MATERIAL MANAGEMENT

Material Management This management is concerned with flow of material

in organisation. It uses functions like production, storing, moving , distributing, dispatch etc.

Aims/Functions of Material Management-Planning & control of materialPurchasing & stock keeping of materialDistribution and allocation of materialDisposal of materialInventory- It is collective stock of items that are

needed for routine functioning of industry.Way of keeping material so that manufacturing do

not stops.Buffer Stock- It is minimum assured stock available in

inventory. Its stock of materials maintained to avoid effect of no stock.

Classification of InventoryRaw material Inventory: Material on which operations will

be performed. E.g. wood, rubber, etc.Semi finished material inventory: Work in progress

material inventory. Material is halfly processed and is waiting for next process

Finished material inventory: These material are ready for dispatch.

Indirect Inventory:Tools inventory: Tools needed for operations in

manufacturing. E.g. Drills, cutters, solder, construction tools etc.

Machinery spares inventory: Spares needed to be used during repair, breakdown of machines.

Supplies Inventory: They support activities but don’t go in to product. E.g. Stationary, oils, electric cables, welding rods

Standard parts Inventory: The parts bought out from market are ‘Standard Parts’. Nut bolts, washers etc.

Objectives of inventory managementOperational Objectives: To ensure

continuous supply of materials, spares and finished goods. So that production is ready and no delay in customer demand.

Financial Objectives: To maintain inventories at optimum level as needed by operational and sales activities.

To keep cost under controlProperty Protection objectives: To

safeguard inventory from theft, damage, wastage, unauthorized use etc.

ABC AnalysisAlso called as Always Better Control

A items purchased in small quantities

B items purchased in intermediate quantities

C items purchased in sufficient quantities

Category of Items

Quantity of Items

Importance due to consumption

Importance

A 10-20% 70-80% Outstandingly

B 15-25% 10-20% Average

C 65-75% 5-10% Unimportant

Steps to do ABC analysisSteps

Prepare list of all items & estimate their annual consumption

Determine unit price of each item

Obtain annual consumption in rupees by multiplication

Arrange items in descending order

Calculate cumulative annual usage and number of items in %

Draw the Graph

Classify in A,B,C categories

Decide the policies of Inventory Control

Economic Order QuantityKeeping optimum stocks in inventory is economical.

Stock availability depends on consumption rate of each department, previous stock and new purchased stock.

If stock is more than requirement then inventory cost is more.

It creates balance between annual inventory carrying cost and annual procurement cost.

Assumptions in EOQ:a. Ordering cost is constantb. The rate of demand /consumption is knownc. Inventory carrying cost is proportional to size of

inventoryd. Quantity discounts are not availablee. Lead time is zero. (Its difference between time of

placing replenishment order and actually receiving items in stock)

Quantity to be ordered(EOQ) depends on two type of costsA. Procurement Costs: It includesa. Receiving quotationsb. Cost of processing quotationc. Cost of issuing purchase orderd. Follow up and complete

purchase orderse. Receiving, inspecting and

stocking of materialf. Stationaryg. Processing vendor’s invoice

B. Inventory Carrying Cost-More you hold inventory more is increase in cost.It includesa. Storage costb. Handling costc. Taxes d. Interest charges, property tax, administrative

taxC. Under stocking cost: Any item short or out of

stock then this cost occurs. Extra cost due to sudden purchase are added.

D. Over stocking cost: If stock is more than required then more space is needed for storage. Capital gets locked in extra material. Due to storage for more duration , inventory carrying cost increases.

Buffer StockAlso known safety stock.It is reserved stock in inventoryUps and down in consumption are absorbed

by buffer stock. Limitations of EOQAfter calculations also it is difficult to order odd

number of items.EOQ is not whether item is difficult to get, we

have to adjust the order.EOQ value must be altered as per our

convenienceIf we get discount on large order then why

EOQ?

Purchase ProcedureObjectives of Purchasing:1. To procure right material: Material to be

purchased should be examined and compared with competitors.

2. To maintain continuity of to supply to support manufacturing schedules

3. To avoid wastage, duplication & obsolescence with respect to material

4. To invest minimum inventory5. Purchasing correct material at

reasonable rates.6. To develop alternative sources of supply

Functions/Duties of Purchasing Department

1. Receiving proper material requisition2. Analyze material specification for

simplification standardizing3. Calling quotations, check legal conditions of

contract.4. Maintaining of records 5. Checking material6. Packing order 7. Inspection of purchase material to ensure

quantity and quality.8. Maintain updated price list of all material9. Maintenance of vendor/performance record

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Steps in purchasing Material requisition

Request for quotation

Market analysis of material suppliers

Finalization of supplier(Select best quotation)

Purchase Order

Material receiving Inspection

The requirement of material is given to stores or purchase department through stores.

All details of required item, quantity, specification are mentioned in requisition.

Original copy is kept to purchase, one copy to stores and other copy is retained by department.

List of suppliers is made who deal with business of that item

Then quotation request is sent to these suppliers A comparative statement of rates, terms & conditions

in quotation are analyzed. A supplier is selected and order is placed to that firm after studying samples, rates, other conditions,

mentioning dates by which material will be received. Copy of PO is sent to stores, requisitioner, accounts

dept. and to inspection department. After material is received detailed inspection is done.

Then bill is passed and payment is given

Types of Purchase Purchasing as per requirement: It is sudden purchasing in

urgent conditions. Also known as ‘Hand to mouth purchasing’.

Purchasing for specific period: Only specific items are purchased to satisfy need of specific period. No sudden decision of purchasing are taken.

Market purchasing: Systematic study of material requirement is done. Market survey is needed.

Contract purchasing: Suppliers are already finalized. Huge supply contract is given. Definite period is fixed for contracts.

