Module IV

Materials Management
Materials management

It is the method for planning, organizing and controlling the activities that
are related to the flow of materials in a company. This can led to the control of the
location, movement and time of those materials from their introduction,
production, manufacturing process and final delivery.

Material management make sure the materials available are aligned with the
customer demands, thus giving a schedule of costs and resources that the company
has or needs. It controls the flow of materials with demand, prices, quality and
delivery schedules. It should be noted that materials are clasiified by direct
materials or indirect materials. Direct materials are those that process and give a
finished product, indirect materials are those that do not generate a final product.

Objectives of Material Management

a. Low prices
b. High inventory turn over
c. Low cost acquisition and possession
d. Continuous of supply
e. Consistency of quality
f. Favorable supplier relation
g. Development of personnel
h. Good relation

Importance of Material Management

a. Lower prices for material and equipment

b. Faster inventory turn over
c. Continuity of supply
d. Reduced lead time
e. Reduced transportation costs
 f. Less duplication of efforts
g. Elimination of buck passing
h. Reduced material obsolescence
i. Improved supplier relationship and better records and information

Material Planning

It is the scientific way of determining the requirements of raw materials,

components, spares and other items that go into meeting the production needs
within the economic investment policies. It is a subject of the overall production
planning and control system which has a broad prospective. It determines the
requirement of all kinds of materials to meet the production economically.

Significance of Material Planning

a. Lack of proper material planning and coordination leads to overloading

or under loading of materials.
b. Poor planning of materials may lead to unwarranted emergency or rush
orders, usually processed by costly means of transport.
c. Material planning activity raises the level of the buyer from a mere order
placer to a purchase executive or manager. It enables the purchase people
to spend money in an optimum manner.
d. It aims at motivating people and saves as an effective control device.
e. Efficiency in material management function cannot be visualized without
a sensible or effective material planning.

Factors influencing Material Planning

The various factors influencing material planning process are classified into
Macro factors and Micro factors. Macro factors which affect material planning are
price trends, business cycle, import policy of the government, credit policy etc.
micro factors affecting material planning includes corporate objectives, working
capital, seasonality, delegation of power and communication system used by the
firm.
Problems in Material Planning

a. Even though material planning is done based on the short-term sales

forecast as the time horizon extends, sales forecast become less reliable.
b. There are constraints regarding import policy of the government, foreign
exchange component s of production requirements, credit availability etc.
which affect the efficiency of material planning.

Material Budgeting

It is the process of preparing material budget or purchase budget in terms of

quantity and money value of materials to be procured for a given period of time. It
is an estimate of expenses to be incurred in the procurement of materials and it
helps effective execution and control of material plans.

Purpose of Material Budgeting

a. The financial resource availability is known exactly through materials

budget provisions and hence the materials management department can
plan its purchases long term purchase contracts with suppliers optimally
taking into consideration price trends, market position, trend in sales etc.
b. The prices of materials based on which budget are prepared and the
actual price at which materials are bought are compared. This helps in
understanding the controllable and uncontrolled elements that cause the
budget variance.
c. The cash requirements for procuring materials can be clearly projected
for the budgeted and also for shorter time periods such as month or
quarter in the planning horizon.

Value Analysis

It is also called value engineering. It is an important activity that typically

occurs jointly between purchasing and methods of engineering. Its focus is placed
on the value of the product what function is to be performed by the product and
how that value can be achieved at the lowest cost. It has been used by many
companies and government agencies. Although it is applied to all phases of
production process, primary attention is devoted to the materials and components
going into the product.
Purchase Function

It is the act of buying an item at a price. It is a managerial activity, which

goes beyond the simple act of buying and includes the planning and policy
activities covering a wide range of related and complementary activities. Included
in such activities are the research and development strategies required for the
proper selection of materials and sources from which those materials may be
bought, the follow-up to insure proper delivery, the development of proper
procedures, methods, and forms to enable the purchasing department to carry out
the established policies; the co-ordination of the activities of the purchasing
department with such other internal of the concern as , store-keeping, and , so as to
facilitate smooth operations; and the development of a technique of effective
communication with the top management of the company so that, a true picture of
the performance of the purchasing function is presented.

