PROCESS OF INVENTORY CONTROL - Quantitative Techniques for management

Process Of Inventory Control Management


For the convenience to understand the topic, the inventory control system may be divided into three parts:
(i) Process of Purchasing of Materials.
(ii) Inventory Storing Procedure.
(iii) Process of Issue of Materials.

Process of Purchasing of Materials

Its steps are as follows:

  1. Establishment of Purchase Department: A different department should be established for purchase of materials. This department not only ensure the availability of raw material but also, machines, stationary etc. are purchased by this department. Purchase of materials should be centralized. All purchase should be under a single department. Control centralized purchase is generally possible only in these industries, which are located at a single place only and nature of production is of same type. But if an industry has different production centre at different places, then it becomes compulsory to follow decentralized purchase system. Thus it is compulsory to have a complete knowledge about the nature of production, capacity of locality etc.
  2. Preparation of Purchasing Budge: First of all the production target of the company should be determined, on the basis of which the budget for purchasing of material is prepared.
    Following points should be kept in mind while preparing purchase budget:
    1. System to receive the materials.
    2. The quantity and quality of the material according to the production requirements.
    3. Source of supply.
    4. Present balance of materials and predictions to receive the materials ordered.
    5. Available cash for debtors.
    6. On which date the indent is made by concerned department.
    7. The conditions regarding the value of the material and rebate or discount on it.
  3. Preparation of Purchase Requisition Slip: The initiations of purchase begin with the formal request from the various sections or departments to the purchase department to order goods. The request is made in a prescribed form to the purchase department by the departments needing the goods, authorizing the purchase department for procuring the goods as per the specifications given in the slip by the date mentioned on it.

    Specimen of a PRS

    Specimen of a PRS
  4. The requisitions are generally prepared in triplicate the original copy is sent to the purchase department, the second copy is retained by the store or the department initiating the purchase requisition and third are is sent to the costing department.

  5. Obtaining the Tender: After the decision for purchase tenders are invited from the prospective suppliers on studying the terms of supply and the quantity and quality of the goods. Vendor is selected out of the tenderers for the comparative study of tenderers. Following type of table may be used:

    Type of Specimen of Tenderer Table

    Type of Specimen of Tenderer Table
  6. Sending Purchase Order: After comparing different tenderers, the best vendor is decided and the order of required material quotation is placed to him. Purchase order is prepared in prescribed form by the purchase department and sent to the vendor authorizing him to supply a specified quantity and quality of the materials at the stipulated terms at the time and place mentioned therein. Generally purchase order has the following information:
    (i) Name of the purchaser, serial no. and date of order.
    (ii) Name of vendor and address.
    (iii) Full details of materials quantity etc.
    (iv) Value, rebate and terms of payment etc.
    (v) Time and place of delivery.
    (vi) Directions regarding packing and despatching.
    (vii) Signature of purchaser.
    (viii) Method of follow-up.

    Specimen of a Purchase Order

    Specimen of a Purchase Order

    Specimen of Goods Received Note

    Specimen of Goods Received Note

  7. Receiving and Inspection of Materials: When goods arrive they are taken delivery of and parcels or packet unpacked and the contents of the packages are checked by the receiving clerk with the order placed by the purchasing department to the vendor. After proper checking goods should be delivered to the laboratory or inspection department. Goods received note is prepared here.
  8. Returning the Materials: On checking if any discrepancy is found as regards to quality and quantity. It should immediately be referred to the purchasing department so that the discrepancy may be adjusted or steps may be taken to return the defective or damaged goods in exchange of proper quality material on credit note.
  9. Payment of Purchased Material: After required inspection etc. final report is sent to purchase officer, who sent it to payment officer after placing required entries in the report. After checking the ledger, payment officer authorize accounts clerk for payment.

Process of Issue of Materials

To control the issue of materials following procedure is followed:

  1. Issue of Materials: When a foreman of any production department needs materials from store, he prepares three copies of goods requisition slip. If the material is costly and important then factory manager also sign these copies. One copy of requisition slip is kept by foreman itself and other two copies are given to stores. According to the requisition slip the store-keeper issues the materials to foreman. Foreman signs the two copy of store’s requisition slips to verify that he has received the materials. then storekeeper makes the required entries in the bin card. After signing both the copies of requisition slip storekeeper sent one copy to accountant of store. After recording the issue of materials, store accountant sent this copy to costing department.

    Sigma Corporation Ltd.
    Material Requisition Slip

    Sigma Corporation Ltd. Material Requisition SlipSigma Corporation Ltd. Material Requisition Slip
    Sigma Corporation Ltd. Material Requisition SlipSigma Corporation Ltd. Material Requisition SlipSigma Corporation Ltd. Material abstract
  2. Periodical Checking of Materials: To control the issue of materials this is very much necessary that bin cards, store control records and store ledgers are checked regularly and if any discrepancy is found, proper corrective actions should be taken.
  3. Physical Stock Checking of Materials: Physical stock checking in stores should be done to prevent materials loss, material damage and theft. This checking can be done weekly, monthly etc. Physical stock checking means the verification of actual quantity in stores. This checking should be done surprisingly or at random basis. If any discrepancy is found and corrective actions should be taken to reduce or eliminate them the possible reasons may be wear and tear of materials, absorption of moisture, evaporation, waste, breakage, theft or wrong recordings. This is assumed to be the best method of inventory control.

Inventory Storing Procedure

Inventory storing procedure is an important part of inventory control management or materials management. Following procedure is followed in inventory storing:

  1. Receipt of Material in Store: The storekeeper receives the material along with the goods received note from the receiving section. The material is then classified according to the nature of the material. The material should be arranged in bins especially meant for the materials. A bin card is attached with each bin or rack displaying the identification mark or code, minimum, maximum and ordering levels of materials and receipts, issues and balance of materials in hand, so that the exact position may be known at any time whenever desired.

    Specimen of Bin Card

    Specimen of Bin Card
  2. Issue of Material from Store: The store undertakes the responsibility of issuing the material to the using departments. In order to prevent malpractices, the materials must be issued only against the properly authorised requisition slips. These requisition must be properly checked and scrutinised to avoid overissue of materials. All requisition received must be posted immediately or daily on the bin cards and on the stock control cards. Generally three copies of requisition slips are prepared — first two copies are given to the stores and third copy kept with the demanding department. Store incharge keeps one copy of requisition slip for himself and other copy he sent to accounts department.
  3. Return of Material to Store: If a department uses less material to its demand then it return the material to stores. Goods return slips are sent along with the materials. The same specifications and details of materials are given in goods return slips as they were mentioned in requisition slips. Three copies of goods return slips are prepared. First two copies are sent to stores department and third copy is kept by the goods returning department itself. Store keeper sent one copy to accounts department. The colour of both requisition slip and return slips are kept different to identify them easily.
  4. Transfer of Material: The transfer of materials from one department to another department is generally not appreciated, because it creates problems in material control process. But sometime when there is emergency, the transfer of material from one department to other department is allowed. The department transferring he materials makes four copies of material transfer slips. First copy is sent to the needy department along with material. Second and third copies are sent to stores department and accounts department for their information.
  5. Material Abstract: In big industries where the large quality of materials are received, issued and transferred daily, “material abstract” is prepared weekly or fortnightly to control the inventory. A physical verification of quantity in stores and other departments is done by material abstract.

    It any discrepancy is found in physical verification of quantity in store or other department. It is brought into the notice of top management this type of check plays a very important role in inventory control. Thus material abstract is a summary of materials received, issued and transferred, for a given time period.

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