Introduction

• What is Material?
– Goods
– Services
• Purchased or otherwise procured from sources
outside the organization
• Used or processed for products
Construction Management • Material management is different for factory and
construction industry
Keyur Nagecha
Department of Civil Engineering •?
V. V. P. Engineering College: Rajkot

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Introduction Introduction:
• Factory: • Construction project:
– Standard product – Unique
– Permanent location – Content
– Permanent process – Nature of execution
– Possible long term planning – Transit location
– Increase in raw material cost can be passed to – Temporary
customer through increase in sales price – Predetermined cost at the start of project
• Example ? • Utmost care in material procurement
• Ensure cost provisions are not overrun.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Introduction: What is material management?
• Materials required for construction project • Material management deals with managing of
– ????? materials along with costs.
• Classified as
– Capital equipment • The main task of material management is
– Construction machineries – to reduce the cost that is to be incurred on
– Consumables materials to the maximum extend,
• Can also be classified as – such that,
– Capital items
• Plant, machinery, vehicles, office equipment, land and – the final products are more competitive and to
building increase the profit of the organization.
– Revenue items
• Tools, consumables, electrical items, construction
materials, spares etc…

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Importance of Material Management Importance of Material Management

• Why MM is important? • Economy is very important
– Construction Cost • The major resources in construction are:
overhead tax profit
– Machines
5% 5% 5% – Materials
POL
5% – Men/labours/workers
– Money
– Referred as four M’s
Mateial Cost
55%
– These are the inputs of any activity
Labour cost
• Output will be either goods or services
25% • To gain maximum profit, the output should be
optimised with the given input.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Importance of Material Management
• Optimisation can be on any four M’s.
• Reduction in manpower & in the machines is not
recommended
• Money is always scarce
• Hence to achieve economy optimisation is only
possible with materials and the study related
towards it is called as ‘material management’.
• Construction materials and components contribute
around 50-60% of the total value of construction.
CONSTRUCTION MANAGEMENT
Importance of Material Management
• MM importance:
– Recession
– Just In Time approach
• Change in manufacturing philosophy
– Return Of Investment
• Development of core business
• Investment in working capital like inventory and
debtors returns far less
CONSTRUCTION MANAGEMENT
Importance of Material Management
• It has been noticed that
– Large quantities of building materials buried or
burnt each year due to inadequate control on
project sites
– 0-20% of all materials delivered to the site either
end up as waste or illegally removed during
construction phase.
– Hence proper material management is required.
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
Objectives of Material Management
• Minimize material cost
• Procure and provide material of desired quality
when required
• Reduce investment tied in inventories
– for use in other productive purposes and to develop
high inventory turnover ratios
• Purchase, receive, transport and store material
efficiently and to reduce the related cost
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
 Objectives of Material Management Objectives of Material Management
• Cut down costs through • To ensure uninterrupted production or operation
– simplification, by maintaining steady flow of materials.
– standardization, • By adopting the latest techniques, economy is to
– value analysis, be achieved.
– import substitution etc. • Speedy disposal of materials which are not
• Modify paper work procedure required.
– Minimize delays in procuring materials
• Train personnel in the field of materials
management
– in order to increase operational efficiency

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Objectives of Material Management Reasons for Poor Materials Management

• Right quantity of materials in required quality at • Senior management is fool
an appropriate cost from proper place with right – Do not recognize the impact of materials
terms & conditions so as to reduce the • Fools hired by Fools
expenditure on materials.
– Employees are not properly selected or trained for
• Reduction in capital cost the task related to materials management
• Losses due to pilferage, deterioration are to be • Fools operating Computers
kept minimum. – Poor choice of computerized systems related to
MM
– It gives what is given.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Functions of Material Management Functions of Material Management
• The functions of MMM
– Materials Planning
– Procurement
• To achieve best results, it would be worthwhile to – Custody (Receiving, Warehousing and Issuing)
place all the functions related to materials under a – Materials Accounting
single department known as – Transportation
Inventory Monitoring and Control
MMM –
– Materials codification
(Materials Management Department). – Computerization
– Source Development (Vendor Development)
– Disposal

