Pom Unit Iii C 1

Priyadarshini Lokmanya Tilak Institute of Management Studies and Research,
Nagpur.
Bachelor of Business Administration (BBA-III Year- 5TH Semester)
BB-18 Principles of Operations Management
Unit III: Material Management: Scope of Material Management, Purchase and Stores
Functions, Introduction to Warehouse Management, Concept of Lead Time, Reorder Level,
Minimum and Maximum Stock, Basic Concept of Inventory Management, Inventory Cost,
Ordering and Carrying Cost.
Introduction to Materials Management
Material is defined as “equipment, apparatus and supplies used by an organization for the
purpose of rendering services”,
The basic objective of management is to optimize the resources, i.e: Men, Money, Materials,
Machines & Minutes (time)
Materials constitute a major cost component for any Industry. Manufacturing materials is
divided into following categories:
• Raw materials- materials that the company converts into processed parts. This might
include parts specifically produced for the company and parts bought directly off the shelf
(i.e., bolts, nuts).
• Purchased parts- parts that the company buys from outside sources (i.e., rubber parts,
plastic parts).
• Manufactured parts- parts built by the company (i.e., tower case for a computer).
• Work in process- these are semi-finished products found at various stages in the
production process (i.e., assembled motherboard).
• MRO supplies- maintenance, repairing, and operating supplies used in the manufacturing
process but are not part of the final products (i.e., soap, lubricating oil).
• Bulk materials- these are materials that are delivered in mass and are deposited in a
container. • Bagged materials- these are materials delivered in bags for ease of handling and
controlled use.
• Palleted materials- these are bagged materials that are placed in pallets for delivery.
• Packaged materials- these are materials that are packaged together to prevent damage
during transportation and deterioration when they are stored.
• Loose materials- these are materials that are partially fabricated and that should be handled
individually.
What is Material Management?
Basically, material management is concerned with the following: -
Procurement and purchasing
Expediting
Materials planning
Materials handling
Distribution
Cost control
Inventory management / Receiving/ Warehousing
Transportation
Notes Compiled by: Prof. Rahul Kapale

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Benefits of material management: -
Reducing the overall costs of materials
Better handling of materials
Reduction in duplicated orders
Materials will be on site when needed and in the quantities required
Improvements in labour productivity
Improvements in project schedule
Quality control
Better field material control
Better relations with suppliers
Reduce of materials surplus
Reduce storage of materials on site
Labour savings
Stock reduction
Purchase savings
Better cash flow management
Functions of Material Management

The functions of materials management can be categorized in the following ways:
1. Material Planning and Control
2. Purchasing
3. Stores Management
4. Inventory Control or Management
5. Standardization
6. Simplification
7. Value Analysis
8. Ergonomics
9. Just-in-Time (JIT)
Purchasing Function
The purchasing function involves more than obtaining the best price.
It also involves buying the best value, which means buying:
- The right quantity and quality
- At the best price
- From suppliers who are reliable and provide good service.
PURCHASE OBJECTIVE…
To provide an uninterrupted flaw of materials and services for company operations
To find reliable alternative sources of supply
To buy at the most economic order quantities

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To buy the best value: a combination of right quality at the best price with the best supplier
service
To maintain good relations with vendors.
Parameters of Purchasing: (AKA Ten ‘R’s’ of the art of efficient purchasing or Principles
of Purchasing)
Ten ‘R’s’ of the art of efficient purchasing

1. Right Price
2. Right Quality
3. Right Time
4. Right Quantity
5. Right Source
6. Right Attitude
7. Right Contracts
8. Right Material
9. Right Transportation
10. Right Place of Delivery

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Purchasing Procedure
The purchasing procedure comprises the following steps.

1) Recognition of the need
2) The selection of the supplier
3) Placing the order
4) Follow up of the order
5) Receiving and inspection of the materials
6) Payment of the invoice
7) Maintenance of the records
8) Maintenance of vendor relations
Types of Purchasing
1. Purchasing by Requirement
2. Market Purchasing
3. Speculative Purchasing
4. Purchasing for Specific Future Period
5. Contract Purchasing
6. Scheduled Purchasing
7. Group Purchasing of Small Items
8. Co-operative Purchasing
Centralized Purchasing & Decentralized Purchasing (Assignment)

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Concept of Purchase Requisition & Purchase Order:
What is a purchase requisition?

A purchase requisition is a document that an employee within your organization creates
to request a purchase of goods or services.
When you fill out a purchase requisition, you are not yet purchasing anything. You are
merely beginning the process of a purchase by asking for internal permission.
This document is used when an employee in your organization makes an order request if a
need arises for certain goods or services.
The employee’s manager – or anyone in charge of purchases at your company – is notified
that the employee has made an order request once they receive the requisition.
What is a purchase order?

