MODULE III

MATERIALS MANAGEMENT
DEFENITION
. NK Nair Defines

“Material management is the integrated functioning of the various sections of an organization dealing
with. The supply of materials and allied activities in order to achieve maximum co - ordination.”

Importance of material management

1. Cost is kept at a reasonable level.

2. Scientific purchasing helps in acquiring materials at reasonable prices.

3. The cost of indirect materials is kept under cheek.

4. The equipment is properly utilized because there are no break downs due to late supply of
materials.

5. The loss of direct labor is avoided.

Functions of material management

1. Production and Material Control

Production manager prepares schedules of production to be carried in future.

2. Purchasing

Purchasing department is authorized to make buying arrangements on the basis of requisitions issued by
other departments. This department keeps contracts with suppliers and collects quotations etc. at regular
intervals.

3. Non - Production Stores

Non - production materials like office supplies, perishable tools and maintenance, repair and operating
supplies are maintained as per the needs of the business.

4. Transportation

The transporting of materials from suppliers is an important function of materials management. The
traffic department is responsible for arranging transportation service. .
PURCHASING MANAGEMENT
According to Alford and Beatty, "Purchasing is the procuring of materials, supplies, machines, tools and
service required for equipment, maintenance, and operation of a manufacturing plant."

Procedure for Purchasing or steps

1. Receipt of Purchase Requisition:

Procurement procedure begins with the receipt of the purchase requisition in the purchasing
department. It provides the purchasing department authorization to initiate action for procuring
the required materials, components and supplies.

2. Potential Sources of Supply: When the purchase requisition is received in the purchasing
department, the purchasing executive looks for the potential sources of supply

3. Issue of Letters Inviting Quotations: sThe purchasing department issue letters to approved
suppliers requesting them to send quotations. These letters contain full information pertaining to
the materials required, quantities, quality specifications, delivery schedule and place of delivery

4. Receipt and Analysis of Quotations: Quotations received from potential suppliers are opened
and signed by a responsible officer.

5. Selection of Vendor: It is not always necessary to select the vendor who offers the lowest
price and most favorable terms and conditions.

6. Purchase Order: Once the purchasing executive has decided on the source of procuring
materials, he issues a purchase order to the vendor. It contains details of items to be supplied,
quantities, quality, price, time and place of delivery.

7. Follow - up and Delivery: The purchaser's job does not end with the issuance of purchase
order. He follows it up to ensure that deliveries are received according to schedules

8. Analysis of Receiving Reports: When materials are received, they are inspected by quality
control and verified by the stores department with reference to the purchase order. .

9. Scrutiny and Approval of Invoices: This is the last step in the purchasing cycle. The
invoices received from suppliers are sent to the purchasing department for verification with
reference to the purchase order, inspection report and the receiving department's reports .
PURCHASE DEPARTMENT
The purchase department plays a very important role in an organization because purchasing has its effect
on every vital factor concerning the manufacture, cost, quality, efficiency and prompt delivery of goods to
the customers.

Objectives of purchasing
1. Timely Deliveries: The delivery schedules must be reliable so that the purchased materials
reach the go down in time.

2. Continuous and regular supply:

3. Optimum Investment: By using different inventory models, it has to be ensured while

purchasing that the amount invested is minimum.

4. Maximized Value: Maximum value is ensured by choosing the best alternative. It must be
noted that optimum price is not necessarily the lowest price.

5. Supplier Partnership.

6. Minimized Wastages: Purchase manager has to ensure that the wastes, obsolescence, delays
and duplication of purchase are avoided.

7. Quality

Purchasing Principles
1. Right Source: The prime issue in purchasing management is the selection of proper source. Allocation
factors are dependent upon the source

2. Right Quality: The manager must properly define the quality requirements, obviously, quality will be
costly.

3. Right Quantity: The issue of quantity generally relates with the decision as to - how- much to
purchase.

4. Right Price: Price is a major guiding factor for a purchase decision. For most of the people, price
comes first than even quality.

