Materials Management Concept Prof. Mohan Mahurkar
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Introduction Materials Management Management is an indispensable core activity of all types of organizations, whether manufacturing, trading or even non profit organizations. All organizations organizations are continuously involved in procurement , storage and stock replenishment of different types of production materials. In a manufacturing organization organization , materials management assumes greater importance, though it also adds to the greater degree of complexities. In some of them the manufacturing organizations organizations the cost of the materials varies from 40% to 80% of the production cost or sales. 3
Examples (As on 31 -03- 2003) IPCA Laboratories
Britannia
Salora International
Net Sales
Rs. 486 Cr
Rs. 1295 Cr
Rs. 341 Cr
Materials
Rs. 218 Cr
Rs 681 Cr
Rs 282 Cr
= 45 %
= 53 %
= 83 %
Thus, the slightest efficiency improvement in the t he materials management releases substantial advantages 4
DEFINITION Materials Management is a term to describe the grouping of management functions related to the complete cycle of materials flow, from the purchase and internal control of production materials to the planning and control of work in progress, to the warehousing, shipping and distribution of the finished product. 5
Objectives of Material Management 1.
Procurement of materials at lowest prices.
2.
High rate of inventory turnover.
3.
To ensure continuity of supply .
4.
To maintain the consistency of quality.
5.
To minimize the acquisition & storing cost.
6.
Lower administrative cost.
7.
Maintenance of supplier relations.
8.
Development of new materials & sources.
9.
Efficient reporting.
10. Development of personnel.
6
Typical Drawing Sheet Management Company
Name of the Component
ELEVATION
Code of ComponentProduct
END VIEW
PLAN
40 nm
200 NM 50 nm 40 nm Specification: Composition: Hardness: Prepared By: Date:
Nos. pc: 1 Blank Size 220 x 60 x 50 Checked By : Date:
DRG No: P 324051 Model : 2 Approved By : Design Chief :
Date: 7
Company Sr. No
M/c
1
Lathe 03
2
Drilling 02
3
Grinding
Component: Code:
Process Sheet Std. Time Min
Tool
Measuring Tool
Turn 120 DIA to 100……
20
CT – 20
V.C
Drill 10 mm hole to depth 20 mm
12
D – 25
V.C
Grind 100 mm DIA 100 +/- 0.2
30
G–3
S.G
Operations
Remarks
8
Scope of Materials Management Materials management includes the following: a. b. c. d. e. f. g. h. i. j. k.
Materials Planning Production Control Inventory Control Purchase Receiving & Inspection Store Keeping Shipping – Distribution of finished goods. Materials Handling Traffic / Transport Physical Distribution ( to customers) Scrap Control 9
EXAMPLE - B Wrist Watch
Case
BEZEL Black Cover CRYSTAL O - RING
Strap
Dial
Hour Hand
Upper Piece
Min. Hand
Lower Piece Lock
Hands
Dial Base Indices Day – Date Window
Sec Hand
Components
Base Plate Power Circuit Train wheel assembly Other components
10
Sample format of Raw Material Master Size Sr Component No
Component Code
Raw Material Designation Dia x Lth Length Brdth Thick
Material reqd per unit / for 100 Remarks units Mts
kgs
11
Sample Format for Bought – Out Items
Sr. No
Description
Component Code
Qty. per unit or per 100 units
Total Qty including rejection
Remarks
12
Sample of Materials Requisition
Company Name
Department
Sr No
Component / Material
Section No
Code
Last Yr Consn.
Date
Stock Available
Qty Reqd This Year
Remarks: When required and in how much quantity
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2.
Materials Planning
It is the scientific way of determining the requirements of various materials & items that go into meeting the production needs within the economic investment policies. Objectives 1.
Smooth flow of production.
2.
Uninterrupted services in various fields,.
3.
Prevention of stock outs.
4.
Control excess inventory.
14
Inputs to the system. 1.
Annual production plan with product – mix.
2.
Monthly production plan.
3.
Materials master.
4.
Design master.
5.
Materials requisition.
6.
Estimates of year ending, work-in-progress, finished goods inventory.
7.
