1

MODULE V
MATERIALS MANAGEMENT Materials are any commodities used directly in producing a product or service, such as raw materials, component parts, assemblies and supplies. Materials account for 60 to 65 % of the sales value of a product, hence small changes in material cost can result in large sums of money saved or lost. Materials management can be defined as controlling the type, amount, location, movement, and timing of various commodities used in and produced by the Industrial enterprise. Materials management is a systematic and integrated approach to all aspects of dealing with materials in industries and comprises of the following major functions: Purchasing: Developing sources of supply, Finalising prices, Placing orders, Obtaining materials. Purchasing is guided by the 5 Rs of Buying- Right Quality, Right time, Right Quantity, Right Price and Right Source. Purchasing also includes developing new sources of supplies, import substitutions etc. In addition to these Purchasing includes the following activities : o Material research: It analyses all the factors such as economic analysis, market analysis, price analysis, transportation analysis, lead time analysis etc that affect the functions of material management o Material Planning: Sales projections are translated to production requirements and makes accurate estimation of materials that are required for production o Disposal of surplus, obsolete and scrap materials. o Waste management It minimizes the wastage of materials by determining the causes fro rejection and scrap of materials. Inventory Management o Inventory control or Stock Control: Planning and maintaining stocks of raw materials, general Supplies, etc as well as handling classifications, codifications, ABC Analysis etc. o Store Keeping: Receiving, Storing, Issuing as well as material handling within the stores. Logistics o Internal Movement of materials : Movement of material within the organization. Movement of materials within the warehouse and movement of raw materials from RM stores to shop floor, movement of semi finished goods from one shop floor to another, Movement of finished goods from Shop floor to Finished goods warehouse and from there to packing and finally to the despatch section etc are examples of internal movement of material. o External Movement of materials: Movement of material out side the factory premises constitute the external movement of the material. Movement of Raw material from the suppliers warehouse to the receiving section of the factory. Movemement of the finished goods from the Despatching section of the factory to the customers warehouse are examples of external movement. o C& F: Clearing incoming materials; both inland and foreign and despatching finished goods also form the part of the logistics functions of materials management.

ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

2 Objectives of Materials Management. To ensure uninterrupted production by maintaining a steady flow of materials. To adopt cost reduction techniques. To ensure the 5 Rs for buying ( see above) To reduce the capital locked up in inventory by adopting scientific inventory management techniques. To preserve the materials and prevent loss of material caused by deterioration or pilferage ( Theft ). To minimize wastage of materials and thereby reduce operating costs. Timely, scientific and efficient disposal of used, scrap or obsolete materials. The various costs involved in Materials management are 1. Basic costs : Cost of material paid by the company to the supplier. 2. Government Levies and Taxes Excise duty, sales tax etc. 3. Ordering costs Cost related to tendering, stationery, postage, receiving, inspection, bill payment, other expenses incurred while purchasing the material. 4. Inventory Carrying cost Cost incurred in connection with the storage of materials which includes losses due to deterioration, shrinkage, loss of weight, insurance premium paid, preservation expenditure expenses for maintaining the material till they are used. 5. Packaging Cost incurred in packaging the product. 6. Material handling Cost of moving the product. 7. Shipment cost Cost of transportation of material from suppliers to the buyers 8. Insurance Premium cost that is incurred for insuring materials.

