Material and Logistic Management

Notes of Materials and Logistic Management
Chapter 1
Definition of Material Management
Materials management may be defined as the function responsible for the co-ordination 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.
Objectives of Material Management
1. To minimize the production and distribution cost and to help organization in achieving its goals
2. Maintaining the flow of production by purchasing materials of right quality, in right quantity, at a
right time, from right source, on right terms and conditions at right prices
3. Inventory control through scientific methods
4. To establish healthy relationship between buyers and sellers
5. To maintain standardization and quality control
6. Achieving co-ordination between various departments of the organization such as personal, finance,
marketing etc.
7. To carry out value analysis
8. Minimizing wastages and speedy disposed of surplus materials etc.
Scope of Materials Management
Materials management function has much wider scope as it deals with material planning, purchasing,
receiving, stores, inventory, scrap, surplus, disposal etc.
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Following are the functions of materials management

1) Materials planning and programming
2) Purchasing
3) Inventory control
4) Receiving and warehousing
5) Store keeping
6) Standardization and value analysis
7) Production control
8) Transportation (Logistic)
9) Materials Handling
10) Scrap disposal
11) Cost reduction
12) Training and Development of staff
Importance of Materials Management
Materials Management plays a key role in a developing economy like India. The reduction in cost due
to materials management helps the organization in improving its profitability and the rate of return on
investment.
Profitability of a firm can be increased by maximizing production. But it is not only quantity which is
responsible but also quality of the output which depends upon effective and efficient materials
management.
The main advantages of integrated materials management are as follows:

1) Better co-ordination of various activities
2) Higher performance
3) Clean accountability
4) Development of team- spirit, self confidence, higher morale, co-operation, better interpersonal
relations etc
5) Optimum materials procurement in time
6) Optimum inventory turnover
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7) Good supplier relations

8) Effective control over costs
Interface with other functional areas
Materials management has interface of two kinds:

Internal and External Interface
Internal Interfaces
1. Demand Forecasting (marketing)
Demand forecasting is the basic function of marketing department which enables the organization to
decide about how much to produce the particular product. On demand basis materials management
has to arrange for various materials.
2. Production of Goods and Services

During the whole process of production cycle materials management has to supply necessary inputs in
order to keep flow of production running smoothly without interruption. It is essential for organization
the linkage between these two departments to achieve its goals.
3. Personal and HRD

For the recruitment of right type of personnel the linkage between these two departments is necessary.
The manpower which will be provided by the personnel department should be as per the requirement of
materials management (skills and quality).
Personal department also should organize trainings for the employees of materials management as
required.
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4. Finance Department
The performance of materials management is effected maximum by the attitudes (co-operative, un-co-
operative) of the finance department.
Finance department should periodically advice materials department on availability of funds. Timely
payments to the vendors are necessary to guarantee smooth inflow of materials.
5. System Departments
A system department helps materials management in following areas:
i. Update records of materials (Input, output and stock)
ii. Information regarding suppliers, Q.C. methods, machines etc.
iii. It will save the time and also helps in management system like TPM, TQM, JIT etc.
Chapter 2
Forecasting in Materials Management
Moving Average Method

The past data of sales of a firm may show peaks and valleys on account of seasonal variations and
random variations. To compute average demand is necessary because trend is an important factor.
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The most common method used to smoothen the effect of random fluctuations is to estimate the
average demand by some kind of moving average.
Moving average is a simple statistical method to establish and extrapolate trend of past sales. The
method makes use of old data and computes a rolling average for a constant number of periods n.
Care has to be taken in selection of moving average period. The larger the period of moving average,
the greater is the smoothing effect.
Value of n also depends on the speed of change of the demand pattern.
The principle underlying the moving average is that future demand shall be average of the past
demand.
Exponential Smoothing Method:

Simple n period moving average gives equal weightage to the last n periods and it ignores the data
of (n+1) or earlier periods. This provides a smoothing effect.
But merely smoothing effect is not enough. The forecasting must ensure that the forecast derived from
it keeps pace with the changing business trends. For this it should emphasis more on the recent demand
rather than old data. One of the most convenient methods for the forecast is exponential smoothing.
The simplest exponential smoothing model estimates the average forecast for the next period by adding
of subtracting a fraction ( ) of the difference between the actual demand of the last period and
the average forecast of the last period to the average forecast of the last period.
The new forecast for average is then,
= Forecast of the last period +
i.e. = + ( - )
All that is needed to prepare a forecast is to collect data on old forecast, current demand and select a
suitable value of smoothing constant. Smaller value of have greater smoothing effect.
Regression Analysis
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Regression Analysis deals with selecting independent variables that affect the demand for the product.
Here time series data are collected relating to these independent variables. Then the nature and extent
of relationship between dependent and independent variables is specified in the form of equation. Then
with the help of statistical techniques the parameters in the equation are estimated. Thus, the linear
repression may be stated as:
Q = a + bP + cY + dA
Where, Q = Quantity demanded, P = Price of the product, Y = Income of the consumer
A = Advertising Expenditure
b, c, d are parameters and a = constant
The above equation will express the relationship between the demand and independent variables like
price, income and advertising expenditure.
Advantages:
Correlation helps in knowing the nature of relation between the variables while regression helps in
explaining the extent relation between variables
It provides value of independent variables
Linear functions are useful because most of the demand function are linear in nature.
Limitations
1. Only few variables are considered and not all
2. Variables have to be estimated simultaneously because they are interacting with each other
3. It is only suitable for short term forecasting
Chapter 3
Inventory
Inventory is one of the largest items of investment of manufacturing companies and often constitutes
40-50% of the total investment and around 80-90% of working capital. Hence the study of inventory is
very important.
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Definition: Inventories are materials or resources of any kind having some economic values wither
awaiting for conversion or to be used in future.
Inventories are stock of materials of any kind stored fir future use, mainly in the production process.
The other indirect materials like fuels, maintenance, materials etc. are also considered as part of
inventories.
Inventory includes raw-materials, in process materials, finished packed materials, spares and all other
materials required for future after demand. From the financial point of view, inventory is defined as
the sum of the value of raw materials, fuels and lubricants, spares, maintenance materials, semi
processed materials and finished goods stock at any given of time.
Types of Inventories
There are different types of inventories in manufacturing process. They can be classified as follows:
1. Raw materials and production inventories:
This includes raw materials and other materials which are required for the production of finished
product.
2. In process Inventories
These are the semi finished, work in progress and partly finished products produced at various stages of
production.
3. MRO Inventories
This includes maintenance, repairs and operating suppliers that are consumed during the process of
production e.g. oils, lubricants, spares.
4. Finished goods Inventories
These are final products ready for sale. Inventories can be also classified on the basis of their function.
5. Movement or transit Inventories
6. Lot size Inventories
These are inventories of some materials which are used in very small quantity
7. Fluctuation Inventories
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Materials which are kept for unpredictable fluctuations in demand for the product. However such
stocks are uneconomical.
8. Anticipation Inventories
These inventories are held to meet the predictable changes in demand e.g. stock of raw materials before
seasonable change
9. Tools and Accessories
10. General stores or operating stores
This includes items like cotton waste, electric bulbs, sand papers etc.
Different types of Cost Associated with Inventories
Inventories account for about 40-50% of total investment and around 80-90% if working capital, hence
it is necessary to take into consideration the cost factor before taking any inventory decision.
Inventory costs basically includes
Ordering costs
Carrying costs
Out of stock/ shortage costs
Capacity costs
Each of these major categories covers several elements which are as follows:
Ordering costs
A) Cost of placing an order of materials

