WAREHOUSING

TOPIC I :INTRODUCTION TO WAREHOUSING

Definitions and general functions of a store:
Warehouse is a room or a place where goods are kept until the time of
need arises
 Warehousing: This is an approach based on holding stocks or
supplies awaiting issue or transport to customers.
 Stocks: These are goods or other assets purchased for resale or
consumable stores.
 Supplies: The term supplies refers to all the materials, goods and
services used in the enterprise regardless of whether they are
purchased outside, transferred from another branch of the company
or manufactured in-house.
 Inventory: This is an American accounting term for the value or
quantity of raw materials, components, assemblies, consumables,
work in progress (WIP) and finished stock that are kept or stored for
use as the need arises.

The distinct functions of warehousing:

a) Receiving of stores from outside suppliers or internal departments
b) Inspection of goods from the suppliers.
c) Recording: receipts and issues of supplies either manually or by
computerized systems
d) Security: protecting stocks against loss through theft or
misplacement
e) Maintenance: protecting stocks against loss through deterioration
from fire, water, weather, vermin etc
f) Stock control: determining the range and quantities of stock or
supplies to be held and their receipt and issue.
g) Stocktaking: checking of stocks and verification of stock records
against actual physical quantities held in stock and also those at the
work in progress stage and finished goods on hand.
h) Disposal of surplus: i.e. scrap, components or equipment identified
as no longer in use or usable, by donating, reuse or sale.
i) Implementation of health and safety regulations relating to stores
and stores staff.
factors affecting the size of a store
1. Customer service level- To give a higher service
level you need more space.
2. Size of market served- More market /customers the
more the space to facilitate customers.
3. No of products marketed- Multiple products ,
products grouping will determine the size of
warehouse.
4. Size of the product- Large products more space
isrequired
5. Material handling – You can use manual, automated
or mechanized .
6. Throughput rate (inventory turnover)
7. Production lead time (length (long/short)
8. Economies of scale
9. Stock layout/arrangement
10. Office area in warehouse
 11. Types of racks and shelves used
12. level and pattern of demand
Demand level and pattern has animpact in the
warehouse size- High demand large &vice versa .

Types of Warehouses
Various types of warehouses came into existence, which may be
classified as follows.
i. Private Warehouses
ii. Public Warehouses
iii. Bonded Warehouses
i. Private Warehouses - The warehouses which are owned and
managed by the manufacturers or traders to store, exclusively, their own
stock of goods are known as private warehouses. Generally these
warehouses are constructed by the farmers near their fields, by
wholesalers and retailers near their business centres and by
manufacturers near their factories. The design and the facilities provided
therein are according to the nature of products to be stored.
ii. Public Warehouses - The warehouses which are run to store goods
of the general public are known as public warehouses. Anyone can store
his goods in these warehouses on payment of rent. An individual, a
partnership firm or a company may own these warehouses. To start such
warehouses a license from the government is required. The government
also regulates the functions and operations of these warehouses. Mostly
these warehouses are used by manufacturers, wholesalers, exporters,
importers, government agencies, etc.
iii. Bonded Warehouses - These warehouses are owned, managed and
controlled by government as well as private agencies. Private bonded
warehouses have to obtain license from the government. Bonded
warehouses are used to store imported goods for which import duty is
yet to be paid. In case of imported goods the importers are not allowed
to take away the goods from the ports till such duty is paid. These
warehouses are generally owned by dock authorities and found near the
ports.
Types of classification of goods
• Raw material and component warehouses Hold raw materials at or
near the point of induction into a manufacturing or assembly process.
• Work-in-process warehouses Hold partially completed assemblies
and products at various points along an assembly or production line.
• Finished goods warehouses Hold inventory used to balance and
buffer the variation between production schedules and demand. For this
purpose, the warehouse is usually located near the point of manufacture
and is often characterized by the flow of full pallets in and full pallets
out assuming that product size and volume warrant pallet-sized loads. A
warehouse serving only this function may have demands ranging from
monthly to quarterly replenishment of stock to the next level of
distribution.
• Distribution warehouses and distribution centres Accumulate and
consolidate products from various points of manufacture within a single
firm or from several firms for combined shipment to common
customers. Such a warehouse may be located central to either production
locations or the customer base. Product movement may be typified by
full pallets or cases in and full cases or broken case quantities out. The
facility is typically responding to regular weekly or monthly orders.
• Fulfillment warehouses and fulfillment centers Receive, pick, and
ship small orders for individual consumers.
• Local warehouses Distributed in the field in order to shorten
transportation distances to permit rapid response to customer demand.
Frequently, single items are picked, and the same item may be shipped
to the customer every day. Figure 8-3 illustrates warehouses performing
these functions in a logistics network. Unfortunately, in many of today’s
networks, a single item will pass in and out of a warehouse serving each
of these functions between the point of manufacture and the customer.
When feasible, two or more missions should be combined in the same
warehousing operation. Current changes in the availability and cost of
transportation options make the combination possible for many products.
In particular, small high-value items with unpredictable demand are
frequently shipped world-wide from a single source using overnight
delivery services.

Characteristics of Ideal Warehouses

Any warehouse is said be an ideal warehouse if it possesses the
following characteristics:
I. Warehouse should be located at a convenient place near highways,
railway stations, airports and seaports where goods can be loaded and
unloaded easily.
ii. Mechanical appliances should be there to loading and unloading the
goods. This reduces the wastages in handling and also minimizes
handling costs.
iii. Adequate space should be available inside the building to keep the
goods in proper order.
iv. Ware houses meant for preservation of perishable items like fruits,
vegetables, eggs and butter etc. should have cold storage facilities.
v. Proper arrangement should be there to protect the goods from
sunlight, rain, wind, dust, moisture and pests.
vi. Sufficient parking space should be there inside the premises to
facilitate easy and quick loading and unloading of goods.
vii. Round the clock security arrangement should be there to avoid theft
of goods.
viii. The building should be fitted with latest fire-fighting equipments to
avoid loss of goods due to fire.

Factors considered when setting up a warehouse

 Government rules, policies and regulations pertaining warehousing and
warehouse construction

 Funds available for a successive project to go through, enough funds

should be in place
 Security ensure that the place is save from any attack or threat
 Accessible the location should be strategically placed for efficiency
  Materials to be kept the size and nature of materials should be factored in
before and construction in put in place
 Social amenities e.g. banks, water communication

WAREHOUSE OPERATIONS
Under the influence of e-commerce, supply chain collaboration, globalization,
quick response, and just-in-time, warehouses today are being asked to:-
Emerging issues in warehousing
• Execute more, smaller transactions
• Handle and store more items
• Provide more product and service customization
• Offer more value-added services
• Process more returns
• Receive and ship more international orders
At the same time warehouses today have
• Less time to process an order,
• Less margin for error,
• Less young, skilled, English-speaking personnel,
• Less warehouse management system (WMS) capability
The principles of warehousing that yield world class warehousing operations
follow warehouse master planning methodology (see Figure 8-1, sample) and
cover warehouse performance metrics, receiving, put away, storage, order picking,
and shipping.
Warehousing is hereby represented as the last of the five logistics activities (see
Figure 8-2) for a variety of reasons:
First, good planning in the other four areas of logistics may eliminate the need for
warehousing.
Second, requirements in the other four areas of logistics may suggest that a third
party warehousing firm should be retained to operate the warehouse.
Third, the warehouse must be designed to meet all the requirements of the
customer service policy spelled out in the customer response master plan, house
the entire inventory required by the inventory master plan, work to receive in
quantities stipulated by the supply master plan, and serve a mission stipulated by
the transportation master plan. The warehouse is a service to all the other areas of
logistics.
ADVANTAGES OF WAREHOUSING

