MATERIALS

MANAGEMENT
Unit 4
Introduction
◦ Materials Management is a process that organisations use to plan, organise and control the steps they
use to manage tangible components within its business process.

◦ “Materials management is the planning, directing, controlling and coordinating those activities which
are concerned with materials and inventory requirements, from the point of their inception to their
introduction into the manufacturing process.”

◦ “Materials Management thus can be defined as that function of business that is responsible for the
coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum
manner so as to provide service to the customer, at a pre-decided level at a minimum cost.”
Functions of MM
1. Materials Planning and Control: This involves estimating the individual requirements of parts,
preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring
the performance in relation to production and sales.
2. Purchasing: Basically, the job of a materials manager is to provide , to the user departments right
material at the right time in right quantity of right quality at right price from the right source
3. Stores: Once the material is delivered , its physical control , preservation , minimisation of
obsolescence and damage through timely disposal and efficient handling, maintenance of records,
proper locations and stocking is done in Stores.
4. Inventory Control: It covers aspects such as setting inventory levels, doing various analyses such as
ABC , XYZ etc. ,fixing economic order quantities (EOQ), setting safety stock levels, lead time analysis
and reporting.
Objectives of MM
I. Primary Objectives

a) Lower Prices
b) Lower Inventories
c) Lower procurement and storage cost
d) Continuity of supply
e) Consistency of quality
f) Cordial relationship with supplier
II. Secondary Objectives
a) Reciprocity: Purchasing materials from organisations and selling the finished products to the same
organisations is called reciprocity.
b) New developments: the staff of MM department are responsible to be updated with the developments
in the materials and its handling.
c) Make or Buy Decision: The material manager with regular reviews of cost and availability of materials
can safely conclude that whether the material is to be purchased or developed in the organisation itself.
d) Standardisation: With regular stock-taking, the non-standardised items can be rejected and standard
components may be brought into product designs to reduce the cost of production.
e) Product Improvement: By supplying the standardised materials or components to the production
department, quality products can be assured.
f) Inter-departmental Harmony: Successful management of materials department contributes to the
success of every other department in the organisation.
g) Economic forecasting: The materials manager should be able to foresee the prices and costs of the raw
materials and general business conditions through their daily contact with the suppliers.
STORES MANAGEMENT
◦ Literally stores is the place where materials are kept under custody.
◦ Stores management is a part of the overall functions of materials management.
◦ According to Alford and Beatty “ Storekeeping is the aspect of material control concerned with
the physical storage of goods.”
◦ According to Maynard responsibilities of store management are “ to receive materials, to
protect them while in storage from damage or unauthorised removal, to issue materials in the
right quantities, at the right time, to the right place, and to provide these services at the least
cost.”
❑ Storehouse is a building provided for preserving materials, stores and finished goods. The
in-charge of the store is called Storekeeper or Stores Manager.
BENEFITS OF STORE
MANAGEMNT
◦ Scientific stock control reduces loss due to accumulation of inventories.
◦ Efficient store issues reduces down time in production
◦ Periodic reviews detects obsolete and non-moving items and helps the firm to
get rid of unproductive inventory.
◦ Follow up with purchase helps to avoid stock outs and production losses.
◦ Records kept provides exact picture of the inventory in store to the higher
management .
OBJECTIVES
◦ To ensure uninterrupted supply of materials to various departments
◦ To prevent overstocking and under stocking.
◦ To ensure safe handling of materials and avoid damage
◦ To protect materials from risk
◦ To minimise the cost of storage
◦ To ensure proper and continuous control over the materials
◦ To ensure most effective utilisation of available space.
PROCESS
 FUNCTIONS OF STORE MANAGER
