Chapter five: STORAGE FUNCTIONS AND RESPONSIBILITIES

Storage can be considered as temporary location for materials need for operational purposes
which is planned, organized and operated in such a way that the life time of each stock item is as
short as possible consistent with economic operation.

Storage could be looked beyond the responsibility of the store’s manager and examined in terms
of the needs of the whole organization. Accordingly, it is defined as follows:
Storage Functions

From the stores point of view the most important thing is to keep the quantities of
incoming goods as near as possible to the departments and the machine shops and
assembly shop to facilitate their daily usage of materials.
Storage is expected to perform the following functions:

1. Receive the materials; check quantities and quality against purchase orders,
invoices and specifications. Certifies deliveries and reports shortages, deficiencies in
quality and partial deliveries, and prepare receiving reports.
2. Provide adequate and proper storage and preservation.
3. Prepare and maintain bin cards, periodically check inventory records against actual
stock.
4. Minimize obsolescence, surplus and scrap through proper codification,
standardization and preservation.
5. Highlight stock accumulation, discrepancies and abnormal consumption and effect
control measures.
6. Ensure good housekeeping so that material handling, material preservation, stock
receipt and stock issue can be done accurately.
7. Assist in verification and provide supporting information for effective purchase
action.
8. Keep and maintain store areas in a clean and orderly condition so as to facilitate
handling and preserve all safety regulations and security measures.
It can be observed from the above listing that the storage function has multiple
responsibilities in managing material related activities. These functions can be put into four
major activities of storage as receiving, storing, issuing and stock controlling.

Storage Systems

Closed Stores System

 A closed stores system is the one in which all area as a rule. That is, there is
limited access to entry into the stores in such a system.
 Materials are physically stored in a closed or controlled area.
  The general practice is to maintain physical control by locking the storage area
whenever there are no activities.
 In this storage system, no one other than stores personnel is permitted in
the stores
 Material enters and leaves the area only with the accompaniment to an
authorizing document.
 This system is designed to afford maximum physical security and to
ensure tight accounting controls of inventories.
Open Stores System

 The open system represents the second major type of stores system. It finds its
widest use in highly repetitive, mass production types of operation exhibiting a
continuous and predictable demand of the same materials.
 In organizations using the open system, no storeroom as such exists.
 Each material is stored as close to its point of use as is physically possible.
 Materials are stored in bins, on shelves or racks, and so on, much as they
would be stored in a storeroom.
After material is received, store personnel are usually responsible for its delivery to the
production areas. They are further responsible for working out satisfactory physical
storage arrangements with the production supervisors.

 Once the materials have been issued to production, the production

supervisors assume responsibility for materials stored in their areas.
 The open system is designed to expedite production activities. It places
little emphasis to the physical security of materials.
 In ideal applications, there is considerable justification for this approach
because the material is used relatively quickly, and it is not subject to a
high rate of deterioration or obsolescence.
 Average inventory is extremely low relative to plant output.
 The open system also places less emphasis on the accounting control of
materials.
 Materials are usually put into production without the use of requisition or
a control document.
 No perpetual inventory records are kept in an open system.
 To determine the actual usage of material during a given period, it is
necessary to take a physical count of the material at the end of the period
and compare this figure with similar beginning-period figures.
 Hence, accounting changes are determined indirectly rather than directly.
 The open system is most applicable in situation where a repetitive
production operation produces standardized products.
  Materials handled in an open system should not be subject to pilferage, nor
should they be easily damaged.
 If production requires delicate or preferable item they should probably be
controlled in closed storeroom.
Generally speaking, an open system is more likely to function successfully if it is not
applied to a large number of items, typically experience better results than those applying
it to several thousand items.
Random Access Storage System

 The random-access storage system is a unique type of closed stores system,

employed by a relatively small number of large firms.
 In this system, no material has a fixed storage location. When an item enters
the storeroom, it is stored in the first available bin or shelf suitable for its
storage requirement, and when it is withdrawn from stores, the storage space is
available for any other in coming item having similar physical storage
requirement.
 All materials are thus stored at random locations throughout the
storeroom. For example, a stock of Ten 50-hoursepower electric motors may
be located at ten different places in the storeroom.
 However, similar types and sizes of storage equipment are grouped
together. This has the effect of dividing the storeroom into areas of
materials that are similar in size and storage requirements.
 When an item enters the storeroom, a record card is prepared.
 Included on the item’s record card is its storage location address (each
storage location is given number/address). The record card is then filled.
 When the storekeeper receives a stores requisition, he will match it with
the record card and identify the location where such item is stored.
 The random access storage system is clearly feasible only in a large
operation.
 It requires electronic data processing equipment, as well as an expensive
control system.
 The system also has several significant disadvantages. For instance, tight
physical control of materials is more difficult to achieve.
 The other problem is when a record card is lost.
 When this happens, the item itself may literally be lost for an indefinite
period of time.
 Additionally, when a physical inventory is taken, it clearly becomes a
major and time-consuming project.
 However, a random-access storage system has two important advantages if
it is properly designed and operated.
  First, it utilizes the storage space more efficiently than a fixed-location
storage system.
 In arranging storage facilities, space for a fluctuating inventory level does
not have to be left vacant for each individual material. Second, the system
provides great flexibility.
 The same storage facilities can easily accommodate different material.
 The three-storage system identified can be used separately under different
conditions or can be employed by the firm at the same time.
 Whenever maximum physical stores security and tight accounting inventory
control is needed, a closed stores system will be the most appropriate one.
 The use of open stores system is justified when a material has a repetitive use
so that it will not be exposed to rapid deterioration.
 If the firm has strong desire to efficiently utilize its storage space, random
access storage system provides several advantages.
 Because of the advantages and disadvantages of these systems, it is rare that
firms relay only on one system. Rather they use the combination of these
systems.

STORAGE LOCATION, LAYOUT AND METHODS

Location System
Definition of Location System
Location systems are the means by which stores are to be found when they are wanted.
The following are some important features of location system:

 Since in all but a few automated storehouses a man must do the finding, it is
important to get it right place with the minimum period of time.
 All good location systems, therefore, not only locate the item, but also conjure up a
mental picture of its precise position within the storehouse.
 To do this, they must be simple, unambiguous, and consistent.
 Color codes are therefore unsatisfactory as failure of lighting; bad lights or a color-
blind store man can fail to see them.
 Most systems have in common a feature, which, like the telephone number codes,
allows one to “dial in” as it were, each digit describing the location more and more
precisely.
LOCATION CODE

The location code consists of the following components or sub-parts.

1. The first character of the code designates the storehouse, the storage bay or group.
Example:
 B = Bin

R = Rack

E = Echelon storage

2. The second character of the code designates the block of storage.

Example:

A digit indicating position from a reference point.

3. The third character of the code designates the discrete part of the block.
Example: N = North F = Front

S = South B = Back

E = East L = Left

W = West R = Right.

4. The fourth character of the code designates a digit indicating a discrete part of a
rack, bin, stack, etc…
5. The fifth character of the code addresses a letter indicating the level a being the
lowest.