Objectives of purchasing

1. To pay reasonably low prices for the best values obtainable, negotiating
and executing all company commitments.
2. To keep inventories as low as is consistent with maintaining production.
3. To develop satisfactory sources of supply and maintain good relations
with them.
4. To secure good vendor performance including prompt deliveries and
acceptable quality.
5. To locate new materials or products as required. To develop good
procedures, together with adequate controls and purchasing policy.
6. To implement such programmes as value analysis, cost analysis, and
make-or-buy to reduce cost of purchases.

Functions of Purchasing Department

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. The
following are the main functions:

1. Procurement of Materials
 2. Evaluating price
3. Paper work and accounting
4. Policy compliance

Purchasing Procedure

1. Determining Purchase Budget:

Purchase Manager prepares a purchase budget for the forthcoming financial year.
Purchase budget is prepared with the help of production planning department. It
contains detailed information regarding quantity to be purchased, quality of
materials, time of purchase and the sources of procurement. A schedule of
materials and components needed for various jobs, known as bill of materials, is
also prescribed for working out details of purchase budget. A bill of materials is
also useful in exercising control over the utilization of materials.

2. Receipt of Purchase Requisition:

A purchase requisition is a form used as a formal request to the purchasing
department to purchase materials. This form is prepared by the store keeper for
regular stock materials and by the departmental head for specific materials not
stocked as regular items. The storekeeper knows when an action or fresh
procurements is to be initiated. He will send the requisition when materials reach
re-ordering level. He retains one copy of the requisition with him for future
reference. It is on the basis of purchase requisition that orders are placed for
materials.

3. Determining Sources of Supply:

Purchase Manager remains in touch with various suppliers of materials. The
quotations are invited for the purchase of specific items. After receiving
quotations, a comparative study is made regarding terms and conditions offered.
The factors to be considered include price, quantity, quality, time of delivery,
terms of payment, trade discount and reputation of suppliers. After looking at
various factors a final decision is taken about the supplier of goods.

4. Placing Order:
After selecting a supplier, a formal purchase order is sent for the supply of
goods. A purchase order is sent on a printed form and is duly authorized by the
purchase manager. This order should contain details about the quantity, quality,
price, mode of delivery, terms of payment etc. The purchase order authorizes the
vendor to despatch goods specified in it. It establishes a contractual relation
between the buyer and the vendor.

5. Follow-Up of Purchase Order:

A purchase order normally bears a date by which the goods must be
delivered It is in the interest of the organization that goods are received in time for
keeping uninterrupted flow of materials. The suppliers may be reminded of the
date of delivery of goods. A follow-up of purchase order is necessary to receive
stocks in time.

6. Receipt and Inspection of Materials:

In big concerns the task of receiving materials is assigned to the purchase
department whereas in small concerns this work is done by the store keeper. After
unpacking goods their quantity is compared to that given in delivery challans. Any
discrepancy in items is reported to the purchase department. The specifications and
quality of goods is also checked at this stage.

7. Checking Invoices:
Lastly, purchase department checks the invoices supplied by the vendor with
that of its own records. The quantity, quality, price, terms etc. are compared with
those given in purchase order. After making full checking the invoices are sent to
accounts department for payment.
Inventory Control

Inventory control is the processes employed to maximize a company's

use of inventory. The goal of inventory control is to generate the maximum
profit from the least amount of inventory investment without intruding upon
customer satisfaction levels. Given the impact on customers and profits,
inventory control is one of the chief concerns of businesses that have large
inventory investments, such as retailers and distributors.

Types of Inventory

1. Production Inventories: Raw materials, parts, and components which enter

the firm's product in the production process. These may consist of two
general types: (a) special items manufactured to company specifications, and
(b) standard industrial items purchased 'off the shelf'.
2. MRO Inventories: Maintenance, repair, and operating supplies which are
consumed in the production process but which do not become part of the
product. (e.g., lubricating oil, soap, machine repair parts).
3. In-process Inventories: Semi-finished products found at various stages in the
production operation.
4. Finished goods Inventories: Completed products ready for shipment.

Safety Stock

It is also called buffer stock. It is the level of extra stock that is maintained to
mitigate the risk of run out of raw materials or finished goods due to
uncertainties in supply and demand. The purpose of safety stock is to ensure
that once you are run through your cycle stock, you are still prepared for any
orders. If there is an unexpected change in demand or in the supply.