Preparing a purchase order
Processing payments
Receiving and inspection materials
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B) Ordering from the plant

Machine set up
Scrap resulted at the time of production
Carrying Costs
A) Capital Costs
Interest on money invested in inventory
Interest on money invested in land and machinery
B) Storage space costs

Rent on buildings
Taxes and Insurance
Depreciation on building
Depreciation on warehouse
Cost of maintenance and repairs
Utility charges like heat, light, water etc
Salaries of personnel
C) Inventory Service costs

Taxes on Inventory
Labor costs in handling and maintaining stocks
Clerical expenses
D) Handling Equipment costs
Taxes and Insurance of equipment
Depreciation on equipment
Fuel Expenses
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Cost of maintenance and repairs
E) Inventory Risk costs

Insurance on inventory
Physical deterioration of inventory
Losses
Out of stock/ Shortage costs
Back ordering
Lost sales
Capacity Costs
Overtime payments when capacity is too small

Lay offs and idle time cost when capacity is too large
All the above stated costs are to be maintained at minimum level to get the profit maximization.
Economic Order Quantity (EOQ)
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Economic Order Quantity (EOQ) is an important technique of inventory control. Inventory control
mainly depends with two basic issues,
When to order? And how much to order?
The issue when to order can be solved by obtaining the stock level of each of the item in the inventory.
The other issue of How much to order or what should be the size of each order is decided with the
help of EOQ model.
EOQ prescribes the order size at which the ordering cost and inventory carrying cost will be minimum.
The ordering cost and the inventory carrying cost are independent and mutually exclusive.
When the size of the individual order is large and the number of annual order is less then the ordering
cost is low but carrying cost is higher.
As against this, large number of small orders results into higher ordering cost but the carrying cost
remains low.
Under this condition the EOQ model aims at achieving the balance between the ordering cost and the
carrying cost. It suggests such a quantity of each order at which the total ordering cost and the carrying
cost would be minimum.
As these costs are mutually exclusive the total of both the costs is minimum at a point where the
ordering cost is equal to the carrying cost. This can be explained with the help of graph as shown on the
next page:
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In diagram order quantity is shown on X axis and annual inventory carrying cost (AICC) and annual
procurement cost (APC) is shown on Y axis.
AICC and APC intersect at point E so that the OQ is the economic order quantity (EOQ).At EOQ
both AICC and APC are equal and annual total cost (ATC) is minimum as shown.
Assumptions of the EOQ model:
1. The demand for the product is constant and uniform throughout the period
2. Ordering costs are constant
3. The product can be obtained in the quantities as required as there is no restriction on supply
4. There is no deterioration or spoilage of the items
5. There are no back orders
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Formula for EOQ
The first step is to establish a functional relationship between the variables concerned. In the context of
costs we may have the following equation:
TC = DC + D * S + Q * H
Q 2
Where, TC = Total cost

C = Purchase cost per unit
S = Cost of placing the order
H = Holding cost per unit of average inventory per annum
D = Annual Demand
Q = Quantity to be ordered
Now, DC = Annual purchase cost for unit
D * S = Annual Ordering cost
Q
Therefore, Q * H = Annual holding cost (carrying cost)
2
In EOQ the total cost is minimum when the cost of ordering is equal to the cost carrying or D
*S=Q*H
2 Q
Therefore, DS = or 2DS =
2
Therefore, = 2DS
H
Hence,
Therefore, EOQ or Q =
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Chapter 4
Classification of Materials in Material Management
A manufacturing organization has to deal with a large number of items of different types, having
different characteristic and uses. Hence for the purpose of convenience some sort of classification of
materials becomes necessary.
Classification of materials is the process of grouping of various items into few categories on the basis
of certain common characteristic such as nature, use or service.
Objectives of Classification
1. To provide necessary information about principle materials used by the organization
2. To help the storekeeper for providing proper storing, careful handling and safe custody of the
materials
3. Helping in planning and controlling of materials of different type
4. To take decision regarding storage and issue of materials in a class
5. To develop accounting and evaluation procedures
6. For effective identification of materials
Generally materials are classified on the basis of 1) Stage of production process, 2) Nature of materials
and 3) Condition of materials.
Classification of materials on the basis of stage of production process