5. Right Time: Delivery schedules are a very important part of effective purchasing

6. Right Place: Right place means right place of delivery Every purchase contract, in addition to time of
delivery.
METHODS OF PURCHASING

I. Centralized purchasing
Centralized purchasing refers to the purchase of materials by a single purchase department. This
department is headed and managed by a purchasing manager.

Advantages of Centralized Purchasing

1. Bulk quantity of materials can be purchased at a low price..

2. The service of an efficient, specialized and experienced purchase executive can be obtained.

3. Better layout of stores is possible in centralized stores.

4. Economy in recording and systematic accounting of materials.

5. Transportation costs can be reduced because bulk quantity of materials purchased.

6. Centralized purchasing avoids reckless purchases.

7. Centralized purchasing discourages duplication of efforts.

Disadvantages of Centralized Purchasing

1. High initial investment has to be made in purchasing.

2. Delay in receiving materials from the centralized store by other departments.

3. Centralized purchasing is not suitable, if branches are located at different geographical

locations.

4. In case of an emergency, materials cannot be purchased from local suppliers.

5. Defective materials cannot be replaced timely.

II Decentralized purchasing
Decentralized purchasing refers to purchasing materials by all departments and branches independently
to fulfill their beeds. Such a purchasing occurs when departments and branches purchase separately and
individually.

Advantages of Decentralized Purchasing

1. Materials can be purchased by each department locally as and when required. .

2. Materials are purchased in right quantity of right quality for each department easily.

3. The replacement of defective materials takes little time

4. No heavy investment is required initially.

5. Purchase orders can be placed quickly.

Disadvantages of Decentralized Purchasing

1. Organization losses the benefit of a bulk purchase

2. Specialized knowledge may be lacking in purchasing staff.

3. There is a chance of over and under - purchasing of materials.

4. Fewer chances of effective control o f materials.

INVENTORY CONTROL
Inventories exist because its items must be on hand to perform a process such as fulfilling customer
orders of manufacturing a batch of products.

USES OF INVENTORY CONTROL

1. Safety or Buffer Inventory

Safety inventory provides a buffer against uncertainty, There is often an uncertainty of demand for one's
products. Without safety inventory, there would be lots of missed opportunities when unexpected
demand spikes aren't fulfilled because of insufficient stock

2. Raw Materials Inventory

If you are a manufacturer or practice delayed differentiation to minimize your safety stock of finished
goods, you would have a raw materials inventory.

3. Anticipation Inventory

When a business anticipates an event that will require more inventory than usual, it acquires anticipation
inventory. . Cycle Inventory When the batch is used up and gets replaced again, it has turned over.
Businesses seek to maximize inventory turnover while minimizing the associated costs.

4. Cycle inventory

Cycle inventory covers normal demand. It's suppliers in batches, the size of which is determined
by factors such as supplier lead times, bulk pricing, shipping costs, and order processing costs.

5. Finished Goods Inventory

Finished goods inventory is the product you keep on hand so that you can immediately respond to
customer orders without the delays of ordering or manufacturing the goods requested in the order. Its
purpose is to maintain good customer satisfaction levels.

6. Decoupling Inventory

Finished goods are often produced by the flow of materials through a chain of operations or
manufacturing centers. Decoupling inventory allows the operation centers to work independently
downstream operations.
INVENTORY COSTS
1. Purchase Cost: This refers to the nominal cost of inventory. It is the purchase price for the
items that are bought from outside sources, and the production cost if the items are produced
within the organization.

2. Ordering Cost / Set - up Cost: Ordering cost is incurred whenever the inventory is
replenished. It includes costs associated with the processing and chasing of the purchase order,
transportation, inspection for quality, expediting overdue orders and so on. It is also known as
the procurement cost. .

3. Carrying Cost: Also known as the holding cost or the storage cost, carrying cost represents
the cost that is associated with storing an item in inventory.