Location Code

First character Second Third Fourth Fifth character

character character character

B = Bin A digit N = North A digit A letter

indicating indicating a indicating
R = Rack position from S = South discrete part level, A being
E = Echelon a reference E = East of a rack, bin, the lowest …
storage point. stack, etc.
W = West
S = Stacking
F = Front

B = Back

L = Left

R = Right
  Having decided on the code to be used, it is vital that each area referred
to shall be indicated by large signs, which are clearly visible, and that
the full code should appear on the location itself in a standard position.
 Having a good location code, however, it's only the beginning, as it only
serves a purpose if the right stores are in the right location.
 A system, therefore, must be set up for the recording of locations
allotted to each receipt, the location index being built up progressively
on cards or using bizada strips and the account also being enfaced with
location data.
 Any movement of stores from one location to another must also be
subject to the preparation of a change of location slip designed to make
necessary changes on the location index account.
 Since the location is the hinge on which the whole warehousing
operation swings responsibility for the stores in it and for the
correctness of the index should be given to a particular individual.
 This is not obvious if the storehouse organization is built on a
functional basis, since the location is not a function; in such a case the
functions would be:
Receipt inspection,
Binning,
Issue picking,
Packing,
Dispatch,
Stock taking,
Stock maintenance, and
Storage maintenance.
Storehouse Layout
Access to Fire-fighting

 If fires do start access may save lives. For this purpose, it is vital that free
movement is possible around the walls of the building.
 Stocks, which are built against walls, constitute dead ends, and hence, death traps.
 The importance of keeping a free flow and reducing the volume of movement in the
storehouse can't be over emphasized.
 You have dealt with how this can be done, and must now then turn to consider the
various methods of storage.
Storehouse Layout
 A storehouse, which is not fully utilized, is wasting the capital expended
upon it, but one, which holds too much is wasteful of time and labor.
 Speed of response is essential to economic storage operations, since time is
money and each day of delay involves holding a further days worth of
stock.
 Concentration rises at the expense of access and vice-versa.
 The crux of one matter is to identify the highest degree of concentration for
the lowest acceptable degree of access. It is more advisable to examine the
nature of the flows themselves.
STORAGE METHODS

In this Section the various types of storage methods along with the respective limitations
and benefits are discussed.

The various methods of storage are outlined below.

Binning
Racking and shelving
Feat pallets and spillages
Post and box pallets
Block stacking
Heavy lift and outward item storage etc…

 The essentials of storage demand tidiness, method and discipline so that

everyone in the storehouse can find stock easily at a glance.
 It presupposes that everybody who uses the location obeys the rules;
otherwise they will upset or wreck the whole stock house in a day's
unconsidered work.
 Thus, the rules for the whole storehouse has to follow the same basic
principles but each type of storage has to have its own specific needs.

Binning is defined as a primary "picking face" area in a storehouse used to hold most of the stock
items required for normal issue and from which most issues are made.

 There are a great variety of bins to choose from including some, which are
mounted on rails so as to reduce aisle space to the minimum. There are two
schools of thought in the use of bins.
i) One holds that this type of storage is the most valuable and as many items as
possible should be put into it refilling being done on a regular basis. For
example the daily feelings in supermarket.
 ii) The other states that manpower movement is the most expensive commodity
and that the task of replenishment should be made as easy as possible by
arranging for the bin to hold rather more than the contents of a complete
package.
Bad Binning can be explained as follows:
i. Dumping of items in odd corners
[Link] binning makes stores difficult to remove and may damage them.
iii.
Items trucked behind others may be "lost".
[Link] picking face is valuable space and its proper use represents time and therefore
money saved; it shouldn't be allowed to stand.
v. Thought should be given to utilizing space more fully.

Note: Stores are easier to see and reach if short bins are placed on stands.

Racking: is used as a packing face for items, which are too big or heavy for bin accommodations or
for reserve stocks for replenishing bins.

There are a number of different ways of treating each of these classes of storage and the one you
select will depend on the size and weight of each item.

Racks may range from simple wooden shelving to sophisticated special purpose systems---the more
important versions being discussed below.

i) Static racking: is a version of racking built from pre-fabricated sections and having
adjustable height shelving. It is designed to accommodate complete pallet can be
reached from an aisle. Racks are, therefore, placed in pair, back to back.

It is designed to take the heaviest loads and is normally constructed by the manufacturer of the
racking. It meets all your requirements, the stock turnover aspect not arising since each pallet
can be accessible separately.
ii) Line racking: is another version of racking consisting of separate conveyers on
which pallet loads are placed in the order in which they arrive. Each line holds only
one type of item. Stores are loaded into the racking at one end and removed from
the other.

The system works well where enough items suitable for such a system are held. However, the
system is inflexible and occupies the same amount of space whether filled to capacity or not.
Care must be exercised in carrying out the feasibility study, which considers this type of storage
to make sure that it does not become an expensive white elephant. If this system is fully used it
solves the problem of stock turnover while providing a reasonable concentration of stores on the
floor.
 iii) Drive - through racking: In this system, the uprights and longitudinal parts are
similar to those described for static racking except that aisles are unnecessary.
However, no shelves are provided and instead pallets either slide into channels or sit
upon arms, which fold out or side out to receive them. As a result the forklift truck
can drive straight into the storage until it comes to the first filled pallet position.
Pallets can be stored to the full depth of the location as with block stacking but
unlike that method, since pallet load doesn't have to be able to bear a load itself, nor
does it have to be flat.
iv) Honey comb racking: is designed for gantries or special traveling cranes operate
steel pipe, girder and bar, this type of storage.
v) Self-erected tracking: various kits are available on the Meccano principle and allow
the user to make up his/her own racks. These kits have their uses and are ideal for
the erection of light racks, particularly when flexibility is important. However, they
are very limited as to the weight they can carry. The most useful of this class of
materials is steel scaffolding.
vi) Mezzanine floor racking: If the building being used as a warehouse is sufficiently
tall but the types of item held are mainly of the intermediate bulk kind which do not
warrant the purchase and erection of purpose built static racks or the other types of
storage described above, consideration should be given to the construction of
Mezzanines racking, which is designed to provide an additional floor for this types
of storage.
This racking provides intermediate bulk storage above palletized bulk. The palletized bulk can
be handled by forklift trucks operating at ground level while the intermediate bulk is lifted to the
Mezzanine floor level by forklift trucks using pallet landings designed for the purpose.

In planning such as storage, it is essential that racks should be wide enough to give stability for
the height and weight of stores being accommodated and sufficient ties and bracers should be
used to knit the whole system together.
Pallets: are specially designed platforms for the stacking of goods with a view to the whole load
being moved, wherever, it is required by fork-lift truck.

There is a wide range of pallets of different size made from different materials from steel and wood
to disposable fiber. Pallets may be flat, have posts to which cages can be fitted to hold loses items
which have boxes with hinged lids fitted to them for the same purpose or merely batten be screwed
to the underside of large crates to lift the container sufficiently off the ground to allow a forklift
truck to get its forks under it.

After some years of experience of the use of pallets, the idea of standard pallets was conceived
since; as the most distribution systems use the common transport network there is a need to have a
standard base for the stacking of stores in ships and railway wagons etc… if space is to be used
economically.
This is introduced in the standard load concept in which the load can be steel-tape-banded to
pallets---the load being one which is acceptable to all customers of a group. The ultimate aim of
this concept is for goods to be handled as standard---loads from completion of manufacture to final
delivery. Pallets have a use, quite apart from storage, in the movement of goods. Within the
warehouse, pallets are used to move stores from the receipts area to bins, from picking through
packing to dispatch or from the storage area to maintain and back again. For these purposes,
although lifting operations will be performed by the ubiquitous fork-lift truck, actual movement is
probably better performed by tractor pallet transporter or spillages truck.

Pallet transporters are battery operated machines which can lift a pallet just sufficiently to permit
it to be moved and can move pallets one at a time to where they are required.

Pallet Control: Expenditure upon pallets can be considerable and upon large stocks are held value
locked up in pallets that may be into several millions of pounds and the control of pallets can be
almost as important as the reduction of stock holdings in minimizing the cost of operations.