 Protection and preservation of goods

 Regular flow of goods
  Continuity in production
 Convenient location
 Easy handling
 Useful for small businessmen
 Creation of employment
 Facilitates sale of goods
 Availability of finance
 Reduces risk of loss
RELATIONSHIP OF STORES DEPARTMENT WITH OTHER FUNCTIONS:
To discharge its responsibilities adequately, the store keepers must actively
cooperate with other departments, not only on provision of a service, but to give
and receive information so that the service is efficient. The specific relationship
relates to the following functions:
a) Production department: This department is the main supplies ‘customer’ and
it is therefore of the first importance that the services to production are
satisfactory in all respects. The closest cooperation is essential not only on the
provision of materials but also on the stock levels to be maintained in
accordance with the policy for the inventory control.
The stores department provides materials, tools and other shop supplies at the
required times and in the required quantities to meet the factory program,
advices anticipated difficulties or failure in supply and notify any substitute or
surplus materials available from stock. The storehouses are always ready to
accept work in progress and finished goods at any time and receive scrap, off-
cuts, rejected items and salvaged or reclaimed materials as they arise so that
the shop floor may be promptly cleared.
The production department sends in to the appropriate storehouses not only
the work in progress and finished goods, but any excess materials, tools,
fixtures and equipment not currently required and notifies as soon as possible
any impending changes in the production schedule.
b) Design and engineering department: It is most desirable for stores
department to have a close link with these departments particularly from the
point of view of specifications, standards and obsolescence. Arrangements are
made to see that, before any new design, modification or technique is put into
production due note is taken of materials to the old design, so as to avoid
obsolescence and , whenever possible, new items and modification are
 introduced to coincide with the running down of existing stocks. The design or
engineering departments are consulted when obsolescent or obsolete items
are to be listed for disposal.
c) Quality department: Accommodation for inspection personnel may be
provided in storehouses and they are notified of all receipts. The stores
department is responsible for holding goods receipt. The stores department is
responsible for holding goods received in quarantine and submitting samples
to inspection promptly. In return, the inspection department inspects and
tests deliveries without delay and indicates acceptance or rejection. The
supplies function must work closely with the quality department if quality is
approached from an ‘assurance’ viewpoint’.
d) Maintenance department: The supplies service in this case consists in
acquiring appropriate materials and machinery spares and being in position to
issue them as and when required. To facilitate this work, the maintenance
department advises of the forward program on repairs and overhauls as far as
possible, particularly where planned maintenance is in operation and advises
on the initial quantities of spares to be provided when any major new plant or
machinery is installed.
e) Finance department: There is a continuous exchange of information covering
verification of records and physical stock, clearance of invoices both inwards
and outwards, revision of prices, supply of material-cost information and
control of working capital allocated to the financing stock. Procedures are
organized to work together effectively to control the value of inventory and
cost of materials. The finance department usually provides regular periodic
detailed statements of the cost of operation of the supplies service.
f) Transport department: The store department is itself sometimes responsible
for transport but where there is a separate transport department, it is
essential that the two work together harmoniously. The supply function
reports details of loads, pick up locations and discharge points, make facilities
available for the speedy, safe loading or discharge of goods and provide a
weighbridge service. The transport department is responsible for the ready
availability of vehicles and for advising any circumstances which may delay
deliveries or collections, such as breakdowns, strikes or adverse weather.
 Sales department: The service provided is normally the acceptance, storage,
packing and dispatching of finished products. The sales department cooperates by
advising of any appreciable fluctuation in the demand

TOPIC II: RECEIVING, INSPECTION AND ISSUING OF

GOODS
Receiving Procedures

1. Unloading and checking the shipment. The number of containers or package of

materials unloaded from the carrier's vehicle is checked against the carrier's manifest
(freight bill or delivery order) to ensure that all the full consignment or order has been
delivered. All containers or package of materials are also inspected for external
damage; any damage found is inspected by the carrier's representative and noted on
the receipt where the receiving clerk signs. Failure to follow this procedure before
accepting a shipment or delivery can relieve the carrier of all liability, except liability
for concealed damage not evident until the container is unpacked.
2. Unpacking and inspecting the material. A receiving clerk is held responsible for
three verification. First, he or she checks the material received against the supplier's
 packing slip and against a copy of the firm's purchase order to verify that the correct
items have been shipped. Second, the quantity of the shipment is verified in the same
manner. Finally, the clerk inspects the general condition of the material to determine
whether any external damage was incurred during shipment.
3. Completion of the receiving report. The paperwork system used varies significantly
from company to company. In some companies, a multipart receiving report form is
produced as a by-product when the purchase order is generated. When the receiving
clerk has finished the inspection, he or she completes the form by recording the
quantities of the items received, indicating those that are still open, and noting any
other useful information on the form. In other firms that utilize a computerized
purchasing/inventory system, the clerk records the receiving data on the receiving
report or a short form, from which a data entry clerk keys the data directly into the
computer system. The system then updates the order and inventory records and may
also generate a receiving report in either hard copy or electronic form. Regardless of
the system used, four operating groups generally require notification that the material
has been received: the requisitioned, the purchasing department, the accounting
department, and the inspection department if technical inspection is required.
4. Delivery of the material. For non-stock materials, the receiving department is
usually responsible for delivery - directly or via an internal delivery service. In the
case of inventory materials, the practice varies. In some firms, the receiving
department is responsible for internal deliveries, while in others this function is
performed by an internal transportation service. In still others, stores clerk are
responsible for picking up their own materials. Upon delivery of the materials, the
recipient customarily signs the receiving report or a delivery receipt, relieving the
receiving clerk of further responsibility for the material.

It should be noted at this point that in some firms not all delivered materials go through
the receiving operation, depend on the inventory and purchasing method applied by the
company, e.g., when a company apply just in time purchasing shipment, sometimes the
delivery is directly to the point of use, so the receiving is bypassed.

Receiving and inspection procedures

Confirm of the carrier/vessel—Confirmation of the destination----
Confirmation of the documentation------offloading------Confirmation of the
packages---Physical check-----Quantity and Quality check---Preparation of
relevant documents-----Storage/rejection of goods----Adjustment of stores
ledgers
Inspect Incoming Goods (Receiving Staff)

1. Upon receipt of a delivery, match the received items to the description stated on the
accompanying bill of lading, as well as the description on the related purchase order.
Major discrepancies can lead to rejection of the delivered goods.
2. If there is no authorizing purchase order and the purchasing manager does not issue a
waiver, reject the delivered goods.
3. Use a preprinted receiving checklist to inspect each delivery. Items likely requiring
review are the quantity received, comparison to a quality threshold, and the date and time
of receipt. Note any variances on the checklist. Initial the checklist when the review is
complete.
4. Sign a photocopy of the bill of lading to indicate that the delivery has been inspected and
is accepted.

Identify and Tag All Received Inventory (Receiving Staff)

1. Identify each item in a delivery and ensure that it is properly labeled with a bar coded tag
that includes the item number, quantity, and unit of measure. If there is some uncertainty
regarding which item number to use, consult with the senior warehouse staff or
purchasing department.

Log in Received Items (Receiving Staff)

 1. Update the receiving log with the date and time of receipt of each delivery, as well as the
name of the shipper, supplier, purchase order number, and description of goods received.
2. Send a copy of the signed bill of lading to the billing clerk in the accounting department.
3. File the master copy of the billing of lading by date in the warehouse filing area.

The procedures for ordering, purchasing and receiving materials

When a department requires new materials, a purchase requisition is

completed (including authorization by the relevant manager) and sent to
the purchasing department.

