Materials Management

Concept

Prof. Mohan Mahurkar

2
 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.

3
 Examples
(As on 31 -03- 2003)
IPCA Britannia Salora
Laboratories International

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

Materials Rs. 218 Cr Rs 681 Cr Rs 282 Cr

= 45 % = 53 % = 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.

6
 Typical Drawing Sheet Management
Company Name of the Code of ComponentProduct
Component

END PLAN
ELEVATION
VIEW

40 nm

200 NM
50
nm
40
nm
Specification: Nos. pc: 1 DRG No: P 324051
Composition: Blank Size Model : 2
Hardness: 220 x 60 x 50
Prepared By: Checked By : Approved By :
Date: Date: Design Chief : Date: 7
 Company Process Sheet Component:
Code:
Sr. No M/c Operations Std. Time Tool Measuring Remarks
Min Tool

1 Lathe 03 Turn 120 DIA to 20 CT – 20 V.C

100……

2 Drilling 02 Drill 10 mm hole 12 D – 25 V.C

to depth 20 mm

3 Grinding Grind 100 mm 30 G–3 S.G

DIA
100 +/- 0.2

8
 Scope of Materials Management
Materials management includes the following:

a. Materials Planning
b. Production Control
c. Inventory Control
d. Purchase
e. Receiving & Inspection
f. Store Keeping
g. Shipping – Distribution of finished goods.
h. Materials Handling
i. Traffic / Transport
j. Physical Distribution ( to customers)
k. Scrap Control

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 EXAMPLE - B
Wrist Watch

Case Strap Dial Hands Components

Base Plate
BEZEL Hour Hand
Upper Piece Power
Black Cover Min. Hand Circuit
Lower Piece
CRYSTAL Sec Hand Train wheel
O - RING Lock Dial Base assembly
Indices Other
components
Day – Date Window

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 Sample format of Raw Material Master

Size Material reqd per

Sr Component Component Raw Material unit / for 100 Remarks
No Code units
Designation
Dia x Lth Mts kgs
Length Brdth
Thick

11
 Sample Format for Bought – Out Items

Sr. Description Component Qty. per unit Total Qty Remarks

No Code or per 100 including
units rejection

12
 Sample of Materials Requisition

Company Department Section No Date

Name

Sr No Component / Code Last Yr Stock Qty Reqd

Material Consn. Available 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
16
 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.

17
 Ordering
a. 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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 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

Purchase Organizational Logistics & supply Legal Purchase

Manual & Personnel chain management aspects accounting
functions
• Law of Audit
• Pur. Dept Orgn contract performance
• Mission • Inward transport
• Roles & • Legal evaluation
• Objectives responsibilities • Outward relationship
• Functions transport • Expenses
• Scope • Agreement
(purchasing) • accounting
Distribution TR.
• Responsibilities • Right personnel • Agents
on job • Sea / Air / Road • Costing
• Limitations  C&F
• Training & Devt
TR • Cost redn
• Financial Powers  Purchase
• Make or buy • Arrangers • Price fixing
decisions carriers Pvt /  Legal
• Sub – contracting Contract / • Performance
Common aspects evaluation
• Vendor rating
• Free on rail • Functional
• Leasing of
capacity (FOR)
• Personnel
• Disposal of • Free on board
surplus / scrap/ • Audit
(FOB)
redundant items/ • MIS
rejected items. • Arbitration &
• KRA Evaluation award
• Imports / Exports • Damage
• Petty Cash claims
Purchases
• Insurance
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• Demurrage
FLOW CHART FOR
PURCHASE
 Finished stock available Quantity Calculations Annual production plan
Compt stock in stores
Consumption & rejection data Purchase Requisition
for last 3 years Work in process
Advertisement call for tenders

Receipt of tenders / New vendors

Existing vendors
quotations
Appointment of
Tender opening tender committee

Preparation of comparative statement

Latest prices Negotiations Costing

elsewhere

Final quotations

Opening of LC Release of purchase orders Select 2 – 3 vendors

Receipt of materials Damages Insurance

Shortages
Inform
Inspection of materials Qty Rejected
Quantity rework purchase note
in inspection
Prepare inspection Quantity accepted report
report Report ( MI Slip)
Stores to A/c for
payments
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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
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 800 400 200 100 50

2
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. Details Order Quantities
No
1 Cost of items purchased each year 30000 30000 30000 30000 30000
(Rs)
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
A Maximum Inventory Level
700

B Us
600 ag
Us e ra t
Units of investment

ag e e
ra t
500 es
l op
e
C
400
D Average Inventory level
Reorder point
300

E Replenishment point Safety stock usage during

200 lead time
Lead
100 Time
Stock out

10 14 15 16 17
Months
A: Maximum level ( 700 units)
B: Average maximum level ( 600 units)
C: Average inventory level ( 400 units) ------- IMPORTANT
D: Re – order point ( 400 units )
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E: Replenishment point ( 250 units )
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. 30
4 Purchase dept cost to profit.
 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)
31
 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, 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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 Maximum Stock Level

REORDER LEVEL
Minimum Stock Level
Stock

Safety Stock Level

Period
39
 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
 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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 100 %

95 %

80 %
Consumption
In Rs

A B C

Percentage Of Items

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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 Cost
o st
ta lc
To
t
cos
g
r ryin
Cost ( Rs )

y Ca
tor
ven
In

Ordering Cost

EOQ

Quantity per order 45

 Mathematical Formula for EOQ
EOQ = 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
46
 Organization for Materials

GENERAL
MANAGER

CHIEF OF CHIEF OF CHIEF OF CHIEF OF

PRODUCTION MARKETING PERSONNEL MATERIALS

47
INTRODUCTION
JIT : Just in Time
KANBAN
MRP II
ERP
48