1. MATERIALS Management

2. Introduction
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

3. Introduction
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

4. Objectives of materials management
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

5. Inventory management
‘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

6. Importance of IM
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

7. Function of im
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

8. Classification of inventories
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

9. Techniques of inventory control
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

10. ABC ANALYSIS
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

11. ABC ANALYSIS
‘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

12. ABC ANALYSIS process
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

13. Basis for ABC Classification
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
Prof. S.K.Rawat

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

15. Policy guideline for inventory control
Policy guide lines for inventory control of A, B & C category items
Sr.
No.
Nature of control
Procedures
‘A’ items
‘B’ items
‘C’ items
Type of control
& authority 1.
Very strict control
Moderate control
Low control
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
Consumption control quarterly 3.
Materials planning
Accurate & upto date
Past consumption can used as a basis
Rough estimates would be enough 4.
Prof. S.K.Rawat
Copyright Kathy Schwalbe/Course Technology 1999

16. Inventory terms Inventory cost Inventory carrying 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

17. Inventory terms 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

18. Economic order quantity
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.
Ordering cost as shown in the graph is curve which starts from top. As the ordering quantity goes up, it keeps reducing.
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.
Inventory carrying cost is represented by a straight line and goes on increasing with the order cost.
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.
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.
Total inventory cost
Order Quantity
Annual Cost
Inventory carrying cost
Ordering cost
Minimum
Total cost
Economic
Order
Quantity
Prof. S.K.Rawat

19. 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
Prof. S.K.Rawat

20. 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.
Prof. S.K.Rawat

21. Purchase department 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

22. 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
Prof. S.K.Rawat

23. Just in time
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