 On receipt of a properly authorized requisition, the purchasing department will

select a supplier and create an order on a purchase order form.
  The purchase order form is sent to the supplier and copies are also sent to the
accounts department and the goods receiving department.
 On receipt of the goods, the goods receiving department will check the goods
against the relevant purchase order, and check the delivery note which
accompanies the goods. Full details of the goods are then entered onto a goods
received note (GRN).
 A copy of the GRN is attached to the relevant purchase order and they are both
sent to the purchasing department where they are matched to the relevant
supplier's purchase invoice. Once approved, the purchase invoice can be paid.

Issuing inventory

The accounting procedures for issuing inventory are as follows.

 Materials requisition notes are issued to production departments. Their

purpose is to authorize the storekeeper to release the goods which have been
requisitioned and to update the stores records.
 Materials returned notes are used to record any unused materials which are
returned to stores. They are also used to update the stores records.
 Materials transfer notes document the transfer of materials from one production
department to another. They are also used to update the stores records.

Some specimen documents that are used in the ordering, receiving and issuing of inventory.
Accounting for inventory - the material inventory account

Materials held in store are an asset and are recorded in the balance sheet of a company.

Accounting transactions relating to materials are recorded in the material inventory account.

Physical inventory and book inventory

Perpetual inventory

Perpetual inventory is the recording as they occur of receipts, issues and

the resulting balances of individual items of inventory in either quantity or
quantity and value.

 Inventory records are updated using stores ledger cards and bin
cards.
 Bin cards also show a record of receipts, issues and balances of the
quantity of an item of inventory handled by stores.
  As with the stores ledger card, bin cards will show materials received
(from purchases and returns) and issued (from requisitions).
 A typical stores ledger card is shown below.

Stock management in the retail supply chain sequence:

1. Request for new stock from stores to head office

2. Head office issues purchase orders to the vendor
3. Vendor ships the goods
4. Warehouse receives the goods
5. Warehouse stores and distributes to the stores
6. Shops and/or consumers (e.g. wholesale shops) receive the goods
TOPIC III: CLASSIFICATION AND CODING OF STOCK MATERIALS:
Classification is the grouping of materials with same characteristic or of same
function under one location within the warehouse.
Coding is a system of words, letters or combination of both that entails brief
information pertaining various materials. Coding is a logical way of describing
materials and it is used specifically to identify items exactness.
Advantages of a coding system:
(1) To avoid repetitive use of long description of items

(2) To ensure accuracy in the description and identification of all items

(3) Prevent duplication of items

(4) Provide a foundation for an efficient purchasing organization

(5) Convenient basis is formed for sorting and recording items

(6) Simplify manual recording

(7) Facilitate convenient central analysis of unit store house records.

(8) Simplify stock control accounting

(9) Simplify pricing and costing of materials

10) May be used as storehouse location system

Disadvantages of stock coding:
(1)The process of preparing stock codes is tedious
(2) It requires a lot of memorizing
(3) It complicates the storage function further
(4) It may lead to a proliferation of jargon making it difficult for outsiders to
understand.
Characteristics of codes:
 Uniqueness: Each item should have one code
  Distinctiveness: To avoid errors, codes representing different items should
be distinctive.

 Clarity: Code should be entirely Alphabetical or Numerical

 Brevity: Codes should be brief but consistent with the requirement

 Expandable: codes should be able to cope with new additional items

 Unambiguous: Codes with similar letters should be avoided

 Significant: The code should signify something about the coded item

Types of codes:
(1) Numeric e.g. 05/09/2009

(2) Alphanumeric e.g. PE/0721

(3) Alphabetical e.g. M/N/Z

Methods of coding/specifying materials:

(1) By nature of item: This is coding of items according to their inherent
characteristics. Similar items into a series of main groups then each group is
further subdivided into sub groups or sections

(2) By the end use of the item: This is coding of items according to or to
correspond with the purposes for which the items will eventually be used.

(3) By the location of the item: This is the coding of materials on the basis of
the location within the store where the materials are to be found e.g. the
gangways, shelves, pallets etc.

(4) By source of supply: Here materials are coded according to the supplier or
origin. If there are three suppliers the coding would be 1,2,3 or A, B,C.
Coding of materials may be in accordance to local or international sources
shape

(5) By the customer who will buy the end item: here materials are coded
according to the final consumer who will eventually buy the end product e.g.
individual consumer, industrial consumer, institutional consumers or resell
government bodies.
Factors to considering classification and coding of materials

 colour
nature of the material
 function to perform
 organizational policies
 government policies and regulations
 size of the material
TOPIC IV
STOCK LOCATION
Storage: is an approach based on holding stocks or supplies awaiting issue or
transport to customers.

Location Refers to the way items are located in the store house.
Methods of stock location
 Zonal location systems
 Fixed location systems
 Random location systems
 Numbering location system

Fixed: This is the traditional idea of a placing for items in a distinct place. Storage
for each item is more or less static. Its advantage is that it is consistent and
therefore stores personnel can easily recognise where items are. Its also easier to
find items in the store since similar items are stored in a similar area. Its
weaknesses include:
 Spare storage space/capacity is needed just in case major relocations of stock
are to be carried out.
 Doesn’t consider handle ability and store ability characteristics of each item
and this may lead to lack of sequence
 Exceptions should be made in case of popularity storage and this is out of
sequence.

Random: Is common where stores are fast moving storage space is scarce and
expensive. It’s a systematic and very highly organized approach to stock placement
using computer technology. Advantages of random method entail: maximum
utilization of available storage space, Its suitable for fast moving items which are
not bulk, efficient stores operations etc. disadvantages are: there are major
differences in sizes shapes and weight of items, requires computer system for its
operation which can fail.

Reasons for stock location

i) Ensure smooth flow of the whole enterprise
ii) Enhance perfect coordination between different functionaries in department as
well as between other departments in the organization
Iii)Avoidance of all types of delay; wastages and spoilage
iv) Reduction of operational costs at all levels including reduction in time and
effort in accomplishment of a job
v) Enhance specialization in, matters of warehousing and its operations
VI) Enhance division of whole materials organization into two broad but clearly
distinguishing categories;
a) Top functionaries designated as top materials
b) Operating staff

Stores vocabulary / Indexing:

When a coding operation is complete, the list of code numbers, description size etc
are published in a document known as stores vocabulary. This is an encyclopedia
book containing details of stores items. There are two types of stores vocabularies
i.e. hard and soft vocabularies.
Hard vocabulary is recorded in books. It is original and requires manual access of
information. Soft vocabulary on the other hand is recorded in computer system and
in other integral devices of computers like Flash disc, CDR, Diskette etc. The
information can only be accessed by checking its content through a computer
system. In some organizations the information is available in the company’s
intranet.

How to organize stores vocabulary / index:

The following stages can be used to organize stores vocabulary:
(1) Establish a catalogue library

(2) Inspect the present systems for stock identification

(3) Consult other interested departments like production, sales, purchasing,

design etc to get their views.

(4) Prepare originating sheets showing items proposed by each department

(5) Compiling the vocabulary after removing the unnecessary items, reducing
variety of materials etc.

(6) Distribute the vocabulary copies to the people (workforce) who need them.

(7) Amendments: Amendments are published at least quarterly in accordance

with the original distribution list.
Treatment of items not in the vocabulary:
Sometimes it may not be advisable to include every stock item in the
vocabulary. These items are described as NIVs (Not in the vocabulary). The
NIVs include:
 Machine spares rarely required: these items should be kept out of the
stores vocabulary since they are only purchased when a need arises. They
are described as ONIS (Only when needed items).

 Items of non-repetitive nature: These are items which are needed at

certain prescribed intervals e.g. 1-5 years, 2-3 years etc.