Purchasing

Store keeping

Material Planning

Materials Management
Trafficor C&F

Waste Manage ment

Inventory control

Scrap Disposal

Figure1MajorFunctionsofMaterialsManagement PURCHASING

ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

3 Purchasing department buys the raw materials, purchased parts , machinery, supplies and all other goodsandservicesusedintheproductionsystemsfrompaperclipstosteeltocomputers. A study by Mckinsey found that a 10% decrease in material cost improves the return by 22%, while the same reduction in labour costs or increase in market share, increases return by 16 and 17 % respectively. Hence though purchasing has strategic importance under all circumstances, when the market is highly competitive purchasing becomes a critical function. It provides the highest leverage toprofitabilityofthefirm. Purchasing department is a key player in the achievement of a companys strategic objectives. The mission of the purchasing is to sense the competitive priorities necessary for each major product/ service ( like low production cost, fast and ontime deliveries, high quality product/services, and flexibility) and to develop purchasing plans for each major product/Service that are consistent with the operations strategies. For example one material may go into a product whose operations strategy call for high volume, produce to stock production and low production costs. For such material,purchasingmustemphasizedevelopingsuppliersthatcanproducethematerialatverylow cost in large quantities. On the other hand, another material may go into a product whose operations strategy calls for low volume fast deliveries and producetoorder production. For this material purchasing must emphasize fast response times by suppliers, very high quality, and dependableshippingschedules. ObjectivesofPurchaseDepartment 1. Toensureuninterruptedflowofmaterialsrequiredbythefirm 2. To ensure the satisfactory compliance of the Purchase principles ( The 5 Rs Right quality, quantity,price,time,source) 3. Toprocurebetterqualityofmaterialsatcompetitiveprices. 4. Recommendalternateorsubstitutematerials. 5. AssistinStandardizationofmaterials. 6. Provide accurate information regarding the materials like price, delivery quality etc to Engineeringorestimationdepartments. 7. Vendor Development for all new raw materials and components and establish good relationshipwiththesuppliers. PurchasingFunctions Theroleofpurchasedepartmentstartsaftergettinganindentfromtheuserdepartmentorthrough materialsplanningsection.Theresponsibilitiescanbecategorizedas Primaryand Secondary PrimaryResponsibilities Floatingtheinquiriestosuitablevendorsandobtainingtheirquotations Evaluationofqualities,referpastrecords,visitfornewvendordevelopment. Compare commercially , technically and reliability wise and select best suited source after negotiation. ReleasePurchaseorder Followupformaterialssupplies.
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

4 Maintaincordialrelationshipwithvendors. Ensurepaymentreleasetovendors. Collectinformationregardingpricesofimportantmaterials,taxstructure,transportcosts. Materialsplanningfordifferentproducts.

SecondaryResponsibilities Disposalofvariousscrap,wastageandpackingmaterials. Procurementofofficestationeryandemployeefacilities. Transportfacilityforincomingandoutgoingmaterials. Reschedulingsupplypatternasperinventorysituationandchangingpriorities. Givespecificationandclarificationtovendors. Depute inspection engineers to vendor whenever vendor is ready with components for inspection. Customsclearance,importlicensing. Storesandinventorymanagement Participationinnewproductdevelopment Makeorbuydecisions.