1] Direct materials
a) Raw materials
b) Work in progress
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c) Works made parts

d) Parts purchased from outside
e) Finished goods
2] Indirect materials (e.g. cotton waste, spray oil etc.)
Classification of materials on the basis of stage of Nature of materials
Raw materials
Perishable materials (e.g. eggs, milk, curd etc.)
Consumable materials (e.g. coal, stationary)
Furniture (e.g. Tables, chairs etc.)
Chemicals (Acids, Alcohol etc.)
Packaging materials
Inflammable items (Petrol, Diesel, Kerosene etc.)
Empties (e.g. wooden boxes, barrels, cans etc.)
Supplies (e.g. oils, grease, cleaning powder etc.)
Spares
Machinery Equipment Tools
Scrap materials
Classification according to the condition of materials

a) Serviceable, unserviceable and obsolete
b) Finished or semi finished stores
c) Dead stock items
d) Unused stock materials
Different Techniques of Inventory control
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Inventories are essential for keeping the production wheels moving smoothly without any interruption.
At the same time, it is necessary to have an effective inventory control to minimize the idle time caused
by shortage and non- availability of materials.
Generally selective inventory control policy has been recommended because it takes into consideration
various factors like value of the inventory items, its criticality, usage frequency etc. It is more effective
and is directed towards more significant group of items.
Selective inventory control makes use of various types of classification schemes depending upon the
criteria used for classification which is as follows:
Types of classification Criterion used
ABC Analysis Usage value (consumption per period* price per

unit
VED Analysis (Vital, Essential, Desirable) Criticality of the item in the process of
production
FSN Analysis (Fast, slow, Non-moving) Issues from stores
GOLF Analysis (Government, ordinary, Local,

Foreign) Sources of Procurement
SOS Analysis (Seasonal, off seasonable) Seasonality
Let us discuss these classifications in details:
ABC Analysis
ABC analysis is based on the principle, vital few, trivial many.
Even the Paretos Law of Cause and Effect which states that only 20% of the activity causes 80% of
effect. This is also known as 20/80 ratio.
It provides a Golden rule that keep an eye on this 20% and you will cover the 80% of the effect. This
rule when applied to inventory items, gives rise to ABC analysis.
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ABC analysis is a basic analytical materials management tool. It always controls the best firs, than
better and lastly the good.
The ABC method takes into consideration:
a) Different Inventory levels, b) Order quantities, c) Monetary value of materials, d) extent and
closeness of the control desired.
By way of taking usage value as a basis, inventory items are classified as number of items and value of
items.
Thus,
Clas No of Items Value of items Value of items (%) for

s (%) (%) graph
A 10 70-90 90
B 20 20-30 8
C 70 10-20 2
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Graphical Presentation of ABC method of Inventory Control

Steps in ABC analysis
1. Prepare the list of items and estimate their annual consumption in terms of physical units
2. Determine cost or unit price of each item
3. Multiply each annual consumption by cost
4. Arrange the items in descending order on annual usage from highest to lowest
5. Express cumulative usage in percentage
6. Express cumulative items in percentage
7. Plot the graph and separate the items into A, B and C Class
Summary of control
Sr no. Control A B C
Process Moderat
1 Control Tight e Loose
2 Requirement Exact Exact Estimate
Individu Individu
3 Posting al al Group
Checkof
4 Revision Close Some Little
Quality Approxima
5 control Exact Exact te
6 Expediting Regular Some No.
VED Analysis (Vital, Essential, Desirable)

According to the VED method, spare parts are classified as Vital, Essential and Desirable according to
their requirements.
Those spares classified as V are to be stocked adequately to ensure smooth operation of the
production process. Vital spares are those because of which the production process may stop on non
availability of these items.
In case of E items, the organization may take reasonable risk. When required such items have to be
made available at a short notice.
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The D items are such that they do not cause any immediate loss of production and their stock out cost
is also normal.
VED analysis is useful to the capital-intensive industries where the machinery, tools and equipments
are extensively used e.g. transport industry.
FSN Analysis (Fast, Slow, Non moving)

Under modern dynamic environment characterized by rapid technological progress threats are
developed to inventory management as large number of items are likely to be obsolete during storage.
The changes in product mix and deviations of actual consumptions may result in accumulating huge
inventory. Thus the inventory can be classified as Fast moving or Slow moving.
In FSN technique inventory of items are to be kept on the basis of the movement i.e. How the items are
moving Fast, slow, or Non moving. This technique is extensively used for selective inventory control.
Uses of FSN analysis

It identifies the active items
Useful to identify surplus items
Non moving items can be identified and disposed
Investment for only required items can be done
GOLF Analysis (Government, Ordinary, Local, Foreign)

The GOLF analysis takes into consideration nature of suppliers that affects quality, lead time, terms of
payment, steadiness of supply and administrative activities involved.
G category items are those that are procured from government agencies such as State Trading
Corporation or public sector undertakings. They take long lead-time. Ordinary or non- government
category includes those items obtained from ordinary suppliers. They take moderate time for delivery
and supply goods even as credit.
Local category includes those items, which are locally available and local suppliers supply them.
Foreign category includes imported items which are required in the production process. For such items
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search of foreign supplies, obtaining letter of credit and making arrangement for shipment etc. is to be
done in proper time to avoid production stoppage.
SOS Analysis (Seasonal- Off- Seasonable)

The SOS analysis is based on seasonable availability of the items. So there are only two categories
seasonal and off seasonal items.
Seasonal items are available only during the season, which is a very short time, such as agricultural raw
materials. Hence they are to be procured in lots during season so as to use for the whole year.
Non seasonal items are those items which are available at any time during the year and hence they can
be purchased as and when required.
Above mentioned are all selective inventory control techniques. These can be used separately or in
combination with others. An organization should select suitable techniques depending upon the nature
of the product and other circumstances.
Chapter 5
Materials Requirement Planning (MRP)

Definition
MRP is a system of planning and scheduling the time phased materials requirements for production
operations.
MRP is an inventory control process carried out with the aid of computer to determine time-phased
requirement of components that are used for manufacturing product on assembly line principles.
MRP aims at solving basic problems of inventory control such as the supply of right quantity
components at right time, to avoid stock piling of heavy inventory and avoid stock outs. MRP is used
for depended demand situations
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MRP outputs are:

1) Master Production Schedule (MPS)
2) Bill of Materials (BOM)
3) Inventory status
Objectives of MRP
1) Inventory Reduction
2) Reduction in production and Delivery Lead Times
3) Realistic Commitments
4) Increase in efficiency
5) To reduce inventory costs by reducing inventory levels
6) To improve plant operating efficiency
Advantages of MRP
1) Reduced Levels of Inventory
2) Better utilization of human and non human resources
3) Improved consumer service
4) Efficient Financial Planning
5) Better Scheduling
6) Improved vendor Relations
7) Efficient Planning
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8) Promoting Engineering Efficiency

9) Dynamic Nature
10) Rational Materials Decisions
Master Production Schedule (MPS)
Initially the MPS is developed from the customer orders received by the firm or from forecasts of
demand before the MRP system begins to operate. The MPS is designed to meet market demand and
hence it provides valuable information for the MRP system. Now with the help of MRP systems the
MPS is scheduled to complete the demand of the markets.
Bill of Materials (BOM)
The BOM identifies how each end product is manufactured, specifying all subcomponent items, their
sequence of build up, their quantity in each finished unit, and the work centers performing the build up
sequence. This information can be obtained from product design documents, workflow analysis and
other standard manufacturing and industrial engineering documents. The MRP receives primary
information from the BOM is that of product structure which shows various components of a product.
Each item in the product structure is given a unique identification number. Accuracy in MRP can be
obtained with the help of BOM at the time of MPS.
Chapter 6
Purchasing Management
All organizations are continuously in need of supplies of materials and services from outside sources.
Hence purchasing and procurement are normal and important functions in the organization purchasing
are one of the major functions of materials management.
Definition:
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Purchasing is the process of procuring of materials, supplies, machine tools and services required for
the equipment, maintenance and operation of a manufacturing plant.
In a narrow sense, purchasing refers merely to the act of buying an item at a price. The broader
meaning of purchasing makes ita managerial activity which includes not only buying but also includes
the planning and policy activities covering a wide range of related and complementary activities.
Principles of Purchasing
Every business has to carry out following six main functions

1. Creation (Product concept)
2. Capital
3. Personnel
4. Purchasing
5. Conversion (Raw material into finished goods)
6. Distribution
Without purchasing the organization will not achieve its goals.
Principles of Purchasing are as follows:
1. Principles of Right Quality

2. Principles of Right Quantity
3. Principles of Right Price
4. Principles of Right Time
5. Principles of Right Source
6. Principles of Right Place
Objectives of Purchasing
1. To supply inputs continuously to maintain production schedules

2. To minimize investment in stores and materials inventory
3. To achieve safety and economy in materials management
4. To avoid duplication of purchases, wastes and costly delays in purchasing activities
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5. To maintain higher quality standards

6. To procure materials of standard quality from the cheapest and reliable source
7. To undertake market survey to locate new materials
8. To develop ideal procedures from the purchase policy
9. To inform top management about the materials development regarding profit and performance of
the organization
10. To achieve and maintain proper coordination and coordination with all other departments in
organization
11. To take necessary steps for standardization, variety reduction and value analysis of materials
Thus, purchasing function plays an important role in improving competitive strength of the company
under modern dynamic environment.
Duties and Responsibilities of the Purchase Dept.
The main duties or the responsibilities of the purchase department may be summarized as follows:
1. Receiving purchasing indents

2. Carrying out search of or reliable suppliers
3. Issuing purchasing orders after analysis of the proposals sent by the suppliers
4. Selecting vendors and Negotiating with them
5. Follow up the orders to obtain necessary materials in time
6. Maintaining record of vendors
7. Developing new sources of supply
8. Disposing of scrap and surplus materials
9. Checking and approving invoices
10. Scheduling purchases and deliveries
11. Checking requisitions
12. Settlement of complaints
13. Maintaining healthy relations with vendors
14. Selection and training of purchase personnel
15. Participating in Inventory and Warehousing policy decision
16. To decide about forward contracts and agreements
17. Arranging for service contracts and agreements
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18. Contracting for machinery and equipments

19. To manage transport and traffic
20. Other functions assigned by the top management from time to time
Purchasing Cycle
There are total eight important steps which are included in purchase cycle. These steps are as follows:
1. Recognition or Need of items to be purchased
2. Selection of the supplier
3. Preparing and placing the purchase order
4. Follow up of the order placed
5. Receiving and inspecting of the materials
6. Payment of Invoice
7. Maintaining the records of received materials
8. Payment of Invoice
9. Maintaining the records of received materials
10. Maintenance of the vendor relations
Purchase cycle is a continuous function. If out of any of the above steps delayed than it will directly
affect the production of the organization.
Relevant Provisions of State and Central Sales Tax Act
The materials manager or a purchase officer commits substantial finance when he places orders for
purchasing materials. He should have a knowledge of some of the important laws with which he will be
always concerned. These laws include,
The law of contract
The law of sales of goods
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The law of Arbitration

State and Central Sales Tax Acts
Central Excise Act
Sales Tax
The business firms in modern times have to pay various taxes and duties. Taxes are levied by the
central, state and local governments in India. Taxes not only determine the legal form of business but
also affect methods of doing business. Taxes may be classified into direct taxes and indirect taxes.
Direct taxes are on people or firms income or wealth where as indirect taxes are the taxes on spending
of goods and services.
Sales tax is an indirect tax levied on the sales of goods. According to the constitution of India, both
central and state Govt. are empowered to levy tax on sale of goods subject to certain conditions.
Classification of Sales Tax

Sales tax can be classified into three categories according to its scope, legal basis and turnover.
According to the scope, sales tax may be divided into following two types:
a) Selective sales tax and
b) General sales tax
Selective sales tax is imposed in the sale of a few selected commodities which are costly and luxury
goods. E.g. Refrigerators, Motor Vehicles etc.
A General Sales tax is imposed by the govt. on the sale of all commodities except those which may be
exempted by the Govt. in social interest.
Types of Sales Taxation in India

In India there are two main systems of taxation. These are,
a) Single point Sales tax and
b) Multiple point sales tax
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a) Single Point Sales tax