Also known as a PO, the purchase order is a document outlining the details of an actual
purchase.
The purchasing department creates the purchase order once a purchase requisition has been
approved. If an organization does not use purchase requisitions, other employees may fill
in purchase orders for approval as well.
Unlike a purchase requisition, the purchase order is an external document. Purchasing

sends it to the vendor as a set of instructions for how to fulfill your order and process your
payment.
Store-Keeping: Meaning, Types, Objectives & Functions.
Store keeping is a specialized and important function of material control that is especially
concerned with the physical storage of goods. The store keeper is responsible for
safeguarding and keeping the materials and suppliers in proper place unit required in
production.
Types Of Stores
Stores may be classified in to two potent categories are as follows;
Centralized stores
Decentralized stores
Centralized stores = Centralized storage means a single store for the whole organization.

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Decentralized stores = Decentralized storage means independent small stores attached to
various departments. (Opportune stores for use in an organization is centralized stores to put
the material in suitable place without any damage.)
Objectives of Storekeeping
Following are the main objectives of an efficient system of store keeping:
To prevent overstocking and understocking of materials.
To protect materials from pilferage, theft fire and other risks.
To minimize the storage costs.
To ensure proper and continuous control over materials.
To ensure most effective utilization of available storage space and workers engaged in the
process of storekeeping.
Functions of Storekeeping
Receiving purchased materials from the purchase department and to confirm their quality and
quantity with the purchase order.
Storing and preserving materials at proper and convenient places so that items could be easily
located.
Storing the materials in such a manner as to minimize the occurrence of risks and to prevent
losses due to defective storage handling.
Providing full information about the availability of materials and goods etc., whenever so
necessary by maintaining proper stores records with the help of bin cards and stores ledger
etc.
There are four sections in the process of storekeeping viz.

(a) Receiving section,
(b) Storage section,
(c) Accounting section, and
(d) Issue section

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Store keeping procedure or store routine
zAfter receiving materials by receiving or store keeping department, store keeping has to
perform various activities relating to materials. It is known as store keeping procedure or
store routine.
Following procedures has to be done;
Classification and codification of materials.
Recording of material received.
Introduction to Warehouse Management:
Concept of Lead Time:

The amount of time that elapses between when a process starts and when it is completed.
The amount of time company takes to deliver products to the market.
Lead time is broken into several components: pre-processing, processing and post processing.
Time taken to procure, make and deliver.
Lead times refer to the time taken between the initiation of a manufacturing process and its
completion.
Types of lead times differ based on the product or customer but for the purpose of
manufacturing or assembly, the primary four lead times are:
1. Customer lead time
It represents the time that a company takes from receiving a confirmation for order until its
fulfilment.
2. Material lead time
It represents the time it takes to place an order with a supplier and receiving supplies.

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3. Production or manufacturing lead time
It is the time that a company takes to produce and deliver the products if all the raw materials
are available.
4. Cumulative lead time
It includes all the above lead times. Or, we can say it is the time that a company takes from
receiving a confirmation for an order to delivering the product to the customer.
Why Lead Time is so Critical?
1. Higher Lead time leads to increase in inventory

2. Lead time has an important role in Demand forecast
3. Lead time has a direct impact on customer Satisfaction; it makes your clients look for
alternatives.
4. Lead time provides a competitive edge for Product Manufacturing companies.
Components of Lead Time
Lead Time = Pre-processing Time + Processing time + Waiting time + Transportation time
+ Storage time + Inspection time
• Pre-processing time: Time taken for receiving the Request, understanding the request
and creating a Purchase order
• Processing Time: Time taken to produce or procure the item
• Waiting Time: Amount of time the item is in queue waiting for production
• Transportation Time: Time the item is in transit to reach the customer
• Storage time: Time the item is waiting at warehouse or factory
• Inspection time: Time taken for checking the product for any non-conformity
How do you reduce Lead Time?
1) Hold stock, ideally the right stock.

2) Have good equipment and employee availability. Solid Total Productive Maintenance
(Preventative Maintenance, Autonomous Maintenance etc.). Robust quality systems
in place. Proper staffing levels.
3) Reduce supplier Lead Times. Focus on long lead time components – source local;
supplier business improvements etc.
4) Suppliers/vendors hold stock e.g., stocking agreements.
5) Change shipping methods – faster, more frequent shipments.
6) Reduce product and component variation and obsolete low runners.
Have accurate forecasting, planning and scheduling.

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Reorder Level:
Reorder level (or reorder point) is the inventory level at which a company would place a new
order or start a new manufacturing run.
Reorder Level = Lead Time in Days × Daily Average
Usage
Lead time is the time it takes the supplier or the manufacturing process to provide the ordered
units.
Daily average usage is the number of units used each day.