Assignment: in relation to warehousing operations on indexing, explain the

importance of stores indexing
TOPIC V

STORES LAYOUT:
Store layout is the internal arrangement of the store and maximization of the
internal floor of that store
1) Inverted T warehouse flow: In regard to this layout:
 Goods in and goods out activities are on the same side of the building
 Shape allows the use of high, medium and low usage areas to minimize
materials handling by locating high and low usage areas respectively
nearest to and furthest from the goods received and goods outwards areas,
thus minimizing materials handling for high usage items

Advantages:
 Better utilization of receiving and issue areas and the associated
mechanical handling equipment
 The total area required is less than where there are separate loading and
unloading areas
 Facility to extend the building (subject to site constraints) on one or more
of three sides
 Unified bay operations provide for better security control and easier
surveillance

The main disadvantage is that the centre aisle may become congested in high
throughput situations
2) Cross flow warehouse flow: The flow in this type of layout is a one way system
with an ‘in-feed’ aisle and a separate ‘out-flow’ from the other end of the
racks. Front entry and dispatches uses a common yard area and the layout
retains the benefits from the integration of bulk and picking stocks, but if bulk
stocks are a large proportion of total stock this may not be practical.
3) Corner warehouse flow: In the corner warehouse flow, inward and outward
flows are on the adjacent but different sides of the building. This layout helps
to reduce congestion of aisles in times of high throughput. The disadvantages
are that expansion is possible only on the two sides without doors. As the
 activities in the yard and within the store are not visible from a single vantage
point, there are potential problems in security and surveillance.

Through flow warehouse: In this layout goods inwards and outwards are on the
opposite sides of the building. All items must therefore travel the full length of the
store. The layout also requires separate goods in and dispatch management with
dual yard access and doubles the internal bay areas. The layout is useful where the
goods in and out vehicle requirement is different, such as in their platform height
or where the nature of the unit load warrants the separation of the two facilities.
Disadvantages include the limitation of future extensions of the building.

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hight
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TOPIC VI

MATERIALS PRESERVATION
i) Preservation is the maintenance of materials in its initial state for a given period
of time
ii) Preservation is the protection of materials from all kinds of damage so as to
maintain the original value of material which have been carried into the store
Food preservation is to prevent the growth of bacteria, fungi (such
as yeasts), or other micro-organisms (although some methods work by
introducing benign bacteria or fungi to the food), as well as slowing
the oxidation of fats that cause rancidity. Food preservation may also
include processes that inhibit visual deterioration, such as the enzymatic
browning reaction in apples after they are cut during food preparation.
Many processes designed to preserve food involve more than one food
preservation method. Preserving fruit by turning it into jam, for example,
involves boiling (to reduce the fruit’s moisture content and to kill bacteria,
etc.), sugaring (to prevent their re-growth) and sealing within an airtight jar
(to prevent recontamination). Some traditional methods of preserving food
have been shown to have a lower energy input and carbon footprint, when
compared to modern methods

Food, by nature, is perishable. Without intervention, food falls

victim to the forces of nature, namely bacteria, yeast, and fungus,
and begins to degrade. The effects of food spoilage are not only
unappetizing, but the agents of spoilage can also cause food
borne illnesses or even death.

METHODS OF PRESERVATION

 Chilling and Freezing - Bacteria and yeast grow best at specific

temperatures, usually between 40-140ºF. By lowering the
temperature below 40ºF their metabolic and reproductive action
is significantly slowed. While this may not actually kill the bacteria
and yeast, it does slow the spoilage process. Although freezing
 food has been used in colder climates for hundreds of years, the
expansion of electricity and home appliances in the early and
mid-20th century greatly expanded the use of freezing as a food
preservation method.
 Canning - Canning preserves food by removing the oxygen
needed for most microorganisms to grow. Because some
organisms are able to flourish in the absence of oxygen, canning
is usually combined with a second factor that inhibits microbial
growth, like acid or salt (usually in the form of a brine). Canning
became a popular method of food preservation with the industrial
revolution and is still quite popular today.

 Dehydrating - Most microorganisms also require moisture to

grow, so removing the moisture from food is a very effective
method of preservation. The key to dehydration is to complete
the process faster than the spoilage occurs. Evaporation is usually
quickened with the addition of moderate heat, sometimes
provided by natural sunlight. The added bonus of sunlight are
ultra violate rays, which also serve to kill microbes. Modern
methods of dehydration use circulating air that is heated just
enough to promote dehydration without "cooking" the food.
Dehydration is the method of food preservation used for meat
jerky, dried fruit or fruit leathers, and herbs.

 Fermenting - Fermenting is another ancient technique of food

preservation that has remained popular to this day. The
popularity is most likely attributed to the unique flavor that is
accrued through fermentation. Fermentation itself is a form of
food spoilage, but when the microorganisms are tightly
controlled, it can produce desirable effects and provide
safeguards against harmful organisms. The bacteria or yeast used
in the fermentation process produce acid as a byproduct, which
acts to prevents other, potentially harmful bacteria from thriving.
As an added bonus, many of the organisms used to ferment foods
are also healthy additions to the natural flora of the human
gastrointestinal tract. Both sauerkraut and kimchi are examples of
the use of fermentation to preserve cabbage.
Salting - Salting preserves food by removing the moisture and creating an
environment unsuitable for microbial growth. Very few bacteria grow in high salt
solutions, so simply adding a very high amount of salt can be an effective method of
preservation. Salting is one of the oldest known methods of food preservation.
Natural sea salts abundant in the Mediterranean region were readily available in
ancient times and were used to preserve meat, fish, vegetables, and even some fruit.
The amount of salt alone needed to preserve food is extremely high and therefore
can be unpalatable. Therefore, salt is often used in combination with another
method, like dehydration or an acidic solution, to preserve food. Examples of salt-
preserved foods include: hard salamis, bacon, salt pork, smoked fish, anchovies,
olives, pickles, and preserved lemons.
HOW TO PRESERVE FOOD | METHODS AND TECHNIQUKnowing how to preserve
food has been essential throughout our history as humans. Consider that before the
advent of refrigeration, which was originally devised in the 18th century, but was
not perfected and widespread until the 20th century, most of civilisation had to
make do without refrigeration and freezing.Many of these techniques are still in
place today and are used for preserving the bounty of produce during the summer
months. Here's a look at the most common ways of preserving food:

Drying, arguably the oldest food preservation method, is a great way of

preserving herbs, fruits, vegetables and meats. Since the beginning of time
people have let sun and nature take care of drawing moisture out of foods. This
practice is used throughout the world. For example, Southern Italy is known
for drying tomatoes, while India is known for drying chilies, mangos and a host
of spices.

Drying To dry herbs, simply tie them together and hang in a

sunny spot away from any humidity. To dry
fruits or vegetables, set them out on a clean surface and keep
them in the sun for a few weeks (this only works well in dry,
warm climates). A more modern method of drying is to use
an electric dehydrating machine.

PICKLING THE main difference between this category

and canning is that you need two things for
pickling: salt and acid. Pickling requires you soak your produce,
most famously cucumbers, in brine with salt. When they have
pickled for the desired amount of time you transfer them to a jar
full of vinegar. At this point you can use the canning method to
produce a vacuum seal, if you wish.

A bonus of pickling is that it does not change the texture too

much. The vegetables undergo a fermentation process, which
also results in a vitamin boost. Pickled vegetables are known
for having an increased level of vitamin B6.

