materials management

MATERIAL MANAGEMENT

Confidential to SoftTech Engineers Pvt. Ltd. Pune

Material Management is concerned with planning, organizing and controlling the flow of materials from their initial purchase through internal operations to the service point through distribution.

OR

Material management is a scientific technique, concerned with Planning, Organizing & Control of flow of materials, from their initial purchase to destination.

Definition


To get

• The Right quality

• Right quantity of supplies

• At the Right time

• At the Right place

• For the Right cost

Aim of Material Management


• To gain economy in purchasing

• To satisfy the demand during period of replenishment

• To carry reserve stock to avoid stock out

• To stabilize fluctuations in consumption

• To provide reasonable level of client services

Purpose Of Material Management


Primary• Right price

• High turnover

• Low procurement & storage cost

• Continuity of supply

• Consistency in quality

• Good supplier relations

• Development of personnel

• Good information system

Objective of Material Management


Objective of Material Management

Secondary• Forecasting

• Inter-departmental harmony

• Product improvement

• Standardization

• Make or buy decision

• New materials & products

• Favorable reciprocal relationships


1. To have adequate materials on hand when needed.

2. To pay the lowest possible prices, consistent with quality

and value requirement for purchases materials.

3. To minimize the inventory investment.

4. To operate efficiently.

Four Basic Needs of Material Management


1. Effective management & supervision.

It depends on managerial functions of:

• Planning

• Organizing

• Staffing

• Directing

• Controlling

• Reporting

• Budgeting

Basic Principals of Material Management


2. Sound purchasing methods.

3. Skillful & hard poised negotiations.

4. Effective purchase system.

5. Should be simple.

6. Must not increase other costs.

7. Simple inventory control programme.

Basic Principals of Material Management


1. Demand estimation.

2. Identify the needed items.

3. Calculate from the trends in consumption during last 2 years.

4. Review with resource constraints.

Elements of Material Management


1. Purchasing

2. Stores

3. Issuing of material

4. Bill payment.

Functional Areas of Material Management


1. Material planning and programming

2. Purchasing and outsourcing

3. Inventory control

4. Storekeeping and warehousing

5. Codification

6. Standardization and evaluation of all products

7. Transportation and material handling

8. Inspection and quality control

Functions of Material Management


9. Cost reduction through value analysis

10. Disposal of surplus / obsolete material

11. Distribution

Functions of Material Management


• Review selection

• Determine needed quantities

• Reconcile needs & funds

• Choose procurement method

• Select suppliers

• Specify contract terms

• Monitor order status

• Receipt & inspection

Procurement Cycle


• Acquire needed supplies as inexpensively as possible

• Obtain high quality supplies

• Assure prompt & dependable delivery

• Distribute the procurement workload to avoid period of idleness

& overwork

• Optimize inventory management through scientific procurement

procedures

Objectives of Procurement System


Process of Procurement System


Open tender • Public bidding, resulting in low prices• Published in newspapers•Term - 4 weeks• Quotations must be sent in the specific forms that are sold, before the time &date mentioned in the tender form• In technical items, ‘two packets or two bins’ system is followed. Offers are given in two separate packets.• Technical bid • Financial bid



• First technical bid is opened & short listed

• Then financial bid of selected companies are opened & lowest is

selected

• Delayed tenders & late tenders are not accepted. But if, in case

of delayed tenders, if the rate quoted is very less, then it can be

accepted.

• Quotations are opened in presence of indenting department,

accounts & authorized persons of party

• Validity of tenders – generally 90 days



Earnest money

2 % of the tender amount or as decided has to be paid along with

all quotations. In case of default 1/5 is withheld

Restricted or limited tender

• From limited suppliers (about 10)

• Lead-time is reduced

• Better quality



Negotiated procurement

• Buyer approaches selected potential Suppliers & bargain directly.

• Used in long time supply contracts

Direct procurement

• Purchased from single supplier, at his quoted price

• Prices may be high

• Reserved for proprietary materials, or low priced, small quantity

& emergency purchases



Rate contract Firms are asked to supply stores at specified Rates during the period covered by the contract.

Spot purchaseIt is done by a committee, which includes an officer from stores, accounts & purchasing departments.

Risk purchaseIf supplier fails, the item is purchased from other agencies & the difference in cost is recovered from the first supplier.