3 years consumption pattern.
8.
Rejection data.
9.
Consumable requirement data.
10. Tools consumption data. 11. Source from where to be procured – imported or indigenous. 12. Safety stock, lead time etc 15
Materials Purchase Request Based on the above data, the materials planning section will prepare “Materials Purchase Request” which will be examined by Material Planning Head and the accounts and forwarded to purchase department.
Purchase The basic objective of the purchase department is to ensure continuity of supply of materials, tools and other items in order to have uninterrupted production and at the same time to ultimately reduce the cost of the finished goods This function can be divided into: •Pre – purchase. •Ordering •Post - purchase 16
Pre – Purchase Activities Purchase Dept. will plan their activities based on a. Materials requisition. b. Lead-time consideration. c. Stock available – stores, work in progress, finished goods. d. Funds availability.
After compiling the complete requirements, the purchase dept. should work out a purchase budget and give details of A,B and C class items budget, capital budget, spares budget, consumable and other items as also stationery budget with a schedule. This will have to be got sanctioned by the finance chief and unit chief. 17
Ordering a. Based on requirement & scheduling for new items, quotations will be called and for the existing items rate fixation will be done by negotiations. b. Vendor rating will also be done. c. Order will be placed on the approved vendors after due sanction of unit chief / materials chief, indicating rate and pattern of supply needed. The purchase order contains various terms and conditional about supply and payments
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d.
A normal purchase procedure will be as follows:
i.
Circulations of enquires.
ii.
Receipt of quotations ( tenders )
iii.
Opening of tenders.
iv.
Preparation of comparative statement.
v.
Discussions with tenderers & arriving at lowest quotation & befitting payment terms.
vi.
Placement of orders.
vii. Order confirmation from vendors. viii. Opening of letter of credit for imports. ix.
Receipt of materials.
x.
Inspection, payments.
xi.
Return of rejected items and getting replacement. 19
Storing The objective of storing the materials is to ensure timely supply of materials in the production cycle ensuring safety of the materials and easy access. Various functions of stores are: 1.Take into stock accepted materials. 2.Store them scientifically. 3.Have proper storage facilities to ensure that no damage is done to materials. 4.Issue materials to requiring departments. 5.Maintain stock reports. 6.Storage of scrap from shops and its disposal. 7.Take physical verification periodically. 8.Disposal of rejected materials.
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Finished Goods Store • Normally this store will be under the marketing department . • The finished goods will be received and dispatched from here and stock reports maintained.
21
Controls 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Materials storage :– racks, A/c, strong-room. Materials Handling. Storage of hazardous materials. Use of vertical space. Use of proper containers. Use of transport facilities :– trolleys etc. Keeping records. Preparation of daily reports. Preparation of monthly and quarterly reports. Preparations of annual reports. Use of computers. Use of scientific techniques. 22
PURCHASING MANAGEMENT Purchase Manual
• Mission • Objectives • Scope • Responsibilities • Limitations • Financial Powers
Organizational & Personnel functions • Pur. Dept Orgn • Roles & responsibilities • Functions (purchasing) • Right personnel on job
Logistics & supply chain management
•
Inward transport
•
Outward transport
•
Distribution TR.
