UNIT-IV

MATERIALS MANAGEMENT
 Materials management is a function, which aims for
integrated approach towards the management of materials
in an industrial undertaking.
 Its main objective is cost reduction and efficient handling of
materials at all stages and in all sections of the undertaking.
 Its function includes several important aspects connected
with material, such as, purchasing, storage, inventory
control, material handling, standardization etc.
 Materials management is defined as “the function
responsible for the coordination of planning, sourcing,
purchasing, moving, storing and controlling materials in an
optimum manner so as to provide a pre-decided service to
the customer at a minimum cost”.
 From the definition it is clear that the scope of materials
management is vast.
 SCOPE/FUNCTIONS OF MATERIALS
MANAGEMENT
1) Materials planning and control:
Based on the sales forecast and production plans, the materials planning
and control is done.
 This involves estimating the individual requirements of parts, preparing
materials budget, forecasting the levels of inventories, scheduling the
orders and monitoring the performance in relation to production and
sales.
II) Purchasing:
This includes selection of sources of supply finalization in terms of
purchase, placement of purchase orders, follow-up, maintenance of smooth
relations with suppliers, approval of payments to suppliers, evaluating and
rating suppliers.
III) Stores management:
This involves physical control of materials, preservation of stores,
minimization of obsolescence and damage through timely disposal and
efficient handling, maintenance of stores records, proper location and
stocking.
 A store is also responsible for the physical verification of stocks and
reconciling them with book figures. A store plays a vital role in the
operations of a company.
 IV) Inventory control or management:
Inventory generally refers to the materials in stock. It is also
called the idle resource of an enterprise.
 Inventories represent those items, which are either stocked
for sale or they are in the process of manufacturing or they
are in the form of materials, which are yet to be utilized.
 The interval between receiving the purchased parts and
transforming them into final products varies from industries
to industries depending upon the cycle time of manufacture.
 It is, therefore, necessary to hold inventories of various kinds
to act as a buffer between supply and demand for efficient
operation of the system.
 Thus, an effective control on inventory is a must for smooth
and efficient running of the production cycle with least
interruptions.
V) OTHER RELATED SERVICES:
 (i) 3S
Standardization: Standardization means producing
maximum variety of products from the minimum variety
of materials, parts, tools and processes. It is the process of
establishing standards or units of measure by which extent,
quality, quantity, value, performance etc. may be compared
and measured.
 Simplification: The concept of simplification is closely
related to standardization. Simplification is the process of
reducing the variety of products manufactured.
Simplification is concerned with the reduction of product
range, assemblies, parts, materials and design.
 Specifications: It refers to a precise statement that
formulizes the requirements of the customer. It may relate
to a product, process or a service.
 Value analysis: Value analysis is concerned with the costs
added due to inefficient or unnecessary specifications and
features.
 It makes its contribution in the last stage of product cycle,
namely, the maturity stage.
 At this stage research and development no longer make
positive contributions in terms of improving the efficiency of
the functions of the product or adding new functions to it.

Ergonomics (Human Engineering): The human factors or

human engineering is concerned with man-machine system.
 Ergonomics is “the design of human tasks, man-machine
system, and effective accomplishment of the job, including
displays for presenting information to human sensors, controls
for human operations and complex man-machine systems.”
MATERIAL PLANNING & CONTROL
 Material planning is a scientific technique of determining in
advance the requirements of raw materials, ancillary parts
and components, spares etc. as directed by the production
program.
 It is a sub-system in the overall planning activity. There are
many factors, which influence the activity of material
planning. These factors can be classified as macro and
micro systems.
 Macro factors: Some of the micro factors which affect
material planning, are price trends, business cycles Govt.
import policy etc.
 Micro factors: Some of the micro factors that affect
material planning are plant capacity utilization, rejection
rates, lead times, inventory levels, working capital,
delegation of powers and communication.
 Techniques of Material Planning
 One of the techniques of material planning is bill of
material explosion.