Purchaseprocess
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

5 Source:Gaither,Norman,GregFrazier,OperationsManagement9e,NewDelhi:2007,pg432 Figure2PurchaseProcess Purchase instruments like Material Specifications, Purchase requisitions, Requests for Quotations, PurchaseordersFormtheframeworkforbuyingthegoodsorServices. Material specifications: For every good to be purchased, the purchasing department must have a detailed description of that material. This detail is called the material specification. These instruments can include such descriptions as engineering drawings, chemical analyses, physical characteristicsandotherdetailsdependingonthenatureofthematerial.Materialspecificationsare the fundamental means of communicating what material production wants purchasing to buy and whatpurchasingauthorizessupplierstosupply. Purchase Requisition: Purchase requisitions originate with the departments that will use the materials. They authorize purchase to buy the goods or services. The requisition usually include identification of what is to be purchased, amount to be purchased, requested delivery date or schedule, account to which the purchase cost is to be charged, where the purchase good or service are to be delivered and the approval by the manager charged with authority to approve the purchase. Requestforquotation:Requestforquotationarepreparedbythepurchasedepartmentandsentto suppliers that are believed to be capable of meeting the cost, quality and schedule requirement of the requesting departments. These instruments invite prospective suppliers to bid or quote on the goodsorservices. PurchaseOrders:Purchaseordersarethemost importantpurchasinginstruments.Thearethebasis ofthesuppliersauthoritytoproducethegoodsorservices,andtheyrepresentthebuyersobligation topayfortheitems.A legalcommitmentbythebuyerispresent whenapurchaseorder is issued in response to a quotation from a supplier. When a purchase order is issued in the absence of a requestforaquotation,alegalcommitmentexistswhenasupplieracknowledgesacceptanceofthe purchaseorder. CONCEPTSINPURCHASING PurchasingSourceofSupply: The selection of the right source of supply is an important factor in obtaining the desired quality, quantity,priceandservice. Thereare4typesofsuppliers: 1. Manufacturers 2. Distributorsoragents 3. Stockistsordealers 4. Subcontractors PriceDetermination: Right price is the one which brings the best ultimate value. The factors which affect the price are quality and quantity required; urgency of requirement; demand and supply of materials in the market ,standardornonstandardandrepetitiveornonrepetitive nature ofrequirements,whether past business relationship was good or otherwise etc. Sometimes seasonal , industrial and political factorsalsoaffectpricetrends.Pricescanbedeterminedthroughanyofthefollowingways Previouspurchases Catalogueprice,pricelistetc. Telephonequotationsreceivedovertelephone
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

6 Enquiry simple method of ascertaining availability and price of material through open offers. TenderProcessofascertainingavailabilityandpriceofmaterialsinsealedcoverswhichare openedandscrutinizedatpredeterminedtimebyatendercommittee.

MiscellaneousPurchasematters Termsofpayments: CashpurchaseReadypaymentmadeimmediatelyonpurchase,Itemsofsmallvaluearepurchased oncashasadministrativeexpense. Against invoice Normally supplies are affected in credit terms, that is payment is made after 15 days30days60daysetc.againstinvoicessubmittedbysuppliers. AdvancePaymentsPaymentoftheentireamountorthepartismadealongwiththeorder. PaymentthroughbankInordertoensurepaymentcertainsuppliersparticularlyoutstationinsiston payment through bank. In such cases the buyer generally mentions the name of his bank and the supplier sends invoices etc through his bank for presentation to the buyers bank. On receipt of the documents the buyers bank intimates the buyer who in turn advises the bank to debit his account andthereafterdeliverthedocumentstohim. Payments against letterof Credit:Letterofcredit is an assurancegiveby abank toa supplierthata specified sum of money will be paid to him on behalf of their clients, on productions of certain documentaryevidenceofhavingsold,shippedorsuppliedthegoodstotheirclients. ShippingTerms Denotes where the goods will be delivered by the supplier and forms an integral part of the purchaseorder ExWorksCostofgoodsindeliverablestate.Loadingandunloadingtobuyersriskandcost. FOBIncludescostuptoloadingontothevesseldesignated. CIF Cost Insurance Freight The Title ( ownership) risk pass over to the buyer when delivered on board of the ship by the seller who pays for the transportation cost and insurance upto destination port.HoweverinCIFtheselleralsohastoprocuremarineinsurance. Gurantee A formal assurance that certain conditions will be fulfilled, especially that a product will be of a specified quality. Guarantee is to a specified quality and not time bound and is non extentable Warranty A written assurance promising to repair or replace an article if necessary within a specifiedperiodoftime. INVENTORYMANAGEMENT Inventory is the stock of idle resource held in the organization for future use. Manufacturing organizations typically have inventories of raw materials, components, subassemblies, tools and equipments, spare parts, semifinished goods, finished goods etc. In service organizations such as banks, financial institutions, hospitals etc the inventory consists of various items used in various service operations. Forms, pamphlets, brochures, currency notes, coins, syringes, medicines, bandages,spirit,cottonetcarefewexamples. There is always a conflict of goal between the departments with regard to the inventory policy. Production departmentwouldrequire maintaining high inventoryof Raw materials,components for uninterrupted production, marketing would require a high stock of finished goods to better serve the customer, finance would prefer less inventory to reduce the working capital requirement and
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

