3. Techniques of material control
Material control aims at eliminating & minimizing all
kinds of wastes & losses while the materials are being
purchased, stored, handled, issued, or consumed. Such
techniques are discussed below:
i. Level setting
ii. Economic order quantity
iii. ABC Analysis
iv. FNSD Analysis
v. VED Analysis
4. 1. Level setting
In order to have proper control on materials, the following
levels are set:
• Reorder level
• Minimum level
• Maximum level
• Average stock level
5. Types of level
Reorder level: Reorder level (or reorder point) is the
inventory level at which a company would place a new
order or start a new manufacturing run.
Reorder level= lead time in days x daily average usage
Minimum level: The minimum level or minimum stock is
that level of stock below which stock should not be
allowed to fall. In case of any item falling below this
level, there is danger of stopping of production
and, therefore, the management should give top priority to
the acquisition of new supplies.
Minimum level = Re-order level – Average usage
Normal re-order period
6. Types of level
• Maximum level: the maximum stock level is that
quantity of material above which the stock of any item
should not normally be allowed to go. This level is
fixed after taking into account such factors as:
capital, rate of consumption of materials, storage space
etc.
Maximum level = Re-order level – Minimum usage
Minimum re-order period + EOQ
Average stock level: the stock level indicates the average
stock held by the concern.
Average stock level=minimum stock level+1/2(reordering
7. 2. Economic Order Quantity
There are three types of cost in respect of inventories.
These are:
Material cost: this is the purchase price paid to the supplier
against the purchase of materials. It also includes the
freight & transit insurance paid on purchase.
Material purchase cost = annual demand x purchase price
Ordering cost: it is cost of placing a purchase to order
supplier. It includes the cost of purchase order, follow up
cost, tender analysis cost etc. these cost are basically fixed.
Ordering cost= [Annual demand/ ordering quantity per
order]x cost of placing order
8. 2. Economic Order Quantity
cont.….
Holding cost: it is cost of holding units in stock. It is
basically based as percentage on investment in the stock.
It is directly positive related to purchase order size.
Holding cost= [ordering quantity per order/2] x holding
cost per unit per annum
9. 3.ABC Analysis
This is the selective control technique which recommends
that all type of materials should not be controlled directly by
the top management. As per the analysis, only a small
portion of material generally occupies a high value of total
materials. It should be controlled by the top management &
other materials may be handed over to the lower
management. Following parameters can be followed:
Category % of weight % of value Controlled by
A 5%-10% 70%-75% Top management
B 20%-25% 20%-25% Middle management
C 70%-75% 70%-75% Lower management
10. 4. FNSD Analysis
FNSD analysis divides the items of stores into four
categories in the descending order of importance of their
usage rate. ‘F’ stands for fast moving items that are
consumed in short span of time ‘N’ stands for normal
moving items which are exhausted over a period of a year.
‘S’ indicates slow moving item which are not frequently
issued & exhausted over a period of two years or more.
‘D’ stands for dead items which are outmoded & which
are not frequently used in future.
11. 5. VED Analysis
• VED analysis is used primarily for control of spare parts
can be divided into three categories- vital, essential &
desirable. The spares, the stock out of which even for a
short time will stop production for some time & where
the cost of stock out is very high, are known as vital
spares. The spares , the absence of which cannot be
tolerated for more than a few hours & the cost of lost
production is high, are known as essential spares. The
desirable spares are those spares which are needed but
their absence for even a week or so will not lead to
stoppage of production