•
Sea / Air / Road TR
• Training & Devt • Make or buy decisions • Sub – contracting • Vendor rating • Leasing of capacity • Disposal of surplus / scrap/ redundant items/ rejected items. • KRA Evaluation • Imports / Exports • Petty Cash Purchases
•
Arrangers carriers Pvt / Contract / Common
Legal aspects • Law of contract • Legal relationship • Agreement • Agents
C&F
Purchase
Legal aspects
• Free on rail (FOR) • Free on board (FOB) • Arbitration & award
Purchase accounting Audit performance evaluation • Expenses accounting • Costing • Cost redn • Price fixing • Performance evaluation • Functional • Personnel • Audit • MIS
• Damage claims • Insurance
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FLOW CHART FOR PURCHASE
Finished stock available
Quantity Calculations
Annual production plan Compt stock in stores
Consumption & rejection data for last 3 years
Purchase Requisition Work in process Advertisement call for tenders
Existing vendors
New vendors
Receipt of tenders / quotations
Appointment of tender committee
Tender opening Preparation of comparative statement Latest prices elsewhere
Negotiations
Costing
Final quotations
Opening of LC
Release of purchase orders Receipt of materials
Select 2 – 3 vendors Damages
Insurance
Shortages Inspection of materials
Qty Rejected
Quantity rework Prepare inspection report
Quantity accepted Stores
Report ( MI Slip) to A/c for payments
Inform purchase note in inspection report
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Economic Ordering Quantity Formula: EOQ =
2AB C
A = Usage unit for the inventory planning period ( Total inventory requirement in the units) B = Buying cost per unit. C = Carrying cost per unit. EOQ =
2 x 1600 x 50 1
=
160000
=
400 units 26
Inventory costs of different order quantities Sr No
Details
1
Size of order units
1600
800
400
200
100
2
Number of orders
1
2
4
8
16
3
Cost per order – Rs
50
50
50
50
50
4
Total ordering Costs – Rs
50
100
200
400
800
5
Carrying cost per units – Rs
1
1
1
1
1
6
Avg Inventory
800
400
200
100
50
Order size 2
Order Quantities
7
Total carrying cost – Rs
800
400
200
100
50
8
Total cost – Rs ( item 4 + 7 )
850
500
400
500
850
Number of orders = Result :
Total inventory requirement / Order size Placing 4 orders of 400 units each, will result into a total cost of Rs. 400, which is the lowest and hence most economical. 27
Determination of EOQ Sr. No 1
Details
Order Quantities
Cost of items purchased each year 30000 30000 (Rs)
30000 30000
30000
2
Order Size ( Units )
6000
3000
1200
1000
600
3
Number of orders
1
2
5
6
10
4
Average Inventory ( Units )
3000
1500
600
500
300
5
Total Carrying Cost
( Rs )
3000
1500
600
500
300
6
Total Ordering Cost
( Rs )
60
120
300
360
600
3060
1620
900
860
900
848
848
848
848
848
7 8
Total Cost
(5+6)
EOQ units
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Re- order Point t 600 n e mt 500 s e v in 400 f
o st i n U
Maximum Inventory Level
A
700
U s a g e r a t e
B
U s a g e r a t e s l o p e C D
Average Inventory level Reorder point
300 E
Replenishment point
Safety stock usage during lead time
200 100
Lead Time
Stock out
10
14
15
16
17
Months A: Maximum level
( 700 units)
B: Average maximum level
( 600 units)
C: Average inventory level
( 400 units)
D: Re – order point
( 400 units )
-------
IMPORTANT
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SR NO A
ITEMS OF EVALUATION
YES
NO
ORGANIZATION 1
The department is quite productive.
2
T he aut hor it y and resp onsibi lit ie s ar e class.
3
Purchasing function is centralized.
4
Purchase manager spends reasonable time in DIRECTING the staff.
B
FORMS 1
Materials requisitions forms are used
2
Purchase order numbers are controlled and record is kept in a register
3
Acceptance copies of P.O are filed
C
etc
RECORDS & FILES 1
All P.O files are up to date.
2
Filing system is perfect.
3
Price – history records are kept.
D
etc
SYSTEMS & PROCEDURES 1
Pro du ctio n i tems ar e p rocu red as per the pr oced ure.
2
Regular meetings are held for purchase of capital items
3
Policies and directions are followed etc.
E
etc.
MIS 1
Regular control reports are generated.
2
Discrepancies are reported
F
etc
RATIOS – CONTROLS 1
Number of orders placed.
2
Cost per order.
3
Purchase to sales ratio.
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Legal aspects of purchasing Purchase function involves a large sum of money. Also it deals with various agencies like suppliers, sub contractors, transporters, agents, government bodies like DGS & D, excise, sales tax ..etc. Hence, it is essential to know various laws and regulations. Some of them are: 1.
Excise notifications.
2.
Sales tax rules.
3.
Law of contract ( Indian Contract Act 1872 )
4.
Law of agency ( ICA 1872)
5.
Negotiable Instrument Act 1881 ( HUNDI )
6.