This is particularly true where more than one organization uses the pallets on some form of pooling
arrangements as may be the case where one company supplies material and another builds a
product from delivered supplies, or when a company subcontracts work on material receiving it
back in the same or different pallets on completion.

When setting up the parameters for pallet control it is important that the economics of the
operation are kept in mind.

If the deposit charges or retails are not economic than those other companies concerned with the
pallets are likely to take advantage of such beneficial rates and use them extensively for miner own
purpose.

Block Stacking: is another version of storage method in which boxes or pallets are stacked directly
upon each other. The major and primary consideration in all block stacking are:

 Safety and stability of stack;

 Ease of access,
 The maintenance of stock turnover discipline; and
 The day-to-day control to ensure the proper utilization of space in that order of
importance.

i) Safety and stability: This depends upon stacks being built so that each
component stands securely on its own, whatever happens to the components
next to it. Each of these units of storage should use boxes as if they were bricks
so that they bind themselves into a solid wall. It is pointless spending time and
trouble in making stocks stable if workers are allowed to remove stores at
random which destroys stability. Therefore, boxes within each component
should be removed on picking layer by layer. Periodic storage maintenance is
 necessary if space is to be used economically during issuing stores from block
stacks. It is also important that a good liaison between the buying department
and the warehouse should exist in order to differentiate permanent reduction in
stock holding from normal usages run-down and to re-plan the basis of real
maximum likely holdings.
ii) Ease of access: Access is a matter of the amount of space devoted to aisles
relative to the stack volume. (Access varies inversely to concentration.) It must
be planned with the equipment, which is to operate in that area of a storehouse
in mind. Once the storage has been built the equipment for which it is planned
must always be available.

The final result will be that an area designed to be operated using mechanical means will, infact;
have to be worked manually, at fearful risk. Attention has to be given for standardizing certain
types of mechanical handling devices.
iii) Stock turnover maintenance: stock turnover is difficult to arrange in block
stacking without the moving of a large number of stores each time issue picking
takes place or alternatively, wasting a great deal of space.

Where pallets are used the additional movement, involved by not having such a system but keeping
a nose of the dates of receipt of pallet loads only is usually acceptable because of the speed with
which these equipments can operate.

Echelon Stacking: If end loading forklift trucks are used, it may be more economical to use echelon
stacking. In this method aisles are laid out at 45 o to main gangways, although boxes or pallet sides
remain parallel to the walls of the building.

Heavy and Awkward Items: This covers items which are so heavy or cumbersome that their
movement is likely to block the flow in their neighborhood for some little time. This first
requirement is for separate access and storage accommodation for storing them, it may be perfectly
possible to use static racking or some other methods already described or it may be necessary to use
a crane lift, getting a crane lift or getting the crane directly over the item concerned.

Timber and Metals: length and weight pallets of various kinds characterize these materials. The
types of storage already described are quite suitable for rolled steel sheet and for short lengths of
bar above 15 ft. (4.5 mt,) There are two great load stability on a pallet and other methods for
moving that must be adopted. Gantries using chain slings with variations which allow support to
be given at two widely spaced points can be used for floor so that a chain can be passed under the
items to be lifted. Such items are therefore usually supported on battens or stacked on each other
criss-cross fashion, so that slings can easily be passed around them. Access by gantries requires a
clear lifting zone above the stacked and this rules out any form of racking.
Hazardous Materials: There are a variety of government regulations in existence covering the
carriage, storage and disposal of hazardous materials falling into the following broad categories:

 Fire risk
 Poisonous
 Toxic fumes and
 Explosives subjected to various governing health and safety.

Vehicles carrying such as goods and buildings storing them should be clearly labeled with the
nature of the risk to ease the problems of dealing with serious incidents. The labeling of the
materials itself should be considered, in particular where similar containers are used for different
materials, gasses or liquids so as to reduce the chance of the error.

 Once the risk has been identified, the particular regulations must be ascertained so that the
legal local fire brigade should be contacted to inform them of special risks and special
equipment required to deal with incidents.
 The question of insurance coverage should be investigated since danger from a fire starting
in such material may be specifically excluded by the terms of the policy.
Delicate Materials: The storage of delicate materials and their packing go hand in hand. Each case
has to be dealt with on its merits, which demand that, a "breakage conscious" foreman or
storekeeper is in charge of the warehouse.

For instance, it may be possible to stack boxes on pallets to a height of four pallets, but if
delicate instruments packed in cardboard boxes are involved, this practice could result in the
crushing of the bottom layer of boxes, resulting in wholesale damage. There is a case for the
setting up of a special delicate materials storage area so that the necessary expertise can be
developed. Obviously it is pointless to take care in the storage of material if careless handling
leads to breakage.

High Security Items: There is a need to identify these items and to apply special, procedures as well
as special storage to protect them. The special procedures will cover handling from dispatch
through receipt storage, packing and dispatch including insurance.

 Material within this category may not be especially valuable, for instance, it should cover
such items as sparking plugs, some instruments, solder and diamond tipped tools, as well
as watches, gold, platinum, silver wire, industrial diamonds, etc.

STORAGE ACTIVITIES

Receiving Goods

Receiving from Suppliers

  When a supplier ships materials or is ready to deliver the goods ordered, the receiving
section should be aware of the dispatch or arrival of the materials through various
documents such as purchase order copy, suppliers advice notes, carriers consignment
notes and suppliers packing list.
 When a supplier has goods for delivery, he/she normally prepares advice note to be
sent to his/her customers. Supplier’s advice note is a document that gives a
description of the goods, the quantity and the date of dispatch.
 This note is often sent by post but sometimes the driver of the vehicle making the
delivery may hand it over on arrival.
 If an independent transport company is employed to move the goods, the carrier (the
transport company) may send a carrier’s consignment note by post in advance in
addition to the advice note sent by supplier.
 The carrier’s consignment note shows the name and address of the consignor, the
description of the goods, and the number of packages, the weight details of the
delivery vehicle and the name and address of the carrier.
 If materials are packaged, it is usual for the supplier to send a packing list, which is
either included in or securely fixed to the package.
 When such separate packing list, other than the advice notes are available, they
normally give much more details about the contents than the corresponding advice
notes.
 Another document used by the store clerk in receiving goods is a copy of purchase
order.
 Purchase order details the type of materials ordered, their quality, quantity, the
delivery date and other terms and conditions of a contract. Buyer sends it to the
supplier.
 The four documents are: the supplier’s advice note, the carrier’s consignment note,
the supplier’s packing list and the copy of purchase order.
 All four documents are notes required for every individual receipt, especially for
items of small value. However, they should be made available for most shipments.

 As soon as the materials are received in the stores, the storekeeper checks that the
supplier’s advice and the carrier’s consignment note with corresponding copy of
purchase order to make sure that there is no disagreement concerning the quality and
description of the materials.
Receiving Activities---Functions and Flow
 The basic responsibility of receiving personnel is to perform their various activities in
such a manner that all incoming materials are processed accurately and expeditiously.
The following are the main functions of receiving when the supplier delivers goods:

Unloading

 Initially receiving department unloads the carrier’s vehicle (truck, freight car, etc.).
 In some situations, unloaded goods are moved to another location by manual handling.
  In other situations, workers unload materials directly onto a conveyor (a fixed path
materials handling equipment) that moves it to another location.
Verifying Items and Quantity (Freight Bill and Purchase Order)
 A freight bill is a document prepared by the carrier that includes information such as
the number of containers, gross weights, and a general description of goods shipped.
 It is essentially a contract between shipper and carrier to ensure safe handling of
shipments.
 All unloaded materials must be initially verified to ensure that the number of
cartons, bags or other units agree with the quality shown on the freight bill.
 This step in the receiving process establishes carrier and supplier liability, and
identifies discrepancies.
 Then, using the copy of the company’s purchase order, an important check is
made to determine when then the items received were actually ordered by the
company.
 This step is important because suppliers sometimes make errors in shipments.
 One common mistake is to ship the wrong materials to a customer.
 Receiving department must be alert and return materials that were not included
in the company’s purchase order.

