Materials Management Concept Prof. Mohan Mahurkar
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Materials Management
Concept
Prof. Mohan Mahurkar
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Introduction
Materials Management is an indispensable core activityof all types of organizations, whether manufacturing,trading or even non profit organizations. All organizationsare continuously involved in procurement , storage andstock replenishment of different types of productionmaterials.
In a manufacturing organization , materials managementassumes greater importance, though it also adds to the
greater degree of complexities. In some of them themanufacturing organizations the cost of the materialsvaries from 40% to 80% of the production cost or sales.
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Examples
(As on 31 -03- 2003)
IPCALaboratories
Britannia SaloraInternational
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 managementreleases substantial advantages
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DEFINITION
Materials Management is a term to describe the
grouping of management functions related to thecomplete cycle of materials flow, from thepurchase and internal control of productionmaterials to the planning and control of work inprogress, to the warehousing, shipping anddistribution 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
ENDVIEW
50nm
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.TimeMin
Tool MeasuringTool
Remarks
1 Lathe 03 Turn 120 DIAto 100……
20 CT – 20 V.C
2 Drilling 02 Drill 10 mmhole to depth20 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 Planning
b. Production Control
c. Inventory Controld. Purchase
e. Receiving & Inspection
f. Store Keeping
g. Shipping – Distribution of finished goods.
h. Materials Handlingi. Traffic / Transport
j. Physical Distribution ( to customers)
k. Scrap Control
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EXAMPLE - B
Wrist 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
PowerCircuit
Train wheel
assembly
Othercomponents
Case Strap Dial Hands Components
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Sample format of Raw Material Master
SrNo
Component ComponentCode
Raw Material
Designation
Size Material reqdper unit / for
100 unitsRemarks
Dia x
Length
Lth
BrdthThick
Mts kgs
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Sample Format for Bought – Out Items
Sr.No
Description ComponentCode
Qty. per unitor per 100
units
Total Qtyincluding
rejection
Remarks
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Sample of Materials Requisition
Company
Name
Department Section No Date
Sr No Component / Material
Code Last Yr
Consn.
StockAvailable
Qty ReqdThis Year
Remarks:When required and in
how much quantity
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2. Materials Planning
It is the scientific way of determining therequirements of various materials & items thatgo 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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Ordering
a. Based on requirement & scheduling for newitems, 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 lowestquotation & 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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StoringThe objective of storing the materials is to ensure timely supply of
materials in the production cycle ensuring safety of the materials andeasy 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 themarketing department .
• The finished goods will be received and
dispatched from here and stock reportsmaintained.
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Controls
1. 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
PurchaseManual
Organizational& Personnel
functions
Logistics & supplychain management
Legalaspects
Purchaseaccounting
Auditperformance
evaluation• Mission
• Objectives
• Scope
• Responsibilities
• Limitations
• Financial Powers
• Pur. Dept Orgn
• Roles &responsibilities
• Functions(purchasing)
• Right personnel
on job
• Training & Devt
• Make or buydecisions
• Sub – contracting
• Vendor rating
• Leasing ofcapacity
• Disposal ofsurplus / scrap/redundant items/rejected items.
• KRA Evaluation
• Imports / Exports
• Petty CashPurchases
• Inward transport
• Outwardtransport
• Distribution TR.
• Sea / Air / RoadTR
• Arrangerscarriers Pvt /Contract /Common
• Law ofcontract
• Legalrelationship
• Agreement
• Agents
C & F
Purchase
Legal
aspects
• Free on rail(FOR)
• Free on board(FOB)
• Arbitration &award
• Damageclaims
• Insurance
• Demurrage
• Expensesaccounting
• Costing• Cost redn
• Price fixing
• Performanceevaluation
• Functional
• Personnel
• Audit
• MIS
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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 datafor last 3 years
Latest priceselsewhere
Opening of LC
Shortages
Quantity rework
Prepare inspectionreport
Annual production plan
Compt stock in stores
Work in process
New vendors
Appointment oftender committee
Costing
Select 2 – 3 vendors
Damages Insurance
Qty RejectedInform
purchase notein inspection
report
Report ( MI Slip)to A/c forpayments
Existing vendors
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Economic Ordering Quantity
Formula: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
SrNo
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 eachyear (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
1014 15 16 17
B
C
D
E Replenishment point
LeadTime
Reorder point
Safety stock usage duringlead time
Stock out
Average Inventory level
U n i t s o f i n v e s t m e n 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 purchasingPurchase 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 Control
Definition
Inventory in wider sense is defined as any “IDLE
RESOURCE” of an enterprise. It is commonly used to
indicate materials –
raw, in-process, finished, packingmaterials, 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 essentialto 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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S t o c
k
Maximum 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.
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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
Available3 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
C o n s u m
p t i o n
I n R
s
100 %
95 %
80 %
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B. Inventory Carrying Cost
1. Interest Charges.
2. Insurance Cost.
3. Storage cost – Rent for space anddepreciation of building and equipment.
4. Operational Costs.
5. Obsolescence and deterioration.
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Economic Ordering Cost
C o s t
( R s
)
Quantity per order
Ordering Cost
EOQ
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Mathematical Formula for EOQEOQ = 2 A
ICWhere,
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 250.2 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