UNIT-IV

Material management
• Material management is a function, which aims for integrated approach towards the
management of materials in an industrial undertaking.

• Its main object is cost reduction and efficient handling of materials at all stages and
in all sections.

• Scope of Material Management:

▪ Material planning and programming.
▪ Store –keeping.
▪ Purchasing.
▪ Inventory control.
▪ Simplification, codification and standardization in stores.
▪ Transportation.
▪ Materials handling.
▪ Disposal of scrap and surplus.
 Definition

It is concerned with planning, organizing and controlling the flow of

materials from their initial purchase through internal operations to the
service point through distribution.
OR

Material management is a scientific technique, concerned with

Planning, Organizing &Control of flow of materials, from their initial
purchase to destination.
 AIM OF MATERIAL MANAGEMENT

To get
1. The Right quality
2. Right quantity of supplies
3. At the Right time
4. At the Right place
5. For the Right cost
PURPOSE OF MATERIAL MANAGEMENT
▪ To gain economy in purchasing
▪ To satisfy the demand during period of replenishment
▪ To carry reserve stock to avoid stock out
▪ To stabilize fluctuations in consumption
▪ To provide reasonable level of client services
 Objective of material management

Primary Secondary
▪ Right price ▪ Forecasting
▪ High turnover ▪ Inter-departmental
▪ Low procurement harmony
▪ & storage cost ▪ Product improvement
▪ Continuity of supply ▪ Standardization
▪ Consistency in quality ▪ Make or buy decision
▪ Good supplier relations ▪ New materials & products
▪ Development of ▪ Favorable reciprocal
personnel relationships
▪ Good information
system
 Four basic needs of Material management
1. To have adequate materials on hand when needed
2. To pay the lowest possible prices, consistent with quality and value
requirement for purchases materials
3. To minimize the inventory investment
4. To operate efficiently
Basic principles of material management
▪ Effective management & supervision
▪ It depends on managerial functions of
✓Planning
✓Organizing
✓Staffing
✓Directing
✓Controlling
✓Reporting
✓Budgeting
▪ Sound purchasing methods
▪ Skillful & hard poised negotiations
▪ Effective purchase system
▪ Should be simple
▪ Must not increase other costs
▪ Simple inventory control programme
Objectives of Material Management:
▪ Maintaining continuity of productive operations by ensuring a uniform flow of
materials.
▪ Reducing material cost by systematic use of scientific techniques.
▪ Releasing working capital for productive purpose by efficient control of
inventories.
▪ Increasing the competitiveness of end products by ensuring right quality at the
right price, especially in foreign markets.
▪ Saving foreign exchanges through economic use of foreign purchases and import
substitution.
▪ Establishing good seller-buyer relation ships.
▪ Ensuring low departmental cost and high efficiency.
▪ Setting high ethical standards.
Functions of Material Management
▪ The functions of material manager are basically economic, even in non profit
organizations.
▪ The most fundamental objective is survival.
▪ The material function also contributes to survival and profits by providing materials at the
lowest cost.
▪ The materials function also helps to achieve the objective when it boosts inventory
turnover or gets the material of superior quality.
▪ If the contribution is made directly by the material function we call it primary objective.
▪ If it is indirect and results from the materials departments assistance to another
department we call it secondary objective.
Duties and responsibility of materials manager

▪ Establishing and supervising materials management functions and procedures in

line with the company policies.
▪ Internal organization of materials management department so as to function
efficiently in carrying out purchasing policies and procedures.
▪ Development of sound supplier relationships.
▪ Coordination between material department and other departments.
▪ Preparing and analyzing forecasts of supply conditions and price trends.
▪ Application of electronic data processing, computerization and other operations
responsible techniques for effective utilization of various resources available to
the material manger.
▪ Simplification, standardization, and specifications tasks in connection with
materials and supplies that are purchased are sometimes the responsibility of
material manger.
Material Handling:
It is an art and science involving movement, packing's and storing of materials in
any form by means of gravity, manual effort or power driven machines.

Steps for reducing material handling cost

▪ Layout.
▪ Use of gravity.
▪ Use of devices.
▪ Proper responsibilities.