 The basis for material planning is the forecast demand for the end
products.
 Forecasting techniques such as weighted average method, exponential
smoothening and time series models are used for the same.
 Once the demand forecast is made, it is possible go through the
exercise of material planning.
 Bill of materials is a document which shows list of materials
required, unit consumption location code for a given product.
 An explosive chart is a series of bill of material grouped in a matrix
form so that combined requirements for different components can be
done requirements of various materials arrives from the demand
forecast, using bill of materials, through explosion charts.
 Thus material requirement plan will lead to be the development of
delivery schedule of the materials and purchasing of those material
requirements
VIDEO: https://www.youtube.com/watch?v=B4UsohNQlek
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 PURCHASING
 Purchasing is an important function of materials management. In
any industry purchase means buying of equipment's, materials,
tools, parts etc. required for industry.
 The importance of the purchase function varies with nature and
size of industry. In small industry, this function is performed by
works manager and in large manufacturing concern; this function
is done by a separate department.
 The moment a buyer places an order he commits a substantial
portion of the finance of the corporation which affects the working
capital and cash flow position.
 He is a highly responsible person who meets various salesmen and
thus can be considered to have been contributing to the public
relations efforts of the company.
 Thus, the buyer can make or mask the company’s image by his
excellent or poor relations with the vendors.
Objectives of Purchasing
 The basic objective of the purchasing function is to ensure continuity
of supply of raw materials, sub-contracted items and spare parts and to
reduce the ultimate cost of the finished goods.
 In other words, the objective is not only to procure the raw materials at
the lowest price but to reduce the cost of the final product. The
objectives of the purchasing department can be outlined as under:
 To avail the materials, suppliers and equipment's at the minimum
possible costs:
These are the inputs in the manufacturing operations. The
minimization of the input cost increases the productivity and
resultantly the profitability of the operations.
 To ensure the continuous flow of production: through continuous
supply of raw materials, components, tools etc. with repair and
maintenance service.
 To increase the asset turnover: The investment in the inventories
should be kept minimum in relation to the volume of sales. This will
increase the turnover of the assets and thus the profitability of the
company.
 To develop an alternative source of supply: Exploration of alternative
sources of supply of materials increases the bargaining ability of the
buyer, minimization of cost of materials and increases the ability to
meet the emergencies.
 To establish and maintain the good relations with the
suppliers: Maintenance of good relations with the supplier helps in
evolving a favorable image in the business circles. Such relations are
beneficial to the buyer in terms of changing the reasonable price,
preferential allocation of material in case of material shortages, etc.
 To achieve maximum integration with other department of the
company: The purchase function is related with production
department for specifications and flow of material, engineering
department for the purchase of tools, equipment's and
machines, marketing department for the forecasts of sales and its
impact on procurement of materials, financial department for the
purpose of maintaining levels of materials and estimating the working
capital required, personnel department for the purpose of manning
and developing the personnel of purchase department and maintaining
good vendor relationship.
 To train and develop the personnel: Purchasing
department is manned with varied types of personnel. The
company should try to build the imaginative employee
force through training and development.
 Efficient record keeping and management
reporting: Paper processing is inherent in the purchase
function. Such paper processing should be standardized so
that record keeping can be facilitated. Periodic reporting
to the management about the purchase activities justifies
the independent existence of the department.
 Parameters of Purchasing:
 The success of any manufacturing activity is largely
dependent on the procurement of raw materials of right
quality, in the right quantities, from right source, at the
right time and at right price popularly known as ten
‘R’s’ of the art of efficient purchasing.
 They are described as the basic principles of purchasing.
 There are other well known parameters such as right
contractual terms, right material, right place, right mode of
transportation and right attitude are also considered for
purchasing.
/
RIGHT PRICE
 It is the primary concern of any manufacturing organization to get an item at the right
price. But right price need not be the lowest price.
 It is very difficult to determine the right price; general guidance can be had from the
cost structure of the product.
 The ‘tender system’ of buying is normally used in public sector organizations but the
objective should be to identify the lowest ‘responsible’ bidder and not the lowest bidder.
 The technique of ‘learning curve’ also helps the purchase agent to determine the price
of items with high labor content.
 The price can be kept low by proper planning and not by rush buying. Price negotiation
also helps to determine the right prices.

