MATERIALS Management

1. MATERIALS Management

2. The efficiency of any organization depends on the availability of component parts and materials in the proper quantity, quality, price, range and time. Management of materials in most organizations is crucial to their success, because the cost of purchasing, storing, moving and shipping materials account for over half of the product cost. Prof. S.K.Rawat Introduction

3. Materials management is the “management of the flow of material into organization to the point where, those materials are converted into the firm’s end product(s).” Materials management is “an organizational concept in which a single manager has authority and responsibility for all activities, principally concerned with the flow of materials into an organization. Prof. S.K.Rawat Introduction

4. The objectives of materials management are discussed below: Low Prices High Inventory Turnover  Continuity of Supply Low Payroll Costs  Cordial Supplier Relations  Development of personnel Maintenance of Good Records  Product Improvement  Inter-departmental Relationships  Economic Forecasts Prof. S.K.Rawat Objectives of materials management

5. ‘Inventory’ is a complete list of items or a quantity of goods in stock which is necessary to manufacture a product and to maintain the equipment and machinery in good working condition and order. • Inventory Management is “The technique of maintaining stocks, keeping items at desired levels; whether they be raw materials, work-in-process or finished products.” Prof. S.K.Rawat Inventory management

6. The importance of inventory management can be outlined under the following points: Continuous material supply. Reduces Investment. Reduces inventory carrying cost. Reduction in placement of orders. Avoid duplication. Proper utilization of materials. Minimizes Obsolescence. Use of modern technique. Prof. S.K.Rawat Importance of IM

7. One reason organization maintains inventory is that it is rarely possible to predict sales levels, production levels, demand and usage patterns exactly. The many functions that inventories perform can be summarized as follows:   Smoothing out irregularities in supply. Buying or producing in lots or batches. To meet seasonal or cyclical demand. To take advantage of price discounts while buying items. To maintain continuity to operations in production processes. Prof. S.K.Rawat Function of im

8. Inventories in Materials Management are usually classified as: Raw materials. Bought-out components or sub-assemblies. Semi-finished goods work-in progress or work-in-process. Consumable stores. Maintenance spare parts. Finished goods stored or in transit to warehouse or customers. Prof. S.K.Rawat Classification of inventories

9. Several techniques are available to control the materials. The most important among them are as: ABC analysis. Level setting. Economic order quantity. Material verification. Inventory turnover ratio and many more. Prof. S.K.Rawat Techniques of inventory control

10. It is referred as “Always Better Control” or Pareto Analysis. ABC analysis is a basic inventory control technique which is often applied to almost all aspects of materials management such as purchasing, receiving, inspection, storekeeping and issue of material from stores, verification of builds, inventory control, value analysis etc. ABC classification systems using the annual consumption value (i.e. annual consumption quantity of an item multiplied by its unit price) have three classes of item namely A, B and C item. Prof. S.K.Rawat ABC ANALYSIS

11. ‘A’ item Category, generally consists of 10 to 15 % of the total number of items and it contribute for 65% to 70 % of the total annual consumption value. ‘B’ items category consists of about 20 % of the total number of items which accounts for about 20% to 25 % of total consumption value. The balance items are categorized as ‘C’ item consist of the remaining 60% to 70% of the total number of items accounting for 5% to 15% of the total annual consumption value. Prof. S.K.Rawat ABC ANALYSIS

12. The steps involved in ABC Analysis are as follows: Calculate the annual consumption value (ACV). Arrange all the items in the order of descending sequence of ACV. Calculate the cumulative ACV for each item, item by item. Compute the cumulative percentage of ACV value for each item. Place the item in the list of ‘A’ category items for which the cumulative ACV is 70% of the total ACV. Place the item in the list of ‘B’ category items for which the cumulative ACV is 90% of the total ACV. And then finally place the remaining items in category ‘C’. Prof. S.K.Rawat ABC ANALYSIS process

13. Prof. S.K.Rawat ABC ANALYSIS chart Basis for ABC Classification Class of item % of Total number of items % of Total consumption value A (Vital few) 10% 70% B (Moderate) 20% 20% C (Trivial Many) 70% 10% 100% 100% Total

14. Prof. S.K.Rawat Abc analysis graph 10 20 30 40 50 60 70 80 90 100 C B A % of ACV (30,90) 10 20 30 40 50 60 70 80 90 100 (10,70) (0,0) (100,100) % of Items

15. Prof. S.K.Rawat Policy guideline for inventory control Sr. No. Nature of control Procedures ‘A’ items ‘B’ items ‘C’ items Type of control & authority Very strict control Moderate control Low control 1. Low safety stock, ordering once in two months or in a quarter Quality of safety stock & ordering pattern Very low or nil, Frequent ordering or staggered supply High safety stock, bulk ordering half yearly or annually 2. Consumption control should be weekly or daily Consumption control fortnightly or monthly Consumption control quarterly Consumption control 3. Materials planning Accurate & upto date Past consumption can used as a basis Rough estimates would be enough 4.