Disposal must be decided in following priority

▪ Send it back on resale to the original supplier, if they are interested.
▪ Sell them at the best [possible price.
▪ Sell it at any available price even at scrap valve.
▪ Give away free. As there is no use of preserving it.
PURCHASING
▪ An activity responsible for getting the right material to the right place at right
time, in the right quantity for the right price.

▪ Purchasing is responsible for that phase of material cycle, from the time an
item is requisitioned until it is delivered to the user.

▪ Includes selection of vendors, deciding the price, negotiating for the quality
and delivery.

▪ Also includes transportation, receiving, inspection and inventory control.

 Functions of purchasing
1. Procurement of Goods and Services: The primary purpose of the purchasing function is to acquire goods and services
that are needed by the organization to carry out its operations. This includes sourcing raw materials, equipment, office
supplies, and services needed for the organization's day-to-day activities.
2. Cost Control: Purchasing plays a crucial role in cost control and cost reduction within an organization. By negotiating
prices with suppliers, seeking out cost-effective alternatives, and managing contracts effectively, the purchasing function
helps the organization obtain goods and services at the best possible prices.
3. Supplier Management: Purchasing is responsible for identifying and selecting suppliers, establishing relationships with
them, and managing these relationships to ensure that the organization receives high-quality goods and services on
time and at the right price.
4. Risk Management: The purchasing function is also involved in managing risks related to the supply chain, such as
disruptions in the supply of critical materials, changes in market conditions, or supplier failures. By diversifying suppliers,
developing contingency plans, and monitoring supplier performance, purchasing helps mitigate these risks.
5. Quality Assurance: Purchasing is responsible for ensuring that the goods and services acquired meet the organization's
quality standards. This may involve setting quality requirements, conducting supplier evaluations, and implementing
quality control measures to ensure that purchased items meet specifications.
6. Inventory Management: The purchasing function is closely linked to inventory management, as it influences the levels
of inventory maintained by the organization. By coordinating with other departments and suppliers, purchasing helps
optimize inventory levels to minimize costs while ensuring that materials are available when needed.
7. Sustainability and Ethics: In modern business practices, purchasing also plays a role in promoting sustainability and
ethical practices within the supply chain. This includes sourcing from environmentally responsible suppliers, ensuring
fair labor practices, and promoting social responsibility in procurement decisions.
FUNCTIONS OF PURCHASING DEPARTMENT
• To purchase materials on properly authorized requisitions.
• To place orders of the requisitioned goods with right suppliers.
• To obtain right type and quality of the goods at the cheapest price.
• To purchase the right quantities at the right time.
• Receipt of goods in time. (timely delivery)
• Check for the consistency in specifications.
• Study various sources of supply and decide the most convenient one as well as alternatives.
• List of reliable vendors.
• To keep list of articles needed up to date with their normal quantities for placing the orders.
• To prepare specifications and quotations----comparative statement.
• Prompt payments.
• To purchase directly all small items, which do not require quotations
• To elevate company’s reputation by raising purchasing standards.
Objective of purchasing
• From the Top Managerial perspective:
• Management expects the purchase department to achieve five R’s in
acquisition of materials.
✓Right Quality
✓Right Supplier
✓Right Quantity
✓Right Time and
✓Right Price
• From the Operating or Functional perspective:
• Uninterrupted flow of materials.

• Buying competitively.

• Buying wisely (market research, price and trend etc.)

• Keep inventory investment at a practical minimum.

• Keep inventory losses at a practical minimum.

• Develop effective and reliable sources of supply.

• Maintain good relationship.

• Achieve maximum integration with other departments.

• Professional and cost effective attitude.

PROCUREMENT / PURCHASE CYCLE
▪ Review requisitions/selection

▪ Determine needed quantities

▪ Reconcile needs & funds

▪ Choose procurement method

▪ Select suppliers

▪ Specify contract terms

▪ Place order

▪ Monitor order status

▪ Receipt & inspection

▪ Payment
Purchase procedure
▪ Requisition (quantity, quality) with specifications. INDENTING
▪ Look for reliable suppliers.
▪ Materials (urgent/small) Local purchase.
▪ Prepare and issue NIT (Notice Inviting Tenders), mentioning terms and conditions, date, time of opening
tenders etc.

