precautionary measures due to operational issues:

N
U
Y
R

No Smoking Smoking and naked No access for pedestrians

flames forbidden
R
E
H
IC

Don not extinguish Not drinkable No access for

with water unauthorised persons
D
N
O

No access for Do not touch

P

industrial vehicles

Fig. 10.2: Depiction of Safety and Health Measures due to Operational Issues

166 DDE, Pondicherry University, Pondicherry

 CHAPTER 10  Issues in Materials and Store Management

Notes From Fig. 10.2, it is evident that adequate safety instructions are installed at several visible
places so that the workforce can see, read and understand the issues and prevent themselves
and others from mishaps during the course of operations.

10.2.2 Management Issues

Y
Management issues are the issues that are related to the functioning of the top-level
management. Some of these management issues are discussed as follows:

IT
‹‹ Safety and security in the form of insurance covers for the workforce dealing with the
dangerous operations of the business units such as working near the inflammable and
hazardous materials.

S
‹‹ Management unwilling to spare the budget due to cost considerations for the training

R
of the workforce deployed or working on very difficult to execute jobs. For example
the jobs that involve high security for the transport of precious materials such as

E
radioactive materials for the research purpose.

IV
‹‹ Management issues that arise due to sheer apathy towards the workforce or the materials
stored in storehouses. For example, covering the food stuff with proper sheet covers
to prevent it from dust and ensuring that the quality of the food stuff is not diluted.

N
‹‹ Issues arising due to wrong management policies in practice such as no insurance covers
for the goods being transported from one place to another place due to an assumption
U
that the cost of the covers would be paid by the customer.

The abovementioned management issues definitely hamper the work of implementing safety
and health measures at a storehouse.
Y

Self-Assessment Questions
R

1. Name the cross-disciplinary function of an organisation that handles the safety,

R

health and welfare of employees in an organisation.

2. The legal reason for practicing OSH by organisations is the preventative and
E

compensatory effects of laws established for the protection of workers’ safety and
health. (True/False)
H

3. Health and safety may involve interactions and relations between occupational
medicine, hygiene, safety engineering, industrial engineering, chemistry, ergonomics
IC

and at times, occupational health psychology. (True/False)

4. Define operational issues in health and safety at workplace.
D

Activity
N

Using the Internet, identify some organisations that are known for their effective health
and safety measures at workplace.
O
P

DDE, Pondicherry University, Pondicherry 167

 Materials and Store Management

Notes
10.3 Interdependence and teamwork
Interdependence and teamwork are other aspects that need to be considered while managing
the stores and materials kept in a storehouse. This important factor is one of the most crucial
factors that must be adequately addressed while managing a store.

In general terms, this means that the work being performed in a storehouse is interdependent

Y
on others. It involves the spirit of teamwork and basic management principles of teamwork
and must be applied to manage a store efficiently.

IT
The notable issues related to the interdependence and teamwork must address the following
core issues:

S
‹‹ Communication among the team members must be adequately addressed and suitably

R
maintained.
‹‹ A proper reporting hierarchy must be in place so that the roles and responsibilities of

E
employees are defined properly.

IV
‹‹ Measurable parameters must be defined to assess the performance of teams and their
interdependencies among different units.

Therefore, it is observed that the interdependence and teamwork form the most crucial

N
activities for the management of materials and store.
U
For example, during the course of the management of materials and stores, the entire work
of marking products through the bar code mechanism is dependent on factors such the person
responsible for stacking the products on the shelf, who in turn is dependent on the person who
Y

ensures that the stacking shelf is empty while the same person is dependent on the machine
operator who physically removes the materials from the shelf. Thus, it is the interdependence
R

of the teamwork that gets the job done.