Checking for Container Damage

 All containers are checked for external damage since any damage to containers is an
indication of damage to the internal contents.
 If the receiving clerk finds evidence of container damage, he/she should review it with
a carrier’s representative and note the damage on the freight bill or a receiving
document.
 In order to establish carrier liability for damages, it is important for the receiving clerk
to perform the checking before signing for the receipt of goods.
Checking Hot List

In many companies there are certain incoming materials that are urgently needed to
satisfy internal or (external) customer requirements.
Often, company personnel have devoted considerable time to expediting such
shipments by paying premium transportation costs (such as air freight).
To alert all pertinent personnel to the significance of these materials, a “ hot list” is
prepared and constantly updated.
If any items in incoming shipments are found to be on the hot list, receiving clerk
will give them preferential treatment in processing.

Unpacking and Sorting

 Those containers that have mixed contents are carefully unpacked and the materials are
sorted for ease of examination.
  The items are also separated to allow faster processing at a later point in the receiving
function.
 For example, a container may have materials destined to several different departments.
Separation, considering the destination, reduces materials handling.

Verifying Items and Quantity (Packing List and Purchase Order)

 After containers have been unpacked, they will be checked to determine any possible
discrepancy.
 The packing list is used to verify all items and their quantities.
 Often materials received in standard containers are in uniform quantities.
 In such cases there is no need to open and count each, spot checks are usually
sufficient.
 The receiving clerk also checks each item included in the packing list to determine
if the item conform to the purchase order.
 Once the type of items has been verified, the next activity is checking whether the
quantity received material is the quantity ordered.
 If too little material is received, there may have been a supplier error or a partial
shipment.
Checking for Concealed Damage

 The term-concealed damage refers to any materials damage that is discovered after the
carrier has left.
 This damage should be reported to the carrier as soon as possible.
 A carrier’s representative will be asked to review the material, and the carrier will
require a completed damage form.
 It is important that all damaged material be stored in a specified, restricted area so
that it will not mistakenly enter the system as good material.
 The disposition of these materials should be determined quickly to avoid excessive
storage.
Unitizing Materials

 Since all incoming materials are not received in unit load condition, they should be
unitized (put together into containers) whenever feasible in order to reduce materials
handling and storage costs.
 The unitizing activity may be physically performed at different times in the receiving
procedures.
 For example, a truckload shipment of non-unitized cartons can be stacked by
receiving clerk on pallets.
 For small quantities unitizing may be performed after verification activities.
 It is desirable to place these materials in a container that is compatible with both
materials handling systems of stores and quantity requirements of operations.
 Also known as Goods Receiving Note (GRN), the receiving report is a certificate to
accounts section for payment of goods.
 Many companies use a standard form, which must be completed by the receiving clerk.
  It is usually prepared in multiple copies as part of the original purchase order in order
to ease completion and distribution.
 Some companies use a copy of the purchase order containing receiving information
and distribute them to all pertinent departments or sections.
RECEIPTS FROM CUSTOMERS

Materials may also be received from customers. Receipts from customers fall into two categories:
Complaints or rejected materials, and
Materials received for servicing.
In both cases, they should be dealt with urgently because it can result in the loss of
customer goodwill.
The rejected materials should be given special priority and care should be taken not
to put them back into active stock.
Inspection
 Weighing, measuring, testing or any other form of inspection must carefully inspect
incoming materials.
 The purpose is to ensure that they conform to the purchase order and are of the proper
quality. That is:
 Whether the item is the correct one,
 Whether the dimensions are correct,
 Whether the condition of the item is good, or whether the item is damaged, rusty, etc.
 The inspection is particularly necessary in the case of raw materials and components, which
go into the product.
 No organization can afford to accept materials that do not meet quality requirements.
 Thus, incoming materials should be inspected prior to their acceptance.
 The final acceptance of materials will be only after they have passed the quality test.
Therefore, technically the purchasing action is not complete until the inspection is over.
 Inspection is generally done by the inspection section (department). In certain cases the
materials department may take the responsibility for inspection of incoming goods.
 It is also usual for goods of a technical nature such as machinery, chemicals and the like, to
be inspected by the user departments as it would be uneconomical to employ inspectors
with the required technical knowledge for inspection of comparatively very few items.
 Inspection may be carried out in the receiving section or in a separate place adjacent to
receiving section.
 In certain cases the quality is checked in the laboratory as in the case of chemicals, pig
irons and so on.
 Is inspection also carried out at the suppliers? Premises under the following situations:
 If cash has to be paid before delivery,
 During the course of manufacture of certain sub-contracted parts or equipment to ensure
that manufacture is being done according to the specification, and
 If the suppliers make it a condition.
 After incoming goods have been checked for quantity and quality, discrepancies might be
identified.
 The various discrepancies that normally occur in incoming shipments are dealt with below:
 i. Loss of Packages: This is a discrepancy when the goods received show shortage in
comparison with the supplier’s advice note or packing list or the buyer’s purchase order.
ii. Damages to Packages: It is container damage, which is easily visible when goods are
received.
iii. Minor Shortages and Damages: These are detected only after opening the packages.
Normally, incoming goods are insured and the claim for minor shortages and the insurance
company or the supplier meets damages.
iv. Major Shortages and Damages: When major shortages and damages are noticed, the
packing case must be preserved and an insurance survey should be arranged.
v. Wrong Items: This is a matter, which should be taken up with the suppliers. The items will
be held in the receiving section until further advice is received from the suppliers.
vi. Excess Supply: In the case of certain commodities, a small quantity is sent in excess by the
suppliers to give allowance for loss or wastage in transit. This should not be taken as excess
supply. Where there is genuine excess supply, the matter should be taken up with the
supplier and either the excess supply should be returned or accepted in consultation with
the purchase section.
If your response to any one of the statements above is negative, you have to get back
and revise the relevant sections. Otherwise you can proceed to the next section.

CODIFICATION AND STANDARDIZATION

CODIFICATION

Codification is the process of representing each item by a number or a letter or a combination of both
in the form of a stores code in order to ease their description and proper identification.

 Several (different) names are used to describe the same material. For example,
the following four names are used by different individuals, but all of them refer to
the same thing--- “dustbin,” “refuse container,” “rubbish receptacle,” or
“litterbin.”
 In order to identify some articles accordingly, a very long and complicated
description may be required.
 Everyone knows what a chair means, but there are many kinds of chairs.
 To identify only one of them properly, it is necessary to say that it is an armchair,
with frame made of beech, polished carved walnut legs, spring seat, back and
arms, finished in saga-green moquette and fitted with two foam rubber cushions;
even this may not be the whole story (description), since nothing has been said
about the quality of the material’s or the dimensions of the various parts.
 Thus, it would be necessary to have some logical basis of identification, which is
more precise and less cumbersome.
 Therefore, in order to codify the materials, it is useful to know the basic nature
and characteristics of all materials used in an organization and classify them in
broad categories and them to group and sub-group them in logical progression of
kinds, types, and sizes, etc.
  By adopting a well-designed codification system, the stores manager will have a
unique, precise, simple and consistent method of identifying the items in his
custody.
 The design of the system should be such that the codes are compact and concise
and are not unduly long.
 In addition, they are flexible enough to accommodate future changes or
alternations as well as modifications.
From the above discussion, you can see how codification could simplify descriptions. Therefore,
codification could simplify description has got several advantages.

