PLANNING OF STOCK ITEMS & SYSTEMS OF RECOUPMENT

5.1.0 Stocking Decisions :

The Stores Department has to first decide what items they would stock for meeting the demands of the various consumers. For items required for maintenance activities, the demands can be generated well in advance as the forecasting is done based on previous consumption pattern. The Stores Department can either stock those items or purchase as and when required to meet the specific demands. This can be decided upon considering the total cost of purchasing plus inventory carrying costs. Generally, it can be said that if the item is required frequently it is cheaper to stock and meet the demands from stock. But if an item is demanded say once or twice a year, it may be better to buy as and when required. For example, if a particular color of paint is used for maintenance of one or two rakes (like Pink City Express) and the demand is only twice a year, it may be better to buy the paint at the time of POH instead of stocking it all the time.

• There are certain items of spare parts which are not regularly required and it is difficult to know when the item will be demanded. If the item is not available, when required the repercussions may be serious. In other words the stock-out costs may be high. Such items have necessarily to be stocked as emergency items in the stores depot.
• Once a decision has been taken to stock an item, then our objective is to make the item, available to the user whenever he requires it. As in many situations, it is not known when the item will be required, we ensure that stocks of the items are always available so that the item can be issued whenever demanded by the user.

5.1.1 Various Recoupment systems have been designed to achieve the objectives mentioned above. All these systems are discussed from par 5.3.0 to 5.4.3.

5.2.0 Forecasting Of Consumption :

5.2.1 In any system of recoupment, we are planning the action in advance. This advance planning is based on a consumption forecast and therefore accurate forecasting of future consumption is most essential for the success of any recoupment system.

• In the railways, the demands are mainly for :

(i) Maintenance activities

(ii) Production activities in a railway workshops

(iii) For projects or works

The maintenance activity is generally a continuing activity and the demands of materials for the purpose of maintenance can be estimated knowing the previous consumption, trend of consumption and various other information given by user departments about increase or decrease of maintenance activity. Various statistical forecasting methods are available for assessing future demands. In the railways, however, we are using at present only average of past 3 years' consumption modifying it as per the trend of consumption. More sophisticated techniques are likely to be used in future making use of the computer for this purpose.

5.2.2 As regards requirements for production activities once production schedule is finalized, the requirements of materials get automatically fixed and a Material schedule is prepared depending upon the final production schedule showing the demands of all items including components and raw materials required to be procured.

• In this material schedule, the time by which the material is required can also be shown depending upon the production schedule. If the material schedule can be prepared one lead time in advance, it may be possible for the Stores department to purchase and supply material of the specific quantities required for this production schedule.
• If, however, it is not prepared sufficiently in advance, the requirement have paraphrased to be assessed on the basis of previous consumption and kept in stock. It may be added here that forecasting in a production situation is involved only for knowing the requirement of the finished products and the requirement of the individual components and raw materials can then be worked out exactly.
• Requirements of materials for projects and works are also worked out on the similar lines as that of production schedule. Once an estimate of a project is approved and a network is prepared, the exact requirements of the various materials and the time when they are required gets automatically worked out.
• The railways have a system of preparing material schedule for project requirements, but they are not indicating, at present, the time by which materials are required. The net work helps in fixing this time and this time factor should be incorporated while preparing material schedule.
• If this material schedule can be prepared sufficiently in advance, the Stores department can supply the items by purchasing for specific demands. The Railways, however, have a system of working out the requirements of items having long lead times, sufficiently in advance, so that the work does not suffer.

5.2.3 Concept Of Dues :For purchase of material, we have to pass through a number of formalities and therefore, some of the materials are expected either against previous recoupment advises or against purchase orders placed on firms but materials not yet supplied. All these outstanding quantities are known as dues.

5.2.4 Covered & Uncovered Dues :Dues may be of two types:

(a) Covered Dues : Dues are known as Covered Dues, when our previous recoupment sheets/Estimate sheets have been covered by purchase orders but the materials have not yet been supplied by the firm. Hence, Covered Dues are the outstanding quantities against all live purchase orders.

(b) Uncovered Dues : If a previous recoupment sheet has not been covered by Purchase Order or is only partly covered, quantities outstanding for coverage against previous Recoupment sheets are known as Uncovered Dues. 

5.2.5 Forecasting Anticipated Annual Consumption & Monthly Usage Factor (Muf) :As already explained above, we forecast future consumption on the basis of :

(a) Past 3 years' consumption after giving due considerations for Stock out periods,

(b) Trend of past consumption and

(c) Information available about increase/decrease of the activities, condemnation of a particular type of rolling stock, phasing out of old rolling stock and machinery & plant, and acquisition of new stock etc. 