RIGHT QUALITY
 Right quality implies that quality should be available, measurable and understandable
as far as practicable. In order to determine the quality of a product sampling schemes
will be useful.
 The right quality is determined by the cost of materials and the technical characteristics
as suited to the specific requirements.
 The quality particulars are normally obtained from the indents. Since the objective of
purchasing is to ensure continuity of supply to the user departments, the time at which
the material is provided to the user department assumes great importance.
RIGHT TIME
For determining the right time, the purchase manager should have
lead time information for all products and analyse its components
for reducing the same.
 Lead time is the total time elapsed between the recognition of
the need of an item till the item arrives and is provided for use.
 This covers the entire duration of the materials cycle and
consists of pre-contractual administrative lead time,
manufacturing and transporting lead time and inspection lead
time.
 Since the inventory increases with higher lead time, it is
desirable to analyse each component of the lead time .
 While determining the purchases, the buyer has to consider
emergency situations like floods, strikes, etc.
 He should have ‘contingency plans’ when force major clauses
become operative, for instance, the material is not available due
to strike, lock-out, floods, and earthquakes.
RIGHT SOURCE

The source from which the material is procured should be dependable

and capable of supplying items of uniform quality.
The buyer has to decide which item should be directly obtained from
the manufacturer.
Source selection, source development and vendor rating play an
important role in buyer-seller relationships. In emergencies, open
market purchases and bazaar purchases are restored to.

RIGHT QUANTITY

The right quantity is the most important parameter in buying. Concepts,

such as, economic order quantity,, fixed period and fixed quantity
systems, will serve as broad guidelines.
But the buyer has to use his knowledge, experience and common sense
to determine the quantity after considering factors such as price
structure, discounts, availability of the item, favourable reciprocal
relations, and make or buy consideration.
 RIGHT ATTITUDE
Developing the right attitude, too, is necessary as one often comes across
such statement: ‘Purchasing knows the price of everything and value of
nothing’;
 ‘We buy price and not cost’; ‘When will our order placers become purchase
managers?’; ‘Purchasing acts like a post box’. Therefore, purchasing should
keep ‘progress’ as its key activity and should be future-oriented.
 The purchase manager should be innovative and his long-term objective
should be to minimize the cost of the ultimate product.
 He will be able to achieve this if he aims himself with techniques, such as,
value analysis, materials intelligence, purchases research, SWOT analysis,
purchase budget lead time analysis, etc.

 RIGHT CONTRACTS
The buyer has to adopt separate policies and procedures for capital and
consumer items.
 He should be able to distinguish between indigenous and international
purchasing procedures. He should be aware of the legal and contractual
aspects in international practices.
 RIGHT MATERIAL
Right type of material required for the production is an
important parameter in purchasing. Techniques, such as,
value analysis will enable the buyer to locate the right
material.
 RIGHT TRANSPORTATION
Right mode of transportation has to be identified as this
forms a critical segment in the cost profile of an item. It is
an established fact that the cost of the shipping of ore,
gravel, sand, etc., is normally more than the cost of the
item itself.
 RIGHT PLACE OF DELIVERY
Specifying the right place of delivery, like head office or
works, would often minimize the handling and
transportation cost.
PURCHASING PROCEDURE
STEP 1: RECOGNITION OF THE NEED
 The initiation of procedure starts with the recognition of the need by
the needy section.
 The demand is lodged with the purchase department in the
prescribed Purchase Requisition Form forwarded by the authorized
person either directly or through the Stores Department.
 The purchase requisition clearly specifies the details, such as,
specification of materials, quality and quantity, suggested supplier,
etc.
 Generally, the low value sundries and items of common use are
purchased for stock while costlier and special items are purchased
according the production programmes.
 Generally, the corporate level executives are authorized signatories
to such demands. Such purchases are approved by the Board of
Directors.
 The reference of the approval is made on requisition and a copy of
the requisition is sent to the secretary for the purpose of overall
planning and budgeting.
STEP 2: THE SELECTION OF THE SUPPLIER

