Material control techniques are systematic tools and procedures that help organizations effectively manage their materials, reduce waste, and optimize inventory levels. These techniques ensure that materials are available when needed, in the right quantity and quality, without excessive investment in stock. By applying these techniques, businesses can achieve greater operational efficiency and cost savings.
1. Economic Order Quantity (EOQ)
EOQ is the optimal order quantity that minimizes the total cost of inventory, including ordering and holding costs.
- Objective: Find the quantity that minimizes total inventory cost.
- Formula: EOQ = √(2DS / H), where D = demand, S = ordering cost, H = holding cost per unit.
- Benefit: Prevents both overstocking and stockouts.
2. Reorder Level System
This technique involves setting a stock level at which a new order is automatically triggered.
- Reorder Level: The minimum stock level that calls for replenishment.
- Formula: Reorder Level = Maximum Usage × Maximum Lead Time.
- Benefit: Ensures timely reordering to avoid shortages.
3. ABC Analysis
ABC analysis categorizes inventory based on its value and importance to the business.
- ‘A’ Items: High-value, low-quantity items—require strict control.
- ‘B’ Items: Moderate-value items—require moderate control.
- ‘C’ Items: Low-value, high-quantity items—require less control.
- Benefit: Prioritizes management efforts on the most critical items.
4. Perpetual Inventory System
This method keeps inventory records continuously updated with each receipt and issue of materials.
- Usage: Requires real-time recording of stock transactions.
- Tools: Bin cards, stock ledgers, and inventory software.
- Benefit: Helps detect discrepancies quickly and supports stock audits.
5. Just-in-Time (JIT)
JIT aims to minimize inventory by receiving materials only when needed in the production process.
- Principle: Zero inventory—materials arrive “just in time” for use.
- Application: Requires strong supplier relationships and accurate forecasting.
- Benefit: Reduces holding costs and improves efficiency.
6. Stock Level Setting
Setting minimum, maximum, and average stock levels helps in maintaining balanced inventory.
- Minimum Level: The lowest quantity that should be in stock to prevent disruption.
- Maximum Level: The highest quantity allowed to avoid excess holding costs.
- Average Level: The average stock maintained over time.
7. FIFO and LIFO Methods
These are inventory valuation techniques that also influence material issue procedures.
- FIFO (First In, First Out): Issues oldest stock first—suitable when inventory has a shelf life.
- LIFO (Last In, First Out): Issues most recently purchased stock first—used for inflation control in cost accounting (less common today).
8. Standardization and Codification
Assigning codes to materials and standardizing descriptions enhances control and avoids duplication.
- Standardization: Uses uniform specifications for materials.
- Codification: Assigns unique codes to materials for easier tracking and retrieval.
- Benefit: Improves inventory accuracy and avoids unnecessary purchases.
9. Material Budgeting
Planning future material requirements based on production forecasts and past usage trends.
- Purpose: Aligns material needs with production and sales targets.
- Benefit: Helps avoid overstocking and supports financial planning.
10. Inventory Turnover Ratio
This ratio measures how efficiently inventory is being used and replenished.
- Formula: Inventory Turnover = Cost of Goods Sold ÷ Average Inventory.
- Benefit: Higher turnover indicates efficient inventory management.
Strategic Role of Material Control Techniques
The use of effective material control techniques helps businesses minimize waste, avoid stock imbalances, reduce costs, and improve overall operational efficiency. By implementing the right mix of these techniques based on business size and industry, organizations can optimize material usage and enhance profitability.