Materials Management Concept

1. Materials Management Concept Prof. Mohan Mahurkar

3. Introduction Materials Management is an indispensable core activity of all types of organizations, whether manufacturing, trading or even non profit organizations. All organizations are continuously involved in procurement , storage and stock replenishment of different types of production materials. In a manufacturing organization , materials management assumes greater importance, though it also adds to the greater degree of complexities. In some of them the manufacturing organizations the cost of the materials varies from 40% to 80% of the production cost or sales.

4. Examples(As on 31 -03- 2003) Thus, the slightest efficiency improvement in the materials management releases substantial advantages

5. DEFINITION Materials Management is a term to describe the grouping of management functions related to the complete cycle of materials flow, from the purchase and internal control of production materials to the planning and control of work in progress, to the warehousing, shipping and distribution of the finished product.

6. Objectives of Material Management • Procurement of materials at lowest prices. • High rate of inventory turnover. • To ensure continuity of supply . • To maintain the consistency of quality. • To minimize the acquisition & storing cost. • Lower administrative cost. • Maintenance of supplier relations. • Development of new materials & sources. • Efficient reporting. • Development of personnel.

7. Typical Drawing Sheet Management END VIEW PLAN ELEVATION 40 nm 200 NM 50 nm 40 nm

9. Scope of Materials Management Materials management includes the following: • Materials Planning • Production Control • Inventory Control • Purchase • Receiving & Inspection • Store Keeping • Shipping – Distribution of finished goods. • Materials Handling • Traffic / Transport • Physical Distribution ( to customers) • Scrap Control

10. EXAMPLE - B Wrist Watch Case Strap Dial Hands Components Base Plate Power Circuit Train wheel assembly Other components Hour Hand Min. Hand Sec Hand BEZEL Black Cover CRYSTAL O - RING Upper Piece Lower Piece Lock Dial Base Indices Day – Date Window

11. Sample format of Raw Material Master

12. Sample Format for Bought – Out Items

13. Sample of Materials Requisition Remarks: When required and in how much quantity

14. 2. Materials Planning It is the scientific way of determining the requirements of various materials & items that go into meeting the production needs within the economic investment policies. Objectives • Smooth flow of production. • Uninterrupted services in various fields,. • Prevention of stock outs. • Control excess inventory.

15. Inputs to the system. • Annual production plan with product – mix. • Monthly production plan. • Materials master. • Design master. • Materials requisition. • Estimates of year ending, work-in-progress, finished goods inventory. • 3 years consumption pattern. • Rejection data. • Consumable requirement data. • Tools consumption data. • Source from where to be procured – imported or indigenous. • Safety stock, lead time etc

16. Materials Purchase Request Based on the above data, the materials planning section will prepare “Materials Purchase Request” which will be examined by Material Planning Head and the accounts and forwarded to purchase department. Purchase The basic objective of the purchase department is to ensure continuity of supply of materials, tools and other items in order to have uninterrupted production and at the same time to ultimately reduce the cost of the finished goods This function can be divided into: • Pre – purchase. • Ordering • Post - purchase

17. Pre – Purchase Activities Purchase Dept. will plan their activities based on • Materials requisition. • Lead-time consideration. • Stock available – stores, work in progress, finished goods. • Funds availability. After compiling the complete requirements, the purchase dept. should work out a purchase budget and give details of A,B and C class items budget, capital budget, spares budget, consumable and other items as also stationery budget with a schedule. This will have to be got sanctioned by the finance chief and unit chief.

18. Ordering • Based on requirement & scheduling for new items, quotations will be called and for the existing items rate fixation will be done by negotiations. • Vendor rating will also be done. • Order will be placed on the approved vendors after due sanction of unit chief / materials chief, indicating rate and pattern of supply needed. The purchase order contains various terms and conditional about supply and payments

19. A normal purchase procedure will be as follows: • Circulations of enquires. • Receipt of quotations ( tenders ) • Opening of tenders. • Preparation of comparative statement. • Discussions with tenderers & arriving at lowest quotation & befitting payment terms. • Placement of orders. • Order confirmation from vendors. • Opening of letter of credit for imports. • Receipt of materials. • Inspection, payments. • Return of rejected items and getting replacement.