Points to remember while purchasing

• Proper specification

• Invite quotations from reputed firms

• Comparison of offers based on basic price, freight &

insurance, taxes and levies

• Quantity & payment discounts

• Payment terms

• Delivery period, guarantee



Points to remember while purchasing…

•Vendor reputation (reliability, technical capabilities,

Convenience, Availability, after-sales service, sales assistance)

• Short listing for better negotiation terms

1. Not to purchase on listed price

2. Negotiate bulk price

3. Always ask for discount

4. Price protection

5. Credit

• Seek order acknowledgement



Receiving of Material

•Checking of goods for quality, expiry etc

•Cross check with purchase order & invoice / delivery challan

•Proper record in designed registers

•Signature of receiver & delivery person

•Periodic check



Material Receipt Register


Date Sr. No.

Supplier’s Name

P. O. Ref. & Date

Challan No. Dt.

Qty Received

Qty Rejected

Qty Accepted

MRN No.


•Store must be of adequate space

•Materials must be stored in an appropriate place in a correct way

•Group wise & alphabetical arrangement helps in identification & retrieval

•First-in, first-out principle to be followed

•Monitor expiry date

•Follow two bin or double shelf system, to avoid Stock outs

•Reserve bin should contain stock that will cover lead time and a small

safety stockIssue & useCan be centralized or decentralized

Storage


The record of stores may be maintained in three forms

1. Bin Cards

2. Stock Control Cards

3. Stores Ledger

The first two forms of accounts are records of quantities received,

issued and those in balance but the third one is an account of their

cost also. Usually, the account is kept in the forms, the quantitative

in the stores and quantitative cum financial in the cost department.

Storage Record


Bin Cards and Stock Control cards

These are essentially similar, being only quantitative records of

stores. The latter contains further information as regards stock on

order. Bin cards are kept attached to the bins or receptacles or

quite near thereto so that these also assist in the identification of

the stock. The stock control cards, on the other hand, are kept in

cabinets or trays or loose binders.

Storage Record


Stock Control cards

Storage Record

Name Of Material

Code No.

Max. Level

Min Level

Re-Order Level

EOQ/Lot size

Units Location

Date Doc Ref IN OUT Balance Remark

Consumption : Month-wise


Advantages of bin cards

•There would be less chances of mistakes being made as entries

would be made at the same time as goods are received or issued

by the person actually handling the materials.

•Control over stock can be more effective, in as much as

comparison of the actual quantity in hand at any time with the

book balance is possible.

Storage Record


Stores Ledger

A modern stores ledger is a collection of cards or loose leaves

specially ruled for maintaining a record of both quantity and cost of

stores received, issued and those in stock. It being a subsidiary

ledger to maintain the main cost ledger, it is maintained by a Cost

Accountant. It is posted form the Goods Received Note and the

Materials requisition.

Storage Record


Advantages of Stores Ledger

•It enables distribution of work among a number of clerks due to

which receipts and issues are posted quickly and regularly.

•It enables the stock records to be centralized in case of an

organization having a number of depots.

•The accuracy of depot can be mechanically tested more

accurately.

•The records are clearer and neater. Also the recurring cost of

maintaining them is much less than those kept manually.

Storage Record


Advantages of Stores Ledger …

• If up to date records are available the management will be able to

exercise a greater control over quantities held in stock from time

to time which may result in a great deal of saving in both the

amount of investment in stock and their cost

Storage Record


Inventory control means stocking adequate number and kind of

stores, so that the materials are available whenever required and

wherever required. Scientific inventory control results in optimal

balance.

Inventory Control


Functions of inventory control

• To provide maximum supply service, consistent with maximum efficiency & optimum investment.

• To provide cushion between forecasted & actual demand for a material.

Inventory Control


CARRYING COST

PURCHASING COST

ECONOMIC ORDER OF QUANTITY(EOQ)

Economic order of quantity

EOQ = Average Monthly Consumption X Lead Time [in months] + Buffer Stock – Stock on hand

Inventory Control


• Re-order level: stock level at which fresh order is placed.

• Average consumption per day x lead time + buffer stock

• Lead time: Duration time between placing an order & receipt of

material

• Ideal – 2 to 6 weeks.

Inventory Control


ABC ANALYSIS

(ABC = Always Better Control)

This is based on cost criteria.

It helps to exercise selective control when confronted with large

number of items it rationalizes the number of orders, number of

items & reduce the inventory.

About 10 % of materials consume 70 % of resources



Inventory Control


ABC ANALYSIS

‘A’ ITEMS

Small in number, but consume large amount of resources

Must have:

• Tight control

• Rigid estimate of requirements

• Strict & closer watch

• Low safety stocks

• Managed by top management

Inventory Control


ABC ANALYSIS

‘C’ ITEMS

Larger in number, but consume lesser amount of resources

Must have:

• Ordinary control measures

• Purchase based on usage estimates

• High safety stocks

ABC analysis does not stress on items those are less

costly but may be vital.

Inventory Control


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CUMMULATIVE CUMMULATIVE COST COST [Rs.]