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Functions of Material Management

v. To develop new sources of supply for purchases
i. Planning- estimating the type of materials, their vi. Development of secondary units
actual quantities and the time at which it is
vii. Cost control of materials using various cost
required.
reduction methods
ii. Type of materials to be purchased
viii.To develop coordination between various
iii. Providing proper storage and distribution departments
systems so as to reduce wastage, pilferage,
ix. To form research and development with respect
deterioration, etc.
to material cell.
iv. Arranging transportation in the most economical
x. Disposal of excess stocks, surplus, scrap items
way for the incoming and outgoing materials.
and also salvage of materials.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Uses of Material Management Uses of Material Management
• To achieve best results it, To obtain clear-cut accountability due to
provides coordination between various centralisation of authority. It will be easy to take
departments, corrective action.
Helps in taking decisions speedily and accurately.
Keeps a right balance of various conflicting
interests under different functions.
Easy to collect data and analyse for improved
decision making.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Material procurement process Material procurement process

• Large construction organization • Responsibilities of Central Materials Department
– Offices at National or International Level – Procure high value materials
– Head office Major Metropolitan – Transportation
– MMM head Vice president cadre – Rate contract for frequently used construction
– Supported by General managers materials
– GM overall in charge of central materials – Develop computerized procedures
department and regional materials department – Procure capital equipment
– Supply raw materials to manufacturing units, if
any.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Material procurement process
– Import construction materials
– Gather management information sytem (MIS)
reports and analysis
– Dispose of waste materials and scrap.
– Standardize and codify the construction materials
CONSTRUCTION MANAGEMENT
Inventory Management
• Inventory turn over ratio is an index of business
performance.
• A soundly managed organization will have higher
inventory turn ratio and vice versa.
• Inventory is a necessary evil.
CONSTRUCTION MANAGEMENT
Inventory Management
• What is Inventory?
– Inventory is usable but idle resource.
• The task of inventory management
– Maintaining an adequate supply of
• raw materials for work in progress,
• finished products and
• other indirect materials
– to meet an
– expected demand pattern for a given financial
investment.
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
Inventory-Related cost
• It has 3 broad components:
a) Cost of Carrying inventories (Holding cost)
• Expressed as ₹/item held in stock/unit time.
• The cost of carrying or holding inventory is the
sum of the following costs:
– Money tied up in inventory, such as the cost of
capital or the opportunity cost of the money.
Physical space occupied by the inventory
including rent, depreciation, utility costs,
insurance, taxes, etc.
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
 Inventory-Related cost
b) Cost of Incurring Shortages (Shortage cost)
• Shortage cost is the cost of having
a shortage and not being able to meet demand
from stock.
• Shortages of stocks may result in the cancelation
of orders and heavy losses in sale which in turn
may result in loss in goodwill, profit even the
business itself.
Inventory-Related cost
c) Cost of Replenishing Inventories (Ordering cost)
• Ordering costs are the expenses incurred to
create and process an order to a supplier.
• These costs are included in the determination of
the economic order quantity for an inventory
item.
• Examples of ordering costs are:
– Cost to prepare a purchase requisition. Cost to
prepare a purchase order.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Functions of Inventory 1. Balancing Supply and Demand

• The primary function of inventory is to use • Balancing supply and demand involves replacing
marketing and production to increase profitability, consumed items, and liquidating seasonal items.
to get the maximum amount for the business
investment.
• There are other functions of inventory, such as
– balancing supply and demand,
– improving efficiency,
– establishing a safety stock and geographical
specialization.
• All of those help to increase a business
profitability.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 2. Safety Stock
• When controlling inventory, one function is
maintaining safety stock.
• This involves having a buffer stock in case of an
unexpected delay in replenishing inventory or
excess sales.
• Larger the uncertainties in demand and supply,
the larger will have to be the amount of buffer
stock.
CONSTRUCTION MANAGEMENT
4. Cycle inventory:
• This function relates to the decision to
manufacture a quantity of products(like in a
lot/batch size)
• The mainspring is to reduce set-up costs and
avoid the loss of process capacity
CONSTRUCTION MANAGEMENT
3. Geographical Specialization
• Geographical specialization in regards to inventory
involves
– maximizing the assets of each of the business'
locations.
• Factors to consider include
– energy costs, location, labour and transportation.
• For example,
– a manufacturing company will want to locate in an
area where it can distribute its product for the least
amount of money. If it uses the railroad, distribution of
the inventory near a railroad is wiser than a remote
distribution center 100 miles away.
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
5. Pipeline inventory :
• We are dealing with ‘pipe-line inventory’,
– when a company decides to subcontract one
process to an outside supplier at some time during
the total process lead time.
– Also known as job work.
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
 OTHER FUNCTIONS
• The manager take great care of time.
• How much time a unit will take in processing and
reaching the inventory so that the material does
not get short in inventory.
• Inventory management is also fed with the cost of
all the raw items and their subsequent costs in
finished form.
OTHER FUNCTIONS
• Inventory management makes sure that the price
of an item does not get too high after including
all the taxes.
• It has to be attentive to all costs from production
to packaging so that the prices should not get
higher.
• observing the availability of all raw materials
– Used in completing all the orders. Managers
have to make sure that all material is available
so that all orders could get complete in time.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

