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CONTENT

Material Management , By Hemant Bhujbal (Lecturer in MIT SSPP) 2

Introduction2. Inventory Concept2.1 Inventory Classification2.2 Inventory Control2.3 Inventory Management3. The ABC Analysis3.1 Need/Necessity of ABC Analysis3.2 Steps to do ABC Analysis4. Economic Order Quantity (EOQ)4.1 Graphical Representation of EOQ4.2 Determination of EOQ5. Standard Steps in Purchasing6. Modern Techniques of Material Management6.1 Material Requirements Planning (MRP)6.2 Enterprise Resource Planning6.3 ERP in Material Management

DEFINITION Material management is defined as the activities

involved to plan, control, purchase, transport, store issue in order to ensure an efficient flow of materials.

Material management ensures that the required materials are brought in the required quantities, at the required time, of the required quality and at an acceptable price.


Functions Of Material management

i. Material planning.

ii. Procurement or purchasing of materials.

iii. Receiving and warehousing.

iv. Storage and store administration.

v. Inventory control.

vi. Standardization, simplification and value analysis.

vii. Disposal of scrap, surplus and obsolete materials.


2. Inventory Concept

Inventory means the aggregate of those items of tangible personal property which,

i. are held for sale in ordinary course of business.

ii. are in process of production for such sales.

iii. are to be currently consumed in the production of goods or services to be available for sale.

Inventories are expandable physical articles held for resale for use in manufacturing, production or for consumption in carrying on business activity.


2.1 Inventory Classification Raw inventories: They include, raw material and

semi-finished products supplied by another firm and which are raw materials for the present industry.

In process inventories: They are semi-finished goods at various stages of manufacturing cycle.

Finished inventories: They are the finished goods lying in stock rooms and waiting for dispatch.

Indirect inventories: They include lubricants and other items needed for proper operation, repair and maintenance during manufacturing cycle.


Functions of Inventories

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To maintain smooth and efficient production flow.

To purchase in desired quantities and thus nullify the effects of changes in prices or supply.

To keep a process continually operating.

To create motivational effect on purchasing . e.g., If a store/shop is full of inventory, person may be tempted to purchase more.

To supply material whenever required.

To prevent stocks out.

Inventories act as a basic raw material.

Material Management , By Hemant Bhujbal (Lecturer in MIT SSPP)

2.2 Inventory Control

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Inventory control is concerned with the acquisition, storage, handling and use of inventories so as to ensure the availability of inventory whenever needed, providing adequate provision for contingencies, deriving maximum economy and minimizing wastage and losses.

Hence inventory control refers to system, which ensures the supply of required quantity and quality of inventory at the required time and at the same time prevent unnecessary investment in inventories.


Objective of Inventory Controli. Procurement of inventory of right quality and right quantity.

ii. Procuring material at an economical rate.

iii. Developing definite identification system for inventory.

iv. Establishing safe, suitable storage location.

v. To control the cost of production.

vi. To have periodic assessment of inventory stock.


Advantages of Inventory Controli. Supply of good quality material at right time results in

good quality of product, timely completion of orders and creating goodwill in the market.

ii. Helps in reducing cost of production.

iii. No shortage and no excess of inventory.

iv. Production targets achieved by avoiding production delay.

v. Efficient utilization of storage space.

vi. Accurate delivery dates can be ascertained and the industry builds up reputation and better relations with customer


2.3 Inventory ManagementInventory management is a process of planning, procuring and controlling the use of inventory such that right kind of inventory should be made available in right quantity and of right quality.

Material manager or store officer is responsible for making effective Inventory management.


The effective inventory management should


Maintain sufficient stock of raw material in the period of short supply and anticipate price changes.

Ensure a continuous supply of material to production department facilitating uninterrupted production.

Minimize the carrying cost and time.

Maintain sufficient stock of finished goods for smooth sales operations.

Ensure that materials are available for use in production and production services as and when required.


Ensure that finished goods are available for delivery to customers to fulfil orders, smooth sales operation and efficient customer service.

Minimize investment in inventories and minimize the carrying cost and time.

Protect the inventory against deterioration, obsolescence and unauthorized use.

Maintain sufficient stock of raw material in period of short supply and anticipate price changes.

Control investment in inventories and keep it at an optimum level.

Objectives of Inventory Management

To minimize the possibility of disruption in the production schedule of a firm for want of raw material, stock and spares.

To keep down capital investment in inventories.

14Material Management , By Hemant Bhujbal (Lecturer in MIT SSPP)

3. The ABC Analysis


ABC analysis is one of the important techniques which is based on grading the items according to the importance of materials. This method is popularly known as Always Better Control.

The items, which are of high value and less than 10% of the total consumption or inventory can be called as ‘A’ grouped materials. It is necessary to exercise selective control and focus more attention on this category because of high value items.

Similarly, 70% of materials in total consumption or inventory which lies 10% of the inventory value can be grouped under ‘C’ categories.

The materials which have moderate value that lies between the high value materials and low value materials are grouped under ‘B’ category.