It is the tax that is imposed only at one point between production of goods and their sale to a customer.
It may be imposed either at the First Time or at the Final point. The rate of tax varies between 2%
to 30% depending upon the nature of the goods produced. Under first time taxation type the number of
dealers tends to be much less, which helps in efficient tax administration as there will be only few big
manufacturers and producers.
Under the final point sales tax system, sales tax is imposed only at the last stage of sale to the consumer
or to the unregistered dealer. Generally this system is preferred.
Multiple point Sales tax

Under the multiple point system sales tax is imposed at every stage whenever the sale of commodity
takes place. This method is adopted for collection of more revenue. The multiple point taxation also
increases the cost of revenue collection; hence the net result tends to be much lower level of collection.
Main Features of Sales tax laws of States

1. The term sale or purchase are defined in a comprehensive way to cover maximum number of
transaction
2. For sake of convenience the goods produced and sold have been classified into different categories
3. Different rates of taxation are charged for different categories of good
4. In most states tax is imposed at a single point
5. Registration of dealers having turnover higher than the certain limit is compulsory
6. Tax is imposed as per the category of the dealer
7. Every firm has to file return of their sales periodically and has to pay taxes regularly, otherwise
heavy penalty may be charged
8. They have to maintain all their records of taxation
The Central Sales Tax Act 1956

The central sales tax act provide principles for determine when a sale or purchase of goods takes place,
a) In the course of inter state trade
b) Outside the state
c) In the course of import into or export from India
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Excise Duties
Central Excise duties is type of indirect taxes. It is a tax or duty on home produced goods either at
some stage of production or before their sales to domestic consumers.
The central excise and Salt Act 1944 was passed to provide excise duties. A duty has been steadily
increasing vertically and horizontally.
In 1948, cigarettes were brought under the net of excise duties and since 1954, excise duty has been
extended to cover cement, footware, art, silk fabrics, soaps etc.
Union Excise Duties in India

Union Excise duties that are in operation in India at present are as follows:
1. The Central Excise and Salt Act 1944

It deals with basic excise duties on several items. This is amended as per the requirement of the
economy.
2. The additional duties of Excise Act 1957 and 1985

It was passed to add excise duties in place of Sales Tax on tobacco and textile items
3. The Mineral Oils Act 1958

This is for excise duties on items like motor spirit, Kerosene, diesel oil, furnace oil etc
4. Excise Duties
Excise duties which are less on certain items like coal and coke, tea, iron etc under special act.
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Objectives of Excise Duties

1. Raising revenue to finance economic growth
2. Reduces domestic consumption of certain commodities
3. Raising revenue from the sources not covered by direct taxation
4. To control inflation rate
5. To promote small scale industries
6. To encourage exports for earning foreign exchange
7. To control shifting of tax burden
Value Added Tax (VAT)

Under the VAT the excise is paid on any raw material or semi finished goods, which subsequent
manufacturer will get a credit for the excise already paid on the value which he has added to the raw
material or semi finished product. Thus the object of VAT is to avoid input taxation.
MODVAT
The scheme was introduced in the Budget of Indian Government in 1986-1987 for selected items. At
present excise is levied on value of production. The tax is paid on these items and it is passed on to
consumer in the form of higher prices.
When the output of one industry is used as input in other industry, the tax will be levied as the value of
the final product of another industry. Therefore the tax collection will be lower and price paid by the
consumer will be lower.
In order to get advantage of this scheme, the Govt. has reduced duties on various essential items, but at
the same time duties in luxuries have been increased. It is expected that in future MODVAT scheme
will be more advantageous.
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Import Export Procedure
Import export procedure includes documentations procedures, rules and regulations imposed by both
the exporting and importing countries.
Import Procedure
Importing refers to the purchase of goods produced by other countries. The procedure of imports differs
from country to country depending upon Govt. import policies. The steps in import procedure are as
given under.
1. Procuring license (Preliminaries)
2. Enquiring and placing indent
3. Obtaining foreign exchange
4. Dispatching the letter of credit (L.C)
5. Procuring documentary bills
6. Clearing the goods
7. Making the payment
8. Taking delivery of goods
Export Procedure
The main activities covered in export procedure are as follows

1. Preliminaries Registration and code numbers
2. Offer and receipt of confirmed orders
3. Production and clearance of the goods to be exported
4. Shipment of the goods
5. Negotiations of document and realization of export proceeds
6. Obtaining export incentives
Chapter 7
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Standardization and Codification
The standardization is a natural phenomena and its origin is as old as human civilization. The scope of
standardization is much wider as it covers every human endeavor like agriculture, transportation,
communication, music, dance etc.
After the World War I, the Hoover Committee recommended to promote standardization to achieve
variety reduction and present wastages in industries. International Organization for Standardization
(ISO) formed in 1947.
Definition
Standardization is the process of formulating and applying rules for an orderly approach to a specific
activity for the benefit and with the cooperation of all concerned and in particular for the promotion of
optimum overall economy taking due account of functional conditions and safety requirements.
It is based on the consolidated results of science, techniques and experience. A standard is defined as a
model or general agreement of a rule established by authority created and used by various levels of
interest.
Industrial standardization is the process of establishing such as dimensions, physical characteristics,

performance etc based on specific studies, experience, recommendations of the statutory bodies or the
Govt. The established agreement or uniform identification is termed as standard.
Levels of Standards
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Standardization operates at different levels:

1. Individual level standards are those standards that are laid down by an individual user, a department
or a firm
2. Industry standards Industry level standards are the standards prepared by a group of related
interests in a given industry, trade or profession or statutory bodies and authorities established by the
Govt. E.g. Textile commission
3. National level standard are the standards that are evolved at the national level by counseling
manufacturers scientists user and Govt. departments. E.g. Indian standards Institution (ISI) now called
as Bureau of Indian standards (BIS)
4. International standards are the standards evolved by the international bodies such as ISO
Objectives of Standardization
1. To reduce time and cost by selecting standard product/ technology