OTHER FUNCTIONS Inventory Policies

• Account of all raw materials and makes order for • Type
their reach in time so that the processing operation – Lot size reorder point policy
does not come to halt. – Fixed order interval scheduling policy
• keeping all records of the ready products which – Optional replenishment policy
has to be shipped. – Two bin system
• They have to be very clever in making • How to choose?
calculation. – Nature of the problem
• The items for shipping should not be shorter than – Usage value of the item
demanded by the clients. – Situational parameters
• If it happens, inventory management can wreck First select an operating policy before determining
the reputation of the organization optimal values of its parameters

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Lot size reorder point policy Lot size reorder point policy
• Classical policy
• Continuous review of inventory
• Reorder ?
– Inventory levels falls to prescribed value called
• Reorder point
– Fresh replenishment of order of fixed quantity
known as EOQ is placed

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Fixed order Interval scheduling policy Fixed order Interval scheduling policy
• Constant replenish time
• Prescribed maximum stock level
• Review at fixed interval
• At each review order size ‘O’ is placed
• Stock on hand + order equal to maximum stock
level
• Variable order quantity
• Small order when excess stock is stored

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Fixed order Interval scheduling policy Optional Replenishment Policy
• Also known as (s,S) policy
• Periodic review
• S maximum stock level
• s Minimum stock level
• At review
• If stock on hand ≤ s
– Place order size ‘Q’
• Stock on hand + order = S
• If stock on hand > s no order is placed
reviewed at next review period

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Optional Replenishment Policy Two bin system

• Two bins are maintained by the companies which
have different levels.
• When the first bin is exhausted, it indicated
• the time for replenishment.
• The second bin is like a reserve stock.
• The concept is similar to the petrol needle of
• a car.
• When the needle reaches the red segment of the
gauge, the driver knows that the car is operating
on reserve stock and it is time to replenish it.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 ECONOMIC ORDER QUANTITY (EOQ)
• EOQ or Fixed Order Quantity system is the
technique of ordering materials whenever
stockreaches the reorder point.
• Economic order quality deals when the cost of
procurement and handling of inventory are at
optimum level and total cost is minimum.
• In this technique, the order quantity is larger than
a single period’s ne requirement so that ordering
costs & holding costs balance out. Order Quantity Size (Q)

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

A SSUMPTIONS OF EOQ
W EAKNESSES OF EOQ FORMULA
o Demand for the product is constant o Erratic usages
o Lead time is constant o Faulty basic information
o Price per unit is constant o Costly calculations
o Inventory carrying cost is based on average o No formula is substitute for commonsense
inventory o EOQ ordering must be tempered with judgment
o Ordering costs are constant per order
o All demands for the product will be satisfied (no
back orders)

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 B ASIC F IXED O RDER Q UANTITY M ODEL (EOQ)

O RDER P OINTS & S ERVICE LEVELS

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

I MPORTANT T ERMS
o Minimum Level - It is the minimum stock to be
maintained for smooth production.
o Maximum Level - It is the level of stock, beyond
which a firm should not maintain the stock.
o Reorder Level - The stock level at which an order CLASSIFICATION OF I NVENTORY
should be placed. CONTROL
o Safety Stock - Stock for usage at normal rate
during the extension of lead time.
o Reserve Stock - Excess usage requirement during
normal lead time.
o Buffer Stock - Normal lead time consumption.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA


ALWAYS BETTER CONTROL (ABC) ANALYSIS
o This technique divides inventory into three
categories A, B & C based on their annual
consumption value.
o It is also known as Selective Inventory Control
Method (SIM)
o This method is a means of categorizing inventory
items according to the potential amount to be
controlled.
o ABC analysis has universal application for fields
requiring selective control.
CONSTRUCTION MANAGEMENT
PROCEDURE FOR ABC ANALYSIS
o Select the top 10% of all items which have the
highest
rupee percentages & classify them as "A" items.
o Select the next 20% of all items with the next highest
rupee percentages & designate them "B" items.
o The next 70% of all items with the lowest rupee
percentages are "C" items.
CONSTRUCTION MANAGEMENT
PROCEDURE FOR ABC ANALYSIS
o Make the list of all items of inventory.
o Determine the annual volume of usage & money
value
of each item.
o Multiply each item's annual volume by its rupee value.
o Compute each item's percentage of the total
inventory
in terms of annual usage in rupees.
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
ADVANTAGES OF ABC ANALYSIS
o Helps to exercise selective control
o Gives rewarding results quickly
o Helps to point out obsolete stocks easily.
o In case of "A" items careful attention can be paid
at every step such as estimate of requirements,
purchase, safety stock, receipts, inspections,
issues, etc. & close control is maintained.
o In case of "C" items, recording & follow up, etc.
may be dispensed with or combined.
o Helps better planning of inventory control
o Provides sound basis for allocation of funds &
human resources.
KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA
 D ISADVANTAGES OF ABC A NALYSIS
o Proper standardization & codification of inventory
items needed.
o Considers only money value of items & neglects
the importance of items for the production
process or assembly or functioning.
o Periodic review becomes difficult if only ABC
analysis is recalled.
o When other important factors make it obligatory
to concentrate on "C" items more, the purpose of
ABC analysis is defeated.
VED C LASSIFICATION
o VED: Vital, Essential & Desirable classification
o VED classification is based on the criticality of the
inventories.
o Vital items - Its shortage may cause havoc & stop the work in
organization. They are stocked adequately to ensure smooth
operation.
o Essential items - Here, reasonable risk can be taken. If not
available, the plant does not stop; but the efficiency of
operations is adversely affected due to expediting expenses.
They should be sufficiently stocked to ensure regular flow of
work.
o Desirable items - Its non availability does not stop the work
because they can be easily purchased from the market as &
when needed. They may be stocked very low or not stocked.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

o It is useful in capital intensive industries,

transport industries, etc. FSN A NALYSIS
o VED analysis can be better used with ABC analysis
in the following pattern: o FSN: Fast moving, Slow moving & Non moving
o Classification is based on the pattern of issues
Category "V" items "E" items "D" items
from stores & is useful in controlling obsolescence.
o Date of receipt or last date of issue, whichever is
"A" items Constant Moderate Nil stocks
control later, is taken to determine the no. of months
& regular stocks which have lapsed since the last transaction.
follow o The items are usually grouped in periods of 12
up
months.
"B" items Moderate Moderate Low stocks
o It helps to avoid investments in non moving or
stocks stocks
slow items. It is also useful in facilitating timely
"C" items High stocks Moderate Very low control.
stocks stocks

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Example - 1
For analysis, the issues of items in past two or
three years are considered. • A construction company receives a total of 200T
If there are no issues of an item during the period, as annual demand for steel reinforcement. The
it is "N" item. annual cost of carrying per unit T of
Then up to certain limit, say 10-15 issues in the
period, the item is "S" item
reinforcement is 2000. and cost to place an
The items exceeding such limit of no. of issues order is 25000.
during the period are "F" items. • What is the Economic Order Quantity?
The period of consideration & the limiting number
of issues vary from organization to organization.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Example – 1 Solution Review Questions

• The EOQ equation: • State if True or False
× × • Construction materials account for a large fraction
• = of overall construction project cost.

× ×
• =

• = 70.7 ! "!# !

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

 Review Questions Review Questions
• State if True or False • State if True or False
• Materials are classified broadly into capital items • Functions involved in material management are –
and revenue items materials planning, procurement, custody
(receiving, warehousing and issuing), materials
accounting, transportation, inventory monitoring
and control and materials codificaiton.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA

Review Questions
• State if True or False
• Costs related to inventory are holding cost, stock
out cost an ordering cost.

CONSTRUCTION MANAGEMENT KEYUR NAGECHA CONSTRUCTION MANAGEMENT KEYUR NAGECHA