Materials Management Concept

Prof. Mohan Mahurkar

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 Laboratories
Net Sales Materials Rs. 486 Cr Rs. 218 Cr = 45 %

Britannia
Rs. 1295 Cr Rs 681 Cr = 53 %

Salora International
Rs. 341 Cr Rs 282 Cr = 83 %

Thus, the slightest efficiency improvement in the materials management releases substantial advantages
4

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.
5

Objectives of Material Management

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Procurement of materials at lowest prices. High rate of inventory turnover. To ensure continuity of supply . To maintain the consistency of quality. To minimize the acquisition & storing cost. Lower administrative cost. Maintenance of supplier relations. Development of new materials & sources. Efficient reporting. Development of personnel.
6

Typical Drawing Sheet Management

Company Name of the Component Code of Component Product

ELEVATION

END VIEW

PLAN

40 nm

200 NM 50 nm
40 nm Specification: Composition: Hardness: Prepared By: Date: Nos. pc: 1 Blank Size 220 x 60 x 50 Checked By : Date: DRG No: P 324051 Model : 2 Approved By : Design Chief :

Date: 7

Company
Sr. No
1

Process Sheet
Operations Std. Time Min
20

Component: Code:
Tool
Measuring Tool V.C

M/c

Remarks

Lathe 03

Turn 120 DIA to 100

CT 20

Drilling 02

Drill 10 mm hole to depth 20 mm

Grind 100 mm DIA 100 +/- 0.2

12

D 25

V.C

Grinding

30

G3

S.G

Scope of Materials Management

Materials management includes the following:
a. b. c. d. e. f. g. h. i. j. k. Materials Planning Production Control Inventory Control Purchase Receiving & Inspection Store Keeping Shipping Distribution of finished goods. Materials Handling Traffic / Transport Physical Distribution ( to customers) Scrap Control
9

EXAMPLE - B
Wrist Watch

Case

Strap

Dial

Hands

Components

BEZEL Black Cover CRYSTAL O - RING

Upper Piece Lower Piece Lock Dial Base

Hour Hand Min. Hand Sec Hand

Base Plate
Power Circuit Train wheel assembly

Indices
Day Date Window

Other components

10

Sample format of Raw Material Master

Size Sr No Component Component Code Raw Material Designation Dia x Leng th Lth Brdth Thick Material reqd per unit / for 100 units Mts kgs

Remarks

11

Sample Format for Bought Out Items

Sr. No

Description

Component Qty. per unit Code or per 100 units

Total Qty including rejection

Remarks

12

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

13

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.
14

Inputs to the system.

Annual production plan with product mix. Monthly production plan. Materials master. Design master. Materials requisition. 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 1. 2. 3. 4. 5. 6.
15

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
18

d. i. ii. iii. iv. v.

A normal purchase procedure will be as follows: Circulations of enquires. Receipt of quotations ( tenders ) Opening of tenders. Preparation of comparative statement. 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.
19

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.
20

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.
21

Controls
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Materials storage : racks, A/c, strong-room. Materials Handling. Storage of hazardous materials. Use of vertical space. Use of proper containers. Use of transport facilities : trolleys etc. Keeping records. Preparation of daily reports. Preparation of monthly and quarterly reports. Preparations of annual reports. Use of computers. Use of scientific techniques.
22

PURCHASING MANAGEMENT
Purchase Manual Organizational & Personnel functions
Pur. Dept Orgn Roles & responsibilities Functions (purchasing) Right personnel on job Training & Devt

Logistics & supply chain management

Legal aspects
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

Purchase accounting Audit performance evaluation

Expenses accounting Costing Cost redn

Mission
Objectives Scope Responsibilities Limitations Financial Powers

Inward transport
Outward transport Distribution TR. Sea / Air / Road TR Arrangers carriers Pvt / Contract / Common

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

Price fixing
Performance evaluation Functional Personnel Audit MIS

23

FLOW CHART FOR PURCHASE

Finished stock available

Quantity Calculations

Annual production plan Compt stock in stores

Consumption & rejection data for last 3 years

Purchase Requisition
Work in process Advertisement call for tenders Receipt of tenders / quotations Tender opening Preparation of comparative statement New vendors

Existing vendors

Appointment of tender committee

Latest prices elsewhere

Negotiations

Costing

Final quotations Select 2 3 vendors Damages Insurance Inform purchase note in inspection report

Opening of LC

Release of purchase orders Receipt of materials

Shortages Inspection of materials Quantity rework Prepare inspection report Quantity accepted Stores Report ( MI Slip) to A/c for payments Qty Rejected

25

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
26

= =

Inventory costs of different order quantities

Sr No 1 Details
Size of order units
1600

Order Quantities
800 400 200 100

2
3 4 5 6 7 8

Number of orders
Cost per order Rs Total ordering Costs Rs Carrying cost per units Rs Avg Inventory Order size 2