2. To achieve economy in selecting standard testing facilities
3. To procure materials of standard quality
4. Reduction in investment
5. To achieve economy in production maintenance
6. To train and develop the employees to achieve higher efficiency and productivity
7. To improve Global Competitiveness of the organization
8. To earn and maintain higher level of profits
Codification
Definition
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Codification is a process of representing each item by a number the digits indicating the group,
subgroup, type and the dimensions of the item.
Codification may be defined as a process of systematic representation of raw material, tools, stores,
equipments etc in an abbreviated form using alphabets, numerals, colors, symbols etc.
Objectives of Codification
To bring all similar items in inventory together
To make identification of a new item easier
To classify items according to their characteristics
To avoid duplication of items
To promote standardization
To achieve variety reduction
To specify item according to national and international standards
Systems of codification
1. Alphabetical System
E.g. Iron ore IR O, Bras, MS-IR-BA-MS etc
2. Numerical System
E.g. Chemical 1, Chemical 5, Chemical 7 etc
3. Decimal System
E.g. Stationary 57, Pencil 57.1, Pen 57.2, Paper 57.3
4. Combined Alphabetical and Numerical System
E.g. Packaging materials PM P.Box12 PM-101, P.Box15 PM-102 etc
5. BRISCH System
6. KODAK System
7. Color Coding System
Storage of Materials
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Introduction
Storekeeping is a service function which deals with the physical storage of goods under the
custodianship of a person called storekeeper or store controller. The place at which the materials are
placed or kept is known as Store room. Finished products ready for shipment are usually called
stocks are housed in a place called stock room.
Storekeeping is the aspect which is concerned with physical storage of goods and materials.
Store functions concern with
Receiving
Involvement
Storage
Issues of items, raw materials, bought out parts, tools, spares, consumables etc. required for production,
maintenance and operation of the plant and finished goods until its dispatch to customers.
Functions of Scientific Store Management
1. Requisitioning from purchasing department an economical quantity of materials for delivery at the
most appropriate time
2. Exercising control on quantity and quality of materials received
3. Storing and Protecting materials against hazardous condition, weather, deterioration and damage
4. Issuing materials against properly authorized materials requisitions
5. Maintaining exact records of all receipts and expenditures
6. Maintaining required stocks of materials to serve production needs
7. Keeping inventory investment within desired limits
Types of Stores
Functionally, stores are of five types
1. Receiving stores
2. Main stores
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3. Finished Production store (Warehouse)

4. Special store
5. Scrap yard
1. Receiving Store
It has to perform activities necessary to exercise control on quality and quantity of purchased materials
before they are accepted and taken into atock.
Receiving stores are of types as under
i. Inward store
ii. Temporary store
iii. Rejection store
2. Main Store
It has to perform activities concerning storage and issue of accepted materials and maintenance of
records
Main stores are of type as under
i. Crib store (Cutting tools, hand tools, gauges etc.)
ii. Finished part store (Parts of final product)
iii. Plant store (Maintenance store)
iv. Sub store (For raw materials)
3. Warehouse
It will perform activities concerning receipt, packaging and packing, dispatch of finished goods to
different destinations and handling of concerned papers and documents.
4. Special store
It has to perform activities of receipt, storage and issue of special materials.
They are of type
Bonded store (Stock of excisable goods)
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Statutory store (Stock of kerosene, diesel, petrol etc.)

Temperature controlled store (For stock of perishable items like meat, fish, milk, fruits etc)
5. Scrap yards
It has to perform activities of receipt, segregation and storage of different types of scrap and also
disposal of scrap as and when required.
Benefits/ Importance of Scientific Storekeeping

In todays competitive environmental organizations are looking at stores as important as that of
production and Marketing functions. It is a key result area for management. Efficiency in production,
maintenance and distribution is largely depends on the efficiency of the store department and its
personnel and operational level. Inventory management has direct impact on profitability of the
organization and it depends upon the efficiency of maintenance of records, implementation of standard
procedures and report on performance level.
Scientific stores management benefits the organization in the following ways:
a) Scientific stock control will help to reduce the losses due to accumulation of inventories
b) Efficient store system will reduce the down time in production which will increase profit
c) Periodic reviews of inventory will help organization for removal of unproductively items
d) Purchase follow up system will help in avoiding stockouts and hence the production losses
e) Proper record keeping will help top management in knowing the exact picture of inventory in stores
at any time.
Store Location
Store location is the process of selecting the appropriate site for the store building in the organization
and deciding how materials are to be placed inside the stores.(i.e. deciding the spot in which an item is
to be placed) so as to provide efficient and prompt service to the user department.
Principles of Good store Location

a) Economy in the cost of Transportation
b) Efficient services
c) Approachable by Rail/ Road transport
d) Separate space for inflammable material
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e) Security
f) Minimum risk of Spoilage and deterioration
g) Flexibility for future expansion
Location Systems
Efficient location systems should consist of
1. Listing and classifying the items to be stored
2. Determining the space requirement
3. Relate the space requirement with space available
4. Determine the method of storing the material
5. Locating materials within the stores
General Principles of locating materials within store are as under:

Characteristics of Materials Preferred location in the stores
1. High usage items 1. As close to the issue counter
2. Heavy items that are difficult to
transport 2. Near the point of use, or near the gate
3. Oils, greases, paints etc 3. Separate store
4. Inflammable and dangerous items 4. In a isolated fireproof place
5. Rubber and rubber parts 5. In air conditioned store
6. In locked cupboard and away from
6. Costly items like bearings and others entrance
Store Layout
Store layout means physical arrangements of space for storage, materials movement, materials handling
equipment, office and its records and thereby provision for the most efficient system for receipt, storage
and issue of materials. Main criteria for store layout are:
1. Easy receipt, storage and issue of materials
2. Sufficient space for easy movement of men and materials handling equipment
3. Optimum utilization of storage space
4. Clear identification of materials
5. Quick location of items
6. Easy in physical stocking
7. Protecting against fire risk
8. Easier and efficient supervision of stores
9. Adequate capacity and provision for future expansion
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Stores Receipts
Receiving concerns control on quantity and quality of materials from the time they are received until
they are accepted and taken in to stock.
Documents used in receiving are Delivery Challan, Railway Receipt (RR), Lorry Receipt (LR), Bill of
entry document, Cash memo etc.
Receiving Procedure
The main steps which are involved in receiving are as follows:
1. Inwarding of material at security gate
2. Verification of correctness of paperwork and appropriateness of supply
3. Inwarding of the consignment in the receiving stores
4. Unloading of the materials in stores
5. Verification of quantities
6. Preparation of Goods Receipt Report (GRR)
7. Inspection of materials
8. Delivery of inspected materials to appropriate stores
9. Return of defective materials back to suppliers
10. Returning all changeable empties back to suppliers
Issuing Procedure for materials