The Indian Arbitration Act 1899.
7.
Provisions regarding the carriage of goods by land, sea, air …etc.
8.
Customs Notifications.
9.
Use of patented items.
10. Works Contract. Refer: Integrated materials management by M.D Patel, Chunawalla & DR Patel ( NMIMS Library)
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7.
Inventory Control
Definition Inventory in wider sense is defined as any “IDLE RESOURCE” of an enterprise. It is commonly used to indicate materials – raw, in-process, finished, packing materials, spares etc. Stocked in order to meet an expected demand or distribution in future. Even though inventory of materials is an idle resource, in the sense it is not meant for immediate use, it is almost a necessity to maintain some inventories for the smooth functioning of an organization. 32
Why inventories are essential ? 1.
For adequate customer service.
2.
To take advantage of price – discounts by bulk purchasing.
3.
To make possible economics in transportation and clearing & forwarding charges.
4.
To maintain service stocks while replacement stocks are in transit.
5.
To serve as buffer in case of shop rejections and delayed deliveries.
6.
To maintain smooth supply chain . 33
Evils of Excess Inventory a) Lock up of capital. b) Cost involved in carrying inventory – storage place, personnel, records…etc c) Risk of deterioration. d) Risk of obsolescence – models change. e) Changes in prices – If low, our loss. 34
Control Aspects a. Elimination of certain inventories. b. Inventory levels fixing – max, min. c. Periodic review.
35
Inventory Control & Its Advantages a) Keeping the investment low. b) Ensures timely availability. c) Allows full advantage of economics. d) Reduces “ Stock – Out ” chances. e) Increased Profitability.
36
Types of Inventories a) Production inventories. b) Maintenance and repair inventories. c) In – process inventories ( WIP ). d) Finished goods inventories. e) Redundant goods inventory – viz: Plant & machinery, Equipments, Spares, R/M, Components, Packing materials…etc. 37
Scientific Stock Levels Since inventory blocks the funds, it is essential to keep “ optimum levels ” of inventories. The ordering should be linked accordingly. Also “ lead time ” is to be considered. 1. Fixed Interval System – monthly ..etc 2. Fixed Order Quantity System – consumption. 3. Safety Stock. 4. Minimum Stock. 38
Maximum Stock Level
REORDER LEVEL Minimum Stock Level k c ot S
Safety Stock Level
Period 39
Safety Stock Calculations ( Example ) Suppose for an item, monthly consumption is 100 units, the normal lead time is 15 days and maximum lead time is 1 month, then safety stock is = ( 1 – ½) x 100 = 50 units. 40
Various Scientific Techniques used in Inventory Control
A . Inventory Analysis 1
VED Analysis :
Vital, Essential, Desirable
2
SDE Analysis :
Scarce, Difficult, Easily Available
3
HML Analysis :
High, Medium & Low Cost
4
FSH Analysis :
Fast, Slow & Non - moving
5
ABC Analysis : 42
100 % 95 %
80 %
n oi t p m u s n o C
s R nI
A
B
C Percentage Of Items 43
B.
Inventory Carrying Cost
1.
Interest Charges.
2.
Insurance Cost.
3.
Storage cost – Rent for space and depreciation of building and equipment.
4.
Operational Costs.
5.
Obsolescence and deterioration. 44
Economic Ordering Cost t o s c a t l o T
t s o g c n i r r y a y C r o t n e I n v
)
s R ( t
s o C
Ordering Cost
EOQ Quantity per order
45
Mathematical Formula for EOQ EOQ =
2 A IC
Where, A : Ordering cost / Order. EOQ : Economic Order Quantity. : Total quantity ordered or annual consumption. I : Inventory carrying cost / Annum. C : Cost per unit in Rupees Say, = 36000
I = 20 %
A= Rs 25
EOQ =
C= Rs 1
2 x 36000 x 25 0.2 x 1
= 3000 units 46
Organization for Materials GENERAL MANAGER
CHIEF OF
CHIEF OF
CHIEF OF
CHIEF OF
PRODUCTION
MARKETING
PERSONNEL
MATERIALS
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