1
50 50 1 800

2
50 100 1 400

4
50 200 1 200

8
50 400 1 100

16
50 800 1 50

Total carrying cost Rs Total cost Rs ( item 4 + 7 )

800 850

400 500

200 400

100 500

50 850

Number of orders = Result :

Total inventory requirement / Order size Placing 4 orders of 400 units each, will result into a total cost of Rs. 400, which is the lowest and hence most economical.
27

Determination of EOQ
Sr. No 1 2 Details Cost of items purchased each year (Rs) Order Size ( Units ) Order Quantities 30000 30000 6000 3000 30000 1200 30000 1000 30000 600

3
4 5 6 7 8

Number of orders
Average Inventory ( Units ) Total Carrying Cost Total Ordering Cost Total Cost ( Rs ) ( Rs )

1
3000 3000 60 3060 848

2
1500 1500 120 1620 848

5
600 600 300 900 848

6
500 500 360 860 848

10
300 300 600 900 848
28

(5+6)

EOQ units

Re- order Point

700 600 500 400 300 E 200 100 C D Reorder point Replenishment point Safety stock usage during lead time B A

Maximum Inventory Level

Units of investment

Average Inventory level

Lead Time

Stock out

10

14

15

16

17

Months
A: Maximum level B: Average maximum level C: Average inventory level D: Re order point E: Replenishment point ( 700 units) ( 600 units) ( 400 units) ( 400 units ) ( 250 units ) ------IMPORTANT

29

SR NO
A 1 2 3 4 B 1 2 3 C 1 2 ORGANIZATION The department is quite productive.

ITEMS OF EVALUATION

YES

NO

The authority and responsibilities are class. Purchasing function is centralized. Purchase manager spends reasonable time in DIRECTING the staff. FORMS Materials requisitions forms are used Purchase order numbers are controlled and record is kept in a register Acceptance copies of P.O are filed RECORDS & FILES All P.O files are up to date. Filing system is perfect. etc

3
D 1 2 3 E 1 2 F 1 2 3 4 MIS

Price history records are kept.

SYSTEMS & PROCEDURES

etc

Production items are procured as per the procedure. Regular meetings are held for purchase of capital items Policies and directions are followed etc. etc.

Regular control reports are generated. Discrepancies are reported RATIOS CONTROLS Number of orders placed. Cost per order. Purchase to sales ratio. Purchase dept cost to profit. etc

30

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. 2. 3. 4. 5. 6. 7. 8. Excise notifications. Sales tax rules. Law of contract ( Indian Contract Act 1872 ) Law of agency ( ICA 1872) Negotiable Instrument Act 1881 ( HUNDI ) The Indian Arbitration Act 1899. Provisions regarding the carriage of goods by land, sea, air etc. 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.
Definition

Inventory Control

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.
32

Why inventories are essential ?

1. 2. 3. 4. 5. 6. For adequate customer service. To take advantage of price discounts by bulk purchasing. To make possible economics in transportation and clearing & forwarding charges. To maintain service stocks while replacement stocks are in transit. To serve as buffer in case of shop rejections and delayed deliveries. To maintain smooth supply chain .
33

Evils of Excess Inventory

a) Lock up of capital. b) Cost involved in carrying inventory storage place, personnel, recordsetc c) Risk of deterioration. d) Risk of obsolescence models change. e) Changes in prices If low, our loss.
34

Control Aspects
a. Elimination of certain inventories. b. Inventory levels fixing max, min. c. Periodic review.

35

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.
36

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 materialsetc.
37

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.
38

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 ) x 100

= 50 units.
40

Various Scientific Techniques

used in Inventory Control

A . Inventory Analysis
1 2 3 4 5 VED Analysis : SDE Analysis : HML Analysis : FSH Analysis : ABC Analysis :
42

Vital, Essential, Desirable Scarce, Difficult, Easily Available High, Medium & Low Cost Fast, Slow & Non - moving

100 % 95 % 80 %

Consumption

In Rs
A

C Percentage Of Items
43

B.
1. 2. 3. 4.

Inventory Carrying Cost

Interest Charges. Insurance Cost. Storage cost Rent for space and depreciation of building and equipment. Operational Costs.

5.

Obsolescence and deterioration.

44

Economic Ordering Cost

Cost ( Rs )

Ordering Cost

EOQ Quantity per order

45

Mathematical Formula for EOQ

EOQ = 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 2 A IC

EOQ =

2 x 36000 x 25 0.2 x 1

= 3000 units
46

Organization for Materials

GENERAL MANAGER

CHIEF OF
PRODUCTION

CHIEF OF
MARKETING

CHIEF OF
PERSONNEL

CHIEF OF
MATERIALS

47

INTRODUCTION
JIT : Just in Time
KANBAN MRP II

ERP
48