ROLE OF MATERIAL MANAGEMENT
A sale forecasting is a
process of estimating
future revenue by
predicting the amount
of product or services
of a sale unit which
will sell in the next
week ,month , quarter,
Production forecasting is
integral to your direct-to-
success. It is the process of
estimating future demand
for retail products, as well
as the resources required
to manufacture those
Material Management= Production Planning + Inventory Control
What is Inventory?
• Inventories are a stock of items needed to satisfy
• Inventory is a list for goods and materials, or those
goods or materials themselves, held available in
stock by a business.
• Inventories may be described as combination of
fluctuations in anticipation, lot size inventories, and
inventories to cover movement of materials from one
location to another.
Chemicals as active ingredients,
diluents, needed to manufacture
intermediates or components of
finished product. Also finishing
supplies such as containers, labels ,
caps, and shippers needed in packaging
These are parts or sub-assemblies
needed for final assembly of end
product(e.g. bulk tablets awaiting
These are materials and components on
which work is being done.
These are stable items , samples, or
other promotional items held in
inventory awaiting customer orders or
made for specific customers.
• Inventory management in business refers to managing order processing,
manufacturing, storage, and selling raw materials and finished goods. It ensures
the right type of goods reach the right place in the right quantity at the right time and
at the right price. Thus, it maintains the product availability at warehouses, retailers,
Requirements for Inventory Management:
•Monthly, quarterly and yearly stock consumption for all products separately
•Seasonal and Non seasonal Consumption
•Distribution chain or Customer Type
Several Point should be considered before taking step toward Inventory management:
•Type of Distribution system and Supply Chain
•Records and Reports that will provide the foundation to inventory management
•Products classification with respect to moving and non moving
•Balance between service level including stocking out cost, ordering cost and stock holding
•When to order and quantity for re-ordering for a product.
• Inventory management means a business strategy, which deals with managing order
processing, manufacturing, storing, and selling raw materials and finished goods.
• It ensures product availability at warehouses, retailers, and distributors.
• Reducing administrative workload.
• Giving satisfaction to customers in terms of quality- care, competitive price and prompt
• Inducing confidence in customers and to create trust and faith.
• Inventory control or Stock control is a part of inventory management process . It is
daily activity of managing stock within the warehouse .Inventory control activities
include receiving, storing and transferring stock, as well as tracking and fulfilling
orders and returns.
• Taking control over your stock rotation is an important part of inventory control and
an overall efficient inventory management process. Defining the flow of stock
ensures you have control over what items are used to fulfill customer orders, and
when. Depending on your product portfolio you can dictate how product is
deployed to fulfill customer orders.
FIFO(First in ,
LIFO (last in ,
OBJECTIVES OF INVENTORY CONTROL
• To reduce the minimum idle time due to shortage of materials and spare parts.
• To offer maximum service and satisfaction of customers.
• To minimize as much as possible capital investment and cost of storage.
• To provide a scientific basis for planning inventory requirement.
• To hold reasonable inventories in order to avoid losses from inventory obsolescence.
• To maintain reasonable safety stock.
• To maintain necessary inventory record.
ADVANTAGES OF INVENTORY CONTROL
To ensure continuous production by supplying material.
It helps to secure many economics through bulk purchase such as higher discount, lower
price , better use of available resources.
It helps the management in maintaining efficient accounting particularly material aspect of
It ensures timely and continuous supply of goods to customers by maintaining sufficient
stock of finished goods .
It eliminates overstocking of the inventories and maintain minimum investment.
It helps in optimum optimization of men, money, material, equipments, time and reduce cost
Inventory Control vs Inventory Management
•Inventory control is a method of regulating the
inventory level in the company warehouse.
•The scope of inventory control is smaller
compared to inventory management.
•Main purpose of inventory control is to
acknowledge what and how much products are
being stocked and to ensure whether the goods
are in usable condition.
• Inventory management refers to the activity of
forecasting and replenishing inventory which is
focused on when to order the inventory, how
much to order and from whom to order.
•Inventory management represents a higher
scope since effective relationships with
suppliers should be maintained.
•Main purpose of inventory management is to
be responsive towards demand and manage
external relationships with suppliers.
COST OF INVENTORY
It involves fixing or standardization individual item cost labour and burden rates for a period
of usually a calendar or year. Cost control takes in to account seasonally deals , promotion,
Introduction of new production & other factors that create a demand on inventory equipment
and personnel .
Cost of Inventory involves three types:-
1. Material cost
2. Labor cost
3. Burden or over head cost
Material Cost- Based on needs expressed in the production
forecast, the purchasing department negotiates contracts and
price arrangements and ascertains the standard cost for each
item. These standard cost form the basis of monthly price
variance report, which measures effectiveness of purchasing
but also monitors changes in cost.
TYPES OF COST INVENTORY
2) Labor Cost- 2 types- Direct Labor
• Direct labour includes all labour that varies
with production volume.