4. Stock out cost: Stock out cost means the cost associated with not serving the customers.
Stock out simply shortages.

Motives of Holding Inventory

1. Avoiding Lost Sales: Without goods in hand which are ready to be sold, most firms would
lose business. Some customers are willing to wait particularly when an item must be made to
order or is not widely available from competitors.

2. Gaining Quantity Discounts: In return for making bulk purchases, many suppliers will
reduce the price of supplies and component parts.

3. Reducing Order Costs: Each time a firm places an order, it incurs certain expenses. Forms
have to be completed, approvals have to be obtained, and goods that arrive must be accepted,
inspected, and counted. Later, an invoice must be processed and payment made. .

4. Achieving Efficient Production Runs: Each time a firm set up workers and machines to
produce an item, start - up costs are incurred.

5. Reducing Risk of Production Shortage: Manufacturing firms frequently produce goods

with hundreds or even thousands of components.
DEFINION OF INVENTORY CONTROL

According to Gordon Carson,

“Inventory control is the process whereby investment in materials and parts carried in stocks is
regulated, within pre-determined limits set in accordance with the inventory policy established
by the management "

Objectives of Inventory Control

1. To maintain the overall investment at the lowest level

2. To supply the product, raw material, sub - assemblies, semi - finished goods etc.

3. To keep inactive, waste, surplus, scrap and obsolete items at the minimum level.

4. To minimize holding, replacement and shortage costs of inventories

5. To treat inventory as investment this is risky.

6. To protect against inflation since the prices of materials are constantly increasing.

Importance of Inventory Control

1. Protects from fluctuations in demand

Many a times, the demand forecast of a product is not accurate. There is always a small
difference between the demand forecast and actual demand. However, sometimes, there is a big
difference between the demand forecast and actual - demand.

2. Better services to customers

If the company maintains a proper inventory of raw materials, then it can complete its production
in time can deliver the finished goods to the customers in time. .

3. Continuity of production operations

A Proper inventory control helps to maintain continuity of production operations. This is

because it maintains a smooth flow of raw materials

4. Reduces the risk of loss

Proper inventory control helps to reduce the risk of loss due to obsolescence (outdated) or
deterioration of items. This is because it checks all the items regularly.

5. Minimizes the administrative workload

6. Protects fluctuation in output

Inventory control tries to reduce the gap between planned production and actual production. .

7. Effective use of working capital

Proper inventory control helps to make effective use of working capital.

Function of Inventory Control

1. To Ensure timely availability of Material: Inventory Control helps in preventing delays due
to lack of materials by ensuring regular supply of proper qualities of material at the right time.

2. Better use of Financial Resources: It minimizes the capital investment in the stock of
materials. The decision regarding the appropriate size of inventory is significant

3. Protecting the inventory from Losses:. It reduces the risk of loss from fraud and theft.
Stock analysis is done to be sure that obsolescence and deprecation are kept at minimum possible
level.

4. Provides protection against the uncertainties of Demand & Supply: Maintenance of

specified raw materials general supplies, work in process and component parts in sufficient
quantities to meet the demand of production.

5. Preparation of accurate material reports: Inventory control helps in keeping perpetual

inventory system and other records to facilitate the preparation of accurate material reports. .

6. Determination of Results: The proper determination o profit depends upon the proper
valuation.
Factors Influencing Inventory Control
1. Characteristics of the manufacturing system

Influence the nature of the production process, the product design production planning and plant
layout have significant effect on inventory policy.

2. Degree of specialization and differentiation

Final assembly and packaging determines the nature of inventory control operation.

3. Process capability and flexibility

It influence Inventory Process capability is characterized by processing time of various

operations Inventory policy should aim towards balancing the production flexibility, capability,
inventory levels and customer service needs.

4. Production capacity and storage facility

It influence Inventory Control The capacity of production system as well as the nature of storage
facilities considerably affects the inventory policy of the organization

5. The nature of the production system

It influences Inventory control It is characterized by the number of manufacturing stage and the
interrelationship between various production operations.