 The process of selection of supplier involves two basic aspects: searching

for all possible sources and short listing out of the identified sources.
 The complete information about the supplier is available from various
sources, such as, trade directories, advertisement in trade journals, direct
mailing by the suppliers, interview with suppliers, salesmen, suggestions
from business associates, visit to trade fair, participation in industries
convention, etc.
 Identification of more and more sources helps in selecting better and
economical supplier. It should be noted that the low bidder is not always
the best bidder.
 When everything except price is equal, the low bidder will be selected. The
important considerations in the selection are the price, ability to supply the
required quantity, maintenance of quality standards, financial standing etc.
 It should be noted that it is not necessary to go for this process for all types
of purchases.
 For the repetitive orders and for the purchases of low-value, small lot
items, generally the previous suppliers with good records are preferred.
STEP 3: PLACING THE ORDER
 Once the supplier is selected the next step is to place the purchase order.
Purchase order is a letter sent to the supplier asking to supply the said material.
 At least six copies of purchase order are prepared by the purchase section and
each copy is separately signed by the purchase officer.
 Out these copies, one copy each is sent to store-keeper, supplier, accounts
section, inspection department and to the department placing the requisition
and one copy is retained by the purchase department for record.
STEP 4: FOLLOW UP OF THE ORDER
 Follow-up procedure should be employed wherever the costs and risks
resulting from the delayed deliveries of materials are greater than the cost of
follow-up procedure, the follow-up procedure tries to see that the purchase
order is confirmed by the supplier and the delivery is promised.
 It is also necessary to review the outstanding orders at regular intervals and to
communicate with the supplier in case of need.
 Generally, a routine urge is made to the supplier by sending a printed post card
or a circular letter asking him to confirm that the delivery is on the way or will
be made as per agreement.
 In absence of any reply or unsatisfactory reply, the supplier may be contacted
through personal letter, phone, telegram and/or even personal visit.
STEP 5: RCEIVING AND INSPECTION OF THE MATERIALS
 The receiving department receives the materials supplied by the
vendor. The quantity are verified and tallied with the purchase order.
The receipt of the materials is recorded on the specially designed
receiving slips or forms which also specify the name of the vendor
and the purchase order number.
 It also records any discrepancy, damaged condition of the
consignment or inferiority of the materials. The purchase department
is informed immediately about the receipt of the materials. Usually a
copy of the receiving slip is sent to the purchase department.
STEP 6: PAYMENT OF THE INVOICE
When the goods are received in satisfactory condition, the invoice is
checked before it is approved for the payment.
The invoice is checked to see that the goods were duly authorized to
purchase, they were properly ordered, they are priced as per the agreed
terms, the quantity and quality confirm to the order, the calculations are
arithmetically correct etc.
STEP 7: MAINTENANCE OF THE RECORDS
Maintenance of the records is an important part and parcel of the
efficient purchase function.
In the industrial firms, most of the purchases are repeat orders and
hence the past records serve as a good guide for the future action.
They are very useful for deciding the timings of the purchases and
in selecting the best source of the supply.

STEP 8: MAINTENANCE OF VENDO RELATIONS

The quantum and frequency of the transactions with the same key
suppliers provide a platform for the purchase department to
establish and maintain good relations with them.
 Good relations develop mutual trust and confidence in the course
of the time which is beneficial to both the parties.
 The efficiency of the purchase department can be measured by
the amount of the goodwill it has with its suppliers.
 STORES MANAGEMENT
Objectives of Stores Management
 It is in direct touch with the user departments in its day-
to-day activities.
 The most important purpose served by the stores is to
provide uninterrupted service to the manufacturing
divisions.
 Further, stores are often equated directly with money, as
money is locked up in the stores.
 FUNCTIONS OF STORES, The functions of stores can be
classified as follows:
 To receive raw materials, components, tools, equipment’s and
other items and account for them.
 To provide adequate and proper storage and preservation to the
various items.
 To meet the demands of the consuming departments by proper
issues and account for the consumption.
 To minimize obsolescence, surplus and scrap through proper
codification, preservation and handling.
 To highlight stock accumulation, discrepancies and abnormal
consumption and effect control measures.
 To ensure good house keeping so that material handling, material
preservation, stocking, receipt and issue can be done adequately.
 To assist in verification and provide supporting information for
effective purchase action.
Codification
 It is one of the functions of stores management.
Codification is a process of representing each item by a
number, the digit of which indicates the group, the sub-
group, the type and the dimension of the item.
 Many organizations in the public and private sectors,
railways have their own system of codification, varying
from eight to thirteen digits.
 The first two digits represents the major groups, such as
raw materials, spare parts, sub-contracted items, hardware
items, packing material, tools, oil, stationery etc.
 The next two digits indicate the sub-groups, such as,
ferrous, non-ferrous etc. Dimensional characteristics of
length, width, head diameter etc. constitute further three
digits and the last digit is reserved for minor variations.
CHARACTERISTICS OF CODING:
 Whatever may be the basis, each code should
uniquely represent one item.
It should be simple and capable of being
understood by all.
Codification should be compact, concise,
consistent and flexible enough to accommodate
new items.
The groupings should be logical, holding similar
parts near to one another.
Each digit must be significant enough to represent
some characteristic of the item.
Objectives of Codification, The objectives of a
rationalized material coding system are:

To enable putting up of any future item in its proper

place.
To classify an item according to its characteristics.
To give a unique code number to each item to avoid
duplication and ambiguity.
To improve standardization.
To establish a common language for the identification
of an item.
To specify item as per national and international
standards.
To enable data processing and analysis.
Advantages of Codification

systematic grouping helps in simplification

& standardization of material processing
Duplication of work is avoided
Easy recognition of items in stores
 INVENTORY
Meaning of Inventory
 Inventory generally refers to the materials in stock. It is also called the idle
resource of an enterprise.

 Inventories represent those items which are either stocked for sale or they
are in the process of manufacturing or they are in the form of materials,
which are yet to be utilized.

 The interval between receiving the purchased parts and transforming them
into final products varies from industries to industries depending upon the
cycle time of manufacture.

 It is, therefore, necessary to hold inventories of various kinds to act as a

buffer between supply and demand for efficient operation of the system.

 Thus, an effective control on inventory is a must for smooth and efficient

running of the production cycle with least interruptions.
 Inventory control is a planned approach of determining
what to order, when to order and how much to order and
how much to stock so that costs associated with buying
and storing are optimal without interrupting production
and sales. Inventory control basically deals with two
problems:
 When should an order be placed? (Order level), and
 How much should be ordered? (Order quantity).
 These questions are answered by the use of inventory
models. The scientific inventory control system strikes the
balance between the loss due to non-availability of an
item and cost of carrying the stock of an item.
 Scientific inventory control aims at maintaining optimum
level of stock of goods required by the company at
minimum cost to the company.
 Objectives of Inventory Control
 To ensure adequate supply of products to customer and
avoid shortages as far as possible.
 To make sure that the financial investment in inventories is
minimum (i.e., to see that the working capital is blocked to
the minimum possible extent).
 Efficient purchasing, storing, consumption and accounting
for materials is an important objective.
 To maintain timely record of inventories of all the items and
to maintain the stock within the desired limits.
 To ensure timely action for replenishment.
 To provide a reserve stock for variations in lead times of
delivery of materials.
 To provide a scientific base for both short-term and long-
term planning of materials.
Reasons for Keeping Inventories
To stabilize production:
The demand for an item fluctuates because of the number of
factors, e.g., seasonality, production schedule etc. The inventories (raw
materials and components) should be made available to the production
as per the demand failing which results in stock out and the production
stoppage takes place for want of materials. Hence, the inventory is kept
to take care of this fluctuation so that the production is smooth.
To take advantage of price discounts:
Usually the manufacturers offer discount for bulk buying and to gain
this price advantage the materials is bought in bulk even though it is not
required immediately. Thus, inventory is maintained to gain economy
in purchasing.
To meet the demand during the replenishment period:
The lead time for procurement of materials depends upon many factors
like location of the source, demand supply condition, etc. So inventory
is maintained to meet the demand during the procurement
(replenishment) period.
 To prevent loss of orders (sales):
In this competitive scenario, one has to meet the delivery
schedules at 100 per cent service level, means they cannot
afford to miss the delivery schedule which may result in loss
of sales. To avoid the organizations have to maintain
inventory.
 To keep pace with changing market conditions:

The organizations have to anticipate the changing market

sentiments and they have to stock materials in anticipation
of non-availability of materials or sudden increase in prices.
Sometimes the organizations have to stock materials due to
other reasons like suppliers minimum quantity condition,
seasonal availability of materials or sudden increase in
prices.
Benefits of Inventory Control
It is an established fact that through the practice of
scientific inventory control, following are the
benefits of inventory control:
Improvement in customer’s relationship because
of the timely delivery of goods and service.
Smooth and uninterrupted production and, hence,
no stock out.
Efficient utilization of working capital. Helps in
minimizing loss due to deterioration, obsolescence
damage and pilferage.
Economy in purchasing.
Eliminates the possibility of duplicate ordering.
Techniques of Inventory Control
 In any organization, depending on the type of business,
inventory is maintained.
 When the number of items in inventory is large and then
large amount of money is needed to create such
inventory, it becomes the concern of the management to
have a proper control over its ordering, procurement,
maintenance and consumption.
 The control can be for order quality and order frequency.
 The different techniques of inventory control are: (1)
ABC analysis, (2) HML analysis, (3) VED analysis, (4)
FSN analysis, (5) SDE analysis, (6) GOLF analysis and
(7) SOS analysis. The most widely used method of
inventory control is known as ABC analysis.
ABC ANALYSIS: (cost criteria)
 A-Item: (small in number but consumes large resources)
Very tight control, the items being of high value. The
control need be exercised at higher level of authority.

 B-Item: (intermediate)
Moderate control, the items being of moderate value. The
control need be exercised at middle level of authority.

 C-Item: (large in number but consumes lesser amount of

resources)
The items being of low value, the control can be exercised at
grass root level of authority, i.e., by respective user
department managers.
 10% of material consumes 70% of resources
 20% of material consumes 20% of resources
 70% of material consumes 10% of resources.
 HML analysis:
In this analysis, the classification of existing inventory is based
on unit price of the items. They are classified as high price,
medium price and low cost items. Its used to keep control over
department level.

 FSN analysis:
In this analysis, the classification of existing inventory is based
on consumption of the items. They are classified as fast moving,
slow moving and non-moving items.

 SDE Analysis: based on availability

Scarce- managed by top level management; maintain big safety
stocks
Difficult-maintain sufficient safety stocks
Easily available- minimum safety stocks
 GOLF analysis:
In this analysis, the classification of existing inventory is
based on sources of the items. They are classified as
Government supply, ordinarily available, local availability
and foreign source of supply items.

 SOS analysis:
In this analysis, the classification of existing inventory is
based nature of supply of items. They are classified as
seasonal and off-seasonal items.

 For effective inventory control, combination of the

techniques of ABC with VED or ABC with HML or VED
with HML analysis is practically used.
Standardization in Material Management

 Standardization means producing maximum variety of

products from the minimum variety of materials, parts,
tools and processes. It is the process of establishing
standards or units of measure by which extent, quality,
quantity, value, performance etc., may be compared and
measured.
 ADVANTAGES OF STANDARDIZATION:
 Various departments like Design, Manufacturing,
Marketing, Production control, production planning,
purchase & stock, Quality control are benefitted from
standardization.
Benefits to Manufacturing Department
Lower unit cost.
Better quality products.
Better methods and tooling.
Increased interchangeability of parts.
Better utilization of manpower and equipment.
Accurate delivery dates.
Better services of production control, stock control, purchasing, etc.
More effective training.

Benefits to Marketing Department

Better quality products of proven design at reasonable cost leads to
greater sales volume.
Increased margin of profit.
Better product delivery.
Easy availability of sales part.
Less sales pressure of after-sales services
Benefits to Production Planning Department
Scope for improved methods, processes and layouts.
Opportunities for more efficient tool design.
Better resource allocation.
Reduction in pre-production activities.

Benefits to Production Control Department

Well proven design and methods improve planning
and control.
Accurate delivery promises.
Fewer delays arise from waiting for materials, tools,
etc.
Follow-up of small batches consumes less time.
Benefits to Production Planning Department
Scope for improved methods, processes and layouts.
Opportunities for more efficient tool design.
Better resource allocation.
Reduction in pre-production activities.

Benefits to Production Control Department

Well proven design and methods improve planning
and control.
Accurate delivery promises.
Fewer delays arise from waiting for materials, tools,
etc.
Follow-up of small batches consumes less time.
Disadvantages of Standardization
Following are the disadvantages of standardization:
Reduction in choice because of reduced variety
and consequently loss of business or customer.
Standard once set, resist change and thus
standardization may become an obstacle to
progress.
It tends to favour only large companies.
It becomes very difficult to introduce new models
because of less flexible production facilities and
due to high cost of specialized production
equipment.
Simplification in Material
Management
 The concept of simplification is closely related to
standardization. Reducing complications in process
of manufacturing.

Advantages of Simplification: Following are the

advantages of simplification:

Quick delivery & better inventory

Reduces production cost
Improves quality