1. Receipt: to receive and account materials
2. Storage: It stores and preserves the inventories protecting them from damage, pilferage and deterioration.
3. Retrieval: It helps easy accessibility to materials and ensures optimum space utilization. Materials can be located
and retrieved with ease.
4. Issue: It satisfies the demands of consuming departments by proper issue of inventories on receiving the
requisitions.
5. Records: It keeps proper records of the issue and receipts using Bin cards Stock cards
6. HouseKeeping: The space is kept neat and clean so that material handling, preservation, storage, issue and receipt
is done satisfactorily.
7. Surplus Stock: surplus is the amount of resources that exceeds utilisation. Scrap and surplus disposal management
is a function of stores.
8. Verification: Physical verification and purchase initiation to avoid stock-outs.
9. Packaging: Materials despatched to customers from finished goods store or from one store to another needs to be
packed according to their nature.
10. Co-ordination and Co-operation: To interface with different department.
TYPES OF STORES
A. Centralised Stores: centralised storage means a single store for the whole organisation. In ensures
better control of stores, lesser staff, saving in storage cost etc. but it may lead to delay in issue of
materials, higher exposure of materials to risk of fire and accidents and higher cost of material handling.
B. Decentralised Stores: it means independent stores attached to various departments. It involves lesser
cost and time in moving bulky materials to distant departments, and are helpful in avoiding
overcrowding in central stores.
C. Central stores with sub-stores: this may be used in big factories with large number of product lines.
The sub-stores draw its requirement from the main store for a certain period. This fixed quantity of
material to the particular department is known as Float or impress. After the completion of the
determined period, the storekeeper of the sub-store will give the description of the material consumed,
and he will be issued quantity of material equal to the material consumed. This system of issuing and
controlling of materials is known as periodic system of stores control.
4. Warehouse: Warehouses are the godowns which take the responsibility of keeping and storing goods
and providing ancillary services in order to help the small and medium-size traders and manufacturers who,
because of technical and economic reasons, may not have their own storehouses. These warehouses
undertake to preserve the goods in a scientific and systematic manner so as to maintain their original value,
quality and usefulness. They charge a certain prescribed rent at a fixed rate in advance.
5. Functional Stores: The stores can be classified depending on the use to which the materials are put. Eg:
Raw material store, General Store, Tools Store, Finished Goods Stores etc.
6. Bonded and Quarantine Stores: Bonded stores are those where aircraft components and materials,
bearing evidence of having been received from approved sources are stocked. Quarantine stores means
stores where aircraft components awaiting evidence of having received from approved sources are stored.
MAINTENANCE MANAGEMENT
◦ Maintenance activities are related with repair, replacement and service of components or some
identifiable group of components in a manufacturing plant so that it may continue to operate at a
specified ‘availability’ for a specified period.
◦ Thus maintenance management may be treated as a restorative function of production management which
is entrusted with the task of keeping equipment/machines and plant services ever available in proper
operating condition.
◦ The workforce and the materials must also be ‘maintained’ through training, motivation, health care and
even entertainment of the people and proper storage and handling of materials.
◦ This renders that maintenance is responsible for provision of the condition of these machines, buildings
and services that will permit uninterrupted implementation of plans requiring their use.
OBJECTIVES
AREAS OF MAINTENANCE
1. Civil maintenance: these include building construction and maintenance,
maintenance of service facilities such as water, gas, heating, ventilation,
plumbing etc., house-keeping, scrap disposal, gardening, fire fighting
equipment etc.
2. Mechanical Maintenance: maintaining machines and equipment, transport
vehicles, boilers, compressors, furnaces etc.
3. Electrical Maintenance: maintenance of generators, transformers, switch
gears, lighting, fans, battery, etc.
 Types of maintenance