Tabular Format of ABC analysis


Graphical representation of ABC Analysis


3.1 Necessity of ABC AnalysisAs the size of industry increases, the number of items to be purchased and then to be taken care of also increases. Purchase and control of all items at a time and in bulk much before their use, blocks a lot of money and man hours, and is therefore uneconomical. ABC analysis helps segregating the items from one another and tells how much valued the item is and controlling it to what extent is in the interest of the organization.


Advantages of ABC Analysis


i. It is possible to exercise selective control.

ii. Focus high attention on high value items is possible.

iii. It helps to reduce the clerical efforts and costs.

iv. It facilitates better planning and improved inventory turnover.

v. It facilitates good storekeeping and effective materials handling.

vi. It releases working capital, which would otherwise have been locked up for a more profitable

channel of investment.

vii. It reduces inventory carrying cost.

Disadvantages of ABC Analysisi. It considers only money value of items and neglects the

importance of items for the production process or assembly or functioning.

ii. Periodic review becomes difficult if only ABC analysis is

recalled.

iii. When other important factors make it obligatory to

concentrate on ‘C’ items more, the purpose of ABC analysis is

defeated.

iv. In ABC analysis, proper standardization and codification of inventory items is needed.


4. Economic Order Quantity (EOQ) Economic Order Quantity is one of the important

techniques used to determine the optimum quantity or number of orders to be placed from the suppliers.

The main objective of economic order quantity is to minimize the cost of ordering, cost of carrying materials and total cost of production.


Graphical Representation of EOQ Ordering cost (Procurement cost)

includes cost of stationery, salaries of those engaged in receiving and inspecting, general office and administrative expenses of purchase departments.

Carrying costs are incurred on stationery, salaries, rent, material handling cost, interest on capital, insurance cost, risk of obsolescence, deterioration and wastage of materials.

Total cost is calculated by adding procurement cost and carrying cost. Total cost is minimum at the point A and thus A' represents the economic order quantity or economic lot size.


5. Standard Steps in Purchasing Purchase procedure is most important procedure as it

is said that effective purchasing will ensure the right quality of materials at the right time and that too in right quantities.

Ordering of material or purchasing procedure for materials is a systematic stepwise process.

The details of purchase procedure steps are given in next slide,


Steps in Purchasing

i. Recognition of need, receipt and analysis of purchase

requisition.

ii. Selection of possible potential sources of supply.

iii. Making request for quotation.

iv. Receipt and analysis of quotations.

v. Selection of right source of supply.

vi. Issuing the purchase order.

vii. Follow-up and expediting the order.

viii. Analysing and receiving reports.

ix. Checking and approving vendors invoices for payment.

x. Closing completed orders.

xi. Maintenance of records and files.


Purchase requisition form


Quotation form


Purchase order


6. Modern Techniques of Material ManagementMaterial Requirements Planning (MRP)

Enterprise Resource Planning


Material Requirements Planning (MRP) Material Requirements Planning (MRP) is a computer

based production planning and inventory control system.

MRP is concerned with both production scheduling and inventory control.

It is a material control system that attempts to keep adequate inventory levels to assure that required materials are available when needed.

MRP is applicable in situations of multiple items with complex bills of materials.

MRP is not useful for job shops or for continuous processes.


Benefits of MRPi. Reduction in Inventory.

ii. Improved customer service.

iii. Quick response to changes in demand.

iv. Better machine utilization.

v. Increased productivity.


6.2 Enterprise Resource Planning An enterprises resource planning system is a fully

integrated business management system covering functional areas of an enterprise like logistics, production, finance, accounting and human resources.

It organizes and integrates operation processes and information flows to make optimum use of resources such as men, materials, money and machine.

Enterprise resource planning promises, one database, one application and one user interface for the entire enterprise.


ERP ERP is integrated software which covers business processes

of all departments, has modules of respective departments. All such modules can be integrated with companies software due to compatibility of ERP software's.

Modules in ERP software

i. Finance module

ii. Distribution module

iii. Service module

iv. Project module

v. Manufacturing module

vi. Utilities module


Advantage of ERPi. ERP reduces paper documents by providing on-line formats for quickly entering andretrieving information.ii. Greater accuracy of information with detailed content, better presentation, satisfactory for the auditors is available.iii. Better monitoring and quicker resolution of queries.iv. ERP improves international operations by supporting a variety of tax structures, invoicingschemes, multiple currencies, multiple period accounting and languages.v. Improves information access and management throughout the enterprise.


vi. Faster response and follow up of customers is possible.

vii. Enables quick response to any change in business operations and market conditions.

viii. ERP helps to achieve competitive advantage by improving its business processes.

ix. Improved cost control is achieved.

x. ERP bridges the information gap across the organization.


Disadvantages of ERPi. Loss of importance as information is no longer an individual prerogative.

ii. Job redundancy.

iii. Change in job profile.

iv. Inexperience with implementing and managing distributed computing technology may pose

significant challenges.


QUERIES??

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