Central purchasing: Purchasing for many sections, departments or plants can be done centrally. Discipline of purchase is implemented. Local corruption is restricted. Discounts are large.

Through DGSD(Director general of supplies and disposals): It is central purchasing organization for purchasing activity. At cheap rates material is provided. Rates of supply is defined & care is taken to provide material in time

Searching and sourcesSearch for suppliersVisit industriesBuyer’s guideIndustrial exhibitions like EXPO, IMTEX.Survey of Industry’s directory published

by MCCIA or other such agencyVisiting cards received in various

operationsClose study of industrial and

commercial journals

Selection of sources for purchasingMaterial qualityPricing discountsSeriousness about supplySupplier status in marketFinancial background of companyFlexibility in various supply issuesReady to negotiate on termsMajor customers of that supplierService warrantyPast records of companyReadiness to accept new technologyTesting methods usedWiilingness to provide support in difficulties

Difference Procurement Purchasing

Strategic function Administrative function

Procurement includes transaction of goods and services, bargaining, logistics, sourcing etc.

It includes actual transaction of goods and services

Systematic process Routine process

Scientific method to get material at right time from right place at minimum cost and good quality

Traditional method of getting goods from market

Material resource planning“A planning technique that calculates material

requirements and schedules supply to meet changing demand across all products and parts”

MRP converts master or main schedule of final products into a detailed schedule for raw material and components used to produce final product.

Major purpose of MRP is to make sure right material is components and required material is available in right time and right place

MRP concentrates not only on demand but also on timing of inventory demand.

MRP determines quantity and timing for material planning

MRP

Master production schedule

MRP

Forecast of demands

from estimates

Firm order from

known customersEngg. Design

changes

Aggregate product

plan

Bill of material

fileInventory record file

Inventory transacti

ons

Purchase file(buy)

Capacity plan(make)

Functions of MRPBased on sales forecast and orders MRP takes

information fro three sources:1. Master production schedule(MPS)2. Bill of material 3. Inventory record fileThese sources calculateWhat parts are to be made or brought? (Purchasing

plan)(MRP determines raw material and components required to get end product)

How many of these parts we need?(Capacity plan) (MRP identifies quantities of each raw material and required components)

When must be parts available? (Detail manufacturing schedule) (MRP determines when item must be ordered and delivered to complete production schedule for final products)

Inputs to MRP1. The master production schedule consists

of What end products are to be produced? How many of each product is to be

produced? When the products shall be ready for

dispatch? Master production schedule It consist crucial information needed for

effectiveness of MRP. MRP generates invalid priorities for manufacturing and purchasing.

Master production schedule

Material Production schedule Week No. 1 2 3 4Product P1 75 Product P2 50 200Product P3 100

Bill of MaterialIt has list of components parts and

sub assemblies needed to produce final product.

P1

S1(2)

C1(1) C2(2)

S2(1)

C3(1)

Bill of materialLead time is required to

manufacture or purchase a component or subassembly

Lead Time (Days) Finished product

P1 1

Sub assembly S1

2

Sub assembly S2

1

Components for

subassemblies C1

1

Components for subassemblies

C2

2

Components for subassemblies

C3

1

Inventory record fileIt keeps track of inventory status

for each item in database. It keeps record of gross

requirement, scheduled receipt, in hand orders and planned orders at various time periods

Inventory record file.

Inventory Record File Part name:

Part No. Lot Size:

Lead time:

Safety stock:

Scrap allowance:

Period 1 2 3 Total

Inventory Status Segment

Gross requirement

Schedule receiptAvailable in handPlanned orders

Steps in MRPMaster production schedule specifies final

products to be manufactured and their delivery dates.

Bill of material tells components needed for each product

Inventory record file has information on current and future inventory stats of each component

MRP Program computes how many of each component and raw material are needed to manufacture

PI needs 200 units of S1&100units of S2

DAY

1 2 3 4 5 6

P1Required 100

Order Placement

100

DAY

1 2 3 4 5 6

S1Required 200 Order Placement

200

S2

Required

100

Order Placement

100

First number of P1 are scheduled. We have to place order in 5th week to get material in 6th week

We have to schedule sub assemblies S1 and S2 that make P1

Final material requirement plan

DAY 1 2 3 4 5 6

P1 Required 100Order Placement

100

S1

Required

200

Order Placement

200

S2Required 100Order Placement

100

MRP OutputsThe purchasing plan and schedule:

It lays out prepared when purchase orders should be released and when purchased items must be received to meet production dates.

Capacity Plan or Production Schedule: It has details of start and completion dates for steps of production process

Benefits and Errors of MRP Benefits:

Minimum level inventoriesMaterial tracking becomes easyReduced purchase costReduced overtimeBetter machine utilizationBetter inventory turnoverNo shortage issueCorrect time to products as per demandErrors: Following information sources may show errors if

incorrect Master plan scheduleBill of material Inventory status & InventoryWork in progress dataLead timesProduction sizeSafety stock levels and times

Enterprise Resource PlanningIt is computer based system designed to

integrate various activities and operations in company.

ERP puts all department data and processes in one place.

Features: No need of dependency for periodic updates Common database Each department is able to access system Main function is flow of information between all

business functions of organization Decision making gets easier Transparency in operations Duplication and repetition of work avoided

ERP ModulesERP finance module: Financial data from

various departments is collected. Using this data financial reports (balance sheet, general ledger) are prepared.

ERP Human resource Module: It mains complete employees database. Database contains contact information, salary details, attendance, performance evaluation, career of employees.

ERP Purchase Module: It makes systematic flowchart of required material. It processes identifying of suppliers, billing, awareness of purchase orders.

ERP of sales and marketingERP inventory modue