Unplanned/reactive Planned/proactive

Breakdown Shutdown Preventive Predictive Periodic Condition based

1. Break-down maintenance: it means maintenance is done only when there is a failure in the asset. This
can be used when the equipment failure does not significantly effect the operations or production or
generate any significant loss other than the cost of repair.
2. Shutdown Maintenance: it is the maintenance that can only be performed while the equipment is not
in use. It will be costly but sometimes due to the nature of the defective part it is the only viable
maintenance procedure.
3. Preventive Maintenance: this is daily maintenance (cleaning, oiling, inspection) to retain the healthy
condition of the equipment. The equipment service life can be prolonged by proper preventive
maintenance. Also called running maintenance.
4. Periodic Maintenance: time based servicing and replacing required parts to prevent sudden failure.
5. Predictive Maintenance: it is a method where based on the inspection or diagnosis the service life of
the equipment is predicted and any maintenance required is undertaken.
6. Condition Based Maintenance : it is a maintenance strategy that monitors the actual condition of the
asset to decide what maintenance needs to be done.
Reliability concept
◦ Reliability is defined as “the probability that a component or an entire system
will perform its functions for a specified period of time, when operating in its
designed environment.”
◦ In other words reliability is the science to predict, analyze, prevent and
mitigate failures over time.
◦ The period of regular operation of an equipment ends when any
chemical-physical phenomenon, said fault, occurred in one or more of its
parts, thereby causing a variation of its performance. The equipment passes
from the state of operation to that of non-functioning.
The Bathtub Curve.
◦ The reliability specialists often use the bathtub curve to describe the lifetime of any product.
◦ The bathtub curve consists of 3 periods: Infant mortality period, Useful life, and End of life.
1. The initial region that begins at time zero when a customer first begins to use the product is
characterized by a high but rapidly decreasing failure rate. This region is known as the Infant
Mortality Period.
2. Next, the failure rate levels off and remains roughly constant for the majority of the useful life of the
product. This long period of a level failure rate is known as the Intrinsic Failure Period or Useful life.
3. Finally, if the product remains in use long enough, the failure rate begins to increase as materials wear
out and degradation failures occur at an ever increasing rate. This is the Wearout Failure Period or
End of life.
Inventory Control
Meaning
◦ The term inventory means all materials, supplies, tools, work-in-progress and
finished goods recorded in the books by an organisation and kept in stock,
warehouse or plant for some time.
◦ Inventory control refers to the regulation of the stock and the flow of materials
and components in an efficient, effective and economical manner to meet the
need of manufacturing department.
Objectives of inventory control
To meet the unforeseen future demand due to variation in forecast
figures and actual figures.
To smoothen the production process
To average out demand fluctuations due to seasonal variations.
To meet the customers demand on time.
To reduce loss due to change in the price of the inventory items
Benefits of inventory control
◦ Ensures adequate supply of materials
◦ Minimising inventory cost
◦ Facilitates purchase economy
◦ Eliminates duplication in ordering
◦ Better utilisation of stocks
◦ Provides a check against loss of materials
◦ Consistent and reliable basis for financial statements.
Components of inventory cost
◦ Material Cost: it is the cost of material itself. It is the purchasing cost or value of the item.
◦ Ordering cost: it is the cost of ordering the item and securing its supply. It includes expense
from raising indent, cost of labour required to inspect the goods, cost to prepare and issue a
payment to supplier etc.
◦ Carrying cost: cost incurred for holding or storage of inventory and is measured as a
percentage of unit cost of an item. It includes cost of building rent, facility maintenance, cost
of material handling equipment, insurance cost, tax on inventory, cost of human resource
involved etc.
◦ Out-of-stock cost: it is the loss which occurs due to non- availability of materials. It includes
breakdown or delay in production, back ordering, lost sales, loss of goodwill etc.
◦ Other cost: it includes overtime payments, lay-off or idle time cost, machine set-up cost and
overstocking cost.
Inventory control techniques
1. Always Better Control (ABC)
◦ ABC technique is widely used for unfinished goods, manufactured products, spare parts, components and
assembly items. Under this technique the inventory is divided into 3 categories A B and C where A
includes the most valuable items and C includes the least valuable items, and all that are moderately
valuable comes under B.

