MATERIAL CONTROL TECHNIQUES

*Swastik Suman Satapathy

Material control is a system to ensure right quality of material is available in right quantity at
the right place. In a manufacturing concern, availability of adequate materials is very much
necessary for the production to be undertaken. So it is the system of material controls which
helps keeping usage of materials under check as regards to their quality, quantity and
investment, so that materials can be put to optimum use and wastage of materials can be
minimized.

TECHNIQUES OF MATERIAL CONTROL

There are several techniques of material control which are listed as below:

1- Setting Stock Levels

2- Economic Order Quantity (EOQ)
3- A-B-C Analysis
4- Perpetual Inventory System
5- VED Analysis
6- Fast-Slow-Non moving (FSN) Method
7- Statistical Quality Control
8- Just-In-Time (JIT) Method
9- Inventory Optimization Software

Out of the above techniques, some of the important techniques are discussed here-

1-SETTING STOCK LEVELS

a) Re-order Level – It is the point of re-ordering of materials. In other words, when stock of
any particular material approaches this level, the storekeeper should initiate requisition for
fresh supply of that material. This level is set in between minimum level and maximum level.

Re-Ordering Level = Minimum Level + Consumption during the time required to get
fresh supply

Or, Maximum Consumption × Maximum Re-order Period

b) Minimum Level – This represents the minimum quantity of materials which must be
maintained in the stores at all the time to avoid stoppage of production due to non-availability
of materials. So typically stock of no material should be allowed to fall below this level.

Minimum Level = Re-ordering Level – (Normal Consumption × Normal Re-order

Period)
c) Maximum Level – It represents the maximum quantity of materials which can be held in
the stores at any point of time. Stock should not exceed this quantity, or else it leads to
wastage due to over-stocking.

Maximum Level = Re-ordering Level + Re-ordering Quantity – (Minimum

Consumption × Minimum Re-order Period)

d) Danger Level – This level is set below the minimum level. This is a level where normal
issue of materials is stopped and storekeeper initiates demand for immediate supply of
materials on emergency basis to the store, so that production is not hampered.

Danger Level =Average Consumption × Maximum Re-order period for emergency

purchase.

e) Average Stock Level – It represents the average quantity of materials maintained in the
store during a period.

Minimum Level = Minimum Level + ½ of Re-order Quantity

Or, ½ (Minimum Stock Level + Maximum Stock Level)

2. ECONOMIC ORDER QUANTITY (EOQ)

EOQ refers to the ideal quantity of material which should be ordered at one time i.e. at the
time of re-ordering fresh materials for the stores. It represents the most economic quantity to
be ordered which ensures optimum investment in materials and no wastages.

EOQ has two components, namely-

a) Ordering Cost, and

b) Carrying Cost

a) Ordering Cost – It is the cost of placing orders for the purchase of materials which
includes-
i) Cost of staffs posted in purchasing department
ii) Cost of stationery, postages and telephone charges

b) Carrying Cost – It refers to the cost of holding the materials in the stores after purchase,
which includes:
i) Cost of staffs posted in stores including storekeeper
ii) Cost of bins and racks
iii) Cost of maintenance of stores
iv) Cost of insurance of materials
v) Cost of interest
vi) Clerical cost
CALCULATION OF EOQ: MATHEMATICAL METHOD:

EOQ = √2AS / I

Where, A = Annual consumption of materials

S= Ordering cost
I = Inventory carrying cost

For eg- Cost of an unit of material X is ₹50 and yearly annual consumption is 20,000 units.
Cost of receiving material is ₹20 and cost of storage is 10% p.a.

So here, A= Annual consumption i.e. 20,000

S= Ordering cost i.e. receiving cost = 20
I = Inventory carrying cost i.e. storage cost = 10% of 50 = 5

So, EOQ = √ 2 × 20,000 × 20 / 5 = 400 Units

CALCULATION OF EOQ: GRAPHICAL METHOD:

In this graph above, carrying cost is denoted by holding cost. Both carrying cost and
ordering cost behave opposite to each other. Which means if large quantity is ordered,
ordering cost will be low and the carrying cost will be high. However, EOQ is always fixed at
the point where the Total Cost is minimum, as shown in the graph.
3- ABC ANALYSIS

Under ABC Analysis, the stores is divided into three categories namely A, B and C and
materials are stores according to their quantities and value as shown below.

Categories Quantity in stores Monetary Value

A Low i.e. about 10% of total items High i.e. about 70% of total
values.
B Medium i.e. about 20% of the total Medium i.e. about 20% of the total
items value
C High i.e. about 70% of the total Low i.e. about 10% of the total
items value

To understand it better, we take an example of jewellery shop/workshop-

Category A – Diamonds – Less quantity but high value

Category B- Gold – Medium quantity and medium value
Category C- Silver – High quantity but low value.

While Category-A materials are kept under strict control and supervision due to their high
value, very little control is required for Category-C materials and medium level of control in
Category-B materials.

4. PERPETUAL INVENTORY SYSTEM

It is a system of record maintained by the stores department which reflects the physical
movement of stocks and their current balance. This system comprises of three tools-

i) Bin card
ii) Stores Ledger, and
iii) Continuous Stock Taking

Bin card is a document maintained by the stores department and shows the physical
movement of materials in quantities i.e. receipts, issues and balance during a particular
period.
Stores ledger is maintained by cost accounting department and apart from showing the
quantities of materials received, issued and their balance, it also reflects the monetary values
of the materials.
Matching of balance of materials as shown in the bin card and the stores ledger is very
important to keep a check on the effectiveness of material control.
The formats of Bin Card and Stores Ledger are given below.
Continuous Stock Taking is yet another technique of perpetual inventory system which
ensures effective material control continuously. In continuous stock taking, physical
verification of materials is undertaken after every receipt and issue in the stores unlike
periodical stock taking where physical verification of the stores is conducted periodically at
regular intervals. Continuous stock taking addresses the drawbacks of periodical stock taking
and has the following advantages-

i) Actual quantity of materials is easily verified with documented quantity as and when
required.
ii) The storekeeper can’t engaged in unauthorized use of materials and a moral check is
exercised at all the time.
iii) Preparation of periodical profit and loss account is possible.
iv) Mismatch between store records and physical flow can be easily detected.
v) A process of internal check remains in force where work of stores department and
accounts department are automatically checked by each other.
5. VED ANALYSIS

This system is primarily used for control of spare parts. The spare parts can be divided into
three categories – vital, essential and desirable.

i) Vital Spares – The most important spares without which the production has to be stopped
immediately.

ii) Essential Spares – The spares, if not available, can stop the production in just few days.

iii) Desirable Spares – The spares which are necessary, but their absence will not lead to
stoppage of production even for a week.