7 minimize locking up of capital in inventory. These conflicting views concerning inventory policies underscores the balance that must be struck among the conflicting goals reduce production costs, reduceinventoryinvestmentandincreasecustomerresponsiveness. WhyWeWanttoholdinventory The table below summarizes the reasons for holding finished goods, inprocess, and raw materials inventories. Table1WhyDoWeWantInventories? 1. Essentialinproducetostockpositioningstrategies FINISHEDGOODS 2. Necessaryinlevelaggregatecapacityplans 3. Productcanbedisplayedtocustomer 1. Necessary in processfocussed production; uncouples stages of production; increasesflexibility INPROCESS 2. Producing and transporting larger batches may create more inventory but reducesmaterialhandlingandproductioncosts. 1. Suppliersproduceandshipsomematerialsinbatches RAWMATERIAL 2. Large purchases may result in large inventory but purchase discounts and lessmaterialhandlingcostsmayresult. Source:Gaither,Norman,GregFrazier,OperationsManagement9e,NewDelhi:2007,pg537 Wealsoholdinventoriesbecausebydoingsocertaincostsarereduced: 1. Ordering costs: Each time we order weincur cost in the form of processing cost of purchase order, expediting, record keeping, receiving the order into the warehouse. The larger the ordering quantity the less number of orders we make in an year and thus the annual orderingcostwouldbelower. 2. Stock out costs: In finished goods inventory, stockout costs can include lost sales and dissatisfied customers. In raw material inventory, stock out costs can include the cost of disruptionstoproductionandsometimesevenlostsalesanddissatisfiedcustomers. 3. Acquisition Costs: Larger batches may increase raw material inventory but unit cost may be lower because of quantity discounts and lower freight and material handling costs. For produced materials, larger lot sizes increase in process or finished goods inventories, but averageunitcostmaybelowerbecauseoflesserlowerchangeovercosts. WhyWeDoNotWanttoHoldInventories Certaincostsincreasewithhigherlevelofinventories. 1. Carrying Costs: Interest on debt, interest income foregone, warehouse rent, cooling, heating, lighting, cleaning, repairing,protecting,shipping, receiving,materialhandling,taxes insurance and management are some of the costs incurred to insure, finance , store, handle andmanagelargerinventories. 2. Cost of customer responsiveness: Large in process inventories hold up the production facilities hence the time required to produce and deliver customer order is increased and ourabilitytorespondtochangesincustomerorderdiminishes.
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

8 3. Cost of coordinating production: Large in process inventories clog production process and morepeopleareneededtosolvecongestionrelatedissuesinproduction. 4. Reduced return on investment: Inventory are assets and large inventories increase the financecostsofthefirmbyincreasinginterestondebts. 5. Reduced Capacity costs: Inventories represent a form of waste. Materials that are ordered, held,andproducedbeforetheyareneededwasteproductioncapacity. 6. Largelotqualitycosts:Ifduetosomereasonsomethinggoeswrongtheentirelargelotwill bewasted. 7. Cost of production problems: Higher inprocess inventories camouflage ( hide) underlying production problems. Problems like machine breakdowns , poor product quality, material shortagenevergetsolved. UsesofInventory

TOACTASA BUFFER BETWEEN ELEMENTSOF SUPPLYCHAIN

SATISFY CUSTOMER DEMAND (ANTICIPATION)

QTYDISCOUNT, PROTECTION FROMPRICE INCREASE

INVENTORY TOSATISFY PERIODSOF SEASONAL DEMAND (SEASONAL)

MINIMIZE TOTAL INVENTORY COST

AVOIDSTOCK OUT

TOPROVIDE BUFFER BETWEEN OPERATION

Fig.3UsesofInventory 1. AnticipationInventory
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