If a business is holding a safety stock to act as buffer if daily usage accelerates the reorder
level would increase by the level of safety stock.
Reorder Level = Lead Time in Days × Daily Average Usage + Safety Stock
Maximum level of stock
The maximum level of stock is the level above which a business does not or cannot hold
stock in its premises.
The maximum level of inventory could be described as the maximum capacity of a business
to stock goods (inventory or raw material) in its store, which may be due to reasons like
demand limitation of goods (in production or sales), the storage capacity of business, rationed
funds etc. The ‘maximum level of stock’ is usually achieved when those goods arrive which
were ordered at the ‘re-order level’ of the stock. This stock is then used in the production
process (in case of raw materials) or sold (in case of finished goods) and then re-ordered
again at the re-order level which again fills up the stock to the ‘maximum level’. This is an
on-going process.
Formula:
The formula to calculate maximum level of stock is given below:
Maximum Level = Re-order level + Re-order quantity – (Minimum usage × Minimum lead
time)
Minimum level of stock
The minimum level of stock is a certain predetermined minimum quantity of raw materials
or merchandise inventory which should always be available in stock in the normal course of
business.

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The minimum level of inventory is a kind of a precautionary level of inventory which
indicates that the delivery of raw materials or merchandise may take more than the normal
lead time. Lead time is the expected time taken by the supplier to deliver goods at the
warehouse or at the point of consumption. If the level of stock strikes the minimum level, the
management of the company must make sure that they corroborate with the supplier and take
other necessary measures to make the goods (inventory or raw materials) available in time so
that the business operations are not disturbed or delayed.
Formula:
The formulas used to calculate the minimum level of stock are given below:
Minimum Level of Inventory = (Maximum usage × Maximum lead time) – (Average usage ×
Average lead time)
Or
Minimum Level of inventory = Re-order level – (Average usage × Average lead time)
Both the formulas are equivalent and produce the same result.
What is safety stock (also known as buffer stock)?
In some scenarios, it may be unlikely that the reorder level could be estimated accurately.
This is because the demand and the lead time of the goods could differ than the usual trends
and in that case the business may run out of stock. So, a level of safety stock is set to avoid
such a condition. It is also known as buffer stock.
Danger level Danger level can be calculated by the help of the following formula or equation:
Danger level = Average daily requirement × Time required to get emergency supply
Concept of Inventory (What is an Inventory)
A physical resource that a firm holds in stock with the intent of selling it or transforming it
into a more valuable state.
Purpose of inventory management • How many units to order? • when to order?
Types of Inventories
Raw materials
Purchased parts and supplies

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Finished Goods
Work-in-process (partially completed products)
Items being transported
Tools and equipment
Nature of Inventories
Raw Materials – Basic inputs that are converted into finished product through the
manufacturing process
Work-in-progress – Semi-manufactured products need some more works before they

become finished goods for sale
Finished Goods – Completely manufactured products ready for sale
Supplies – Office and plant materials not directly enter production but are necessary for
production process and do not involve significant investment.
Motives for Holding Inventories
There are three major motives behind holding inventories in an enterprise:

1. Transaction Motive:
According to this motive, an enterprise maintains inventories to avoid bottlenecks in its
production and sales. By maintaining inventories; the business ensures that production is not
interrupted for want of raw material, on the one hand, and sales also are not affected on
account of non-availability of finished goods, on the other.
2. Precautionary Motive:
Inventories are also held with a motive to have a cushion against unpredicted business. There
may be a sudden and unexpected spurt in demand for finished goods at times. Similarly, there
may be unforeseen slump in the supply of raw materials at some time. In both the cases, a
prudent business would surely like to have some cushion to guard against the risk of such
unpredictable changes.
3. Speculative Motive:

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An enterprise may also hold inventories to take the advantages of price fluctuations. Suppose,
if the prices of raw materials are to increase rather steeply, the enterprise would like to hold
more inventories than required at lower prices.
Benefits of Holding Inventories:

Holding inventories bears certain advantages for the enterprise.
The important advantages but not confined to the following only are as follows:
1. Avoiding Losses of Sales:
By holding inventories, a firm can avoid sales losses on account of non-supply of goods at
times demanded by its customers.
2. Reducing Ordering Costs:

Ordering costs, i.e., the costs associated with individual orders such as typing, approving,
mailing, etc. can be reduced, to a great extent, if the firm places large orders rather than
several small orders.
3. Achieving Efficient Production Run:

Holding sufficient inventories also ensures efficient production run. In other words, supply of
sufficient inventories protects against shortage of raw materials that may at times interrupt
production operation.
Cost of Holding Inventory
Holding of inventories has considerable costs. The burden of the cost of inventory is
expressed in terms of money. Inventory costs are basically categorized into three headings:
1. Ordering Cost
2. Carrying Cost
3. Shortage or stock out Cost & Cost of Replenishment
a. Cost of Loss, pilferage, shrinkage and obsolescence etc.

