Material Management

Definition: Material 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.
 Functions of Material
Management
 Material planning and Programming
 Purchasing and procurement of
material
 Storing and administration
 Inventory control
 Value analysis, standardization and
simplification
 External transportation
 Material handling ( Internal
transportation)
 Disposal of scrap, surplus and
 Objectives of Material
Management
 To minimise material cost
 To ensure continuous and uninterrupted
production or operation by maintaining a
steady flow of materials in efficient and
economic manner.
 To achieve economy in the cost of materials
while purchasing, storing and processing
 To improve quality
 To increase competitiveness of products by
reducing their price.
 To ensure co-operation among all
departments of the enterprises to meet
material management objectives at
corporate and functional levels.
 To trace new sources of supply.
 Advantages of Material
Management
 Better accountability
 Better co-ordination
 Better performance
 Adoptability of Electronic Data
Processing (EDP)
 Miscellaneous Advantages: team
spirit.
 Organization of Material
Management
Chief
executive

Personnel Financia Material Production Marketing

Manager l Manager Manager Manager
Manage
r

Stores Material Research Shipping

Purchase
Dept. Handling section

Receiving Storage Issuing

 Inventory Control
 Inventory is the stock of any item or
resource used in an organization and can
include: raw materials, finished products,
component parts, supplies, and work-in-
process
 An inventory system is the set of policies
and controls that monitor levels of
inventory and determines what levels
should be maintained, when stock should
be replenished, and how large orders
should be
 Firms invest 25-35 percent of assets in
inventory but many do not manage
 Types of inventories
1. Direct inventories: materials and parts which
finally goes into finished products
2. Indirect inventories: necessary for
Manufacturing.

4. Raw material
 Purchased but not processed
5. Work-in-process
 Undergone some change but not completed
 A function of cycle time for a product
6. Maintenance/repair/operating (MRO)
 Necessary to keep machinery and processes
productive
7. Finished goods
 Completed product awaiting shipment
Necessity of inventory control
1. To maintain independence of operations
 Provide “optimal” amount of cushion
between work centers
 Ensure smooth work flow
2. To allow flexibility in production
scheduling
3. To meet variation in product demand
4. To provide a safeguard for variation in
raw material or parts delivery time
 Protect against supply delivery problems
(strikes, weather, natural disasters, war, etc.)
5. To take advantage of economic
purchase-order size
 Lead Time ( Procurement Time)
 It is the time which the stock takes to reach from
recorder point to minimum stock level.
It may include following activities:
3. Raising of a purchase requisition.
4. Inquiries, quotations scrutiny and approval
5. Placement of an order on supplies.
6. Suppliers time to make the goods ready.
7. Transportation or clearing.
8. Receipt of goods at company stores.
9. Receiving inspection
10. Taking into stocks.
In order to receive supplies before the stock reaches
to zero level, it is necessary to order the material
much in advance i.e. the stock available is
sufficient and last during the lead time.
 Units in stocks

Order here to receive supply

at C

300 ---------------------------------------- ROL=300

MB =NC = 15 Days
= Lead time
200

100

Time in
0 A M B N C days

In fig. Recorder level (ROL) = Stock sufficient to last during lead

time=300 units
Suppose an item has a lead time of 15 days and monthly consumption of
the item is 600 units, then a recorder must be placed at 300 units.
 Stock-out
 When there is shortage of material for
production or services to be rendered it is called
stock out.
Safety Stock
 Safety stock is the lower limit of stock below
which the stock should not be allowed to fall
under normal circumstances.
Factors affecting safety stock
5. Number of suppliers
6. Lead time
7. Criticality of the item
8. Annual usage
9. Type of items
10. Service level desired by management
11. Order quantity
12. Risk of deterioration
13. Space restrictions.
 The Material Flow Cycle

Cycle time

95% 5%

Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
 Inventory Costs
 Holding (or carrying) costs.
 Costsfor capital, taxes, insurance, etc.
(Dealing with storage and handling)

 Setup (or production change) costs.

(manufacturing)
 Costs for arranging specific equipment setups,
etc.

 Ordering costs (services & manufacturing)

 Costs of someone placing an order, etc.

 Shortage (backordering) costs.

 Costs
of canceling an order, customer
goodwill, etc.
 Techniques of Inventory
control
ABC Analysis
(Always Better Control)
This is based on cost criteria.
ABC analysis tends to segregate all items
into three categories: A B and C on the
basis of their annual usage.
 To control and focus his attention only on
few items
 A-control inventories and show visible
results in shorter span
 Reduces clerical work
 A-Items
 Small in numbers (10%)but consume large amount of
resources (70%).
 Must have
c. Tight control
d. Rigid estimates of requirement
e. As many sources as possible for each item
f. Strict and close watch
g. Low safety stock
h. Frequently ordering or weekly deliveries
i. Maximum follow up and expending
j. Accurate forecasts in material planning
k. Minimisation of waste, obsolete and surplus
l. Central purchasing
m. Maximum efforts to reduce lead time.
n. Managed by top management.
 B-Items
 These items are generally 20% of total items and
represent 10-15% of total expenditure.
 Intermediate items.
 Not as detailed and rigid as A items.
 Moderate control and low safety stock
 Once in three months
 Monthly control reports
 Periodic follow-up
 Moderate value analysis
 Two or more reliable sources
 Estimates based on past data on present plans
 Can be handled by middle management

C-Items
Larger in number but consume less amount of resources.
 Must have
c) Ordinary control measures
d) Purchase based on usage estimates
e) High safety stocks
f) Bulk ordering once in a 6 months
g) Minimum value analysis
h) Two reliable sources of each item
i) Group postings
j) Decentralization purchasing
k) Minimum clerical efforts.
ABC analysis does not stress on items those are less costly but may be
vital.

Colour Coding
A-item: Red colour
B-item: Pink colour
C-item: Blue colour
 Steps in conducting ABC
analysis
1. Prepare a list of items and estimate their annual
consumption (Units)
2. Determine unit price of each item
3. Multiply each annual consumption by its unit
price to obtain its annual consumption in Rs.
4. Arrange items in the descending order of their
annual usage starting with highest annual
usage down to the smallest usage.
5. Calculate cumulative annual usage and express
the same as cumulative usage percentage. Also
express number of items into cumulative item
percentage.
6. Plot cumulative usage percentage against
cumulative item percentages and segregate the
items into A,B and C categories.