Materials Management Concept

Prof. Mohan Mahurkar

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Introduction

Materials Management is an indispensable core activity of all types of organizations, whether manufacturing, trading or even non profit organizations. All organizations are continuously involved in procurement , storage and stock replenishment of different types of production materials.

In a manufacturing organization , materials management assumes greater importance, though it also adds to the greater degree of complexities. In some of them the manufacturing organizations the cost of the materials varies from 40% to 80% of the production cost or sales.

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Examples

(As on 31 -03- 2003)

IPCA Laboratories

Britannia Salora International

Net Sales Rs. 486 Cr Rs. 1295 Cr Rs. 341 Cr

Materials Rs. 218 Cr

= 45 %

Rs 681 Cr

= 53 %

Rs 282 Cr

= 83 %

Thus, the slightest efficiency improvement in the materials management releases substantial advantages

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DEFINITION

Materials Management is a term to describe the grouping of management functions related to the complete cycle of materials flow, from the purchase and internal control of production materials to the planning and control of work in progress, to the warehousing, shipping and distribution of the finished product.

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Objectives of Material Management

1. Procurement of materials at lowest prices.

2. High rate of inventory turnover.

3. To ensure continuity of supply .

4. To maintain the consistency of quality.

5. To minimize the acquisition & storing cost.

6. Lower administrative cost.

7. Maintenance of supplier relations.

8. Development of new materials & sources.

9. Efficient reporting.

10. Development of personnel.

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Typical Drawing Sheet Management

Company Name of the Component

Code of Component

Product

200 NM

ELEVATION

40 nm

END VIEW

50 nm

40 nm

PLAN

Specification: Nos. pc: 1

Composition: Blank Size

Hardness: 220 x 60 x 50

DRG No: P 324051

Model : 2

Prepared By:

Date:

Checked By :

Date:

Approved By :

Design Chief : Date:

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Company Process Sheet Component:

Code:

Sr. No

M/c Operations Std. Time Min

Tool Measuring Tool

Remarks

1 Lathe 03 Turn 120 DIA to 100……

20 CT – 20 V.C

2 Drilling 02 Drill 10 mm hole to depth 20 mm

12 D – 25 V.C

3 Grinding Grind 100 mm

DIA

100 +/- 0.2

30 G – 3 S.G

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Scope of Materials Management

Materials management includes the following:

a. Materials Planningb. Production Controlc. Inventory Controld. Purchasee. Receiving & Inspectionf. Store Keepingg. Shipping – Distribution of finished goods.h. Materials Handlingi. Traffic / Transportj. Physical Distribution ( to customers)k. Scrap Control

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EXAMPLE - BWrist Watch

BEZEL

Black Cover

CRYSTAL O - RING

Upper Piece

Lower Piece

Lock Dial Base

Indices

Day – Date Window

Hour Hand

Min. Hand

Sec Hand

Base Plate

Power Circuit

Train wheel assembly

Other components

Case Strap Dial Hands Components

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Sample format of Raw Material Master

Sr No

Component Component Code

Raw Material

Designation

Size Material reqd per unit / for

100 unitsRemarks

Dia x

Length

Lth

Brdth

Thick

Mts kgs

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Sample Format for Bought – Out Items

Sr. No

Description Component Code

Qty. per unit or per 100

units

Total Qty including rejection

Remarks

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Sample of Materials Requisition

Company

Name

Department Section No Date

Sr No Component / Material

Code Last Yr

Consn.

Stock Available

Qty Reqd This Year

Remarks:When required and in

how much quantity

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2. Materials Planning

It is the scientific way of determining the requirements of various materials & items that go into meeting the production needs within the economic investment policies.

Objectives

1. Smooth flow of production.

2. Uninterrupted services in various fields,.

3. Prevention of stock outs.

4. Control excess inventory.

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Inputs to the system.

1. Annual production plan with product – mix.

2. Monthly production plan.

3. Materials master.

4. Design master.

5. Materials requisition.

6. Estimates of year ending, work-in-progress, finished goods inventory.

7. 3 years consumption pattern.