As regards (a), we may take simple average of true issues which took place during past 3 years or we may take weighted average by giving more weightage to most recent consumption. Some of the Railways give weightage of

•  3 to the consumption of last year (YR-1), 
• 2 to the year before last year (YR-2) and
• 1 to the consumption during further previous year (Yr- 3).

While working out weighted average consumption, we may also take into account current consumption by giving it a weightage of

3. Thus weighted average can be worked out as under:

By this method, we get forecast of monthly consumption. This can be suitably modified in view of factors mentioned at (b) & (c) above to get a reasonably accurate figure known as Monthly Usage Factor (MUF)

5.2.6 Lead Time : Lead Time is the time elapsed from the date of realization of need of recoupment (i.e. date of recoupment) to the physical receipt of material at the stocking place. Knowledge of Lead Time is very important for effective design of any Recoupment system. Lead Time often is not constant and therefore variations in Lead Time also play very important role.

5.2.7 Safety Stock Or Buffer Stock : In any recoupment system, we work out the quantities to be recouped on some forecasts of annual consumption and lead time. However, the actual figures may deviate from the forecast figure and this will lead to a situation of either stock out or overstock at some point of time. To avoid stock outs, we often provide safety stocks which are also known as buffer stock.

5.3.0 Recoupment Of Emergency Stores :

5.3.1 Emergency Stores by their nature, are slow moving items and therefore are issued occasionally. Their future demand pattern is totally uncertain. However, at the time of sanctioning an item for stocking as emergency store, a stocking limit known as base stock is also sanctioned. This base stock is based on some data of past consumption and a guess for future consumption.

5.3.2 The method of recoupment for these stores is known as base stock method. As per this system, as and when an item is issued, an equivalent quantity is immediately recouped. Therefore, theoretically, no . of recoupments may be equal to no. of issues.

5.3.3 As per base stock method, total physical stock and dues added together should be equal to 'base stock' at all times.

5.4.0 Recoupment Of Ordinary Stores :

Ordinary stores are the items which have regular turn over caused by constant demand. Therefore, we should recoup them in such a manner that fresh supplies are received before existing stocks are fully consumed. 

• For these items, we have two basic systems of recoupments described in paragraph 5.4.1 & 5.4.2 below.
• Third system described in paragraph 5.4.3 is combination of these two systems.

5.4.1 Continuous Review System (or Reorder Level System or Q System or Maxima-Minima System) :In this system, we predecide reorder level (or recoupment point) and when, as a result of issues of the item, Stock + dues come down to this level, immediately a recoupment sheet for a quantity equal to pre-decided order quantity is placed on the purchase office for placing the order on the suppliers. In Railways, this system is known as Maximum-Minimum System. The meaning of maximum- minimum is explained below:

(a) Maximum : This is the quantity which is most economical to order at a time. If we order large quantities at a time, large amount of money will be blocked and inventory carrying cost will be higher. As against this, if we order too small a quantity at a time, we will have to order more frequently and ordering costs will go up. 'Maximum', therefore, aims at a quantity which tends to minimize the total costs. For high value item, this quantity has been fixed as 3/6 months' requirements while for low value item, it has been fixed as 12 months' requirements. This optimum quantity can also be theoretically worked out if we know our cost of ordering and cost of carrying inventory. In that case this is known by the name Economic Order Quantity (EOQ).

(b) Minimum : Minimum is the quantity (Physical Stock + dues) which should be sufficient for the consumption during the lead time, i.e. time taken for procurement of the item. As Lead time is rarely constant and future demand may also vary, we decide the minimum quantity after taking into account reasonable safety factor so that material do not become out of stock before receipt of fresh supplies.

• In this system, stock and dues have to be reviewed perpetually to see whether they have reached re-order level. It may happen sometimes that this review may not take place due to human factors and we may not place the recoupment sheet although stock and dues would have come down to Minima. In this case, when we prepare the recoupment sheet,

Quantity for recoupment (Q) is worked out by the following formula.

Q = Maximum + Minimum + Pending Demand - (Stock + Dues)

Here pending demand are the requisitions received from user departments which have not been complied due to low stock or Nil stock.

5.4.1.1 Disadvantages of this system are that :

(i) There are chances of missing the reorder point as explained above and in that case if the recoupments are abnormally delayed, we may have to face frequent stock outs, and,

(ii) If an item is stocked at more than one place (Depot), reorder level may not reach simultaneously and this will lead to multiplicity of purchases which will increase workload on purchase office and also we may not get advantage of bulking.