▪ Open the tenders (prescribed time and date)

▪ Prepare comparative statement of rate, T/c mentioned in the tenders. Study them.
▪ If required, samples may be received from the firms who have quoted the lowest price.
▪ Place the purchase order (PO) to the selected firm.

▪ Copy of PO to stores, department head seeking requirements, accounts section, and also to the
QC/inspection department.
▪ Detailed inspection of material after receipt.
▪ If satisfactory, bill of the supplier is passed and payment is made.
▪ Close the order.
Point to remember while purchasing
▪ Proper specification

▪ Invite quotations from reputed firms

▪ Comparison of offers based on basic price, freight &
▪ insurance, taxes and levies
▪ Quantity & payment discounts

▪ Payment terms

▪ Delivery period, guarantee

▪ Vendor reputation
▪ (reliability, technical capabilities, convenience, availability,
▪ after-sales service, sales assistance)
▪ Short listing for better negotiation terms

▪ Seek order acknowledgement

Equipment maintenance and condemnation
• PREVENTIVE MAINTENANCE
• Purchase with warranty & spares.
• Safeguard the electronic equipment's with: (as per guidelines)
• Voltage stabilizer, UPS
• Automatic switch over generator
• Requirement of electricity, water, space, atmospheric conditions, etc. Must be taken into consideration
• Well equipped maintenance cell must be available
• All equipment must be operated as per instructions with trained staff
• Monitoring annual maintenance contracts. (AMC)
• Maintenance cell
• Communications between maintenance cell & suppliers of the equipment.
• Follow-up of maintenance & repair services
• Repair of equipment
• Outside agencies
• In-house facility
• CONDEMNATION & DISPOSAL
• Criteria for condemnation:
• The equipment has become:
• 1. Non-functional & beyond economical repair
• 2. Non-functional & obsolete
• 3. Functional, but obsolete
• 4. Functional, but hazardous
• 5. Functional, but no longer required
• PROCEDURE FOR CONDEMNATION
• 1. Verify records.
• 2. History sheet of equipment
• 3. Log book of maintenance & repairs
• 4. Performance record of equipment
• 5. Put up in proper form & to the proper authority
• DISPOSAL
• 1. Circulate to other units, where it is needed
• 2. Return to the vendor, if willing to accept
• 3. Sell to agencies, scrap dealers, etc
• 4. Auction
• 5. Local destruction
Source of supply
▪ A source of supply defines how or where a product is procured. When a
procurement proposal is created, the source of supply to be used is
determined automatically or interactively.
▪ The system uses this source to create the procurement proposal.
▪ A distinction should be made between the procurement types external
procurement and in-house production
▪ Supplier can be selected among those from the buyer has a previous
purchase.
▪ In general, this process involves comparing potential suppliers to provide
the right quality and needed quantity at the right time, all at the right
place with the desired degree of service. Quality, quantity, and price
should be compared and balanced against one another
Quality Assurance
It means to provide the necessary confidence to the customer as well as to the top management that all concerned
are carrying out their job effectively and the product quality is as per customer satisfaction.

Responsibility
▪ Plan and develop and establish quality policies.
▪ To assure that products of prescribed specification reaches to the customers.
▪ Regularly evaluate the effectiveness of the quality programmes.
▪ Conduct studies and investigations related to quality problems.
▪ Liaise with different department in and outside the organization.
▪ Organize the training programmes on quality.
▪ Plan and coordinate vendor quality surveys and evaluate their results.
▪ Develop quality assurance system and regularly evaluate its effectiveness.

Quality cost: it means cost of poor quality goods or services.

✓ Failure costs.
✓ Detection costs.
✓ Prevention costs.
Quality planning
▪ It is a systematic process for
▪ Identifying customers.
▪ Discovering customers needs.
▪ Designing the responsive products.
▪ Developing the process for creating and delivering the products.
Quality Control:
▪ It is the control of quality during manufacturing. Quality is closely allied to cost and consumer
needs.
▪ Quality of nay product is regarded as the degree to which it fulfills the requirements of the
customer. It means degree of perfection.
▪ It is industrial management technique by means of which products of uniform acceptable quality
are manufactured.