6. Amount of Protection against Shortage

It influences Inventory Control there is always variation in demand and supply of the product.
The protection against such unpredictable variations can be done by means of buffer stocks.
STOCK LEVELS
1. Minimum Level

This is the minimum quantity of materials which must be maintained in hand at all times. This is the
level below which the stock of any material is not allowed to fall.

2. Maximum Level .

This is the maximum quantity of materials which can be maintained in hand at all times. In other words,
it is the maximum quantity of materials which should not exceed the normal course. This level is fixed
by considering:

 The normal delivery time

 Rate of consumption of materials.

 Capital required and available.

 Availability of storage space.

 Re - order quantity.

[Link] - order level

This level is fixed between minimum and maximum levels. This level is fixed above the minimum level
to guard against the abnormal usage of material.

4. Danger Level This

This level is fixed below the minimum level. When stock of material reaches this level, normal issues
will be stopped .

[Link] Stock Level

Average Stock level is the average of minimum and maximum levels. It is the quantity of material
handled by the store house on an average during a particular period.
TECHNIQUES OF INVENTORY CONTROL
1. Economic Order Quantity (EOQ)

EOQ is an important factor in controlling inventory. It is at quantity of inventory which can reasonably
be ordered economically at a time. It is also known as 'Standard Order Quantity' or 'Re-order Quantity'.
Re - order Quantity is not a stock level. The antity to be purchased at the minimum cost is called
Economic order Quantity. The quantity to be ordered depends on two factors. They are ordering cost and
carrying cost

2. Perpetual Inventory System

It is a system of controlling the stock of material in the stores on a continuous or perpetual basis.

3. ABC Analysis

ABC analysis is otherwise known as Always Better Control Method. It is a system of inventory control
which is based on selective inventory management. Here stores are divided into three categories
according to their importance.

4. VED Analysis

The three letters V, E, D represent Vital, Essential and desirable. This is used primarily for control of
spare parts this division is based on its criticality to production.

5. PARETO Analysis

This analysis is also known as 80:20 rules. Pareto's rule palates that 20% of stock must be strictly
controlled by adopting suitable policies, procedures and devices. The balance 80% of stock will have to
be analyzed in establishes norms and procedures

6. FNSD Analysis A system of inventory control based on the speed movement of material is known
as FNSD analysis, PNSD means Fast moving, Normal moving, Slow moving and Dormant stock.

7. JIT (JUST IN TIME)

Just in time purchasing is the purchase of materials at such a time that delivery immediately, which
precedes demand or use. The purpose is to reduce stock levels to s minimum through creating closer
relationship with suppliers and arranging frequent deliveries of smaller quantities. helps to reduce storage
costs, material handling, spoilage and obsolescence.

8. Inventory Turnover Ratio

It is a method of exercising control over materials, It’s the ratio which the value of material consumed
during period bears to the average stock held during the period.
9. SDE Analysis

SDE (Scarce, Difficult and Easy) analysis evaluates the portability of inventory items on the basis of their
availability. SDE analysis the inventory items are grouped into the Blowing categories.

10. HML Analysis

This is similar to the ABC analysis except that, in t analysis, the items are classified on the basis of unit
co rather than their usage value. The items are classified accordingly, H - high, M - medium, oL - low
this type of analysis is useful for keeping control over materials consumption at the departmental level.

11. GOLF Analysis

12. SOS Analysis

SOS analysis is based on the nature of supplies, where S represents the Seasonal items and OS represents
the seasonal items. . The SOS analysis made on the basis of the nature of supplies. As such, it denotes
the items into two groups S (Seasonal) and OS (Off sonal). .

13. XYZ Analysis

XYZ analysis is based on the closing inventory value of different items. Items, whose inventory values
are high, are classed as X items. Those with low investment in them are termed as Z items. Other items
are the Y items whose inventory value is neither too - high nor too - low.