1. Requests of materials should be logged in the requisition register
2. Verification of materials requisitions
3. Check up the availability of indented materials in stores
4. If the exact or substitute materials is not available, the requisition may be kept as pending
5. Updation of issue register and preparation of bin card
6. If materials is to be issues outside the company a gate pass has to be prepared
7. Issue of materials after signing of issue voucher by the respective department or representative of
that particular department to which the materials has to be issued
Logistics Management
The term Logistics is derived from military organization and it was in use in the days of Louis XIV of
France.
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It was observed that effectiveness of the military organization did not depend on only weapons,
fighting skills and spirit of the soldiers but also effected by the efficiency of transportation and supply
of ammunition and food. Logistics means this support to military. The same term when applied to
industrial activity it reflects the similar kind of approach to improve flow of product from source of
origin through different stages and finally to the end user.
Definition
Logistics Management encompasses all material flow management from the inflow of purchased
materials into works, materials flow through manufacturing processes and material flow to customers.
Logistics Management includes the design and administration of systems to control the flow of
materials work in progress and finished inventory to support business unit strategy.
Objectives of Logistics Management

Basic objectives of a good logistic system is to get the right goods or services to the right place, at the
right time, in the right condition and at the right cost. Other objectives are as follows:
a) To ensure the highest level of customer service and satisfaction
b) To minimize the operating costs of physical materials system
c) To reduce time spent from procurement to delivery of materials
d) Add value at every stage of logistic pipeline
e) Overall control on inventory, work in progress and finish goods
f) To help the organization for its competitive position in the market
g) Help in improving communication system both external and internal
h) Try to implement the principles of JIT
i) Promote cooperation and coordination in each sub-system to achieve the goods of the organization.
Activities of Logistics function

1) Order Processing
2) Transportation Management
3) Inventory Management
4) Warehousing
5) Materials handling
6) Packaging
7) Acquisition
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8) Product Scheduling
9) Information system
Improving Effectiveness of Logistics Management

Effectiveness of Logistics management can be achieved with the help of following:
1. Logistics Network
2. Transport
3. Information
4. Inventory and
5. Warehousing, materials handling and packaging
1. Logistics Network
It includes facilities like manufacturing, dealers, retail stores and warehouses. Larger the geographical
area more complex is the logistical network. Superior logistic network is a very big competitive tool. It
is based on systematic analysis and determination of number of factors like type of facilities,
geographical location, specific work allocation etc.
2. Information
Timely information is the key to the logistic performance. Modern information technology, in the form
of both hardware and software has removed the deficiencies in information.
3. Transport
Cost, speed and reliability are the key determinants of the effectiveness of any business essential for
optimum cost.
4. Inventory
Good inventory management system must be operated to achieve desired customer service with
minimum inventory investment. Inventory management is the profit centre area of each organization.
5. Warehousing, Materials handling and packaging
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The choice and location of the warehouse should be with a view to get closer to the core customers.
Materials handling should be planned to ensure safe and speedy receipt, movement, storage and
packaging of customers requirements.
Chapter 8
Materials Handling
Materials handling is the primary activity in all the manufacturing organizations. For processing the
materials to facilitate their movement or storage, with ease, speed economy and safety.
Objectives of Materials Handling

1. Speed and economy in movement of materials
2. Minimization of cost of material handling
3. Prevention of damages to materials
4. Safety in materials handling
5. Improvement in productivity
6. Good housekeeping
7. Efficient storekeeping
Principles of Materials Handling

Materials handling principles can basically be grouped into five categories:
1. Planning Principles
2. Operating Principles
3. Equipments Principles
4. Costing Principles
5. General Principles
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Planning Principles
Material handling should be planned and well integrated with production activity to obtain maximum
overall operating efficiency
a) Plant layout principle
b) Delegation of responsibility principle
c) Minimization of re-handling principle
d) Spacing saving principle
Operating Principles
a) Unit load handling Principle
b) Gravity Principle
c) Flow of materials Principle
Equipment Principles
a) Mechanization Principle
b) Terminal time Principle
c) Dead weight Principle
d) Standardization Principle
e) Maintenance Principle
f) Speed Principle
g) Versatility Principle
Costing Principles
a) Equipment selection Principle
b) Replacement Principle
c) Handling cost appraisal Principle
General Principles
a) Safety Principle
b) Training Principle
c) Identification Principle
d) Location Principle
e) Material treatment Principle
Materials handling equipments used in materials management

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Materials handling equipments play a vital role in production and operations management because the
manufacturing process starts and ends with them. In modern manufacturing organization materials
handling cost has been estimated to be around 15-20% of the cost of production.
Objectives
Materials handling equipments policy has the following objectives:
1. To facilitate value addition to materials effectively
2. To increase mobility and speed
3. To add safety and convenience
4. To improve productivity and efficiency
5. To increase economy by reducing wastages and efforts
6. To promote motivation amongst employees
7. To increase labor productivity
8. To produce quality products
Selection of the Materials Handling Equipment

Selection of M.H.E is a vital decision as it affects operating cost and efficiency of the plant. Following
factors are to be considered at the time of selection.
Sr Factors to be considered Details
no.
1 Materials to be Handled i. Size and Shape
ii. Quantity and weight
iii. Characteristics
2 Plant Buildings i. Temporary or Permanent
ii. Width of doors
iii. Height of the ceiling
iv. Levels and load bearing capacity of floor and
walls
v. Columns and pillars
3 Layout Product or process layout
4 Speed Minimum, maximum, Average
5 Material flow pattern Vertical, Horizontal
6 Method of production Mass production, Batch production
7 Distance Fixed, long, short
8 Safety requirement Characteristics of materials
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9 Installation and operating i. Initial investment

cost ii. Operating cost
iii. Maintenance cost
iv. Finance available
10 Skill requirement Type of skill required to operate the equipment
Types of Material Handling Equipment
1. Wheel barrows, Hand trucks and Trolleys