9 This is the fundamental use of maintaining the inventory of an item. It is to satisfy the customer demand. Enough inventories of items should exist to meet the expected or anticipateddemandofcustomers. 2. CycleStock The inventory manager has to determine the quantities the quantities of items to be stockedbyusingmodelslikeeconomicorderquantity(EOQ).Thusthestockofitemsstored as inventory to meet an inventory cycle determined by an inventory model as called the cyclestock. 3. Safetyorbufferstock To protect against fluctuations of demand and abrupt increases in the time taken by the suppliers to supply the items, some stock known as the safety or buffer stock is maintained inexcessoftheanticipationinventory. 4. Inventoryforquantitydiscount/futurepriceincreases Supplies often offer discounts for bulk purchases. To take advantage of such discounts, organization opt for large quantities of items, which have to be stored as inventory. In view of the expected price increases, organizations go for bulk purchases, to reap the benefits of lowercostsoftheirfinishedgoodscomparedtothoseofthecompetitorsinthefuture. 5. DecouplingofWorkinProcessInventory When operations take place in a sequence, inventories of semifinished goods pile up near each machine. These inventories are at times desirable, as in the case of a machine break down; the remaining machines can continue their operations for some time during which the faulty machine can be corrected. Such inventories are called decoupling inventories, as thesedecouple(delink)thevariousprocessesofoperationsfromeachother. 6. SeasonalInvnetory Festivals are bonanza time for most organizations, before which preparations in the form of proper inventory of items have to be made to meet the anticipated heavy demand. Certain types of items are seasonal in nature eg. Umbrella, raincoats, etc are required in rainy seasons; airconditioners,aircoolers in summer season;heaters,warmcloths during winter. Inventories of these items are stocked by firms before the start of the season, hence these inventoriesarecalledseasonalinventories. 7. TransitStock When stock are moved between the various elements of the supply chain, ie. Between suppliers, manufacturers, distributors, wholesalers, and the end customers, they are called Transit Stock or Pipeline stock. During the transportation period between twoplaces , these stocksdonotserveanypurposebutareneededtosmoothenthedistribution. INVENTORYMANAGEMENTSYSTEM TypesofInventorymanagementsystems 1. FixedQuantityFixedintervalSystems 2. FixedorderQuantitysystems a. TwoBinSystems b. Threebinsystems 3. Fixedintervalordersystem a. Flowcontrolsystem 4. VariableorderVariablequantitysystem.
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

10 Fixed Quantity, Fixed interval Systems: A fixed quantity is ordered at regular intervals. This is the mostsimplisticmodel.Thismodelisadoptedinsmallshops,eventhemilkprocurementathomecan besaidtofollowafixedquantityfixedintervalsystem. FixedorderQuantitysystems. Here order quantity is fixed but timing of order is variable. This system is also known as the fixed order system, or Qsystem, reorder point system, perpertual review system. Etc. This system works onthefollowingassumptions 1. Annualrequirementoftheitemispredeterminedandtherewillbenodeviations. 2. Consumptionrateisconstant. 3. Pricechargedperunitwillbeconstantthroughouttheyear. Twoexamplesoffixedordersystemarethetwobinandthethreebinsystem. Two bin system : The quantity equivalent to the difference between the maximum stock and the reorderstockisplacedinthefirstbin.Andthereorderqtyisplacedinthesecondbin,assoonasthe firstbinisemptytheitemisorderedandtheconsumptionstartsfromthesecondbin.Oncetheitem arrivesbothbinsarereplenished. Three bin system: This is similar to the two bin system with a slight modification. The second bin is split into two with the first holding the reorder quantity and the second a quantity called the safety stock which would be used only in case of extreme emergency. When supplies are received , all the binsaretoppedtotherequisitelevels. Fixed interval order system: In this system the order quantity varies but the interval is fixed. This system is also known as fixed time ordering system, Psystem, cycle order system, etc and is a time based operation. The position of the stock is reviewed periodically ( fixed by the management) and decisionstoorderornotandhowmuchquantitytobeorderedistaken. Theadvantagesofthissystemare; 1. Consolidationispossible 2. Itpermitsevendistributionofworkloadthroughouttheyear. 3. Strict inventory control is possible as order quantity can be varied from one review to other. Thedisadvantagesofthesystemare 1. Itleadstohigherinventorylevelsduetohighersafetystock. 2. Itmaycauseproblemswithsuppliersastheorderquantityisnotfixed. 3. Reviewisahighermanagementfunction. Oneexampleoffixedintervalsystemistheflowcontrolsystem. Flow control system: Flow control system is applicable to continuous manufacturing operations that produce the same basic product in large quantities day after day. The materials used are often purchased on term contracts with deliveries on daily or weekly basis and material flow through the plant on a continuous basis. Inventory can therefore be keptlow. Variable order Variable quantity system: This system is also called the Ss system or optional replenishment system or perpertual inventory system. In this system the maximum stock level is fixed as in the fixed interval system and designated as S. A reordering level is fixed similar to the fixed order quantity system and designated as s. At every opportunity to order ie when bulk orders
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