Importance of preservation of materials

i) To keep the materials safe from all kinds of damage and spoilage
ii) To protect the material so as to maintain their value and quality
iii) To see that the materials which have been carried into the stores are
available whenever they are required in perfect and serviceable
condition
iv) Enhances the smooth flow of operations within the organization
v) Helps in lowering investment rate and volume
TOPIC VII

Packaging
Packaging is the technology of enclosing or protecting products for
distribution, storage, sale, and use.
Packaging also refers to the process of designing, evaluating, and
producing packages. Packaging can be described as a coordinated
system of preparing goods for transport, warehousing, logistics, sale, and
end use
Important Functions of Packaging
(i) Product Identification:
Packaging serves as an identification of the product. A product is packed in
special sized, colored and shaped container for keeping its difference from
the products of competitors. For example, the yellow and black colored
pack of KODAK ROLL tells itself of its producer

(ii) Product Protection:

The main function of packaging is to provide protection to the product from
dirt, insects, dampness and breakage. For example, the products like
biscuit, jam, chips, etc., need to be protected from environmental contact.
That is why they are tightly packed.

(iii) Convenience:
Packaging provides convenience in the carriage of the product from one
place to another, in stocking and in consuming. For example, the new pet
bottles of COKE makes the carriage and stocking easier. Similarly, the
pack of FROOTI provides convenience in its consumption.

(iv) Product Promotion:

Packaging simplifies the work of sales promotion. Packing material in

the house reminds the consumers constantly about the product. In
this way, the packaging performs the role of a passive salesman.
Consequently, it increases the sales.

Function
The purpose of product packaging is to protect the product from
damage. Product packaging not only protects the product during
transit from the manufacturer to the retailer, but it also prevents
damage while the product sits on retail shelves. Most products
have some form of packaging. For example, soups must have a
container and package while apples may have packaging for
transport but not to sell the product from the produce department
of the local grocery st
Attraction
How a product is packaged may be what attracts the consumer to
take a look on the product as is sits on store shelves. For this
reason, many companies conduct extensive research on color
schemes, designs and types of product packaging that is the most
appealing to its intended consumer.
Promotion
Packaging also plays an important role for portraying information
about the product. Outside packaging may contain directions on
how to use the product or make the product.
Facilitates Purchase Decision
Packaging may also contain ingredients and nutritional
information about the product. This information can help to sell
the product because it allows potential customers to obtain the
necessary information they need to make a purchase decision.
Information contained on a package may propel the reader to buy
the product without ever having to speak to a store clerk.
Differentiation
Packaging can also differentiate one brand of product from
another brand. Because the product packaging can contain
company names, logos and the color scheme of the company, it
helps consumers to identify the product as it sits among the
competition’s products on store shelves. For example, as a
shopper walks through the coffee aisle of the local grocery store,
the bright orange, pink and white packaging of the Dunkin’
Donuts coffee brand may be easily recognizable for the consumer
to grab on his way by the coffee shelf. The shopper may identify
with the company brand, which propels them to buy the product.
If the product packaging changes, it may alter the brand
perception of the company, which doesn’t mean that the
consumer would not still purchase the product, but it may delay
the purchase until the person is able to identify the product
according to its new packaging.
Types of Packaging for Your Different Business Needs

Shipping companies know that not every client will be able to

ship their goods in standard cardboard boxes, so they offer a
broader assortment of options. Here are five of the most common
types of packing materials that can accommodate a wide variety
of company needs.

1. Crates and Pallets

No matter what kind of product you need to move, crates and

pallets are an important part of the shipping and packaging
process. They act as secondary wrapping and keep the actual
goods safe until they are delivered. Pallets keep packages
raised off of the surface they are sitting on—whether it is the
ground or the bed of a delivery truck. Keeping products off
the ground keeps the packaging in good condition, and
protects against dirt and moisture.
Almost all packaging companies from Toronto to Tennessee use
crates and pallets when preparing their clients’ products for
shipment. Some companies, like Pack-All International, use
wooden materials that can easily be reused or recycled. Other
shipping locations, like Nelson Company, use reusable and
recyclable plastic crates and pallets. Both materials have their
advantages and disadvantages, but either will keep your
products safe and dry in their packaging.

2. Shrink Wrap

Shrink wrap is used as both/either primary and secondary

packaging. You can shrink wrap your actual product, like the
shrink wrap around CD cases or loose notebook paper, or you
can shrink wrap an entire pallet of packages to hold the
packages together and make them easier to move.

Shrink wrap does more than keep packages together. It also

provides puncture and abrasion protection as well as impact
resistance. Plastic is also cheaper and more recyclable than
corrugated boxes. Shrink wrap provides the same protection
when it is used as individual product packaging, plus it gives the
contents visual appeal.

3. Vacuum Packaging

Vacuum wrapping eliminates oxygen from the packaged food,

which keeps out bacteria, mold, and yeast. Food that comes in
vacuum packaging will also stay fresh in the freezer longer than
food wrapped in other types of packages. If your company ships
any kind of perishable food, vacuum packaging will efficiently
meet your needs. Vacuum packaging is also used for medical
materials, or anything that needs to be hermetically sealed.

4. Preservation Packaging

Preservation packaging includes both shrink wrapping and

vacuum packaging, as well as other forms of packaging such as
jar canning, aluminum cans, and other types of protective
packages like egg cartons and milk jugs. These packaging
materials have one goal—keep the product safe, protected, and
fresh.

Another type of preservation packaging material that doesn’t

necessarily have to do with food is bubble wrap. Bubble wrap is a
lightweight, inexpensive way to cushion your products and
provide them with impact protection throughout the shipping
process.

5. Shock Mount Packaging

For items that are extremely fragile, shock mount packaging is

one of the safest options. The packaging contains built-in shock
absorption, protecting the contents from shock and vibration as
well as humidity, dust, and moisture. This heavy-duty type of
packaging is typically used for fragile electronic equipment, or
unstable chemical compounds.

There are many different ways to package and ship your

products. Evaluate the needs of your company and products, and
decide which of these options will work best for you, and will
keep your products safe throughout the shipping process.

Main features of good packaging:

1. Convenient
Good packaging should be convenient. Package should be made in a way
that the product could be conveniently taken from one place to another and
can be handled easily by middlemen or consumers. The size and shape of
package also should be convenient for retailers to keep in shop or for
consumers to keep at their home. The package design should be made re-
use-able, if possible.
2. Attractive
Package should be very attractive and fascinating. Attractive package
draws customers' attention. It stimulates their interest towards the product
and makes them realize the want of product. Color, picture, design, size
etc. of package can be dramatically influence customers' mind. Some
customers demand due to attractive packaging.
3. Economical
The other feature of good packaging is to be economical. It should not be
costly. If packaging is expensive, it increases the price of the product. As a
result, it becomes difficult to sell the product. So, packaging should not be
costly nor should be clumsy.
4. Protective
The purpose of packaging is to protect products from different risks.
Products should be packaged in a way that the quality, quantity, color etc.
of product does not decline or damaged from sun, rain, insects, dust etc.
While carrying from one place to another, transporting or storing in, and
products may get damaged, putrefied, spoiled, or rotten. So, proper
arrangement should be made to save the product from every risk. Only the
packaging, which can protect products from all risk, is a good packaging.
5. Communicative
Good packaging should also be communicative. it should give information
to the customers about the brand utility and quality of the product, which
can stimulate demand. Good packaging works as silent salesperson and
an effective advertisement.
Factors to consider when packaging

Necessities.
No two products are the same. If your product is fragile, then your
packaging needs to be sturdy. If you are offering frozen food, then you will
have to offer the food in a package that can be reheated. If you process hot
fluid items, you should consider packaging it in a glass bottle over plastic in
order to prevent contamination.