These are generally used in small scale industries and are manual handling equipments.
1. Hand barrow
2. Wheel barrow
3. Two-wheel-truck
4. Hand trolleys
5. Sliding wheel trucks
6. Lift trucks
7. Stillage trucks
8. Pallet trucks
2. Conveyors
Conveyor is a fixed type of material handling system used for moving materials wither continuously or
intermittently between two fixed points in vertical or horizontal direction.
1. Belt Conveyors
2. Roller Conveyors
3. Screw Conveyors
4. Monorail Conveyors
5. Pipe line Conveyors
6. Vibrating Conveyors
7. Oscillating Conveyors
3. Industrial Trucks
i) Hand Operated trucks
ii) Fork lift trucks
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4. Hoists and Cranes

Hoists are used for loading and unloading of heavy or long objects.
i) Chain hoists (manual)
ii) Pneumatic hoists
iii) Electric hoists
Cranes are overhead device capable of moving materials vertically and laterally in any areas of limited
length, width and height.
i) Overhead bridge Cranes
ii) Gantry Cranes
iii) Jib Cranes
5. Ropeways
They are used for overhead transport of materials over greater distance.
6. Slides and Chutes

To transfer jobs under gravity from one location to another
7. Lifts
Employed in multi-storey plants for transportation of materials
8. Tractors and Trailers

Tractors and trailers are used to transport materials over long distances.
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Chapter 9
Modern Materials Management

Computers in Materials Management
Information is the essential ingredients of management control and as such continuous flow of
information is of most important to the company. The traditional methods do not serve the purpose. The
importance of computer control system lies in their ability to acquire, assimilate large amount of
information with speed, accuracy and flexibility. Computers find increasing acceptance in MM because
amount of administrative work includes thousands of requisitions, purchase enquiries, purchase orders,
goods receipt reports and other documents. Most of this work when will be performed by computers
there will be enough time to the materials manager or Buyers to concentrate on more productive
activities like vendor development, cost price analysis, value analysis, wastages reduction etc.
Benefits of computer Systems

1. Free from clerical job (Lower and Middle Management)
2. Standardization of data is possible
3. Instant availability of any required information
4. Improving communication and reporting
5. Reducing inventory investment due to speed and accuracy
6. Enabling better control over operations
Data Base for Materials Management System

A data base is a collection of Information processed by the computer
Materials Management data will include the following:
For Purchasing
Supplier, offer, statistics, receiving department, invoice database etc
For Inventory
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Item master, Lead Time, unit of measurement, Group code, receiving database etc.
Computer Applications in Materials Management
Applications of computers in materials management can be classified into three groups:
Operating System
Operating System process data for the routine operations of the departments. E.g. Purchasing, vendor
history etc.
Reporting System
Reporting System process data, often drawing on data files set up for operating systems and report
these data to the management. E.g. Purchased past history, vendor delivery records, inventory
transactions, Purchase order analysis etc.
Decision Support Systems

It incorporated data into an analytical frame work utilizing scientific techniques like regression
analysis, simulation etc and present data in the form of select alternatives actions and thereby assisting
materials people to select from among the alternatives.
E.g. Quotation analysis, price discount analysis, forecasting, ABC/FSN analysis etc.
Activities of Materials Management covered by Computerization

1. Purchasing
2. Stores Management
3. Inventory Control and Material Planning
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Notes of Materials and Logistic Management

Definition of Material Management

Objectives of Material Management

3. Inventory control through scientific methods

4. To establish healthy relationship between buyers and sellers

5. To maintain standardization and quality control

7. To carry out value analysis

8. Minimizing wastages and speedy disposed of surplus materials etc.

Scope of Materials Management

Following are the functions of materials management

Importance of Materials Management

The main advantages of integrated materials management are as follows:

7) Good supplier relations

Interface with other functional areas

Materials management has interface of two kinds:

2. Production of Goods and Services

3. Personal and HRD

Forecasting in Materials Management

Moving Average Method

Exponential Smoothing Method:

The new forecast for average is then,

= Forecast of the last period +

Different types of Cost Associated with Inventories

A) Cost of placing an order of materials

B) Ordering from the plant

B) Storage space costs

C) Inventory Service costs

Cost of maintenance and repairs

E) Inventory Risk costs

Out of stock/ Shortage costs

Overtime payments when capacity is too small

Economic Order Quantity (EOQ)

When to order? And how much to order?

Assumptions of the EOQ model:

Formula for EOQ

Where, TC = Total cost

Classification of Materials in Material Management

Classification of materials on the basis of stage of production process

c) Works made parts

Classification according to the condition of materials

Different Techniques of Inventory control

Types of classification Criterion used

ABC Analysis Usage value (consumption per period* price per

FSN Analysis (Fast, slow, Non-moving) Issues from stores

GOLF Analysis (Government, ordinary, Local,

SOS Analysis (Seasonal, off seasonable) Seasonality

Let us discuss these classifications in details:

Clas No of Items Value of items Value of items (%) for

Graphical Presentation of ABC method of Inventory Control

VED Analysis (Vital, Essential, Desirable)

FSN Analysis (Fast, Slow, Non moving)

Uses of FSN analysis

GOLF Analysis (Government, Ordinary, Local, Foreign)

SOS Analysis (Seasonal- Off- Seasonable)

Materials Requirement Planning (MRP)

MRP outputs are:

8) Promoting Engineering Efficiency

Master Production Schedule (MPS)

Bill of Materials (BOM)

Every business has to carry out following six main functions

Principles of Purchasing are as follows:

1. Principles of Right Quality

1. To supply inputs continuously to maintain production schedules

5. To maintain higher quality standards