8. Rejection data.

9. Consumable requirement data.

10. Tools consumption data.

11. Source from where to be procured – imported or indigenous.

12. Safety stock, lead time etc

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Materials Purchase Request

Based on the above data, the materials planning section will prepare

“Materials Purchase Request” which will be examined by Material

Planning Head and the accounts and forwarded to purchase department.

Purchase

The basic objective of the purchase department is to ensure

continuity of supply of materials, tools and other items in order to have

uninterrupted production and at the same time to ultimately reduce the

cost of the finished goods

This function can be divided into:

•Pre – purchase.

•Ordering

•Post - purchase

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Pre – Purchase Activities

Purchase Dept. will plan their activities based on

a. Materials requisition.

b. Lead-time consideration.

c. Stock available – stores, work in progress, finished goods.

d. Funds availability.

After compiling the complete requirements, the purchase dept.

should work out a purchase budget and give details of A,B and C

class items budget, capital budget, spares budget, consumable and

other items as also stationery budget with a schedule. This will have

to be got sanctioned by the finance chief and unit chief.

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Orderinga. Based on requirement & scheduling for new items,

quotations will be called and for the existing items rate fixation will be done by negotiations.

b. Vendor rating will also be done.

c. Order will be placed on the approved vendors after due sanction of unit chief / materials chief, indicating rate and pattern of supply needed. The purchase order contains various terms and conditional about supply and payments

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d. A normal purchase procedure will be as follows:

i. Circulations of enquires.

ii. Receipt of quotations ( tenders )

iii. Opening of tenders.

iv. Preparation of comparative statement.

v. Discussions with tenderers & arriving at lowest quotation & befitting payment terms.

vi. Placement of orders.

vii. Order confirmation from vendors.

viii. Opening of letter of credit for imports.

ix. Receipt of materials.

x. Inspection, payments.

xi. Return of rejected items and getting replacement.

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Storing The objective of storing the materials is to ensure timely supply of

materials in the production cycle ensuring safety of the materials and

easy access.

Various functions of stores are:

1.Take into stock accepted materials.

2.Store them scientifically.

3.Have proper storage facilities to ensure that no damage is done to

materials.

4.Issue materials to requiring departments.

5.Maintain stock reports.

6.Storage of scrap from shops and its disposal.

7.Take physical verification periodically.

8.Disposal of rejected materials.

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Finished Goods Store

• Normally this store will be under the marketing department .

• The finished goods will be received and dispatched from here and stock reports maintained.

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Controls1. Materials storage :– racks, A/c, strong-room.2. Materials Handling.3. Storage of hazardous materials.4. Use of vertical space.5. Use of proper containers.6. Use of transport facilities :– trolleys etc.7. Keeping records.8. Preparation of daily reports.9. Preparation of monthly and quarterly reports.10. Preparations of annual reports.11. Use of computers.12. Use of scientific techniques.

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PURCHASING MANAGEMENT

Purchase Manual

Organizational & Personnel

functions

Logistics & supply chain management

Legal aspects

Purchase accounting

Audit performance

evaluation• Mission

• Objectives

• Scope

• Responsibilities

• Limitations

• Financial Powers

• Pur. Dept Orgn

• Roles & responsibilities

• Functions (purchasing)

• Right personnel on job

• Training & Devt

• Make or buy decisions

• Sub – contracting

• Vendor rating

• Leasing of capacity

• Disposal of surplus / scrap/ redundant items/ rejected items.

• KRA Evaluation

• Imports / Exports

• Petty Cash Purchases

• Inward transport

• Outward transport

• Distribution TR.

• Sea / Air / Road TR

• Arrangers carriers Pvt / Contract / Common

• Law of contract

• Legal relationship

• Agreement

• Agents

C & F

Purchase

Legal

aspects

• Free on rail (FOR)

• Free on board (FOB)