Objectives:
▪ To set up standards of quality acceptable to the customer and economical to achieve and
maintain.
▪ To locate and identify the process faults so as to control defectives, scrap and waste.
▪ To take necessary corrective measures so as to maintain the quality of the products.
▪ To ensure that sub standard product do not reach the customers.
Factors affecting quality:
▪ Market research i.e demand of purchaser.
▪ Money i.e capability to invest.
▪ Management policies for quality.
▪ Production methods and product design.

Functions of quality control department:

▪ Only the products of uniform and standard quality are allowed to be sold.
▪ To suggest methods and ways to prevent the manufacturing difficulties.
▪ To reject the defective goods, so poor quality may not reach the customers.
▪ To find out the points where the control is breaking down and investigate
the causes of it.
▪ To correct the rejected goods, it is rehabilitation of defective goods.
Advantages of quality control:
▪ Quality of product is improved which in turn increases sales.
▪ Scrap rejection and rework are minimized thus reducing the waste.
▪ Good quality product improves reputation.
▪ Inspection cost reduces to a great extent.
▪ Uniformity in quality can be achieved.
▪ Improvement in manufacturer and consumer relations.
▪ Improvement in technical knowledge and engineering data for the process
development and manufacturing design.
Product quality analysis: It includes,
▪ The various functions to be performed by the manufactured product.
▪ Life and durability of product.
▪ Working conditions required during manufacturing.
▪ Product specifications.
▪ Manufacturing process and methods.
▪ Maintenance and installation.
Inspection
It is the function to judge the quality of as product. It is the process of measuring the
quality of a product or service in terms of established standards.

It is the art of comparing materials, products or performance with established standards.

Objects of Inspection
▪ To collect the information regarding the performance of the product with
established standards for the use of engineering, production, purchasing and
quality control.
▪ To sort out poor quality manufactured products and thus to maintain the
standard.
▪ To establish and increase the reputation by protecting consumers from receiving
poor quality products.
Qualities of inspector

▪ He should know his job thoroughly. The technical knowledge and skill in the art of
inspection is essential.
▪ He should be intelligent, capable and of good grasping power.
▪ He should understand his responsibility and work with patience. Any negligence on
his part may lead to serious loss to quality of product.
▪ He must know statistical quality control techniques programme well.
▪ He should be able to minimize or prevent wastage by using substitute to the
materials already in use.
▪ He should have the working knowledge of the general quality standards.
Principles of Inspection
The inspection function for maximum efficiency must be independent but
coordinate with the functions of production, planning and sales department.

Improvement in quality performance is achieved as result of changes in

engineering specifications or manufacturing procedures and not by
inspection techniques.

Inspection standards
▪ Inspection standards for raw material.
▪ Inspection standards for work in process.
▪ Working inspection standards.
▪ Inspection standards for finished product.
▪ Inspection standards of the completed mechanism.
Functions of inspection department
▪ To inspect raw material.
▪ Metallurgical and metallographic inspection.
▪ Purchase parts inspection.
▪ Work in process inspection.
▪ Tools inspection.
▪ Periodic gauge and other measuring instruments inspection.
▪ Finished product inspection.
▪ Salvaging.
▪ Complaints division.
Kinds of Inspection
▪ Tools Inspection.
▪ First piece inspection.
▪ Working inspection.
▪ Sample inspection.
▪ Operation inspection.
▪ Final inspection.
▪ Pilot piece inspection.
▪ Key operation inspection.
▪ Functional inspection.
▪ Endurance inspection.
Method employed are for inspection
▪ Floor inspection.
▪ Centralized inspection.
▪ Screening or 100% inspection.
▪ Lot by lot inspection.
▪ Process inspection.
 Inventory control
What is inventory?
Detailed list of movable goods as raw materials, materials used in process, finished goods, general
supplies and equipment's etc. along with their quantity and value of each .
Inventory control
It is defined as a systematic location storage and recording of goods in such a way that
desired degree service can be made to the operating shops at minimum ultimate cost.

Need of inventory control

▪ The necessity is to maintain a reserve of goods that will ensure manufacturing
according to the production plan based on sales requirements and lowest possible
ultimate cost.