R

Self-Assessment Questions
5. One of the issues related to interdependence and teamwork is the smooth flow of
E

communication among the team members. (True/False)

H

6. What is the importance of interdependence and teamwork in a storehouse?

IC

10.4 Interdependence on Other Functions

D

While the last section focussed on the interdependence of the teamwork, another most
important part of the management of materials and stores is the interdependence of other
N

functions. In other words, it is not only the interdependence of the workforce alone that gets
the job done; it is also the interdependence of other functions that are involved in the process.
O

For example, suppose a store manager wants to place an order for materials. In this case,
P

the manager is required to raise an invoice. This invoice is then processed by the inventory
department, who in turn passes it to the finance function. This finance function then makes
the appropriate money available and then places the final order for the purchase. Thus, it is the
interdependence of the functions that leads to an efficient management of stores. Fig. 10.3
depicts the interdependence of functions:

168 DDE, Pondicherry University, Pondicherry

 CHAPTER 10  Issues in Materials and Store Management

Notes
Social Domain

Cognitive Cognitive
Domain Domain
Consensual
Domain
Direct
Engagement

Y
Mediated
Engagement

IT
APPLICATION(S) APPLICATION(S)

S
OPERATING SYSTEM OPERATING SYSTEM

R
Data Domain

E
HARDWARE HARDWARE

Physical Domain (Infrastructure)

IV
Fig. 10.3: Interdependence of Functions

N
From Fig. 10.3, it is observed that the various functions such as application programs are
dependent on the functions of operating system, which in turn are dependent on the type of
U
hardware in the system or machine.

Self-Assessment Questions
Y

7. It is not only the interdependence of the workforce alone that gets the job done in a
storehouse; it is also the interdependence of other functions that are involved in the
R

process. (True/False)
R

Activity
E

Using the Internet, identify some functions of a storehouse that are closely related. and
how they are dependent on each other.
H
IC

10.5 Issues in Personnel Management

When it comes to the process of the management of materials and storage, personnel issues
D

are bound to occur. This is due to the fact that when human beings operate in an environment
wherein large amount of interactions takes place, personnel issues happen.
N

Some of the factors responsible for the generation of personnel issues are:
O

‹‹ Lack of clarity on the role that a person is supposed to perform. For example, a person
may be performing the role of a manager, when in fact he/she is fit for the role of a
P

team leader or an executive. This lack of clarity generates frustration and is responsible
for generating issues that need to be considered.
‹‹ Lack of the uniform implementation of HR policies. This is another reason responsible
for the generation of issues in the personnel management. In many organisations, there
may be several policies, but when it comes to the implementation, it is applied on some
while on others, it is bypassed.

DDE, Pondicherry University, Pondicherry 169

 Materials and Store Management

Notes ‹‹ Lack of clear-cut rules on the responsibility and authority of employees. This is another
reason for generating issues. This is due to the fact that in the absence of clear-cut roles
and responsibility, no work gets done.

10.5.1 Development of Personnel

Y
The previous sections covered the basic issues related to the safety and health of the workforce
personnel and the interdependence and spirit of teamwork among the workforce. However,

IT
to improve the productivity of individuals and to ensure that the work performed by them is
of the highest quality, the workforce personnel must be developed continuously, which means
that the development of the personnel itself becomes one of the major tasks for the executive

S
management.

R
The workforce personnel must be developed on account of the following reasons:

E
‹‹ Through constant development, the workforce personnel are able to perform better and
with improved results.

IV
‹‹ Development of the workforce reduces the cost of operations, as a trained workforce is
an asset to the organisation.

N
‹‹ Development of the workforce personnel ensures that the defects that become a part
of the day-to-day operations are reduced and thus the organisation is able to save the
U
cost of removing the defects.
‹‹ Development of the workforce personnel provides a competitive advantage to the
Y
organisation, as a developed workforce is always ready to take the given task on as is
basis, as compared to an undeveloped workforce.
R

Therefore, it is observed that the development of the workforce is a mandatory activity in the
management of storage and materials. Without the development of the workforce, it becomes
R

extremely impossible to get the work done.