The annual consumption of items is calculated as:

C= Annual demand x item cost per unit.
According to ABC analysis:
• 70-80% of annual consumption value comes from 20% of total inventory – Item A
• 15-20% of annual consumption value comes from about 30% of total inventory – Item B
• 5% of the annual consumption value comes from 50% of total inventory – Item C
Thus under the ABC technique the items included in the A category are given
priority, with strict inventory control, and frequent reorder to avoid
unavailability.

The items under C category are of low value and so not much care has to be
given for these items. It is also slow moving so frequent reorder need not be
done.

The items coming under B category are of medium value and should be under
normal control.
2. VED Analysis
◦ Under this technique the items of inventory are classified on the basis of their
requirement on the organisation. Accordingly the items are classified as :-
a) Vital : these are the items, the absence of which even for a short period of
time will cause halt in the production function. So ample stock has to be
maintained.
b) Essential : these are the items which may cause disruption to the normal
activity, but can be tolerated for a day or two.
c) Desirable : these are the items which are definitely needed but the work can
continue without them for a substantial period of time.
3. SDE Technique
◦This is the classification of inventory based on their availability.

❑ S refers to Scarce.
❑ D refers to Difficult and
❑ E refers to Easy to acquire.
4. FSN Technique
◦This is based on how fast the materials are used up.

F is for Fast moving

S is for slow moving and
N is for non – moving.
5. Two-Bin Inventory Control
◦Two-bin inventory control is a system used to determine when
items or materials used in production should be replenished. When
items in the first bin have been depleted, an order is placed to refill
or replace them. The second bin is then supposed to have enough
items to last until the order for the first bin arrives. In short, the first
bin has a minimum of working stock and the second bin keeps
reserve stock or remaining material. It is also called KANBAN
technique.
6. Just–in-Time (JIT)
◦ The just-in-time (JIT) inventory system is a management strategy that aligns
raw-material orders from suppliers directly with production schedules.
Companies employ this inventory strategy to increase efficiency and decrease
waste by receiving goods only as they need them for the production process,
which reduces inventory costs. This method requires producers to forecast
demand accurately.
Economic Order Quantity (EOQ)
◦ It is defined as the quantity of material to be ordered at one time.
◦ EOQ is fixed in such a manner as to minimise the cost of ordering and carrying
the stock so that only the correct quantity of material is purchased.
◦ This is the most economical purchase quantity which maintains a balance
between the two opposing costs of procurement and carrying the inventories.
◦ EOQ is that level at which the procurement cost and carrying cost are equal. At
this point the total cost is minimum.
Determination of EOQ

◦ Where :-
D – Annual demand/Consumption
S – Cost per order
H – Annual carrying cost or holding cost.
Basic Assumptions
◦ Annual carrying costs per unit and cost per order can be accurately estimate
and are the only relevant costs.
◦ Annual demand can be estimated and is linearly consumed by the customers.
◦ Average inventory level is the order quantity (Q) divided by 2.
◦ Lead time is known, fixed and independent of demand.
◦ There are no quantity discounts on large orders.
Weakness of EOQ
1. Erratic Usages: according to the EOQ model the usage of the material is
both predictable and evenly distributed. When this is not the case, the EOQ
formula cannot be used.
2. Faulty basic information: EOQ calculations are only as accurate as the order
cost and carrying cost information. These calculations are not easy.
3. Time consuming: the accurate estimation of cost of acquisition and holding
cost can be very much time consuming.
Factors influencing order timing
◦ Lead time: the time gap between placing an order and receiving the items.

◦ Safety stock: this is the quantity of items that must be set apart as an insurance against the
variation in demand and procurement period for unforeseen reasons and to avoid stock-out. It
is also called Buffer stock. It is calculated by multiplying the difference between maximum
and average consumption rate with lead time.