▪ To promote the smooth factory operation and to prevent the piling up of stock or the
idle machine time proper quantity of material must be on hand when it is wanted.
Proper inventory control can reduce the losses.
Functions of inventory:
▪ To run the stores effectively: This includes layout, storing media, utilization of
storage space receiving and issuing procedures.
▪ To ensure timely availability of material and avoid built up of stock levels.
▪ Technical responsibility for the state of materials: This includes methods of
storing, maintenance procedures, studies of deterioration and obsolescence.
▪ Stock control system: physical verification, ordering policies, procedure for the
purchase of goods.
▪ Maintenance of specified raw materials, general supplies, work in process and
component part in sufficient quantities to meet the demand of production.
▪ Protecting the inventory from losses due to improper handling and storing of
goods and unauthorized removal from stores.
▪ Pricing all materials supplied to the shops so as to estimate material cost.
Quantity Standards:
▪ The maximum stores.
▪ The minimum stores.
▪ The standard order.
▪ The order point
▪ Lead or procurement time.

Advantages of inventory control:

▪ It creates buffer between input and output.
▪ It ensures against delays in deliveries.
▪ It allows for possible increase in output.
▪ It allows advantage of quantity discounts.
▪ It ensures against scarcity of materials in the market.
▪ It utilize the benefit of price fluctuations.

Inventory Build-up: It starts because of the reasons either

▪ Items get ordered in excess of the requirements.
▪ They do not get used at the same rate at which they are received.
Control techniques: ABC (Always Better Control) control Analysis
▪ In material management, its very difficult and costly to give equal attention to all
the items of inventory.

▪ ABC analysis is meant for relative inventory control in which maximum attention
can be given to items which consume more money and fair attention can be given
to medium value items, while the attention for low value can be reduced to routine
procedure only.

▪ It is necessary to clear that ABC analysis does not depend on the unit cost of the
items but on its annual consumptions

▪ It is also clarified that it do not indicate importance of any item or category and
every item is equally important.
ABC analysis is a basic technique of materials management and can be applied over
almost all the aspects of material management such as purchase, sales, inspection,
inventory control, store keeping.

Control policies of ABC items are based on two principles:

▪ To keep capital tied up inventories as low as practicable
▪ To ensure that all the materials would be available when required.

Methodology of handling ABC analysis:

▪ Calculate the rupee valve for each item in inventory and the annual
consumptions.
▪ Arrange all the items in descending order, value wise.
▪ Prepare the list of items according to annual rupee value.
▪ Compute a total running total item-by-item
▪ Computer print for each item, the cumulative percentage for the item and
cumulative item issue valve.
 ABC ANALYSIS
(ABC = Always Better Control)
This is based on cost criteria.
It helps to exercise selective control when confronted with large number of
items it rationalizes the number of orders, number of items & reduce the
inventory.
About 10 % of materials consume 70 % of resources
About 20 % of materials consume 20 % of resources
About 70 % of materials consume 10 % of resources
 ‘A’ ITEMS
Small in number, but consume large amount of resources
Must have:
•Tight control
•Rigid estimate of requirements
•Strict & closer watch
•Low safety stocks
•Managed by top management
‘B’ ITEM
Intermediate
Must have:
•Moderate control
•Purchase based on rigid requirements
•Reasonably strict watch & control
•Moderate safety stocks
•Managed by middle level management
‘C’ ITEMS
Larger in number, but consume lesser amount of resources
Must have:
•Ordinary control measures
•Purchase based on usage estimates
•High safety stocks
ABC analysis does not stress on items those are less costly but may be vital
 ANNUAL COST CUMMULATIVE
ITEM % ITEM
[Rs.] COST [Rs.]
COST %
ABC
1 90000 90000
10 % 70 %
A 2 50000 140000
3 20000 160000
N 4 7500 167500
20 % 20 %
A 5 7500 175000
6 5000 180000
L
7 4500 184500
Y 8 4000 188500
9 2750 191250
S
10 1750 193000
I 11 1500 194500

S 12 1500 196000
13 500 196500 10 %
70 %
14 500 197000
15 500 197500
WORK 16 500 198000
SHEET 17 500 198500
18 500 199000
19 500 199500
20 500 200000
 Economic Ordering Quantity: (EOQ)
The evaluation of the most economic quantity to be purchased involves calculation of the two costs:
1. Procurement cost.
2. Inventory carrying cost.