The principal advantages of a rationalized codification system are outlined below:

It avoids repeated use of long descriptive titles and the confusions
caused by these descriptions.
It helps to identify all items accurately.
It prevents duplication of items.
It assists in simplification, reduction of varieties and standardization.
It provides a foundation for an efficient purchasing organization.
It serves as a basis for sorting and recording of documents.
It simplifies data processing.
It can be employed as a basis for stock control accounts.
As mentioned earlier coding can be done with the help of figures, alphabets or a
combination of both.
When the coding is done with the help of figures, the practice is commonly termed as
“numerical codification.”
If the coding is done through the use of letters, it is called ‘alphabetical codification.”
The most common method is the combination of both which is known as “alphanumerical-
codification.”
STANDARDIZATION

Standardization is the process of reducing the number of varieties stocked to a controlled workable
minimum. Thus, standardization brings about uniformity.

 Mass production techniques in manufacturing industries are based on the principle

of uniformity and interchangeability of many parts, components and materials that
are used in the production process.
 In its simplest form, modern standardization has been recognized and used
since the advent of mass production techniques.
 Such standardization requires the cooperation of all concerned for the
promotion of overall economy (cost savings) with due regard to functional and
safety requirements.
 The starting point for standardization of items is codification.
 This is so because materials required by an organization can be standardized on
the basis of codes given to each item.
  Material codification is usually made on the basis of their similarity and
interchangeability.
 In the field of materials management, standardization enables an organization
to proceed on scientific lines to locate factors influencing preparation of
inventory control programs for achieving economy of materials and parts,
avoiding wastages, disposal of unwanted stocks.
 The grouping of like items together makes it easier to examine the complete
range of any given type of stocks and consider whether the number of varieties
held can be reduced and standardization achieved on the minimum number
 Material codification is usually made on the basis of their similarity and
interchangeability.

 In the field of materials management, standardization enables an organization

to proceed on scientific lines to locate factors influencing preparation of
inventory control programs for achieving economy of materials and parts,
avoiding wastages, disposal of unwanted stocks.
 The grouping of like items together makes it easier to examine the complete
range of any given type of stocks and consider whether the number of varieties
held can be reduced and standardization achieved on the minimum number of
the most suitable types, grades, sizes, shapes, models etc.
 Therefore, by analyzing their nature, characteristics or end use of the
materials, a store manager has to select few appropriate colors and sizes.
The conduct of a standardization program involves a complete examination of the list of
materials stocked in order to determine the following:
The use or uses for which each item is intended,
Which items have similar characteristics and can be used as substitutes for each other,
What range of sizes is essential,
Which items can be eliminated, and
What specifications are necessary for retained items?

 Since standardization is variety reduction, the use of standards permits a firm to

buy fewer items (in terms of variety), in larger quantities, and at lower prices.
 This, fewer items and processed and stocked which in turn lower purchasing,
receiving, inspection and payment costs.
 Stocking of fewer items makes controlling inventories easier and less costly.
 Consequently, the purchase of standardized materials saves money in the
following ways:
 It lowers the price of materials,
 It lowers the processing (production) costs,
 It lowers inventory carrying costs, and
 It results in fewer quality problems.
Issue and Dispatch
 REQUISITION

A requisition is a written authority for the stores to issue materials to any person or section of
the organization entitled to draw materials from the stores. Thus, no issues shall be made from
the stores without a proper requisition.

When requisitions are prepared, the number of copies in use varies form organization to
organization, but generally copies are provided for Accounts, Stores and the Department drawing
the material.
Not all employees of the organization are granted the authority of making
materials request from the stores.
In order to prevent malpractice, the authority for signing requisition is delegated
only to selected persons.
While section heads may sing for general requirements, it is important that
requisitions for expensive or high value materials to be signed only by senior managers.
Thus, the stores must be notified of the persons authorized to sign requisitions
together with their specimen signatures and the limitations. Stores should, therefore, ensure that
materials are issued only against appropriate authority.

Basically there are three types of requisitions:

 Single-item requisition
 Multi-item requisition, and
 Pre-itemized group requisition

Although a requisition just titled “Materials Requisition” may be adequate in most cases, in order to
indicate the purpose for which the forms are used requisition may, sometimes, be titled “General Stores
Requisition,” “Group Requisition for Milling Machine Components,” “Stationary Requisition.” Work
Clothing Requisition,” “Tool Replacement Requisition,” etc,.

 Single-item requisition restricts the withdrawal of items to one per requisition and
is used in factories where there are a number of stores so that separate
requisitions are presented for materials stored in separate stores.
 A multi-item requisition is used for drawing more than one item from one store at
a time.
 In pre-itemized group requisition, the part number or code number and
description will be pointed.
 A good deal of writing time is, thus, saved.
There are three uses of pre-itemized requisitions:
 1) In a production plant it may be used for drawing components for various sub-
assemblies and assemblies. Replacement for spoilage or loss can be drawn on plain
requisitions with the approval of only a senior officer.
2) In an airline pre-itemized requisition may be used for replacement spares for
overhaul of major items such as engines.
3) It may be used for the issue of variable parts within a limited range.

ISSUES

 Since stocks in stores could be misappropriated, wasted or improperly used,

issues have to be made to the right persons. Before goods can be withdrawn from
a storehouse, there must be some authority for the transaction. Thus, issues
cannot be made indiscriminately.
 Rather they must be made only on the basis of valid authorization.
 This authorization can be in the form of a signed document, such as material
requisition voucher, a verbal instruction, or a routine arrangement.

The procedure for issues is briefly described hereunder.

 The normal way is to use an issue not signed by authorized person.

 The storekeepers should have full details of the names, designations and specimen
signatures of all persons empowered to approve issue notes.
 Sometime it is desirable to restrict the authority of different levels of
management within certain financial limits.
 Similarly, authority may be restricted for certain types of materials.
 When there are scheduled issues to production or any other form of regular
issues, the authorization may be undertaken by the production control
department.

Methods of Issuing

 There are various methods through which issuance of materials can be effected.
 These include authorized written issues on request, scheduled issues to production,
replacement issues, etc. …
 However, the basic form of issue procedure is where the user comes or sends to
the storehouse and presents a properly authorized issue note or similar voucher
giving details of what is required.
 The storekeeper then selects the items wanted, and hands them over in exchange
for the document.
 This document is usually called store request and issue note or requisition
voucher.
TYPES OF ISSUES
 There are several ways of issuing stocks. As the size and complexity of the modern business
increases, many stores hold quite a great variety of items. The storage of these varieties of items calls
for different types of issue classification.
Accordingly, the most common type of issues are discussed below:

i. Capital Issues: These are the major pieces of equipment purchased and issued by
the company. In many cases, large capital items will not be held in stock so that
purchasing will by the item and issue it to the users as soon as the good is received at
the factory. Because of their financial implication as well as their non-recurring
nature, capital issues will involve the top management in the issue process.
ii. Imprest Issues: These are items that are required by the user to be constantly on
hand. Therefore, the user will need constantly to top-up (to fill) his/her supply. In
certain cases, items of this nature are held in small, outlying stores.
iii. Replacement Issues: This is when an item, or equipment, or a supply or goods has
been broken or has become worn out or obsolete. In this case the authorization for
a new issue is the exchange for the old piece of equipment or item.
iv. Loan Issues: These are usually tools that are required by certain departments for
special jobs. The stores will lend the equipment needed. Such loans are controlled
by means of the person borrowing the items signing out the tools and signing them
back in again.
v. Allocated Issues: This is when stock has been allocated by the production plan to a
certain operation in a given department or section. In these cases the formal
production-planning document acts as the means of authorization.
vi. General Issues: These are the general items of stock needed by various departments
within the operation for the day-to-day running of the company. They could range
from engineering spares to packing materials.
vii. Special Issues: In cases where highly dangerous materials are being handled, a
special issue procedure has to be followed to ensure that proper precautions are
taken against possible damage. This usually involves the senior storekeeper
becoming involved in the actual process.
CONTROL OF STOCK ISSUES

The stock held by the company represents a great deal of the organization's money and resources.
This, control of the issue of that stock is vital if losses are to be reduced.