• Arbitration & award

• Damage claims

• Insurance

• Demurrage

• Expenses accounting

• Costing

• Cost redn

• Price fixing

• Performance evaluation

• Functional

• Personnel

• Audit

• MIS

FLOW CHART FOR PURCHASE

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Quantity Calculations

Purchase Requisition

Advertisement call for tenders

Receipt of tenders / quotations

Tender opening

Preparation of comparative statement

Negotiations

Final quotations

Release of purchase orders

Receipt of materials

Inspection of materials

Quantity accepted

Stores

Finished stock available

Consumption & rejection data for last 3 years

Latest prices elsewhere

Opening of LC

Shortages

Quantity rework

Prepare inspection report

Annual production plan

Compt stock in stores

Work in process

New vendors

Appointment of tender committee

Costing

Select 2 – 3 vendors

Damages Insurance

Qty Rejected Inform purchase note in inspection

report

Report ( MI Slip) to A/c for payments

Existing vendors

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Economic Ordering QuantityFormula:

EOQ = 2AB C

A = Usage unit for the inventory planning period ( Total inventory requirement in the units)

B = Buying cost per unit. C = Carrying cost per unit.

EOQ = 2 x 1600 x 50 1

= 160000

= 400 units

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Inventory costs of different order quantities

Sr No

Details Order Quantities

1 Size of order units 1600 800 400 200 100

2 Number of orders 1 2 4 8 16

3 Cost per order – Rs 50 50 50 50 50

4 Total ordering Costs – Rs 50 100 200 400 800

5 Carrying cost per units – Rs 1 1 1 1 1

6 Avg Inventory Order size

2

800 400 200 100 50

7 Total carrying cost – Rs 800 400 200 100 50

8 Total cost – Rs ( item 4 + 7 ) 850 500 400 500 850

Number of orders = Total inventory requirement / Order size

Result : Placing 4 orders of 400 units each, will result into a total cost of Rs. 400, which is the lowest and hence most economical.

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Determination of EOQ

Sr. No

Details Order Quantities

1 Cost of items purchased each year (Rs)

30000 30000 30000 30000 30000

2 Order Size ( Units ) 6000 3000 1200 1000 600

3 Number of orders 1 2 5 6 10

4 Average Inventory ( Units ) 3000 1500 600 500 300

5 Total Carrying Cost ( Rs ) 3000 1500 600 500 300

6 Total Ordering Cost ( Rs ) 60 120 300 360 600

7 Total Cost ( 5 + 6 ) 3060 1620 900 860 900

8 EOQ units 848 848 848 848 848

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Re- order Point

700

600

500

400

300

200

100

10 14 15 16 17

B

C

D

E Replenishment point

Usage rate

Lead Time

Usage rate slope

Reorder point

Safety stock usage during lead time

Stock out

Average Inventory level

Un

its

of

inv

estm

en

t

MonthsA: Maximum level ( 700 units)

B: Average maximum level ( 600 units)

C: Average inventory level ( 400 units) ------- IMPORTANT

D: Re – order point ( 400 units )

E: Replenishment point ( 250 units )

A Maximum Inventory Level

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SR NO ITEMS OF EVALUATION YES NO

A ORGANIZATION

1 The department is quite productive.

2 The authority and responsibilities are class.

3 Purchasing function is centralized.

4 Purchase manager spends reasonable time in DIRECTING the staff.

B FORMS

1 Materials requisitions forms are used

2 Purchase order numbers are controlled and record is kept in a register

3 Acceptance copies of P.O are filed etc

C RECORDS & FILES

1 All P.O files are up to date.

2 Filing system is perfect.

3 Price – history records are kept. etc

D SYSTEMS & PROCEDURES

1 Production items are procured as per the procedure.

2 Regular meetings are held for purchase of capital items etc.

3 Policies and directions are followed etc.

E MIS

1 Regular control reports are generated.

2 Discrepancies are reported etc

F RATIOS – CONTROLS

1 Number of orders placed.

2 Cost per order.

3 Purchase to sales ratio.

4 Purchase dept cost to profit.

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Legal aspects of purchasing Purchase function involves a large sum of money. Also it deals with various agencies like

suppliers, sub contractors, transporters, agents, government bodies like DGS & D, excise,

sales tax ..etc. Hence, it is essential to know various laws and regulations. Some of them

are:

1. Excise notifications.

2. Sales tax rules.

3. Law of contract ( Indian Contract Act 1872 )

4. Law of agency ( ICA 1872)

5. Negotiable Instrument Act 1881 ( HUNDI )

6. The Indian Arbitration Act 1899.

7. Provisions regarding the carriage of goods by land, sea, air …etc.

8. Customs Notifications.

9. Use of patented items.

10. Works Contract.

Refer: Integrated materials management by M.D Patel, Chunawalla & DR Patel ( NMIMS Library)

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7. Inventory ControlDefinition

Inventory in wider sense is defined as any “IDLE

RESOURCE” of an enterprise. It is commonly used to

indicate materials – raw, in-process, finished, packing

materials, spares etc. Stocked in order to meet an

expected demand or distribution in future.