Procurement cost includes:

▪ Calling quotations.
▪ Processing quotations.
▪ Placing purchase orders.
▪ Receiving and inspection.
▪ Verifying and payment of bills.
▪ Other incidental charges.

Inventory carrying cost:

▪ Insurance.
▪ Storage and handling
▪ Obsolescence and Depreciation.
▪ Deterioration.
▪ Taxes and interest
The economic ordering quantity is obtained by the quantity whose procurement cost is equal
to inventory carrying cost.
Let A= total item consumed.
P= procurement cost per order.
C= annual inventory carrying cost.
Q= economic ordering quantity.

Procurement cost/year = No of orders placed in a year * Cost per order = A* P/Q

Inventory carrying cost/year = average valve of inventory in a year * annual inventory carrying
cost per item. = Q/2 *C

Total cost: (A*P)/Q+ (Q*C)/2

This total cost will be minimum when, (A*P)/Q = (Q*C)/2

Q2 =2AP /C

Hence the EOQ (Q)= √2AP/C

 Value Analysis and Engineering
• It is the modification of designs and processes to increase the value of a
product or service.

• Technique used for cost reduction.

• It identifies the areas of excessive or unnecessary expenses and attempts to

improve the value of the product.

• It provides the base for better performance at a lower cost without

compromising on quality, reliability and maintainability.

• An organized and exhaustively critical study of a product in terms of the

design, functions and costs with the objective of cost reduction.
Value Analysis:
▪ Value analysis is a technique of cost reduction based on systematic
and organized examination of every item of cost which goes into
the manufacture of the industrial product in terms of the valve or
customer satisfaction it adds to the product.

▪ It is the organized and exhaustively critical study of a product in

terms of the design, functions and costs with the object of cost
reduction.

▪ Value engineering identifies the areas of excessive or unnecessary

expenses and attempts to improve the value of the product. It
provides the base for better performance at lower cost while
reducing neither necessary quality, reliability nor maintainability.
Value:
It differs from price and cost, it is defined as cost proportionate to utility,
thud value of product can be increased either by increasing its utility with
the same cost or by decreasing the cost for same utility.

Objects of value analysis:

▪ To simplify the product.
▪ To use cheaper and better material.
▪ To use efficient and economical process.
▪ To improve the product design.
▪ To increase the utility of the product.
▪ To increase the profits.
Stages in value analysis

▪ What the customer wants.

▪ Finding out the best method of performing the work to be done.

▪ To have the appropriate cost for the appropriate performance.

▪ Search the better ways of performing work and consider the functional
use of each part of a product.
Approach for value analysis:
Value analysis is essentially a job for team. Much discussions are required.

▪ Does a function or part contribute the value.

▪ Is the cost reasonable having regard to the product usefulness.
▪ Are the features essential.
▪ Are their any alternative product.
▪ Whether additional features add the value to the product.
▪ Whether the component of product Made or purchased.
▪ Whether the workers of reduced skill can be employed to reduce
labor cost.
Advantages of Value Engineering:

▪ The most suitable product are manufactured because of careful study made to
determine each product in terms of customer requirement.
▪ Each product should be manufactured at the lowest cost, because special attention is
paid for simplification, standardization and improved methods of production.
▪ Quality is maintained at desired level because there is no question to reduce cost at
the expense of quality.
▪ Value engineering is based on the principal that management effectiveness can be
measured in terms of cost saving. Any saving in cost is treated as increase in
efficiency.
▪ The constant search for improvement will lead to greater all around efficiency.
▪ Easy to repair or replace any part of the product.
▪ Lighter in weight.
▪ Easy in packing to protect the product till it reaches to the user.
 CONCLUSION

Material management is an important management tool which will be very useful in getting the right
quality & right quantity of supplies at right time, having good inventory control & adopting sound
methods of condemnation & disposal that will improve the efficiency of the organization & also make
the working atmosphere healthy for any type of organization; whether Private, Government, Small
organization, Big organization and Household.

Even a common man must know the basics of material management so that he can get the best of
the available resources and make it a habit to adopt the principles of material management in all our
daily activities