16. Inventory cost The material if used or kept idle in any place becomes inventory. There are expenses for every material lying any where. The expenses, which are attached to such material is inventory cost. Inventory cost is of two types. (i) Inventory carrying cost. (ii) Ordering cost. Inventory carrying cost It is expressed in item held in stock per unit time. Some of cost elements that compromise inventory carrying cost are as follows: (i) Acquisition cost, (ii) Carrying or holding costs and (iii) Shortage costs. Prof. S.K.Rawat Inventory terms

17. Ordering cost It is basically the expenditure for placement of order and further activities in the company such as receiving inspection, stores crediting, etc. by ordering and buying large quantities they reduce both purchase cost and ordering cost. As we have seen, the bigger the order quantity, the bigger the average inventories investment and fewer the number of orders that must be processed, hence fewer the deliveries that need to be handled. This reduces costs. Prof. S.K.Rawat Inventory terms

18. Prof. S.K.Rawat Economic order quantity EOQ can be understood by studying the relation of inventory carrying cost and ordering cost. The graph shows the relation of inventory carrying cost and ordering cost. Ordering cost as shown in the graph is curve which starts from top. As the ordering quantity goes up, it keeps reducing. As the order quantity per order increases the ordering cost reduces, but the inventory carrying cost increases. This is because more material is received in the company per order so it is essential to balance this order quantity. To optimize the order quantity this crossing point is considered as the most economic order quantity (EOQ). After this, the total cost goes on increasing as shown by the curve of total inventory cost. Inventory carrying cost is represented by a straight line and goes on increasing with the order cost. Now from the graph, at certain stage, ordering cost is equal to inventory carrying cost. This is shown by the crossing of these two lines. Total inventory cost Inventory carrying cost Annual Cost Minimum Total cost Ordering cost Economic Order Quantity Order Quantity

19. Prof. S.K.Rawat Economic order quantity Let ‘A’ be the annul consumption for an item and if ‘Q’ is the order size (i.e. EOQ) to be determined, then the number of order / year = Let B = per order cost / ordering cost then, annual ordering cost = (number of orders per year) x (per order cost) Let C = carrying cost in percentage, P = price per unit and = average inventory level

20. Prof. S.K.Rawat Economic order quantity Then Annual carrying cost = [Average inventory level] x [Annual carrying cost / unit] Thus total annual inventory cost = (Annual ordering cost) + (Annual carrying cost) i.e. The maximum order quantity occurs at a point where the total cost curve is minimum. Thus maximum values of order quantity (Q) or EOQ can be determined by equating both the cost. i.e., Annual ordering cost = Annual carrying cost.

21. Objectives To be aware of the quality standards available in the market and to maintain the quality of purchased materials. The supply of items and scheduled activities are not interrupted. It integrates the requirements of all the departments there by avoiding duplications of purchase, resulting in wastes and obsolescence. It has to create goodwill for the organization through healthy buyer-supplier relationship. Help the design and development department to develop new products and related new components of those products. To maintain good relationship with the vendors. To train and develop highly competent personnel who are motivated to make the company as well as their department succeed. Prof. S.K.Rawat Purchase department

22. Prof. S.K.Rawat Purchase procedure REQUIREMENT from user dept PLACE the Oder to right vendor Send ENQUIRY to vendors FOLLOW UP with vendor Get QUOTATION from vendors GET the material COMPARISON of Quotation INSPECT the material NEGOTIATE Quotation for Price CREDIT the material

23. JIT is the technique which minimize the cycle time from procurement of raw material to delivery to customer. It is an effort to bring down the cycle time to the level of process time. Many companies have been able to reduce the inventory by up to 90% by use of JIT. JIT focuses on eliminating or reducing the waste embedded in the process. JIT hits at the root of the non values adding inventory management procedures. JIT is about looking for those solutions beyond keeping lot of inventories. Prof. S.K.Rawat Just in time