Finances./cost

Sometimes, what you ideally need is not something you can afford. When
Matt McKee, the founder of Cali water cactus water launched his business,
he wanted to package his product in a Tetra Pak. But at an MOQ (minimum
order quantity) of 205,000, Tetra Packs seemed unaffordable for a startup
manufacturer. Matt worked around this roadblock by launching in PET
bottles until business grew enough to justify production on Tetra Pak.

Perception.
If you sell food, then the packaging should trigger your appetite. When
Michelle Adams launched her French Macaroons business, Michelle's
Macaroons, they created a “window” so people could see the food item
they are buying. This, in a way also helped underline the quality of the
product, which she says is quite important.

Align with price point.

This is an off-shoot of the product perception. According to Mark
Asselstine, the marketing director at Uncorked Ventures, a premium wine
seller from California, the package material should reflect the price point
you are selling your product at. His company sold wine baskets in the
$125-$175 price bracket and Mark says the traditional wicker baskets
would not have justified the cost of their gift baskets. The company settled
on hard wood boxes with imprinted logos which, which cost significantly
more than the alternatives but seemed to fit the price point better.
Convenience.
How easy is it for the customer to use your product is an important factor to
consider while design a package. When Lisa Hennessy, the owner of Your
Pet Chef launched her personalized dog food business, she delivered the
food in reusable containers that could be rinsed and returned for future
delivery. This was environmentally friendly but not convenient for
customers. This drove her company to replace containers with quart sized
Ziploc bags that are recyclable and also easy to dispose.

Steps in packaging

Step 1: Consult a local contract packaging professional to gain some

insight into the most cost effective and popular packaging materials in the
space you are competing. This will also help you with identifying the best
materials and structures, as the best solutions are based on the type of
equipment and automation that is necessary.

Step 2: Hire a good graphic designer who has prior experience in

retail. They will help you design your retail package based on your vision of
the product, the image or personality you like the product to have, the ideal
customer, price point, perceived value, where the product will be sold, your
existing product name, logo and also based on the information you want on
the product.

Step 3: Creatively negotiate with vendors based on your volume

requirements. Whether you are looking to buy corrugated, chipboard, rigid
containers or flexible packaging, low volume orders will mean higher prices
regardless of the source. This can be a barrier to entry for many new
"entrepreneurs" and tip the cost model upside down in the early stages.

Find a supplier who wants to not just be a vendor, but also a partner.
Such partners are ready to absorb some of the upfront tooling and
miscellaneous charges if you promise them a larger buy after the first
order.

TOPIC VIII

STOCK CONTROL
Stock control is the management of the flow of materials within the warehouse to
maintain a standard amount of stock in the warehouse.

Stock management is the function of understanding the stock mix of a company

and the different demands on that stock. The demands are influenced by both
external and internal factors and are balanced by the creation of purchase order
requests to keep supplies at a reasonable or prescribed level.

Importance of holding stock

 There is continuity of production
 Quantities of products to be stored
 costumers needs and demands are made
 Quality services are able to be delivered
 The organization is able to compete effectively in the market
  There is stabilization of market prices
 Organization is able to achieve its set objectives

Advantages of software application

 Most inventory management applications give organizations a structured

method of accounting for all incoming and outgoing inventory within their
facilities.
 Organizations save a significant amount in costs associated with manual
inventory counts, administrative errors and reductions in inventory stock-
outs.
 Often tracking stock just through sales and returns is not enough for retailers
and does not meet the demands of customer’s multichannel expectations.
Customers expect retailers to have real-time knowledge of stock availability.
 This can be a challenge for retailers who may have on-line as well as bricks
and mortar outlets.
 A good stock management system will be able to list all stock options with a
size color matrix as well as give live reports on best or worst sellers, supply
chain and sales staff.

Stock control methods To avoid over-stocking and under stocking of materials,

the management has to decide about the maximum level, minimum level, re-order
level, danger level and average level of materials to be kept

Some of the most important techniques/methods of inventory control system are:

1. Setting up of various stock levels. 2. Preparations of inventory budgets. 3.

Maintaining perpetual inventory system. 4. Establishing proper purchase
procedures. 5. Inventory turnover ratios. and 6. ABC analysis.7 just in time (JIT) 8.
Last in last out (LIFO) 9. First in first out (FIFO)

1. Setting up of various stock levels:

To avoid over-stocking and under stocking of materials, the management has to

decide about the maximum level, minimum level, re-order level, danger level and
average level of materials to be kept in the store.

These terms are explained below:

(a) Re-ordering level: It is also known as ‘ordering level’ or ‘ordering point’ or
‘ordering limit’. It is a point at which order for supply of material should be made.

Re-order level =Maximum Rate of consumption x maximum lead time

(b) Maximum Level: Maximum level is the level above which stock should never
reach. It is also known as ‘maximum limit’ or ‘maximum stock’. The function of
maximum level is essential to avoid unnecessary blocking up of capital in
inventories, losses on account of deterioration and obsolescence of materials, extra
overheads and temptation to thefts etc. This level can be determined with the
following formula. Maximum Stock level = Reordering level + Reordering
quantity —(Minimum Consumption x Minimum re-ordering period)

(c) Minimum Level: It represents the lowest quantity of a particular material

below which stock should not be allowed to fall. This level must be maintained at
every time so that production is not held up due to shortage of any material.

It is that level of inventories of which a fresh order must be placed to replenish the
stock. This level is usually determined through the following formula:

Minimum Level = Re-ordering level — (Normal rate of consumption x Normal

delivery period)

(d) Average Stock Level: Average stock level is determined by averaging the
minimum and maximum level of stock.

The formula for determination of the level is as follows:

Average level =1/2 (Minimum stock level + Maximum stock level)

This may also be expressed by minimum level + 1/2 of Re-ordering Quantity.

(e) Danger Level: Danger level is that level below which the stock should under
no circumstances be allowed to fall. Danger level is slightly below the minimum
level and therefore the purchases manager should make special efforts to acquire
required materials and stores.

This level can be calculated with the help of following formula: Danger Level
=Average rate of consumption x Emergency supply time.
(f) Economic Order Quantity (E.O.Q.):One of the most important problems
faced by the purchasing department is how much to order at a time. Purchasing in
large quantities involve lesser purchasing cost. But cost of carrying them tends to
be higher. Likewise if purchases are made in smaller quantities, holding costs are
lower while purchasing costs tend to be higher.

Hence, the most economic buying quantity or the optimum quantity should be
determined by the purchase department by considering the factors such as cost of
ordering, holding or carrying

formula:

Q = √2AS/I

Where

 Q stands for quantity per order ;

 A stands for annual requirements of an item in terms of rupees;
 S stands for cost of placement of an order in rupees; and
 I stand for inventory carrying cost per unit per year in rupees.

2. Preparation of Inventory Budgets: Organisations having huge material

requirement normally prepare purchase budgets. The purchase budget should be
prepared well in advance. The budget for production and consumable material and
for capital and maintenance material should be separately prepared.

 Sales budget generally provide the basis for preparation of production plans.
Therefore, the first step in the preparation of a purchase budget is the
establishment of sales budget.
 As per the production plan, material schedule is prepared depending upon
the amount and return contained in the plan. To determine the net quantities
to be procured, necessary adjustments for the stock already held is to be
made.
 They are valued as standard rate or current market. In this way, material
procurement budget is prepared. The budget so prepared should be
communicated to all departments concerned so that the actual purchase
commitments can be regulated as per budgets.
 At periodical intervals actual are compared with the budgeted figures and
reported to management which provide a suitable basis for controlling the
purchase of materials,
3. Maintaining Perpetual Inventory System: This is another technique to
exercise control over inventory. It is also known as automatic inventory system.
The basic objective of this system is to make available details about the quantity
and value of stock of each item at all times. Thus, this system provides a rigid
control over stock of materials as physical stock can be regularly verified with the
stock records kept in the stores and the cost office.

