FINANCIAL MANAGEMENT & COST ACCOUNTING

Lesson 43. CODIFICATIONS AND STANDARDISATION

Module 7. Inventory management

Lesson 43

CODIFICATIONS AND STANDARDIZATION

43.1 Introduction

Due to the growth of industrial activity and diverse kind of industrial requirements, a large no. of organizations have to store a large number of items, often running into several thousands and even lacks. Therefore, there should be some means of identifying them. A common practice is to describe the items by individuals’ names. Since several departments use the same item, they call the same item by different names and store them in different places. One of the most useful techniques of “Materials Management’’ is a rationalized codification system for properly classifying equipments, raw materials, components and spares to suit to the particular needs of any organization.

43.2 Codification

An article of stores is identified by its simple description or nomenclature. Difficulty arises when the same article is known by different names. For example, chipping goggles, grinder goggles, or white goggles are one item but may be stored separately under same nomenclature as different items. One storekeeper might classify an item as Sal Ammoniac, whereas a research chemist might identify it under the name of Ammonium Chloride, only to be told that it is not available.

The need for Codification arises because of the following reasons:

(i) Speed,

(ii) Unambiguity,

(iii) Saving of Effort,

(iv) Space Saving on forms,

(v) Ease of classification,

(vi) Mechanization.

Characteristics of Codes

As far as possible uniform dimension say, the metric system should be adopted.

i) Code should be Simple.

ii) Code should be unique.

iii) Coding should be compact, concise and consistent.

iv) Code should be sufficiently flexible to meet future demands.

An ideal material code should

i) Identify commodities

ii) Name commodities

iii) Specify commodities

iv) Classify commodities

v) Indicate inter-relationships between commodities

vi) Indicate the source of origin of commodities

vii) Refer specifically to an individual and unique commodity.

viii) Retrieval and Transaction

ix) Processing System

43.3 Codification Systems

One of the prerequisites of classification and codification is to know the basic nature and characteristics of all materials used in an enterprise and then classify them in broad categories and then to group and sub-group them in logical progression of kinds, type and sizes etc. As for example, Raw materials, Semi-processed Materials, Mechanical (Products and equipment), Electrical (products and equipments), Chemicals (Allied products and chemical processing equipment), Laboratory and office (equipment and supplies) etc. can be classified, grouped and sub-grouped first.

Therefore, codification is a process of representing each item by a number, the digits of which indicate the group, the subgroup, the type and the dimension of item. The first two digits normally represent the major groups, such as raw tools, oil stationery, etc. The next two digits indicate the sub-groups, such as ferrous, non-ferrous, etc. Dimensional characteristics of length, width, head diameter usually constitute the further three digits and the last digit is reserved for minor variations.

Some of the systems of codification are:

Arbitrary Systems

Arbitrary system as the word ‘arbitrary’ indicates is based on the serial number under which a material is received and the same is allotted as a code number. Using this approach, all inventory items are simply assigned arbitrary numbers in sequence as they are added to the stores account. Each item thus has a discrete number, but it bears no systematic relationship to the numbers assigned to related items. Two similar items or two mating parts may have numbers several thousand digits apart. For example, if bolts are received and suppose a number 2521has already been allotted to the previous item received, then the code number of these bearings will be 2522. This system has the advantage that there is no fixed limit for codifying any number of items. The main disadvantage is that one cannot know the characteristics or history of the items. This is the reason why the system is not popular.

Mnemonic System

A mnemonic system functions much like a numerical system. However, it combines numeric and alphabetic notations in its symbols. For example, the carriage-bolt described under the numerical system in the following manner:

P Fa BCS 503

P denotes a purchased part, Fa is a fastener, BCS stands for bolt, carriage, with a square neck, and 503 represent the specific number of the bolt. Mnemonic systems, particularly where a small number of items are involved, frequently make visual identification easier because they are more descriptive and they are often shorter. As more and different types of items are added to the inventory, however, this advantage diminishes because the numbers of good symbols are limited.

Brisch System

The Brisch system consists of seven digits applied in three stages. The items are grouped into suitable preliminary categories, such as assemblies, sub-assemblies, components and off the shelf items. After these preliminary categories, items are grouped within the respective class in order to bring similar items together. The Brisch system through it consists only of seven digits, is quite comprehensive as the basis is on logical major groupings.

Kodak System

The Kodak system consists of 10 digits of numerical code. The logic of major grouping is based on sources of supply. All materials are divided into 100 basic classifications, contributed only by procurement considerations. For instance, a bolt is listed as hardware item if this is listed in hardware catalogues and available with hardware suppliers. If this bolt is available as a part of the machine, it will be available under maintenance.

43.4 Standardization

Mass production techniques of industrial production are based on the principle of uniformity and interchange ability of many parts, components and material used in the production process. Standard products can be manufactured on a mass scale and their production cost can be kept minimum. Standardisation leads to cheaper and easier procurement and cost of replacement can also be reduced.

In our country Indian Standards Institution (ISI), now known as the Bureau of Indian Standards (BIS), is the national body which deals with standardisation at national level. There are various committees dealing with different industries who formulate national standards.

BIS in collaboration with NTH (National Test House) and with the help of their control laboratories they issue the ISI certification mark, which is a third party and is accepted nationally as a proof of standard quality. Some of the international standards are British Standard (BS), American Standards Association (ASA) or the American Society for Testing Materials (ASTM). However, all the industrially advanced countries in the world have their own national standards. International Standards Organization (ISO) with its HQ at Geneva, issues international specifications. India being a member of ISO is a general acceptance as to be desirability of standardization, there is no possibility of complete standardization.

The Codex Alimentarius Commission was created in 1963 by FAO and WHO to develop food standards, guidelines and related texts such as codes of practice under the Joint FAO/WHO Food Standards Programme. The main purposes of this Programme are protecting health of the consumers and ensuring fair trade practices in the food trade, and promoting coordination of all food standards work undertaken by international governmental and non-governmental organizations. Codex texts are voluntary and non-binding. In international trade disputes, Codex standards and guidelines may be cited as reference texts at the World Trade Organisation (WTO). By introducing legislation and regulation that is consistent with Codex standards and guidelines governments may reduce the risk of being brought before a WTO Disputes Panel. A Government can adopt its own level of protection, e.g. go beyond or stop short of Codex. If a government chooses a higher level of protection, and in the event of a trade dispute, it may be required to justify the sanitary measure corresponding to its chosen level of protection on scientific, health, or other legitimate grounds. In many countries, most food legislation is already consistent with Codex.

In the field of stores and material management, standardisation enables industry to proceed on scientific lines to locate factors influencing preparation of inventory control programmes, for achieving economy of materials and parts, avoiding wastages, disposal of unwanted stores and reduction in stock. Again through standardisation and variety reduction, rationalized codification becomes easier. The role of standardisation and variety reduction in inventory simplification has therefore real significance in industrial materials management field.