20. Storing The objective of storing the materials is to ensure timely supply of materials in the production cycle ensuring safety of the materials and easy access. Various functions of stores are: • Take into stock accepted materials. • Store them scientifically. • Have proper storage facilities to ensure that no damage is done to materials. • Issue materials to requiring departments. • Maintain stock reports. • Storage of scrap from shops and its disposal. • Take physical verification periodically. • Disposal of rejected materials.

21. Finished Goods Store • Normally this store will be under the marketing department . • The finished goods will be received and dispatched from here and stock reports maintained.

22. Controls • Materials storage :– racks, A/c, strong-room. • Materials Handling. • Storage of hazardous materials. • Use of vertical space. • Use of proper containers. • Use of transport facilities :– trolleys etc. • Keeping records. • Preparation of daily reports. • Preparation of monthly and quarterly reports. • Preparations of annual reports. • Use of computers. • Use of scientific techniques.

23. PURCHASING MANAGEMENT Purchase Manual Organizational & Personnel functions Logistics & supply chain management Legal aspects Purchase accounting Audit performance evaluation • Law of contract • Legal relationship • Agreement • Agents • C & F • Purchase • Legal aspects • Free on rail (FOR) • Free on board (FOB) • Arbitration & award • Damage claims • Insurance • Demurrage • Pur. Dept Orgn • Roles & responsibilities • Functions (purchasing) • Right personnel on job • Training & Devt • Make or buy decisions • Sub – contracting • Vendor rating • Leasing of capacity • Disposal of surplus / scrap/ redundant items/ rejected items. • KRA Evaluation • Imports / Exports • Petty Cash Purchases • Mission • Objectives • Scope • Responsibilities • Limitations • Financial Powers • Inward transport • Outward transport • Distribution TR. • Sea / Air / Road TR • Arrangers carriers Pvt / Contract / Common • Expenses accounting • Costing • Cost redn • Price fixing • Performance evaluation • Functional • Personnel • Audit • MIS

24. FLOW CHART FOR PURCHASE

25. Annual production plan Finished stock available Quantity Calculations Compt stock in stores Consumption & rejection data for last 3 years Purchase Requisition Work in process Advertisement call for tenders New vendors Receipt of tenders / quotations Existing vendors Appointment of tender committee Tender opening Preparation of comparative statement Latest prices elsewhere Negotiations Costing Final quotations Opening of LC Release of purchase orders Select 2 – 3 vendors Receipt of materials Damages Insurance Shortages Inform purchase note in inspection report Inspection of materials Qty Rejected Quantity rework Prepare inspection report Quantity accepted Report ( MI Slip) to A/c for payments Stores

26. Economic Ordering Quantity Formula: EOQ = 2AB C A = Usage unit for the inventory planning period ( Total inventory requirement in the units) B = Buying cost per unit. C = Carrying cost per unit. EOQ = 2 x 1600 x 50 1 = 160000 = 400 units

27. Inventory costs of different order quantities Number of orders = Total inventory requirement / Order size Result : Placing 4 orders of 400 units each, will result into a total cost of Rs. 400, which is the lowest and hence most economical.

