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The document discusses materials management, including the purchasing process from raising a purchase requisition to receiving goods, and the costs associated with inventory like ordering costs and carrying costs. It also covers calculating the economic order quantity to determine the optimal order size by balancing ordering and carrying costs, and setting three inventory control levels - reorder level, minimum level, and maximum level - based on usage rates and lead times.

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ttongoona3
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9 views

Null 6

The document discusses materials management, including the purchasing process from raising a purchase requisition to receiving goods, and the costs associated with inventory like ordering costs and carrying costs. It also covers calculating the economic order quantity to determine the optimal order size by balancing ordering and carrying costs, and setting three inventory control levels - reorder level, minimum level, and maximum level - based on usage rates and lead times.

Uploaded by

ttongoona3
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MATERIALS MANAGEMENT

Compiled by Gwizu K
OBJECTIVES
 By the end of the lecture, you should be able to;
1 explain the purchasing procedure of materials
2 explain cost of holding stock and ordering costs .
3 calculate economic order quantity
4. Calculate three levels of controlling inventory
ORIGINAL DEMAND

 Various departments demand various materials

 Demand can come from production, inventory


control, storekeepers and departmental mangers.
PURCHASE REQUISITION

 A purchase requisition is then raised by


procurement department
 It specifies the quantity and quality of materials

 It also specifies delivery requirements


SUPPLIER SEARCH
 A search for possible suppliers is then done using
own records, directotories and trade associations
etc
 Can search suppliers in newspapers by inviting
suppliers to submit various tenders to supply
goods
REQUEST FOR TENDERS AND
QUOTATIONS

 Request for tenders from potential


suppliers
 Suppliers then provide various
quotations for supplying requested
materials
SUPPLIER SELECTION

 The right suppliers is then selected from a pool of


suppliers
PURCHASE OF ORDER

 A purchase order is the drafted.


 Purchase order is then dispatched and
distributed to various persons in the organization
e.g financé director, finance manager and cost
and management accountant
MONITORING AND RECEIPT OF GOODS

 Progress should focus on chasing deliveries


 Make follow ups on supplies to speed up the
delivery of materials purchased.
RAISE GRN (GOODS RECEIVED NOTE)
 Check the goods to ensure they are the right
quantities and quality
 Raise GRN after inspecting the goods

 Use the purchase order to check against the


goods received.
STORING
 Goods taken to stores and the inspection note /
GRN note signed.
COST ASSOCIATED WITH MATERIALS

There are two types of costs


which are associated with
inventory; the cost of making a
purchase and the cost of keeping
the goods in inventory.
These are known as the ordering
costs and the carrying costs
respectively
ORDERING COST

Ordering costs of inventory include


the costs of placing a purchase order
including the clerical costs of
preparing a purchase order, cost of
receiving the material and the costs
involved in the inspection of the
material.
Examples include
costsof correspondence and
communication,
advertising costs for inviting
tenders,
 tender evaluation costs etc.
clerical costs of preparing a purchase
order
cost incurred on the transport of
material from the supplier to the
factory or depot.
inspection cost of material affects the
total ordering costs
COST OF HOLDING INVENTORY/CARRYING
COST OF HOLDING INVENTORY
COST OF HOLDING INVENTORY/CARRYING
COST OF HOLDING INVENTORY

The following costs make up the cost of


holding inventory:
interest costs e.g a loan from the
bank to finance the purchase of raw
materials
costs relating to renting the
premises, insurance for the premises
and for the inventory.
Other costs include risk of
obsolescence, deterioration and theft.
ECONOMIC ORDER QUANTITY (EOQ) /
OPTIMAL ORDER QUANTITY

a size of order for which the


total of the ordering and
carrying costs is at the lowest
possible.
Economic order quantity can
be understood with the help
of a graph:
ASSUMPTIONS OF EOQ
 a) The annual demand is certain and known.
 b) The time required for the receipt of material
(known as lead time) ordered is certain.
 c) There is no situation of stock outs.

 d) The entire material ordered is received in a


single batch.
 e) The per unit costs of material does not change.

 f) The costs are always known with precision.


GRAPHICAL METHOD
DETERMINING EOQ USING THE
FORMULAE METHOD
(CONT)

Co= cost of ordering per


order / consignment from
supplier
Ch = cost of holding per unit
of inventory per annum /
time period
 D = total demand during the
period
EXAMPLE 1
 Calculate the economic order quantity from
the following information. Also state the
number of orders to be placed in a year
 Consumption of material per annum 10,000
Kilograms
 Order placing cost per order $50
 Cost per kilogram of raw material $2
 Storage cost 8% of raw material cost per kg
SOLUTION

EOQ= 2*100 000*50


0.16

=
EXAMPLE 2

Tubes Plc manufactures


picture tubes for televisions’
Details of their operation
during 20X8 are as follows:
Normal weekly usage 100
tubes
Ordering cost $50 per order
Inventory holding cost 20%
per annum on cost of a tube
Cost of tubes $300 per tube
Calculate the optimal re-
order quantity.
INVENTORY CONTROL
Inventory control includes
recording and monitoring of
stock levels.
Setting pre-determined
inventory levels is an integral
part of the inventory system.
Improper management of levels
of inventory result in stock outs.
THREE LEVELS OF INVENTORY CONTROL

Typical methods of calculating


major controls levels are
1. Reorder level
2. Minimum level
3. Maximum level
REORDER LEVEL
Maximum usage x maximum
lead time
MINIMUM LEVEL
Reorder level-(average lead
time x average usage)
MAXIMUM LEVEL
Reorder level+ EOQ-(min lead
time x min usage)
EOQ is sometimes in other texts
is referred as reorder quantity
EXAMPLE 1

Minimum usage 60 kgs per day


Maximum usage 140kgs per day
Lead time 20-26 days
EOQ 4000 kgs
Calculate the 3 normal levels of
controlling stock
EXAMPLE 2
 In Excellent Plc, uses a component of raw
material called zygon, a chemical, are used for
production. The details of the use are given
below:
 Normal usage 50 units per week of each

 Maximum usage 75 units per week of each

 Minimum usage 25 units per week of each

 Reorder quantity zygon: 500 units

 Lead time : 4 weeks


REQUIRED

 Calculate the following for each component:


 (a) Reordering level

 (b) Minimum level

 (c) Maximum level

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