In Railways, earlier, we were using this system for majority of the items but now only few railways are using this system for some items. However, all the shop manufactured items are still recouped on this method only. Recoupment sheets generated under this system are known as SR (Stock Replacement) or SRM (Stock Recoupment Memo).

5.4.2 Periodic Review System (or P System or Annual Estimate System) :In this system of recoupment, recoupment is done periodically on fixed review dates. In Railways, this system is known as Annual Estimate System.

• In this system, the date on which the recoupment sheet for the item is to be prepared is fixed as per pre-decided time table to be followed for recoupment of the items as against the maximum- minimum system where items are recouped as and when they touch the minimum level.
• The period for which items are recouped is fixed and is called "Contract Period". This contract period is generally 12 months.
• The interval between the dates fixed for preparing the recoupment and the beginning of the contract period is known as the Interim period.
• This period is equivalent to lead time for that particular item. For the purpose of convenience, different contract periods are fixed for different groups of items so that some groups are recouped in January, some in February and so on.
• This system is advantageous as

1. It is possible to combine the demands of different depots and make the purchase for all depots together. 
2. It is also possible to combine demands of similar items into one purchase. 
3. This reduces not only the ordering cost but gives a better bargaining power due to bulking of quantities. 
4. Inventory carrying cost can be kept low if order is placed with required no. of phased deliveries.

5.4.2.1 Fixation of Net Interim Period requirement and contract period requirements : In this system, we separately work out Net Interim Period requirement and contract period requirements as per following procedure :-

(a) First of all we work out total Gross Requirement for the Interim period ( GRIP ) by adding adequate safety factor known as Buffer. Normally, we provide Buffer Stock equivalent to 2-3 months' consumption. Thus

GRIP = Interim period (in months) x

Anticipated monthly consumption (MUF)+

Buffer stock + Pending Demand (if any).

(b) Then we work out Net Requirement for Interim Period ( NRIP ) by  subtracting total stock and dues available on date of review. Ideally, if our earlier estimate sheet was prepared correctly and there were no fluctuations in demand, the net I.P. requirement should be Nil. However, in a practical situation, we may either require some quantity or some quantity may be excess to Gross requirement for IP (GRIP) . Thus

NRIP = GRIP - (Stock + dues)

(c) Then we work out Net Contract Period Requirement as under :

Net Contract period requirement (NRCP) = Contract Period in months x

MUF - NRIP

o Estimate sheet prepared on this system are also known by name 'Balance Return' or 'Provision Statement' on some of the Railways.

o All estimate sheets for an item received from different depots are compiled in Purchase Office. Normally, if practicable, excess requirement of IP of one depot are adjusted with shortages of the other depot and Net Combined I.P. requirement and C.P. requirements for the Railway as a whole are worked out.

o If net I.P. requirement is positive and substantial (say more than 1- 2 months' requirement) separate purchase for I.P. is also to be arranged and delivery is to be arranged quick enough, so that there is no possibility of stock out.

o In this system, normally, recoupment is done on the fixed dates only. But if due to either heavy issues of the item or change in the activity, it is felt that total stock and dues are not sufficient to lastup to the contract period for which arrangement was made last, we may submit a supplementary estimate sheet. This estimate sheet, on many of the Railways, is known as Recoupment Sheet.

5.4.2.2 In this system, we have the following advantages:-

(i) Because the recoupments are made as per fixed time table, the possibility of lapse on the part of the ledger section is minimized and therefore timely replacement can be better monitored;

(ii) In this system, it is also possible to properly distribute the workload of recoupment in the depots and purchase work in the purchase office;

(iii) If a time table is laid down with adequate planning, we can get advantage of buying seasonal item at lower prices.

(iv) The demands from more than one depots for the same items can be combined in purchase office. This is possible because demands will be received in the purchase office at the same time as per the time table laid down.

(v) It is also possible to combine the demands of similar items into one purchase so long as the source of supply of the items is common. This will help in reducing the ordering costs substantially.

(vi) Due to adequate buffer, chances of stockout may also be minimized.

• However, this system is not most suitable for the purpose of inventory control because we cannot take advantage of optimum economical order quantities and therefore, is not suitable for items with high consumption value. However, this disadvantage can be overcome by taking delivery into various installments.

5.4.3. Some of the Railways are following a Hybrid system in which although stock recoupment sheets are prepared on fixed dates as per fixed time table, but advantage of economic order quantities are also taken.

• In this system, interim period, contract period or buffer stock are not fixed. Instead, minimum and maximum quantities are fixed based upon average lead time with adequate safety and economic order quantity respectively. Quantity to be recouped on the review date is worked out on the Maximum-Minimum formula explained in para 5.4.1 above. This system has all the advantages of periodic review system and may take care of inventory control problems also.