ANNUAL COST ANNUAL COST [Rs.]ITEMITEM COST %COST %ITEM %ITEM %

70 %70 %

20 %20 %

10 %10 %

10 %10 %

20 %20 %

70 %70 %

ABCANALYSIS

WORKSHEET

Inventory Control

ABC ANALYSIS


ABC ANALYSIS

‘B’ ITEM

Intermediate

Must have:

• Moderate control

• Purchase based on rigid requirements

• Reasonably strict watch & control

• Moderate safety stocks

• Managed by middle level management

Inventory Control


Advantages of ABC Analysis:

• It ensures that, without there being any danger of interruption of

production for the want of materials or stores, minimum investment

will be made in inventories of stocks of materials to be carried.

• The cost of placing orders, receiving goods and maintaining stocks

is minimized especially if the system is coupled with the

determination of proper economic order quantities.

Inventory Control


Advantages of ABC Analysis:

• Management time is saved since attention need to be paid only to

some of the items rather than all the items as would be the case if

the ABC system was not in operation.

• With the introduction of the ABC system, much of the work

connected with purchase can be systematized on a routine bases to

be handled by the sub-ordinate staff.

Inventory Control


Inventory Control

VED ANALYSIS•Based on critical value & shortage cost of an item–It is a subjective analysis.

• Items are classified into:Vital:

• Shortage cannot be tolerated.Essential:

• Shortage can be tolerated for a short period.Desirable:

• Shortage will not adversely affect, but may be using more resources. These must be strictly Scrutinized


V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROLCATEGORY 2 - MODERATE CONTROL.CATEGORY 3 - NO NEED FOR CONTROL

Inventory Control

VED ANALYSIS


SDE ANALYIS

Based on availability

Scarce

Managed by top level management

Maintain big safety stocks

Difficult

Maintain sufficient safety stocks

Easily available

Minimum safety stocks

Inventory Control


FSN ANALYSIS

Based on utilization.

• Fast moving.

• Slow moving.

• Non-moving.

Non-moving items must be periodically reviewed to

prevent expiry & obsolescence

Inventory Control


HML ANALYSIS

Based on cost per unit

• Highest

• Medium

• Low

This is used to keep control over consumption at departmental

level for deciding the frequency of physical verification.

Inventory Control


Material Issue Procedure

Issue of material must not be made except under properly

authorized requisition slip; usually it is the foreman of a

department who has the authority to draw materials from the

store.



Material Requisition NoteIt is the voucher of the authority as regards issue of material for use in the factory or in any of its departments. Where a ‘Materials List’ has been prepared, either the whole of the materials would be withdrawn on its basis or separate material requisitions would be prepared by the person or department and the material drawn up to the limit specified in the list. The requisition notes are made out in triplicate.The copies are distributed in the following manner

• One copy for the store-keeper• One copy for the Cost Department• One Copy for the Department requiring it



Usually a foreman’s authority is enough, but in the case of costly

materials it would be desirable to have such requisitions duly

approved by some higher authority, like the Superintendent or

the Works Manager before these are presented to Stores.



Bill of Materials

It is also known as Material Specification List or simply Material

List. It is a schedule of standard quantities of materials required

for any job or other unit of production. A comprehensive

materials list should rigidly lay down the exact description and

specifications of all materials required for a job or other unit of

production and also required quantities so that if there is any

deviation from the standard list, it can be easily detected.



Bill of Materials …

The materials list is prepared by an Engineer or Planning

Department in a Standard form, but 4 is the minimum order. A

copy of it is usually sent to each for the following departments

• Stores Department

• Cost Accounts Department

• Production Control department

• Engineering or Planning Department


Valuation of Material Issues

Materials issued from the stores should be priced at the value, at

which they are carried in stock, but the value attached to the stock

of any items of material; at any point of time may be the result, not

of one purchase rate but of different purchase rate or prices.

In other words, the same material may have been acquired at

different prices and its stock at any particular time may comprise of

some materials more than one lot so that there would be a problem

of determining the appropriate rate at which to price out the issue

of materials.Confidential to SoftTech Engineers Pvt. Ltd. Pune


Ascertaining the Actual Cost is very important for the purpose of

determining the Sale Price which directly impacts the profitability of

the Company.

Several methods of pricing material issues have been evolved in an

attempt to satisfactorily answer the problem.