The basic principle behind the control of stock issue is that of authorization, that is to say, a system
or procedure that will ensure that activities within the organization.

There are several ways for the authorization of issues.

i) Financial Limits: This is when the stores is given a list of persons, each of whom is
allowed to request stock from stores up to a given stock value limit. For example, Mr. A
may have the authority to request stock having value up to 10,000 Birr while Mr. B is
allowed to request only up to 5,000 Birr. This system, however, is not very common and
has some drawbacks such as:
 It requires the stores to be informed of the current value of the stocks, as the stock
values vary through time.
 It involves the work of updating the list of authorized persons and their financial
limits.
 It does not always prevent misuses of stock.
ii) Position within the Organization: This is when members of the staff are able to request
stock on the basis of the position within the company. For example manager would be
able to request a greater amount of stock than a supervisor. Such limits must be given
to the stores.
iii) The Function within the Organization: This method of authorization provides more
close control of stock because it restricts staff to requesting those items and services that
they require in relation to their job or function within the operation. For example, an
electrical engineering foreman can only request related materials up to a given financial
limit. Therefore, in this method it is not only the stock value that is limited but also the
type of materials to be issued that are restricted.
iv) The “80-20” Rule: The materials that are found in stores are not of equal value and
importance. There are fewer items in terms of number (20% of the total number) but
have greater value in terms of their investment (80% of the total expenditure). In such
cases many firms have found that it is more control effective to have less control of the
very small and inexpensive items of stock and concentrate on the more valuable items
held in the store. This method has been proved very effective in many stores.

DISPATCH

Dispatch refers to items being selected from stock and then marshaled, documented, loaded and
subsequently delivered to their given destinations.

 In order to dispatch, the materials should be packed properly to enhance safety and
ease of handling.
 The packages must also be properly marked.
The markings should indicate the following points:
 The type of product
 Destination
 Gross weight
 Dimensions
  Sender’s details
 Special handling instructions.

The special handling instructions are often used to guide carrier by indicating the following:

 Whether the contents are fragile;

 Directions of lifting;
 Directions of storage;
 Probation of use of hooks;
 Sling and center of gravity for huge packages; and
 Whether the contents are inflammable, explosive, radio active, corrosive or poisonous.

The above information will enable the carrier to take adequate precaution in loading, unloading,
and transporting the materials.

Different types of materials may be dispatched to different destination. The following Table is a
brief summary of the destinations as well as the items to be dispatched.

DISPATCH PROCEDURE

In a large storehouse there must be a procedure for dispatching. Even if there is no standard
procedure, most firms use the following basic chains of events in dispatching.

1. A routine system for the time of receipt of issue notes, the selection of what is required, and
marshalling (delivering) of the needs to the destination.
2. A time schedule for loading vehicles.
3. A detailed transport plan for journeys to the users.
4. Timing and routing of each vehicle and providing, as far as practicable for full loads
outwards and return loads.
5. A regular system of checking to ensure that all items due for dispatch are loaded, and that
no unauthorized items are put on the vehicles.

STORES SECURITY

Stock security is one of the most important aspects of stores management, which covers not only
theft and fraud, but also stock deterioration, damage, and obsolescence.

Methods of Stores Security

 There are two main methods by which the security of the stores can be attempted.
 They are security service and stores management security.
  The former deals with stores security provided by an external party while the latter
involves internal system of stores security.
Let me discuss each in a bit detail as follows:
Security Service

This is a method where the company makes use of specialized organizations that supply a trained team of
security guards and other personnel to guard against theft.

Though such services are not well developed in our country, they are widely used in the developed world
on fee basis. Security service has got the following advantages and disadvantages.
STOCK CONTROL AND STOCK TAKING

Important Reasons for Holding Stocks in Organizations

The following are the most salient reasons for holding stocks in organizations:
1. Protection against fluctuating demand: Stocks are held in order to deal with changing
demand level. Especially they are kept to meet peak (high) demand. For example, blood is
stored in hospitals' blood bank in quantities sufficient to meet the needs of a major accident
or an emergency case.
2. Protection against delayed supply: Stocks are kept to level off irregularities arising out of
purchasing. In certain cases materials may not arrive on their delivery date for different
reasons. For instance, a strike in the suppliers’ plant, strikes in transportation networks, and
shortage of materials lead to delays. Therefore, stocks have to be kept as a buffer that can be
used until late deliveries arrive.
3. Smooth and sustainable production requirement: In order to ensure sustainable or
continuous production activities, stocks of ‘emergency’ or ‘insurance’ materials are kept so
that unforeseen shortages do not interrupt operations.
4. Protection against inflation: Stocks are often kept as a hedge against inflation. In this case,
they are built up or accumulated in anticipation of possible future price increase. As a result,
the organization buys materials in larger quantities at a given (relatively lower) price now
rather than paying higher prices in the future when inflation occurs.
5. Benefits of large quantities: Stocks provide benefits of large quantities both from purchasing
and production point of view. Purchasing of large quantities of materials often entitles the
buyer to a price discount. Similarly, manufacturing larger production lots (quantities) results
in the benefits of economies of scale in production with a reduced per unit manufacturing
costs.
6. Quality requirement: Some items need to be kept in stores for a considerable period of time
in order to reach at a desired quality level. For example, products like wines and tires have to
be kept in store for certain periods of time until they have the required quality level that
makes them ready for market or use.
7. Sales Promotion: In this case stocks are primary basis for business. Especially retail
operations involving customer examination and selection require fully stocked shelves and
 complete set of stocks. Because a fully shelved retail store has more power of attracting
customers than the one which is not full. In addition when the company is planning to
conduct sales promotion in the future (like big discount, prizes or lottery), it has to
accumulate larger stocks. This is so because during that discount period the company will
face peak (high) demand.
8. Savings on ordering costs: Ordering in large quantities reduces the number of times that an
order must be placed and processed. Since a fixed cost is associated with planning an order,
the fewer times the company places an order, the lower the total cost of ordering will be. For
example, if the company’s annual material requirement is 100,000 units at a time and give 10
orders a year or buy 50,000 units and order only two times a year in which case the cost of
ordering will be reducing significantly.
9. Time Utility: Stocks are required to bridge the gap between production and consumption.
Without them, it is physically impractical and economically impossible to operate. Raw
materials may enter into the production process three months after they are purchased and
finished goods may be sold or consumed a year after they have been produced. Therefore, in
order to bridge these time gaps, there is a need for holding stocks. Stocks of raw materials
will be made available whenever they are needed for production. Similarly, finished goods
stocks can be made available whenever needed for sale. So stocks create the utility of time.
10. Decoupling: Stocks can be used to reduce the interdependence of various functional units or
stages of production system. If various production stages operate successively, then in the
event of breakdown of one or any disturbance at some stage can affect the entire system.
Decoupling stocks may take the following forms:
Raw materials are used to decouple the producers from suppliers. i.e. purchasing from
suppliers and production from purchasing. If sufficient stock of raw materials is stored,
production doesn’t depend on purchasing or suppliers since it can use the materials from the
stores even when there are shortages of supplies.
Work-in-process stocks usually decouple successive production stages. This occurs
when the output of one process (stage) is used as an input for the second and the output of the
second as an input for the third stage and so on. If work-in- process inventories and kept in
larger quantities, it is possible to reduce the interdependence between the different stages.
Finished good inventories decouple the consumers from producers, i.e. marketing from
production. This is so because customers’ demand can be served from stock rather than directly
from production. Such cases are common when plants are shutdown for maintenance. Under
this circumstances, finished goods can be sold even if there is no production