E

10.5.2 Identification of Training Needs

H

Having understood the importance of the development of the personnel, let us now discuss
IC

the importance of the training needs. Training is a wonderful tool for the development of
personnel. Well-trained personnel are able to cope with the exigencies of work, depending on
the situation. For example, a personnel well trained on the handling of fire fighting equipment
D

is able to immediately take control of the situation. Here, trainings act as boon to business units.
N

Thus, training needs are required to be identified to ensure that the personnel have the
required skills for performing a particular job. The following points provide inputs for the
O

identification of the training needs of the personnel:

‹‹ The appraisal process that highlights the grey areas and the places where the personnel
P

is required to be trained
‹‹ Training needs arising due to the requirements posed by the new technology
‹‹ Training needs identified by the new process and initiatives undertaken by a business
unit
‹‹ Training needs identified by the personnel themselves to advance in their career they
want to peruse

170 DDE, Pondicherry University, Pondicherry

 CHAPTER 10  Issues in Materials and Store Management

Notes Thus, it is observed that training needs are necessary to develop personnel. Fig. 10.4 depicts
the various inputs to training needs:

Organization Organization
Development Strategy

Y
Competency Gaps
Organization Needs Process Gaps

IT
Competence based SOURCES OF TRAINING
performance Appraisal Performance Research
NEEDS

S
Competence Competence

R
Competency Strengths
Strengths Gaps

E
Opportunities for new
Paradigm shifts
Competence Development

IV
Fig. 10.4: Various Channels for Identification of Training Needs

From Fig. 10.4, it is observed that there are many avenues for the identification of training

N
needs of personnel and further, each of these inputs must be carefully tackled and managed to
ensure that the workforce personnel are trained based on the identified training needs.
U
Self-Assessment Questions
Y

8. Which of the following is not a factor responsible for generating personal issues in a
storehouse?
R

a. Lack of role clarity of a person

R

b. Lack of the uniform implementation of HR policies

E

c. Lack of management at the top level in the hierarchy of an organisation

d. Lack of clear-cut rules on the responsibility and authority of employees
H

9. The development of workforce reduces the cost of operations, as a trained workforce

IC

is an asset to the organisation. (True/False)

D

10.6 Summary
N

‹‹ In the management of a business work arising due to day-to-day tasks, risks are bound
to occur.
O

‹‹ These risks are responsible for hampering the smooth functioning of the organisation.
‹‹ Therefore, workforce is required to be developed, which means that they are required
P

to be trained.
‹‹ Training needs identification is an integral and ongoing process that must be carefully
addressed to ensure that the workforce remains productive.

DDE, Pondicherry University, Pondicherry 171

 Materials and Store Management

Notes ‹‹ Training needs are identified on various bases such as appraisal, new technology and
new initiatives by a business unit.

10.7 Glossary
‹‹ Training: It is a formal process in which participants are formally exposed to the work
system that they may be required to perform as a part of their job.

Y
‹‹ Training Needs Identification: It is a formal process used for identifying the training

IT
that the workforce personnel must have.
‹‹ Risk: It is a future event that may or may not occur, but when it occurs, it has the
potential to impact the business or do damage in several manner.

S
‹‹ Operational Issues: They are the issues that arise during day-to-day operations.

R
10.8 Terminal Questions

E
1. Discuss health and safety at workplace.

IV
2. Explain interdependence and teamwork in a storehouse.

3. Discuss the interdependence on other functions.

N
4. Elaborate on the issues in personnel management.
U
5. How would you identify the training needs of employees?
Y

10.9 Answers
R

Q. Self Assessment Questions

1. Occupational Safety and Health (OSH)

R

2. True
E

3. True
H

4. Operational issues are those issues that arise from the processes of various
operations used in the management of materials and store.
IC

5. True

6. Work being performed in a storehouse is interdependent on others. It involves

D

the spirit of teamwork and basic management principles of teamwork and must
be applied to manage a store efficiently.
N

7. True
O

8. c. Lack of management at the top level in the hierarchy of an organisation

P

9. True

Q. Terminal Questions

1. Health and safety programmes in an organisation have the objective of fostering

a safe and healthy work environment in the organisation. Refer to section
10.2 Health and Safety at Work.

172 DDE, Pondicherry University, Pondicherry

 CHAPTER 10  Issues in Materials and Store Management

Notes 2. Interdependence and teamwork are other aspects that need to be considered
while managing the stores and materials kept in a storehouse. Refer to section
10.3 Interdependence and Teamwork.

3. It is not only the interdependence of the workforce alone that gets the job done;
it is also the interdependence of other functions that are involved in the process.