◦ Reorder Point : it is the predetermined stock level at which a new order is initiated. The
reorder level is equal to the minimum stock plus the requirement during lead time.
Example-1
◦ Calculate the Economic Order Quantity from the following:-

Annual consumption 6000 units

Cost of ordering Rs.60
Carrying Cost Rs.2
Example - 2
◦ABC hospital purchases 1600 pairs of surgical gloves every year at
a unit cost of ₹ 15. the order cost is ₹100 per order and the holding
cost per unit is computed at ₹8. calculate the EOQ.
Example -3
◦A company has a total annual consumption of 10,000 Kgs.
Buying cost per order is Rs.50. Unit cost of material is
Rs.2 per KG. Carrying and storage cost is 8%. Calculate
EOQ.
 Determining Ordering & carrying Cost.
◦ The following are the annual expenses given by a company:
Purchase department exp – 2,00,000 Int charges on stock – 14.5
Stores personnel exp – 2,00,000 Insurance charges – 2%
Obsolescence – 60,000 Bill payment exp - 75000
Hire charges of warehouse – 1,40,000 Inspection cost 50000
Collection cost – 40000 Receiving cost – 35000
Materials handling in stores – 1,60,000

The firm places 5000 orders per year and has an average total of Rs.100 lakhs. Calculate
ordering and carrying cost.
MRP – I Materials Requirement Planning
◦ Materials requirement planning is a scientific technique of planning for ordering and usage
of materials at various levels of production and for monitoring inventories during these
activities.
◦ It is a production planning process that starts from the demand for finished products and
plans the production step by step of subassemblies and parts.
◦ It utilises the master schedule for the end products, product structure for determining
requirement of subassemblies, components and raw materials, procurement/manufacturing
lead time, inventory status of products, and by utilising this database it draws up timings
for procurement or manufacture of all the subassemblies, parts and raw materials required
over the production horizon to meet the end production schedule.
Major Terms in MRP
1) MPS: the master production schedule expresses how much of each item is wanted and when it is
wanted.
2) BOM: the product structure record is also known as Bills of Materials records (BOM). It contains
information on every item or assembly required to produce the end item.
3) Inventory status records: it consists of the status of all inventory items on hand as well as scheduled
receipts. It must be updated with each receipt and disbursement.
4) Gross requirement: this is the total demand for inventory item per time bucket.
5) Scheduled receipts: it is the incoming supply of inventory.
6) Net requirement: it is the difference between gross requirement and available inventory.
7) Requirement explosion: it is the breaking down of parent item into components that can be individually
planned and scheduled.
 Scope of MRP
A. it is suitable for items that have dependent demand
B. It is applicable for companies that offer variety of finished products
C. It is appropriate when the final product is complex and is made up of several
levels of assemblies
D. When the procurement lead time is relatively long
E. Where the manufacturing cycle is long
F. When the demand of product is known.
 Steps in MRP
1. Determining the gross requirement of finished products
2. Determining the net requirement of finished products
3. Developing master production schedule
4. Explode BOM
5. Determine the net requirement of items
6. Adjust requirements of scrap allowance
7. Aggregate requirements and determine order quantities
8. Schedule planned orders
9. Place the order
10. Maintain schedules
MRP – II Manufacturing Resource Planning
◦ It is an integrated information system that synchronises all aspects of business.
MRP-II system coordinates sales, purchasing, manufacturing, finance, and
engineering by using a unified database to plan and update the activities in all
the systems.
◦ MRP –II is divided into 3 parts:-
a) Product planning function: done at top management level
b) Operations planning: done by staff units
c) Operations control: conducted by manufacturing line and staff supervisors.
Contd.
◦ MRP II is a computer based system that can create detailed production schedules
using real-time data to coordinate the arrival of the component materials with machine
and labor availability. It is an extension to MRP-I system.
◦ A materials requirements planning information system is a sales forecast-based
system used to schedule raw material deliveries and quantities, given assumptions of
machine and labor units required to fullfill a sales forecast. By the 1980s,
manufacturers realized they needed software that could also tie into their accounting
systems and forecast inventory requirements. MRP II was provided as a solution,
which included this functionality in addition to all the capabilities offered by MRP I.
Inventory Records
◦ The type of inventory depends on the nature of business concern. A manufacturing company will have
raw materials, work-in-progress, tools and equipment, finished goods etc. Whereas a trading company
will have the products bought for resale.
◦ The valuation of inventory is based on cost price or realisable value, whichever is lower. The cost price
includes cost of purchase, cost of transportation and all other cost spent to bring the inventory in present
condition and location.
◦ Inventory record system is one that is concerned with keeping track of physical quantities and the
complete monetary valuation of inventories sold and in-hand. It helps in recording goods as it reaches the
warehouse or godown and as and when it is issued.
◦ Basically there are 2 types of inventory record system: periodic inventory system and perpetual inventory
system.
1. Periodic Inventory System
It is also called as Physical Inventory System. It is a method of determining the value of unsold inventory
along with its physical quantities. In this method, an actual physical count is undertaken with respect to the
measurement and weight of all the inventory units at a specific date.
The calculation of cost of goods sold is:

COGS = Opening inventory + Purchases – Closing stock

One of the major limitations of this method is that the normal business operations are hampered during the
physical verification of stock. Further, the COGS is the residual figure, so it is not easy to recognise the loss
of stock due to damage, theft and pilferage.
2. Perpetual Inventory System
This is a system of ascertaining the value of inventory after every receipt and issue of stock. In addition to
this physical inventory is checked and compared with the balances shown in the records, to ensure
reliability and accuracy. It is also called Continuous Stock Verification.
Under this system the COGS is determined instantly with the help of the ledger and the balance of goods
left is considered as inventory in hand. That is:

Closing stock = opening stock + purchases – Cost of goods sold.

This system is comparatively costlier but it provides better information.

Spare Parts Management
These days the industries are going for capital intensive, mass production
oriented and sophisticated technology. Under such circumstances if the
machines breakdown, and needs replacement of certain parts, it should be
immediately available because the downtime of such machineries will be
prohibitively expensive. That is undertaken by spare parts management.
There come a dilemma, wherein the maintenance department complain
regarding non-availability of spare parts when required, whereas the finance
department is concerned about the increasing locked up capital in the spare parts
management.
Problems in SPM
1. Uncertainty: the time and quantity of requirement of the spare parts are uncertain. This is
because failure of a component cannot be accurately predicted.
2. Not easily available: certain spare parts may not be easily available in the market. This may
be due to their becoming out dated, or because these items are not fast moving. Also in case
the machinery or equipment are imported, the availability of spare parts may become even
more difficult.
3. Variety of items: the number and variety of spare parts are too large, making it even more
difficult and tedious to manage.
Thus the main objective of spare parts management is to ensure availability of spare parts as and
when required and at optimum cost and of the right quality.
SCM & Logistics
◦ Logistics deals with reaching the products or services where they are wanted and when they are wanted.
It involves coordinated efforts of transportation, warehousing packaging and inventory management.
◦ A supply chain is a sequence of organisations – their facilities, functions and activities – that are involved
in producing and delivering a product or service.
Definitions
Donald J Bowersox - “Logistics is concerned with getting products and services where they are
needed and when they are desired”.
Sunil Chopra – “ A supply chain consists of all parties involved, directly or indirectly, in fulfilling a
customer request. The supply chain includes not only the manufacturer and suppliers, but also
transporters, warehouses, retailers and even customers themselves.”
 Basic concepts
A. Inventory Planning
B. Transportation
C. Packaging
D. Warehousing
 Importance
I. Value adding process
II. Minimising cost
III. Penetrating new markets
IV. Reverse logistics channel
V. Globalisation.
Functions of Logistics Management