4. Establishing Proper Purchase Procedures: A proper purchase procedure has

to be established and adopted to ensure necessary inventory control.

Purchase procedures

(a) Purchase Requisition: It is the requisition made by the various departmental

heads or storekeeper for their various material requirements. The initiation of
purchase begins with the receipts of a purchase requisition by the purchase
department.

(b) Inviting Quotations: The purchase department will invite quotations for
supply of goods on the receipt of purchase requisition.

(c) Schedule of Quotations: The schedule of quotations will be prepared by the

purchase department on the basis of quotations received.

(d) Approving the supplier: The schedule of quotations is put before the purchase
committee who selects the supplier by considering factors like price, quality of
materials, terms of payment, delivery schedule etc.

(e) Purchase Order: It is the last step and the purchase order is prepared by the
purchase department. It is a written authorisation to the supplier to supply a
specified quality and quantity of material at the specified time and place mentioned
at the stipulated terms.

5. Inventory Turnover Ratio:

These are calculated to minimize the inventory by the use of the following
formula:

Inventory Turnover Ratio= Cost of goods consumed/sold during the

period/Average inventory held during the period
The ratio indicates how quickly the inventory is used for production. Higher the
ratio, shorter will be the duration of inventory at the factory. It is the index of
efficiency of material management.

The comparison of various inventory turnover ratios at different items with

those of previous years may reveal the following four types of inventories:

(a) Slow moving Inventories: These inventories have a very low turnover ratio.
Management should take all possible steps to keep such inventories at the lowest
levels.

(b) Dormant Inventories: These inventories have no demand. The finance

manager has to take a decision whether such inventories should be retained or
scrapped based upon the current market price, conditions etc.

(c) Obsolete Inventories: These inventories are no longer in demand due to their
becoming out of demand. Such inventories should be immediately scrapped.

(d) Fast moving inventories: These inventories are in hot demand. Proper and
special care should be taken in respect of these inventories so that the
manufacturing process does not suffer due to shortage of such inventories.

Perpetual inventory control system:

 In a large essential to have information about continuous availability of

different types of materials and stores purchased, issued and their balance in
hand. The perpetual inventory control system enables the manufacturer to
know about the availability of these materials and stores without undergoing
the cumbersome process of physical stock taking.
 Under this method, proper information relating to receipt, issue and
materials in hand is kept. The main objective of this system is to have
accurate information about the stock level of every item at any time.
 Perpetual inventory control system cannot-be successful unless and until it is
accompanied by a system of continuous stock taking i.e., checking the total
stock of the concern 3/4 times a year by picking 10/15 items daily (as
against physical stock taking which takes place once a year).
 The items are taken in rotation. In order to have more effective control, the
process of continuous stock taking is usually undertaken by a person other
than the storekeeper. This will check the functioning of storekeeper also.
 The items may be selected at random to have a surprise check. The success
of the system of perpetual inventory control depends upon the proper
implementation of the system of continuous stock taking.

6. ABC analysis: In order to exercise effective control over materials, A.B.C.

(Always Better Control) method is of immense use. Under this method materials
are classified into three categories in accordance with their respective values.
Group ‘A’ constitutes costly items which may be only 10 to 20% of the total items
but account for about 50% of the total value of the stores.

A greater degree of control is exercised to preserve these items. Group ‘B’ consists
of items which constitutes 20 to 30% of the store items and represent about 30% of
the total value of stores.

A reasonable degree of care may be taken in order to control these items. In the last
category i.e. group ‘Q’ about 70 to 80% of the items is covered costing about 20%
of the total value. This can be referred to as residuary category. A routine type of
care may be taken in the case of third category.

This method is also known as ‘stock control according to value method’, ‘selective
value approach’ and ‘proportional parts value approach’.

If this method is applied with care, it ensures considerable reduction in the storage
expenses and it is also greatly helpful in preserving costly items.

1.FIFO (First In First Out) method

FIFO is a stock control method where goods brought in first is the first to be
released or issued. FIFO is a stock control method where goods brought in
first is the first to be released or issued.

Advantages of the FIFO method

It’s a logical pricing method which probably represents what

is happening in practice:

oldest items are usually issued first out.

ii. Unrealized profits or losses do not arise at the end of period.
Materials are issued at the same price as that at which they were
acquired hence no profit or loss arises out of the transaction.
iii. It is easy to understand. It is also easy to calculate if prices of
materials don’t fluctuate
iv. Closing stocks values reflect the latest costs thus tend to
reflect the current market
values.
v. It is acceptable to many tax authorities and is also consistent
with accounting practices for instance the International Financial
Reporting Standards (IFRS) and International Accounting
Standards (IAS).
Disadvantages
i. It can be cumbersome to operate because of the need to
identify each batch of materials separately
ii. Product costs, based on the oldest material prices, lag behind
current conditions
especially in inflationary markets.
iii. Managers may find it difficult to compare costs and make
decisions where they are
charged with varying prices for the same materials.
2.LIFO (Last In First Out) method
It assumes that materials are issued out of stock in the reverse
order to which they are delivered
i.e. they are valued at the price of units received first. Stock
valuation is, therefore, based on the
prices ruling on the acquisition of the last stocks.
Advantages of the LIFO method
Product costs tend to be based on current market prices thus the
method is realistic. Managers
are continually aware of the recent costs when making decisions
because the cost being charged to the department or products
will be the current costs
Disadvantages
The LIFO method involves tedious calculations if the prices of
materials fluctuate from time to time. Comparison of one job with
another may be unfair and difficult. Variation in prices may make
the, decision-making process difficult and unfair. This is because
LIFO method is often the opposite of what is happening in reality
(stocks are valued at the oldest prices) and thus becomes difficult
to explain to managers.
TOPIC IX
STOCKTAKING
Stock management is the function of understanding the stock mix of a company
and the different demands on that stock. The demands are influenced by both
external and internal factors and are balanced by the creation of purchase order
requests to keep supplies at a reasonable or prescribed level.

Stock-taking or "inventory checking" is the physical verification of the quantities

and condition of items held in an inventory or warehouse.

A stock take is a count of the business inventory on hand, typically done at the end
of the financial year, though some businesses may do it more regularly.

Stock-taking may be performed as an intensive annual, end of fiscal year,

procedure or may be done continuously by means of a cycle count.[1]An annual end
of fiscal year stock-taking is typically undertaken for use in a company's financial
statements. It is often done in the presence of the external auditors who are
auditing the financial statements

A stock-take sale is a sale with reduced prices in a shop designed to sell off stock
from previous seasons. This makes the task of stock-taking easier.

Reasons for stock taking

 This may be done to provide an audit of existing stock.

 To determination of a cutoff point i.e. what was the stock position of the
company/organization at a specific point of time. the source of stock
discrepancy information.

The following forms may help in this regarded usage

 Periodic stocktaking involves checking the balance of every item of

inventory on the same date, usually at the end of an accounting
period.
 Continuous stocktaking involves counting and valuing selected
items of inventory on a rotating basis. Specialist teams count and
check certain items of inventory on each day. Each item is checked at
least once a year with valuable items being checked more frequently.
  Any differences (or discrepancies) which arise between 'book'
inventory and physical inventory must be investigated.
 In theory any differences, as recorded in the stores ledger or the bin
card, must have arisen through faulty recording.
 Once the discrepancy has been identified, the stores ledger card is
adjusted in order that it reflects the true physical inventory count.
 Any items which are identified as being slow-
moving or obsolete should be brought to the attention of
management as soon as possible.
 Management will then decide whether these items should be
disposed of and written off to the income statement.
 Slow-moving items are those inventory items which take a long time
to be used up.
 Obsolete items are those items of inventory which have become out
of date and are no longer required.