Stock Control Techniques

Functions and Responsibilities of Stock Control

The functions and responsibilities of stock control may be summarized as follows:

 1. Ensure that production is hampered. This is the primary duty and it relieves other
departments of their problem of materials. The work involves determining correct
minimum and maximum levels, timely replenishment and timely submission of
shortage reports to purchasing section.
2. Effect control over investment on materials. Keeping stocks within pre-
determined levels achieve this. Large stocks not only tie up the working capital
which is required for other purposes but also cause high carrying cost by way of
rent for storage space, spoilage, obsolescence, etc. which would result in
reduction of profit.
3. Bring to light abnormal consumption for investigation and point out cases of
unused items purchased against special purchase requisitions received from
various departments.
4. Provide accurate information for financial control in the way of budgetary figures.
5. Put from time to time lists of obsolete and surplus materials and present this to the
concerned units of the organization for their proper action.

Fixed Order Quantity System

This technique is also known as the order point system. Thus, it is based on the order
point and order quantity factors rather than on the time factor. This method involves the
following requirements:

a) Predetermination of an Order Point: When the stock levels on hand (in stores) drop to
the order point, immediately a new order is placed.

The reorder point (also known as order point) is computed in such a way that the
estimated usage of the item during the lead time period will cause the actual stock level to fall to
a planned minimum stock level (safety stock) by the time the new order is received.
That is, the reorder point is calculated on the basis of usage rate of the item and the
period of lead time so that the record level quantity would be sufficient enough to satisfy
operational requirements during the lead time period.

b) Predetermination of a Fixed Order Quantity: Once the order point has been determined,
the next issue is how much should be ordered. As the name suggests, whenever an order
is placed with a supplier it is for a fixed quantity.

 Taking into account the ordering and holding costs calculate the fixed order
quantity.
 The most widely used model to determine the fixed order quantity is the EOQ
(Economic Order Quantity).
  According to this model, the order quantity is computed and that quantity is optimal
in that it will minimize the total intently cost.

c) Perpetual Inventory (stock) Records: To use the fixed order quantity model, which places an
order when the remaining stock drops to a predetermined order point, the stock on hand
must be monitored continually. Thus, the fixed order quantity system is a perpetual system,
which requires that every time a withdrawal from stock or an addition to stock is made, the
records (that is the stock balance) must be updated to ensure whether the recorder point
has or has not been reached.

Fixed Time Period System

 This technique is also termed as periodic review system fixed order interval
system, or cyclical ordering system.
 It is a time-based system, which involves scheduled periodic reviews of the
stock levels of all inventory items.
 Orders are placed at the end of a predetermined time period.
 When inventory replenishment is made under economic order quantity (EOQ)
model, fixed quantities of items are ordered at varying time intervals.
 However, just the opposite occurs under the fixed order interval model.
 That is, orders for varying quantities are placed at fixed time intervals (like
once a week, or once a month, etc…)

The two basic considerations in the fixed period ordering are:

Determining the “order size” which is the difference between the
maximum inventory and inventory position at the review period.
Determining the “order interval” which is the optimum time interval
that minimizes the total inventory investment.

The fixed order interval system, as indicated above, involves the determination a fixed time period
(interval) and a variable order quantity, which depends on the usage rate during the interval
period.

 The fixed-time period model generates order quantities that vary from period to
period, depending on the usage rates.
 These generally require a higher level of safety stock then a fixed order quantity
system.
 The fixed order quantity system assumes a continual counting of inventory on
hand; with an order immediately place when reader point is reached.
 The fixed-time period model assumes that inventory is counted only at the time
specified for review.
  It is possible that some large demand will drop the stock down to zero light after
an order is placed.
 This condition could go unnoticed until the next review period. Then the new
order when placed, still takes time to arrive (lead time).
 Thus, it is possible to be out of stock throughout the entire review period and the
order lead-time.
 Therefore, in this system, safety stock must be kept in order to protect against
possible stock outs during the review period.
 Comparison Between Fixed Order Quantity and Fixed Order Interval Systems
 The basic destination between the two systems is that fixed order quantities
models are “event triggered” whereas fixed time period (cyclical) models are
“time triggered.”
 That is, a fixed order quantity model initiates an order in the event of reaching a
predetermined reorder levels. This event may take place at any time, depending
on the demand for the items considered.
 In contrast, the fixed order interval model is limited to planning orders at the end
of a predetermined time period. That is, only the passage of time triggers
placement of an order.
 The other difference is, while fixed order quantity model uses a perpetual
recording of inventory items, the fixed order interval is periodic meaning counted
only at the review period.
 The type of items under fixed order quantity is higher value and critical while
fixed time period model is popularly used for low value less critical and seasonal
items.

TWO-BIN SYSTEM

 Two-bin system is a modified version of the basic order point system.

 However, this system differs form the fixed order quantity system in one respect
 The distinguishing feature of this system is the absence of a perpetual inventory
record.
 In practice, the stock is physically separated into two bins or containers--- the
lower bin and the upper bin.
 Or the stock may be store into two separated stores, serving as lower bin and
upper bin.

Purpose of Stock Taking

Causes of Disagreement Between Stock Record and Physical Stock
There are two possible causes that may lead to discrepancies (disagreements) between the
amount and value of stock found in the inventory (stock) records and what is physically found in
stores.
 a) Physical Stock Failures: Stock may be incorrectly labeled or identified, indicating
inadequate inspection on receipt; mistakes may have been made in packing for issue.

 Stock could have been binned in the wrong location an as a result “lost” to all
records.
 Stocks can be mislaid or pushed of the rack to lodge between shelves and
boxes.
 They may be left in gangways or used for such purposes as seats, platforms or
as a means to steady ladders and not be replaced in their correct locations.
 All these add up to poor storehouse discipline.
 Theft tends to be concentrated on attractive or valuable items, but there is no
accounting for human behavior and stores which have little intrinsic value or
use to the ordinary mortal sometimes become the object of regular theft.

b) Failure of the Paper System: Bad writing and figures copied incorrectly account for more
than fifty percent (50%) of all errors. All errors of this kind lead to discrepancies between
records and stock, whether they occur in the item stock number or the quantity. Loss of
paperwork should be picked up, as paper system should be self-checking. This is not always
the case, and failure to follow up the progress paper work will lead to discrepancies.

 If stock is not checked, the credibility of the whole stock control operation
gradually comes into question.
 The accountability chain comes to have little purpose and the accounting
system degenerates into a purely paper exercise, which has little to do with
reality.
 Lack of accuracy of the stock record will be accompanied by increasing waste
of time as pickers go to empty shelves. Customers will become increasingly
dissatisfied with the service and, if the storehouse serves a production line,
stoppages in production could be frequent as stocks are not available.