Even though inventory of materials is an idle resource,

in the sense it is not meant for immediate use, it is almost

a necessity to maintain some inventories for the smooth

functioning of an organization.

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Why inventories are essential ?1. For adequate customer service.

2. To take advantage of price – discounts by bulk

purchasing.

3. To make possible economics in transportation and

clearing & forwarding charges.

4. To maintain service stocks while replacement stocks are

in transit.

5. To serve as buffer in case of shop rejections and delayed

deliveries.

6. To maintain smooth supply chain .

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Evils of Excess Inventory

a) Lock up of capital.

b) Cost involved in carrying inventory –

storage place, personnel, records…etc

c) Risk of deterioration.

d) Risk of obsolescence – models change.

e) Changes in prices – If low, our loss.

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Control Aspects

a. Elimination of certain inventories.

b. Inventory levels fixing – max, min.

c. Periodic review.

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Inventory Control & Its Advantages

a) Keeping the investment low.

b) Ensures timely availability.

c) Allows full advantage of economics.

d) Reduces “ Stock – Out ” chances.

e) Increased Profitability.

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Types of Inventories

a) Production inventories.

b) Maintenance and repair inventories.

c) In – process inventories ( WIP ).

d) Finished goods inventories.

e) Redundant goods inventory – viz:

Plant & machinery, Equipments, Spares, R/M,

Components, Packing materials…etc.

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Scientific Stock Levels

Since inventory blocks the funds, it is essential

to keep “ optimum levels ” of inventories. The

ordering should be linked accordingly. Also “ lead

time ” is to be considered.

1. Fixed Interval System – monthly ..etc

2. Fixed Order Quantity System – consumption.

3. Safety Stock.

4. Minimum Stock.

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Sto

ckMaximum Stock Level

REORDER LEVELMinimum Stock Level

Safety Stock Level

Period

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Safety Stock Calculations( Example )

Suppose for an item, monthly consumption

is 100 units, the normal lead time is 15

days and maximum lead time is 1 month,

then safety stock is

= ( 1 – ½) x 100

= 50 units.

Various Scientific Techniques

used in Inventory Control

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A . Inventory Analysis

1 VED Analysis : Vital, Essential, Desirable

2 SDE Analysis : Scarce, Difficult, Easily Available

3 HML Analysis : High, Medium & Low Cost

4 FSH Analysis : Fast, Slow & Non - moving

5 ABC Analysis :

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A B C

Percentage Of Items

Co

nsu

mp

tio

n

In R

s100 %

95 %

80 %

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B. Inventory Carrying Cost

1. Interest Charges.

2. Insurance Cost.

3. Storage cost – Rent for space and

depreciation of building and equipment.

4. Operational Costs.

5. Obsolescence and deterioration.

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Economic Ordering CostC

ost

(

Rs

)

Quantity per order

Total cost

Inventory Carrying cost

Ordering Cost

EOQ

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Mathematical Formula for EOQEOQ = 2 A IC

Where, A : Ordering cost / Order. EOQ : Economic Order Quantity. : Total quantity ordered or annual consumption. I : Inventory carrying cost / Annum. C : Cost per unit in Rupees

Say, = 36000 I = 20 % A= Rs 25 C= Rs 1

EOQ = 2 x 36000 x 25 0.2 x 1

= 3000 units

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Organization for Materials

GENERAL MANAGER

CHIEF OFPRODUCTION

CHIEF OFMARKETING

CHIEF OFPERSONNEL

CHIEF OFMATERIALS

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INTRODUCTION

JIT : Just in Time

KANBAN

MRP II

ERP