11 arereceivedoratfixedintervalsorwhenanychangeinmarketingenvironmentoccurs,thesumof( stockinhand+stockonorder)iscomparedwithS.ifitislower,thenanorderisplaced. EconomicOrderingQuantity Economic ordering Quantity, EOQ, is the order quantity at which the total cost of inventory is minimum.Therearebasicallytwotypesofcostsrelatedtoinventories.Theseare: 1. Orderingcost,thecostofplacingasingleorderand 2. Carrying or Holding costs cost of storing the inventory in the warehouse which includes the rent of warehouse, cost of capital tied in inventory, cost of damages, cost of obsolescence, deteriorationetc. Totalcost=Orderingcost+inventorycarryingcost Totalcost=No.ofordersxcostofplacingoneorder+AverageinventoryxCostofholdingoneunit TC = No. of orders x Co + Average Inventory x Ch Where Co is the ordering cost and Ch is the Carrying cost IfDistheAnnualDemandandQistheorderingquantity No.oforders=D/QandAverageinventory=Q/2 SubstitutingthesevaluesintheequationforTotalcostweget TC=(D*Co)/Q+Q*Ch/2 This is the equation for the total cost of inventory. We get the point of minimum by differentiating theaboveequationandequatingittozero. d/dq(TC)=0;ieD*Co/Q2+Ch/2=0orD*Co/Q2=Ch/2 Q=Squarerootof(2D*Co/Ch)

Fig.4GraphicalrepresentationofEconomicorderingquantity. AssumptionsintheBasicEOQmodel
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

12 1. Theannualdemandoftheitemisconstant. 2. Theannualdemandofanitemisuniformlydividedthroughouttheyear. 3. The lead time of procurement is zero. Ie the supplier supplies the item as soon as it is ordered 4. Orderisplacedalwaysonlywhenthestockbecomeszero. 5. TheStockoutcostorthecostofcustomerresponsivenessisnottakenintoaccount. Note:pleaseworkoutproblemswithbasicEOQwithdiscountsandsafetystock. INVENTORYCONTROL Inventory control is needed to ensure that the business has the right goods in hand to avoid stock out, to prevent shrinkage ( spoilage, theft) and to provide proper accounting. Inventory control involvesprocurement,careanddisposalofmaterials. Theimportanceofinventorycontrolare Helpsbalancethestockastovalue,size,color,style,andpricelineinproportiontodemand orsalestrends. Helpplanthewinnersaswellasmoveslowsellers Helpssecurethebestrateofstockturnoverforeachitem. Helpsreduceexpensesandmarkdowns. Helpsmaintainabusinessreputationforalwayshavingnew,freshmerchandiseinwanted sizesandcolors.