Reasons for carrying Safety Stock

1. Protect against unforeseen variation in supply.

2. Compensate for forecast inaccuracies.
3. Prevent disruption in manufacturing or deliveries.
4. Avoid stock outs to keep customer service and satisfaction level high.
 Reorder Point (ROP)

It is the minimum unit quantity as a specific product reaches to trigger

inventory replenishment. It gives business time to restock a product before the
item is out of stock and they are unable to fulfil orders. The ROP formula
calculates the sum of lead time demanded and safety stock in days for when an
item needs to be reordered.

ROP = Demand during lead time +Safety Stock

Importance of ROP

1. It minimizes cost
2. It minimizes stock out
3. Helps in better forecasting.

Demand during lead time

Lead time is the number of days between when you place a purchase order
with your manufacturer or supplier for a product and when you receive the
product.

Service level

It is the expected probability of not hitting a stock out during the next
replenishment cycle or the probability of not losing sales. It is determined in the
company by level of stock.

Inventory Control Systems

1. Perpetual Inventory Control

Under this system, it continually updates inventory records and
accounts for addition and subtraction when inventory items are
received, sold from stock, move from one location to another location.
It is also preferred for inventory tracking because they deliver
accurate and reliable result on a continual basis when managed
properly.
 2. Periodic Inventory Control
It does not track inventory on a daily basis, rather they allow
organization to know the beginning and ending inventory levels
during a certain period of time. These types of inventory control
systems track inventory using physical inventory counts. When
physical inventory is complete, the balance in the purchase account
shifts into the inventory account and adjusted to match the cost of
ending inventory. Organization may choose whether to calculate the
cost of ending inventory using LIFO or FIFO method.

Inventory Control Techniques

1.ABC Analysis

ABC analysis stands for Always Better Control Analysis. It is an

inventory management technique where inventory items are classified into
three categories namely: A, B, and C. The items in A category of inventory
are closely controlled as it consists of high -priced inventory which may be
less in number but are very expensive. The items in B category are relatively
lesser expensive inventory as compared to A category and the number of
items in B category is moderate so control level is also moderate. The C
category consists of a high number of inventory items which require lesser
investments so the control level is minimum.

2.Just In Time (JIT) Method

In Just in Time method of inventory control, the company keeps only as

much inventory as it needs during the production process. With no excess
inventory in hand, the company saves the cost of storage and insurance. The
company orders further inventory when the old stock of inventory is close to
replenishment. This is a little risky method of inventory management because
a little delay in ordering new inventory can lead to stock out situation. Thus,
this method requires proper planning so that new orders can be timely placed.
It is a philosophy of manufacturing based on planned elimination of all waste
and continuous improvement of productivity.
3.Material Requirements Planning (MRP) Method

Material Requirements Planning is an inventory control method in

which the manufacturers order the inventory after considering the sales
forecast. MRP system integrates data from various areas of the business
where inventory exists. Based on the data and demand in the market, the
manager would carefully place the order for new inventory with the material
suppliers.
4.Economic Order Quantity (EOQ) Model

Economic Order Quantity technique focuses on taking a decision

regarding how much quantity of inventory sh ould the company order at any
point of time and when should they place the order. In this model, the store
manager will reorder the inventory when it reaches the minimum level. EOQ
model helps to save the ordering cost and carrying costs incurred while
placing the order. With the EOQ model, the organization is able to place the
right quantity of inventory.
5.VED Analysis

VED stands for Vital Essential and Desirable. Organizations mainly use
this technique for controlling spare parts of inventory. Like, a hi gher level of
inventory is required for vital parts that are very costly and essential for
production. Others are essential spare parts, whose absence may slow down
the production process, hence it is necessary to maintain such inventory.
Similarly, an organization can maintain a low level of inventory for desirable
parts, which are not often required for production.
Kanban System or Pull System
It is a physical control system consisting of cards and containers. The system
is used to signal the need for more parts and to ensure that those parts are produced
in time to support subsequent fabrication or assembly. The word Kanban is a
Japanese word meaning card and these cards are the means of communicating
within to and from a work centre. It is the heart of the JIT system.