Inventory losses and waste

 Inventory losses may be quantified by comparing the physical

quantity of an item held with the balance quantity recorded on the bin
card and/or stores ledger card.
 There are two categories of loss: those which occur because of theft,
pilferage, damage or similar means and those which occur because
of the breaking of bulk receipts into smaller quantities.
 It is the second of these which are more commonly referred to as
waste.
 Inventory losses must be written off against profits as soon as they
occur. If the value to be written off is significant then an investigation
should be made of the cause.
o When waste occurs as a result of breaking up bulk receipts, it is
reasonable to expect that the extent of such wastage could be
estimated in advance based upon past records. Either of two
accounting treatments could then be used:
o Issues continue to be made and priced without any adjustment
and the difference at the end of the period is written off.
o Alternatively, the issue price is increased to compensate for the
expected waste.
 Suppose that a 100 metre length of copper is bought for $99. The
estimated loss caused by cutting into shorter lengths as required is
1%.
  The issue price could be based on the expected issues of 99 metres,
i.e. $1 per metre rather than pricing the copper at:

Note: If a delivery arrives when a physical inventory count is being conducted,

segregate the goods in a clearly marked storage area, and do not record these
items in the inventory database until after the physical counting process is
complete.

Essentials of effective sock taking

 Regular stock takes afford businesses an accurate accounting of their stock levels, highligh
customer demand.
 Timing is everything…
 The best time to conduct a stock take is when it will cause the least amount of disruption t
 So is organization
 Appoint leaders with strong organizational skills to head up the stock take, and task them w
 Organize staff into teams and ensure that each team is assigned a supervisor. Everyone sho
 Avoid double counts by marking goods
 In order to avoid double counts have staff mark each item counted so that they know what
 Never trust a label – open, count and record everything
 When conducting a stock take it never pays to try speed the process along by guesstimatin
recorded.
Having an accurate idea of the number of stock items your business owns allows
your accountant to reconcile physical stock to the inventory records, highlight
variances, and identify issues with stock management and control.

With accurate knowledge about stock movements and stock on hand, you can
make informed decisions about theft, slow-moving items, damaged stock,
technology obsolescence and warehouse processes.

Top tips to have a smooth, successful and stress-free stock take.

1. Clearly identify what stock is owned by the business. Separate stock that’s
been invoiced to a customer, but is still in the warehouse. Likewise, stock received
but not yet recorded in the books should be distinguished.

Make sure stock held at different locations or on consignment basis is accounted

for.

2. Make sure the stock room is clean and tidy and inventory items are clearly
laid out

Attach labels to shelves to clearly identify different stock; e.g. categories inventory
and label inventory not to be counted etc.

If relevant, give stock counters clear guidance on the way they should count, e.g.
start at the top shelf and work your way down, while working from left to right.

3. Tools for the stock take

 Clipboards
 Stock sheets Don’t include the current number of inventory on hand. If
inventory is barcode, make sure barcodes are written down clearly.
 Write-off sheets Make sure you check the condition of the inventory as you
count.
 Pens Use different colors. The audit trail can be easily followed if the first
counter uses a blue pen, second counter uses a red pen, and the sheets are
submitted to the stock take coordinator who uses a purple pen.
 Calculators
 Hand held scanners For bar-coded inventory.

4. Discourage radios, mobile phones, iPods and idle chit chat

While it might seem mean, distractions can easily lead to errors.

5. Count every item of your inventory. Don’t estimate!

It might seem tedious, especially if you think you have a good idea of quantities,
but it’s much better to get a 100 percent accurate record the first time. Don’t forget
to open boxes – just because the carton says there are 24 items in the box doesn’t
mean there actually are.
6. Check the physical count against accounting records. Recheck
discrepancies

Make a note about variances and follow up where necessary.

7. Update your records Once the stock take has been finalized, update the
inventory records in your accounting package.

A well planned stock-take will result in minimal disruption, accurate inventory

records and provides a basis for making informed business decisions.

Inventory records and systems Last allows you to keep track of and make sure
your inventory records are up-to-date.

Methods or types of stock taking

 periodic or perpetual/ inventory system.

 Continuous/ perpetual stock taking

Periodic inventory systems: In a periodic inventory system, you don’t update

your inventory records straight after your inventory levels change. Instead, you
update them time-to-time by physically counting your inventory by doing a stock
take.

Advantages of periodic inventory systems include:

 being less costly to set up than a perpetual inventory system

 less reliance on electricity than a perpetual inventory system
 sometimes being cheaper to run.

Perpetual inventory systems In a perpetual inventory system, you update your

inventory records straight away after your inventory levels change. Perpetual
inventory systems are often electronic and use a point-of-sale system.

Some benefits of perpetual inventory systems are:

 better detection of theft

 More up-to-date records.
Inventory records Inventory records are records of what your business has and
how much it’s worth. It’s a good idea to update inventory records when your
inventory changes, such as when:

 inventory goes obsolete, such as throwing out a movie ticket because the
tickets are for a movie that is no longer in cinemas
 inventory has been lost or stolen
 inventory has perished, such as milk you that went out-of-date
 the value of inventory has changed, such as the resale value of a diamond
ring going down
 you buy new inventory from a supplier
 you sell inventory to a customer.

The Importance of Keeping an Accurate Inventory

Planning When you keep accurate inventory records, you have data that tells you
whether you can take on client requests or particular projects with the inventory on
hand. You get a sense of when you will need to order new items. You also can
review the inventory records to identify inventory trends over time and make some
basic predictions about inventory that might run out faster than usual. All of these
elements mean that you are able to plan and strategize.

This is critical to developing and maintaining relationships with investors, who

want to see that you have specific plans for your operations.

Customer Service Good inventory records mean that when customers call or write
with inventory-related questions, you can find the answer quickly. A fast response
time usually means the customer gets a better impression of the company. When
you know exactly what inventory you have and where it is stored, you can retrieve
it promptly and fill customer orders efficiently. The ability to deal with inquiries
and fill orders quickly means the company is able to serve more customers and
move more inventory through the company, resulting in higher profit. If customers
have to wait for responses or products, they may cancel orders and go to other
companies.

Expense Control Failure to maintain accurate inventory records sometimes means

that a company cannot send out an item until it is close to a deadline. Companies
that have to send items out at the last minute might have to pay extra to expedite
shipping. Doing this for one or two customers might not be a huge deal, but it
translates into big losses for companies that work with dozens or even hundreds of
customers every day. Furthermore, sometimes companies end up ordering new
inventory to meet client demands, only to find the original inventory later and
realize the new order wasn't necessary. Replacing goods in this way is costly,
especially if the company cannot sell the original inventory and ends up with
"extra." Inventory tracking thus is a strategy for expense control.

Rewards and Praise Proper inventory tracking provides an opportunity to

measure success. For instance, you can define successful tracking as losing only
one item per month. If your inventory staff meets this goal because they keep
excellent data, you can give them positive reinforcement and offer rewards. This
helps keep morale high, which often translates into better productivity and fewer
conflicts. Without good records, you cannot tell whether your inventory staff
deserves something extra or whether disciplinary action is appropriate.

Time, Skills and Talents Accurate inventory records mean that your inventory
staff has more time available to do other things. For example, they can investigate
new vendors or come up with ways to reorganize the inventory for optimum
efficiency and access. This not only improves production and gives your company
additional options but also lets inventory workers explore other skill and talent area
they have. You may discover, for example, that a lower-level inventory worker is
particularly good at data analysis