1. Cost price method• Specific price method• First in first out method• Last in first out method• Base stock method

2. Average price method• Simple average price method• Weighted average price method• Periodic simple average method• Moving simple average price method• Moving weighted average price method



3. Market price method• Replacement price method• Realizable price method

4. Notional price method• Standard price method• Inflated price method• Reuse price method


Waste scrap and spoilage

Waste

It represents the portion of basic raw material lost in processing

having no recoverable value. Waste may be visible – remnants of

basic raw materials or invisible; e.g. Disappearance of basic raw

materials thorough evaporation smoke etc. shrinkage of material

due to natural causes may also form a part of a material wastage.

Normal waste is absorbed in the course of net output, whereas

abnormal waste is transferred to the Costing Profit and Loss

Account.Confidential to SoftTech Engineers Pvt. Ltd. Pune


Waste…

For effective control of wastage, normal allowance for waste and

yield should be made from past experience, technical factors and

special features of the material process and product. Actual yield

and waste should be compared with anticipated figures and

appropriate actions should be taken wherever necessary.



Scrap

The incidental residue from certain types of manufacture, usually

of a small amount and low value, recoverable without further

processing. Scrap may be treated in the cost accounts in the

following ways:-

Where, the value of scrap is negligible, it may be excluded from

the costs. In other words, the cost of scrap is borne by the good

units and income scrap is treated as other income.



The sales value of scrap net of selling and distribution cost, is deducted from overhead to reduce the overhead rate. A variation of this method is to deduct the net realizable value form material cost. This method is followed when scraps cannot be aggregated job or process wise.When the scrap is identifiable with a particular job or process and its value is significant, the scrap account should be charge with full cost. The credit is given to the job or process concerned. The profit or loss in the scrap account, on realization, will be transferred to the Costing Profit and Loss Account.



Spoilage

It is the term used for materials which are badly damaged in the

manufacturing operations, and they cannot be rectified

economically and hence taken out of process to be disposed of in

some manner without further processing. Spoilage may either be

normal or abnormal.



Spoilage…Normal Spoilage (i.e. which is inherent in the operation) cost are included in costs either charging the loss due to spoilage to the production order or by charging it to production overhead so that it is spread over all the products. Any value released form spoilage is credited to the production order or production overhead account as the case may be.The cost of abnormal spoilage (i.e. arising out of causes not inherent in manufacturing process) is charged to the costing Profit and loss account.


Points to be noted before purchase of an equipment:• Latest technology• Availability of maintenance & repair facility, with minimum down time• Post warranty repair at reasonable cost• Upgradeability• Reputed manufacturer• Availability of consumables• Low operating costs

• Installation • Proper installation as per guidelines

Procurement of Equipment


History Sheet Of Equipment:Name of equipmentCode numberDate of purchaseName of supplierName of manufacturerDate of installationPlace of installationDate of commissioningEnvironmental controlSpare parts inventoryTechn. Manual / circuit diagrams / literatures

After sales arrangementGuarantee periodWarranty periodLife of equipmentDown time / up timeCost of maintenanceUnserviceable dateDate of condemnationDate of replacement

Maintenance of Equipment


Maintenance sheet:Annual maintenance contract [AMC]

Starting dateExpiry dateService / repair descriptionMaterials / spares usedCost of repairs

In-houseOutside agency



EQUIPMENT MAINTENANCE & CONDEMNATION

Maintenance & repairs:Preventive maintenanceMaster maintenance planRepair of equipment



PREVENTIVE MAINTENANCE•Purchase with warranty & spares.•Safeguard the electronic equipments with: (as per guidelines)

•Voltage stabilizer, UPS•Automatic switch over generator

•Requirement of electricity, water, space, atmospheric conditions, etc. Must be taken into consideration•Well equipped maintenance cell must be available•All equipment must be operated as per instructions with trained staff•Monitoring annual maintenance contracts. (AMC)•Maintenance cell•Communications between maintenance cell & suppliers of the equipment.•Follow-up of maintenance & repair services

•Repair of equipment•Outside agencies•In-house facility



Criteria for condemnation:The equipment has become:1. Non-functional & beyond economical repair2. Non-functional & obsolete3. Functional, but obsolete4. Functional, but hazardous5. Functional, but no longer required

Condemnation & Disposal of Equipment


PROCEDURE FOR CONDEMNATION

1. Verify records.

2. History sheet of equipment

3. Log book of maintenance & repairs

4. Performance record of equipment

5. Put up in proper form & to the proper authority



DISPOSAL1. Circulate to other units, where it is needed2. Return to the vendor, if willing to accept3. Sell to agencies, scrap dealers, etc4. Auction5. Local destruction



CONCLUSION

Material management is an important management tool which will be very useful in getting the right quality & right quantity of supplies at right time, having good inventory control & adopting sound methods of condemnation & disposal will improve the efficiency of the organization & also make the working atmosphere healthy any type of organization, whether it is Private, Government ,Small organization, Big organization and Household.


materials management

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