The above problems call for the need for regular and continuous stocktaking as the only solution.

 The purpose of stock taking and the proper documentation of stores movements
is a two fold.
 First, to set up records as the basis for control, and secondly to hand on
accountability form one responsible person or department to another.
  Accountability, however, is concerned with physical stock rather than with
paper
 Paper is only the means by which action is communicated from one person to
another and by which progress and action can be a recorded.
 If there is no check upon the physical stores, paperwork checks are
meaningless.
 Paperwork is only of use if it shows reality, and comparing the physical stock
and the stock record can only ensure this. This is the real importance of
stocktaking. Thus, stocktaking is doubly important.

Stores Accounting

Stores accounting is used for the purpose of providing information about numbers of each item
of stock held, transactions which have taken place and the cost or price of the item.

IMPORTANCE’S OF STORES ACCOUNTING

The following are the importances of stores accounting:

1. With proper stores account record, it is easier to attain efficiency and economy in management.
2. Stores accounts help in location and even prevention of waste and pilferage.
3. Stores accounts give valuable information on the capital tied-up in inventory and thus help in
keeping their level to a reasonable point.
4. Proper account record reveals the quality and value of the stock at all times, and thus at the
time of loss or fire, there is no difficulty in insurance claims in case of insured goods.
5. Proper accounting is a safeguard against misappropriation of stocks.
6. Stores accounting system is valuable for accurate materials costing.
7. Proper stores accounting helps in cost reducing by providing an accurate picture of inventory
cost and by keeping it low.
8. Stores accounting ensures that all goods are satisfactorily accounted for as charges to
production or to various other jobs.

BASIS OF STORES ACCOUNTING

 The basis of all stores accounting is a purchase order, delivery note, or the
supplier’s invoice.
 This stores accounting is performed through the use of the above documents.
 This subsection, however, focuses on the last one---suppliers’ invoice.

 An invoice is a document prepared by the supplier giving a statement of the

transaction for the buyer.
Invoice normally shows the quantity, quality and description of the goods, together with a
statement of the unit price and total price payable. The purchase order reference number is also
quoted. Thus, invoice is the proof of the contract of a sales and purchase to be taken as a statement
of account rendered to the buyer.

The price of the goods in the invoice is mentioned according to the agreement or contract. The
contract may be one of the following:

1. F.O.B. (Free on Board): This is a price term in which the buyer will be responsible for the
payment of freight and any insurance charges. Alternately, the seller will be able to charge
any extra disbursements for insurance and fraught, which is paid out on the buyer’s
request.
2. C.I.F. (Cost, Insurance and Freight): This means that the price quoted includes in itself the
cost of insurance and freight (cost of transportation).
3. C and F. (Cost and Freight): Similar to C.I.F, but in this price term the cost of insurance is
not included. It includes only the cost of goods and the cost of transportation.

STOCKTAKING MECHANISMS

There is always a time difference between the posting of an account and its physical execution.
In the case of receipts, stores are usually binned before the posting is entered, whereas in a per-
posting environment issues will be possessed first and picked later.

Before stock can be agreed with the records it is necessary to ensure that all floating paperwork is
caught so that the proper reconciliation is made.

 Stocktaking also referred to as store verification is meant to ascertain any discrepancy of

actual stock when compared with records.
 The following methods of taking inventories are commonly used for physical verification of
stores.
1. Spot checks: The storekeeper makes spot checks at the time of receiving fresh stock or
issuing store items. This is the method of store verification, which is voluntarily carried out
by stores staff for their own satisfaction and for accuracy of store material. It is not a
regular method of verification. Spot checks are made besides annual stocktaking, but may
not be required if some system of continuous stock verification is in practice.
2. Routine or periodic checks: Periodic checks are made by stores staff with the following
objectives voluntarily:
 To check the accuracy of the stock record.
 To verify the physical count in case of doubt or confusion.
 To be ready for any internal audit or inspection of stores.
 To prevent pilferage of expensive items.
Routine checks are made in addition to annual stock verification.

3. Perpetual Inventory Systems:

- Here, regular checks are carried out throughout the year. It should be carried out
by at least two persons.
- They may be taken from regular store staff or from the accounts section.

The group of two may also consist of one-person form the store and another from the accounts
section.

Perpetual inventory may mean checking daily a few items. The regular store staff may make
physical count of items in stock when free or whenever a specific request for verification is made
from the concerned authorities or store record section.

In this system the discrepancy between actual stock and the balance shown in the bin card of any
item is examined.

The bin card and other stores record is duly modified to show the correct position of the
serviceable materials.

Benefits of perpetual inventory system:

 Stock items are checked a number of times in a year.

 Discrepancies in stock items are reduced and come to light sooner than annual stock
verification system.
 Deterioration of materials is soon noticed to avoid wastage due to damage or deterioration.
 This system helps to recognize obsolete or slow moving materials more readily.
 It prevents malpractice and encourages maintenance of up-to-date records by store staff.
 Easier to observe, investigate, fix responsibility and rectify discrepancy and malpractice
more effectively due to availability of sufficient time and absence of need to hurry.
 Daily routine work of the store or production is not held up.
 The method is easier and more convenient to apply incase of large stores with thousands of
items.

1. Annual stock verification:

- It is the most common method of checking inventory---both physical and record on

the book.
 - A complete or 100% count or check is made of all materials, parts, and in-process
and finished goods in the organization.
- This is done at the end of a financial year for an organization, and all transactions of
store remain completely closed during this period.
- Annual stocktaking or stock verification is to be done rapidly, effectively and
efficiently by suspended normal work.
 Due to the suspension of normal work, which implies a limited time, annual stock
verification can’t be sometimes done thoroughly.

Procedure for annual stock-taking

Preparations that should be looked into before actual verification starts are:
 A general notice is issued regarding the annual stock-taking dates and programme.
 Staff assigned duty for such verification.
 Materials are sorted out and restacked or piled for ease in counting.
 All loaned materials are put back at their proper places for physical verification.
 All dead stock items are recorded on separate lists and are recounted. They are also
inspected for their physical condition.
 Reports are prepared for excesses, shortages and discrepancies. Lists are also prepared for
damaged, unserviceable or obsolete items.
 Arrangements are made to declare unserviceable and to dispose of deteriorated or
unserviceable materials and items.
 Stocks are verified formal records and the store records are closed for each item and closing
balances compared with physical inventories.
 Opening balances are entered into new pages or new stock registers for the new financial
year.
 A summary sheet of the closing year’s opening balance, receipts, issues and closing balances
in quantity and value is prepared for total stock and sometimes for the individual item.
 During stock-taking no material is issued or received.
2. Low point or out-of-stock verification
This type of verification is only made when the record shows a particular item
having out stock or when only a small quantity remains in the bin or when the last bag or packet is
opened up in case of sealed minimum.
The storekeeper keeps a record of such verification and of any correction made in
the store’s record.
This system has the following advantages:

 The store won’t be closed for physical verification as in the case of annual verification.
 The verification is not made under pressure. It has greater accuracy and is voluntarily
done when stock is minimum.
 Error and discrepancies are more readily discovered and adjusted than in any other
system.
 It saves counting time and effort.
 This method of verification also calls for coordination between store record section and
accounts section.
 The time of verification, which is to be scheduled before receipt of articles and after issuing,
requires more precise prediction.
 This method puts a load on the store staff.
 The verification job is May not be taken seriously.
 This system along with annual stock-taking is more effective and practical.