• Direct labour refers to any employee that is
directly involved in the manufacturing of a
• Direct labor requires higher cost than indirect
• Indirect labor is labor that is not directly
related to the production of a product. For
example, once a product has been completed,
the salespeople you employ would be
responsible for selling the product, but
because they were not involved in making the
product, they would be considered indirect
Burden or over-head cost- 2 Types- 1) Direct Burden
2) Fixed Burden
Direct burden are such expenditures as
supervision and clerical help; lost time ;
premium on overtime; vacation; holiday ,
and sick pay; and employee benefits as
hospitalization insurance and retirement
benefits . Addition items falling into
direct burden and controllable expenses
incurred in the operation of each
department and commonly called
In addition to operating departments
,other such as engineering, quality
control, materials management –cost of
fuel, electricity, land and real estate taxes
and depreciation on the buildings and
Techniques involved in Inventory Management
• ABC Analysis
• VED Analysis
• EOQ Analysis
• Perpetual Inventory System
• Lead time
• Buffer Stock
One of the most important and simplest tools for inventory management in the classification
of Inventories. This classification is based on a principle first outlined in the late 1800s by V
Pareto, an Italian engineer and mathematician . In simplest term it states that in large
population in which many items are involved , relatively few items account for major
In this technique all the materials are classified according to their value high, medium or
A Class- Materials having small % of items but having higher values.
B Class- Materials that are the medium value of the material should be in the
normal control. In other words, these materials having more % of total items but
having medium value
C Class- The low value of materials should be under simple method of control . In
other words, these materials having high % of total item but having low value.
•It covers 10% of total
•It consumes about 70%
of total budget.
•Very Strict control
•It requires either no
safety stocks or low safety
•It must be handled by
It covers 20% of total
It consumes about 20%of
Very moderate control.
It requires low safety
It can be handled by
•It consumes about 10% of
•It covers 70% of total
•Very loose control.
•It requires high safety
•It can be handled by any
VED analysis is an inventory management techniques that classifies
inventory based on its functional importance . It categorizes stock under
three heads based on its importance and necessity for an organization or
any of its other activities. VED analysis stands for Vital, Essential, and
V-Vital Category- It includes inventory necessary for production or any other
process in an organization. The shortage of items under this category can severely
hamper or disrupt the proper functioning of operations. Hence, continuous
checking, evaluation, and replenishment happen for such stocks. If any of such
inventories are unavailable, the entire production chain may stop. Also, a missing
essential component may be of need at the time of a breakdown. Therefore, the order
for such inventory should be beforehand. Proper checks should be put in place by the
management to ensure the continuous availability of items under the “vital” category.
E- Essential Category -The essential category includes inventory, which is next to
These, too, are very important for any organization because they may lead to a
stoppage of production or hamper some other process. But the loss due to their
unavailability may be temporary, or it might be possible to repair the stock item or part.
The unavailability of inventory under this category should not cause any stoppage or
D- Desirable category- The desirable category of inventory is the least important
among the three, and their unavailability may result in minor stoppages in
production or other processes. Moreover, the easy replenishment of such shortages is
possible in a short duration of time.
The economic order quantity (EOQ) is a company's optimal order quantity that
meets demand while minimizing its total costs related to ordering, receiving, and
The EOQ formula is best applied in situations where demand, ordering, and holding
costs remain constant over time.
One of the important limitations of the economic order quantity is that it assumes the
demand for the company’s products is constant over time.
Formula for Calculating Economic Order Quantity (EOQ)
Where A= Annual usage in Dollars
S= Ordering Cost in Dollars
I= Inventory carrying cost (in decimal)
Using simple figures for ease of calculation the following trial and error method shows
EOQ= √2AS∕ I
Total amount cost for various order quantities assumed
1. Annual usage of 12,000 units
2. Unit cost of $3.00
3. Cost of carrying inventory 10% per year
4. Ordering cost per order $50
EOQ= √2(12000 x 3) x 50∕ 0.10 =$600
Perpetual inventory is an accounting method in which a business continuously tracks
its inventory levels in real-time. This method makes more precise inventory counts
available to a business at all times.
Perpetual inventory is distinguished from a perpetual inventory system, which usually
refers to the software or program that executes the perpetual inventory accounting
Perpetual Inventory System
Lead time in inventory management is the lapse in time between when an order is
placed to replenish inventory and when the order is received. Lead time affects the
amount of stock a company needs to hold at any point in time
Therefore, the formula for calculating inventory lead time is as follows:
Lead time = reordering delay + supply delay
• Buffer stock is an additionally stored volume of goods which is kept to meet any
sudden future demand or supply fluctuations. It is a backup stock, which retains
some kind of buffer to protect in case of uncertain future. Buffer stock is kept as an
extra backup to prepare for any uncertain business situations.
• Buffer stock is also known as strategic stock or safety stock or buffer inventory.