INTERNATIONAL INSTITUTE OF PROFESSIONAL

STUDIES( DAVV)

M.B.A.(M.S.)- IV SEM

PURCHASE AND MATERIAL MANAGEMENT

ASSIGNMENT( III INTERNAL)

MATERIAL PLANNING & BUDGETING

SUBMITTED BY-
SUBMITTED TO-
SHRUTI DUNGARWAL
DR. AJAY CHHABRIA
ROLL NO.- IM-2K19-127
 CONTENT
Material planning
 Material planning factors
 Advantages of material planning
 Disadvantages of material planning
 Planning approaches to material management
 Budgeting- Advantages & disadvantages
 Financial aspects in material management
 Interaction with materials & cost
 Techniques of material cost control
 Economic Order Quantity- Meaning& Assumptions
 MATERIAL PLANNING

“Material planning is the scientific method of planning and determining the

requirements of consumables, raw materials, spare parts and other
miscellaneous materials essential for the production plan implementation.
This plan forms a sub-component of the overall organizational plan, hence it
is always derived from the overall organizational plan. Material planning
essentially carries out the process of forecasting and planning of procurement
of materials.”
 Material Planning Factors

There are two major factors that influence material planning, and they
are as follows:

•Macroeconomic factors: These include business cycles, import and

export policies, price trends, credit policy, and other global factors.

• Micro factors: Internal organizational factors such as production

plans, investments, corporate policies, and inventory holding are
examples of these factors. Other critical factors influencing material
planning include procurement timing, working capital, acceptable
inventory levels, delegation of power, and seasonality
 Material
Planning

Projection & Capacity Manufacturing Customer Warehouse

Forecasting needed order size demand capacity
 Advantages

 Reduced per cost of production, allowing a company to price its products more
seriously.
 Stock levels are low, especially for in-measure materials.
 Better response to pique interest.
 Better customer service.
 Reduced set-up and destruction costs.
 Extensive material tracking and improved production planning
 Enhancement in limit designation and arrangement.
 Material planning optimizes capacity utilization and allots the appropriate time to
products based on demand forecasts.
 Material tracking becomes much easier, and all lot orders are guaranteed to have an
economical order quantity.
 Disadvantages
Material planning is completely reliant on input from other system
departments. If the input information is incorrect, the output for material
planning will be incorrect as well.

 Material planning necessitates the upkeep of a robust database containing

all information pertaining to inventory records, production schedules, and so
on, without which output would be incorrect.

 Material planning systems necessitate proper training for end users in

order to get the most out of the system.

Material resource planning systems necessitate a significant investment in

both time and capital.
 Planning Approaches To Material
Management

Functional managers use basic planning concepts to make daily business

decisions. When making decisions about materials management
activities, these managers typically use the following planning
approaches:
Budgeting

Purchasing
research
Project
planning
Annual
operating plan
 Annual Operating plan

Every planning activity begins with the creation of an annual operating

plan, which is a forecast of the scope and magnitude of key operational
activities. The key operating activity in a manufacturing firm is sales
forecasting for the organization's overall sales forecast.
This overall sales forecast is further subdivided into different product
items as well as smaller time frames. This sales forecast is used to create
a production forecast, which leads to the creation of a production
schedule.
 Project planning
The materials department is frequently involved in the planning and
control of project-type activities. The primary consideration in these
types of activities is proper project scheduling.
It refers to the planning of the start of various activities in such a way
that no work is delayed at any time due to the non-completion of the
previous activity or another adjacent activity. Network techniques such
as CPM and PERT are used to schedule projects.
 Purchasing Research

Several long-term and short-term decisions must be made during the

planning process, and these decisions cannot be made until the unknown
areas are explored. As a result, most purchasing actions necessitate
certain research investigations during the planning stages. Purchasing
research is divided into three categories:

Strategic Research on
Procurement the purchasing
material
planning system
planning
 Budgeting
Budgeting is a fundamental tool for management planning and control. A
budget is a tool that balances the planned allocation of expenses with
forecasted income over specified time periods. The budget of a company
is divided into numerous sub-budgets, each of which covers a specific
department's operating activities.
 Advantages of Budgeting

This budget keeps the inventory always in check. There is no

sudden scarcity or abundance of raw materials.

There is no excess inventory cost.

This Budget helps in managing cash flows in a better way.

This budget notifies the exact amount and timing of the expected
cash flow required in the future.

The preparation of the Direct Materials budget is for every month

or quarter. Thus this leads to the identification of any errors or flaws
before the financial year-end.
 Disadvantages of
Budgeting

The major problem occurs when budgets are applied mechanically and

rigidly.
Budgets can demotivate employees because of lack of participation. If
the budgets are arbitrarily imposed top down, employees will not
understand the reason for budgeted expenditures, and will not be
committed to them.
Budgets can cause perceptions of unfairness.
Budgets can create competition for resources and politics.
A rigid budget structure reduces initiative and innovation at lower levels,
making it impossible to obtain money for new ideas.
Financial Aspects In Material Management
 Interaction with Materials & Cost

When products are acquired, they become part of the inventory that
is used during the building process. The overall goal of inventory
control is to reduce the total cost of holding inventory while making
compromises among the various cost categories:

Purchase Unavailability
cost cost

Order Holding
cost cost
 Purchase cost

The unit purchase price from an external source, including transportation and
freight costs, is the purchase cost of an item. When purchasing building
supplies in bulk, it is typical to gain discounts, thus the unit purchase cost
decreases as quantity grows. These savings might be attributed to
manufacturers' marketing strategies, economies of scale in material
manufacturing, or scale economies in transportation. There are additional
benefits of using homogenous materials.
For example, a bulk order of bricks to ensure the same color
or size may be desirable. As a result, it is normally preferable to make a
limited number of major material purchases. In some situations, businesses
may merge modest orders from a variety of projects to take advantage of such
bulk discounts; this is a basic savings to be garnered from a central
purchasing office.
 Order cost
The order cost indicates the administrative cost of sending a purchase
order to a third-party vendor. Order costs include the costs of
creating requisitions, researching alternative vendors, drafting
purchase orders, receiving items, examining supplies, checking
orders, and keeping detailed records of the entire process. Order
costs are typically a small portion of total costs for material
management in construction projects, despite the fact that ordering
can take a significant amount of time.
 Holding cost
Holding costs are the expenses incurred as a result of storing unsold
inventory. These costs, along with ordering and shortage costs, are a
component of total inventory costs. The price of damaged or spoiled goods,
as well as the cost of storage space, labor, and insurance, are all included in
a company's holding costs.
Example-Assume that ABC Manufacturing produces furniture
that is stored in a warehouse and then shipped to retailers. ABC must either
lease or purchase warehouse space and pay for utilities, insurance, and
security for the location.
The company must also pay staff to move inventory into the warehouse and
then load the sold merchandise onto trucks for shipping. The firm incurs
some risk that the furniture may be damaged as it is moved into and out of
the warehouse.
 Unavailability Cost

The unavailability cost is incurred when a desired material is not available at

the desired time. In manufacturing industries, this cost is often called the
stock out or depletion cost. Shortages may delay work, thereby wasting
labour resources or delaying the completion of the entire project.
Again, it may be difficult to forecast in advance
exactly when an item may be required or when an shipment will be received.
While the project schedule gives one estimate, deviations from the schedule
may occur during construction. Moreover, the cost associated with a shortage
may also be difficult to assess; if the material used for one activity is not
available, it may be possible to assign workers to other activities and,
depending upon which activities are critical, the project
may not be delayed.
 Techniques Of Material Cost Control

Level Perpetual
setting inventory VED
system Analysis

EOQ ABC Material

Analysis turnover
ratio
Re-order level
Minimum level
Maximum level
Danger level
Average stock level
 Level Setting

a) Re-order level-Re-ordering level can be calculated by applying the following

formula.
Ordering Level = Minimum Level + Consumption during the time required to
get the fresh delivery.

b) Minimum level- Minimum Stock Level = Re-ordering Level – (Normal

Consumption x Normal Re-order Period)

c) Maximum level- Maximum Stock Level = Reordering Level + Re-ordering

Quantity – (Minimum Consumption x Minimum Re-ordering Period)

d) Danger level- Danger Level = Average consumption x Max. re-order period

for emergency purchases

e) Average stock level- Average Stock Level = Minimum Stock Level + 1/2 of
Re-order Quantity or 1/2 (Minimum Stock Level + Maximum Stock Level)
 Economic Ordering
Quantity
EOQ stands for Economic Order Quantity. It is a measurement used in the
field of Operations, Logistics, and Supply Management. In essence, EOQ is
a tool used to determine the volume and frequency of orders required to
satisfy a given level of demand while minimizing the cost per order.
 
The Economic Order Quantity is a set point designed to
help companies minimize the cost of ordering and holding inventory. The cost of
ordering inventory falls with the increase in ordering volume due to purchasing
on economies of scale. However, as the size of inventory grows, the cost of holding
the inventory rises. EOQ is the exact point that minimizes both of these inversely
related costs.
The formula for EOQ is:

Q= 2 DS / H
where: Q=EOQ units
D=Demand in units (typically on an an
nual basis)
S=Order cost (per purchase order)
H=Holding costs (per unit, per year)​

The total costs of a material usually consist of:

Total aquisition cost+ Total ordering cost+ Total carrying cost
Acquisition cost- Acquisition cost refers to an amount paid for fixed
assets, for expenses related to the acquisition of a new customer, or for the
takeover of a competitor.It is useful in identifying the full cost of fixed
assets because it includes items such as legal fees and commissions and
removes discounts and closing costs.

Carrying costs – Carrying costs are the various costs a business pays for
holding inventory in stock.
Examples of carrying costs include warehouse storage fees, taxes, insurance,
employee costs, and opportunity costs.

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 as follows:
 Cost to prepare a purchase requisition
Cost to prepare a purchase order
 Assumptions in the calculation of EOQ

1. There are dynamic conditions of the supply which enable a firm to

place as many orders as it needs.
2. Prices of the item remain stable which keep carrying cost constant.
3. The quantity of the item to be consumed during a particular period is
totally known i.e., quantity to be consumed is certain.
4. The use of inventories or sales made by the firm remains constant or
unchanged throughout the period.
5. The moment inventories reach to the zero level, the order of the
replenishment of inventory is placed without delay.