28. Determination of EOQ

29. Re- order Point A Maximum Inventory Level 700 B 600 Usage rate Usage rate slope 500 C Units of investment 400 D Average Inventory level Reorder point 300 E Replenishment point Safety stock usage during lead time 200 Lead Time 100 Stock out 10 14 15 16 17 Months A: Maximum level ( 700 units) B: Average maximum level ( 600 units) C: Average inventory level ( 400 units) ------- IMPORTANT D: Re – order point ( 400 units ) E: Replenishment point ( 250 units )

31. Legal aspects of purchasing Purchase function involves a large sum of money. Also it deals with various agencies like suppliers, sub contractors, transporters, agents, government bodies like DGS & D, excise, sales tax ..etc. Hence, it is essential to know various laws and regulations. Some of them are: • Excise notifications. • Sales tax rules. • Law of contract ( Indian Contract Act 1872 ) • Law of agency ( ICA 1872) • Negotiable Instrument Act 1881 ( HUNDI ) • The Indian Arbitration Act 1899. • Provisions regarding the carriage of goods by land, sea, air …etc. • Customs Notifications. • Use of patented items. • Works Contract. Refer: Integrated materials management by M.D Patel, Chunawalla & DR Patel ( NMIMS Library)

32. 7. Inventory Control Definition Inventory in wider sense is defined as any “IDLE RESOURCE” of an enterprise. It is commonly used to indicate materials – raw, in-process, finished, packing materials, spares etc. Stocked in order to meet an expected demand or distribution in future. Even though inventory of materials is an idle resource, in the sense it is not meant for immediate use, it is almost a necessity to maintain some inventories for the smooth functioning of an organization.

33. Why inventories are essential ? • For adequate customer service. • To take advantage of price – discounts by bulk purchasing. • To make possible economics in transportation and clearing & forwarding charges. • To maintain service stocks while replacement stocks are in transit. • To serve as buffer in case of shop rejections and delayed deliveries. • To maintain smooth supply chain .

34. Evils of Excess Inventory • Lock up of capital. • Cost involved in carrying inventory – storage place, personnel, records…etc • Risk of deterioration. • Risk of obsolescence – models change. • Changes in prices – If low, our loss.

35. Control Aspects • Elimination of certain inventories. • Inventory levels fixing – max, min. • Periodic review.

36. Inventory Control & Its Advantages • Keeping the investment low. • Ensures timely availability. • Allows full advantage of economics. • Reduces “ Stock – Out ” chances. • Increased Profitability.

37. Types of Inventories • Production inventories. • Maintenance and repair inventories. • In – process inventories ( WIP ). • Finished goods inventories. • Redundant goods inventory – viz: Plant & machinery, Equipments, Spares, R/M, Components, Packing materials…etc.

38. Scientific Stock Levels Since inventory blocks the funds, it is essential to keep “ optimum levels ” of inventories. The ordering should be linked accordingly. Also “ lead time ” is to be considered. • Fixed Interval System – monthly ..etc • Fixed Order Quantity System – consumption. • Safety Stock. • Minimum Stock.

39. Maximum Stock Level REORDER LEVEL Minimum Stock Level Stock Safety Stock Level Period

40. Safety Stock Calculations( Example ) Suppose for an item, monthly consumption is 100 units, the normal lead time is 15 days and maximum lead time is 1 month, then safety stock is = ( 1 – ½) x 100 = 50 units.

41. Various Scientific Techniques used in Inventory Control

42. A . Inventory Analysis

43. 100 % 95 % 80 % Consumption In Rs A B C Percentage Of Items

44. B. Inventory Carrying Cost • Interest Charges. • Insurance Cost. • Storage cost – Rent for space and depreciation of building and equipment. • Operational Costs. • Obsolescence and deterioration.

45. Economic Ordering Cost Total cost Inventory Carrying cost Cost ( Rs ) Ordering Cost EOQ Quantity per order

46. Mathematical Formula for EOQ EOQ = 2 A IC Where, A : Ordering cost / Order. EOQ : Economic Order Quantity. : Total quantity ordered or annual consumption. I : Inventory carrying cost / Annum. C : Cost per unit in Rupees Say, = 36000 I = 20 % A= Rs 25 C= Rs 1 EOQ = 2 x 36000 x 25 0.2 x 1 = 3000 units

47. Organization for Materials

48. INTRODUCTION JIT : Just in Time KANBAN MRP II ERP