Y
Refer to section 10.4 Interdependence on Other Functions.

4. When it comes to the process of the management of materials and storage,

IT
personnel issues are bound to occur. Refer to section 10.5 Issues in Personnel
Management.

S
5. Training needs are required to be identified to ensure that the personnel
have the required skills for performing a particular job. Refer to section

R
10.5.2 Identification of Training Needs.

E
Case Study: Health and Safety Risk

IV
10.10
Assessment in XYZ Ltd.

N
In the storehouse of a small organisation, XYZ Ltd., a manager carried out the health and
safety risk assessment of the storehouse. The storehouse had a staff of 12 workers and some
U
of them were part of a union. The manager took the following steps for assessing risks in the
storehouse:

1. To identify the hazards, the manager:

Y

 Learnt where hazards can occur

R

 Walked around the storehouse and noted the activities that might pose a risk and
considered the points that he had learnt from HSE’s guidance
R

 Discussed the issues with the safety representative of the union and asked the
E

concerns that the staff had on health and safety

 Talked to the supervisors to learn from their detailed knowledge on particular jobs
H

and areas
IC

 Looked at the accident book to gather information on the past problems.

2. The manager then wrote down the particulars of all who could be harmed by the
hazards and how.
D

3. To implement the findings of the risk assessment, the storehouse manager determined
N

the individuals responsible for carrying out the additional actions and specified deadlines
for completion. This information was documented, and upon finishing each action, it
O

was marked as complete, along with the corresponding date.

4. The storehouse manager, in consultation with the safety representative, discussed the
P

assessment findings. They agreed to review and update the assessment at least annually
or in the event of significant changes to the workplace. Copies of the risk assessment
were distributed to all staff members by the storehouse manager.

5. The approach used by the storehouse manager of XYZ Ltd. can be used as a guide to
think about some hazards in your organisation and the steps you need to take to control
the risks.

DDE, Pondicherry University, Pondicherry 173

 Materials and Store Management

Notes Discussion Questions

1. How did the storehouse manager of XYZ Ltd. identify the hazards?

(Hint: The storehouse manager was able to identify the hazards by conducting the risk
assessment of the storehouse.)

Y
2. How can the risks identified by the storehouse manager of XYZ Ltd. be represented?

(Hint: One of the ways for representing risks is numerically like a 0.5 or 50/50, which

IT
depicts the chance of the outcome occurring during a year.)

S
10.10 References and Suggested Readings

R
‹‹ Ayers, J. (2001). Handbook of supply chain management (1st ed.). Boca Raton, Fla.: St.

E
Lucie Press.
‹‹ Chopra, S., &Meindl, P. (2014). Supply Chain Management (1st ed.). Hallbergmoos:

IV
Pearson.
‹‹ Fredendall, L., & Hill, E. (2001). Basics of supply chain management (1st ed.). Boca

N
Raton: St. Lucie Press.
‹‹ Wisner, J., Leong, G., & Tan, K. (2005). Principles of supply chain management (1st
U
ed.). Mason, Ohio [u.a.]: Thomson/South-Western.

E-references
Y
R

‹‹ Ecrasia.com,.(2014). The Basic Concepts of Supply Chain Management. Retrieved

12 August 2014, from http://www.ecrasia.com/the-basic-concepts-of-supply-chain-
R

management/
‹‹ Fibre2fashion.com,. (2014). Overview of Supply Chain Management, Supply Chain
E

Process, Supply Chain Information System. Retrieved 12 August 2014, from http://
www.fibre2fashion.com/industry-article/29/2893/an-overview-of-supply-chain-
H

management1.asp
IC

‹‹ Scm.ncsu.edu,.(2014). What is Supply Chain Management? - SCM | Supply Chain

Resource Cooperative (SCRC) | North Carolina State University. Retrieved 12
August 2014, from http://scm.ncsu.edu/scm-articles/article/what-is-supply-chain-
D

management
N
O
P

174 DDE, Pondicherry University, Pondicherry

P
O
N
D
IC
H
E
R
R
Y
U
N
IV
E
R
S
IT
Y