b. Cost of Logistics
c. Sales Discounts, Volume discounts and other related costs.
These costs are divided into the following:

(i) Set up Cost:
These costs include clerical cost on orders and discount rates on quantity of goods purchased.
The costs are included in the cost of material at two stages. Firstly, when material is
purchased and stored, and secondly, when goods manufactured are stored from the said
material. Every company has to store its goods that it wants to be sold
(ii) Cost of Spoilage and Obsolescence:

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The next is the cost of spoilage and obsolescence. It refers to loss of goods while in stock.
Any product or material is bound to spoil if stored for a long time. The risk of spoilage is an
open risk. The cost of spoilage is bound to be taken into account.
Similarly, the cost of obsolescence, some spare parts and machine components may become
obsolete if they are stored for a long time. This is true when there are rapid technological
changes. As a result, the cost of spoilage and obsolescence gives rise to the accountability of
inventory cost.
(iii) Cost of Placing an Order: (Ordering Cost)

This cost may be for placing order on outside suppliers for procuring raw goods to be
manufactured inside the firm. Depending upon the type of stock, this cost may vary.
Cost of placing an order includes the following:

(i) Set up cost of machines,
(ii) Cost involved in follow-up,
(iii) Cost involved in receiving the order, and
(iv) Paper work costs.
(iv) Cost of Carrying Stock:
This is the cost which a firm actually incurs for carrying the stock.
Cost of carrying stock is calculated by taking into consideration the following items:
(i) Interest on capital,
(ii) Tax and insurance charges,
(iii) Storage cost,
(iv) Allowance for spoilage, and
(v) Obsolescence.
(v) Cost of Running out of Stock:
Whenever stock exhausts for any item, this cost is incurred. These costs are different in
nature. The cost of running out of stock for a raw material or spare part is made up of plant
down time and possible special delivery costs. For a finished good, such costs are known as
dissatisfaction to customers or lost customers.
**********End of Unit-III**********

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Priyadarshini Lokmanya Tilak Institute of Management Studies and Research,

Notes Compiled by: Prof. Rahul Kapale

Functions of Material Management

Notes Compiled by: Prof. Rahul Kapale

Ten ‘R’s’ of the art of efficient purchasing

Notes Compiled by: Prof. Rahul Kapale

The purchasing procedure comprises the following steps.

Centralized Purchasing & Decentralized Purchasing (Assignment)

Notes Compiled by: Prof. Rahul Kapale

What is a purchase requisition?

What is a purchase order?

Unlike a purchase requisition, the purchase order is an external document. Purchasing

Store-Keeping: Meaning, Types, Objectives & Functions.

Stores may be classified in to two potent categories are as follows;

Notes Compiled by: Prof. Rahul Kapale

Following are the main objectives of an efficient system of store keeping:

To prevent overstocking and understocking of materials.

To protect materials from pilferage, theft fire and other risks.

To minimize the storage costs.

To ensure proper and continuous control over materials.

There are four sections in the process of storekeeping viz.

Notes Compiled by: Prof. Rahul Kapale

Following procedures has to be done;

Classification and codification of materials.

Recording of material received.

Introduction to Warehouse Management:

Concept of Lead Time:

The amount of time company takes to deliver products to the market.

Time taken to procure, make and deliver.

1. Customer lead time

2. Material lead time

Notes Compiled by: Prof. Rahul Kapale

4. Cumulative lead time

Why Lead Time is so Critical?

1. Higher Lead time leads to increase in inventory

Components of Lead Time

How do you reduce Lead Time?

1) Hold stock, ideally the right stock.

Have accurate forecasting, planning and scheduling.

Notes Compiled by: Prof. Rahul Kapale

Daily average usage is the number of units used each day.

Maximum level of stock

The formula to calculate maximum level of stock is given below:

Minimum level of stock

Notes Compiled by: Prof. Rahul Kapale

What is safety stock (also known as buffer stock)?

Concept of Inventory (What is an Inventory)

Purpose of inventory management • How many units to order? • when to order?

Purchased parts and supplies

Notes Compiled by: Prof. Rahul Kapale

Work-in-process (partially completed products)

Items being transported

Tools and equipment

Work-in-progress – Semi-manufactured products need some more works before they

Finished Goods – Completely manufactured products ready for sale

Motives for Holding Inventories

There are three major motives behind holding inventories in an enterprise:

Notes Compiled by: Prof. Rahul Kapale

Benefits of Holding Inventories:

2. Reducing Ordering Costs:

3. Achieving Efficient Production Run:

Cost of Holding Inventory