For the purpose of better inventory control the inventory is classified into various categories based on certain criteria since it is not possible and also feasible to exercise strict management on the entire inventory. The principle of management by exception is applied for selective control of the inventory. Basedonthecriteriadifferentclassificationsarefollowedintheindustry.Afewexamplesare Classification Criteria 1. ABC Consumptionvalue,AhighBmoderateClow 2. FSN Rateofconsumption,Fast,slowandnonmoving 3. VED Criticality,Vital,Essential,Desirable 4. PQR Shelflife,Long,moderate,lowshelflife Procurementease,Scarce,Difficult,Easy 5. SDE 6. GOLF Suppliertype,Government,Openmarket,Local, Foreign. 7. SOS Availability,SeasonalOSoffseasonal. 8. HML UnitPrice,HighPrice,mediumprice,Lowprice. ABCAnalysis This is an inventory classification technique where the inventory is classified into 3 categories, namely,A,B,Conthebasisoftheirconsumptionorusagevalues. Consumptionvalue(CV)=UnitPriceofanitemxno.unitsconsumedperannum.
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

13 A category items have high CV, B moderate and C has a low CV. This classification is done using a curveknownastheABCcurveortheparetocurve. ProceduretoWorkoutABCClassification Step 1: Prepare a list of materials used in one year with annual consumption quantity for each item andunitprice. Step 2: Multiply the unit price with the quantity consumed in that year and get per item annual consumptionvalue. Step3.:Rewritethelistwithdescendingorderofannualconsumptionvalueandits%withrespectto annualconsumptionandcumulative%. Step4:From thelistpreparedinStep3,theinventoryitemsthatfallwithintheannualconsumption value % upto 70% would be A category items, 70 90% would be B category items and remaining wouldbetheCcategoryitems.

Fig.5ABCClassification Control Mechanism: After making the category, the top executives have the list of A category which consume higher amount and hence need maximum attention in pricing, purchase quantity and inventory holding. On the other hand B items need moderate control on volume, pricing and ordering, this can be done by middle level management. C category items do not need serious attentionandcanbetakencareofbyJuniorlevelmanagement. LimitationofABCAnalysis Inbigindustriestheitemsareinthousandsandhencelistingandcalculationisbitdifficult. The analysis takes care of annual consumption values and hence important of items is not takencareof. Price factor, fluctuations, seasonal variations in price and consumption pattern not taken careof, ThereshouldbeexcessstockofCcategoryitemsleadingotdeterioration,obsolescence.
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

14 SomeBcategoryitemscouldbevitalhenceneedingmorealternation.

STORESMANAGEMENT Business activities needs storage of various materials like raw materials, WIP components, spares, consumables, finished goods and package materials. Storage of materials is an important function andisessentialefficientfunctioningoftheorganization. TheFunctionsofstoresare: 1. Receipt 2. Arrangeforinspection. 3. Storage 4. Issues 5. RecordKeeping(accounting) 6. InventoryControl 7. Rejectionsmonitoring 8. Materialsafety 9. Scrapdisposal. StoresLocationandLayout There are two broad categories of stores, one is open yard storage and another is covered stores. The open yard storage is essential for big industries and huge quantity of materials like steel varieties, castings, forgings sugar cane etc. All these categories require large space and extra movementspace. Location: Stores is generally located in production area. Again in production zone it is preferred to locate in busy assembly zone where in lots of spares, components and sub assemblies need to be issued. Basic principle is to have minimum movement and lesser time investment to reach the shop floors. Location of stores and movement of materials have specific considerations depending upon thetypeofmaterials,volumeandtypeofprocess. Typesofstores Basedontheagencyresponsibleforissueandreceiptofmaterialsstorescanbecategorizedas 1. Centralizedstores;Receiptandissueofallmaterialsfromonesingleagency. 2. Decentralizedstores:Substoresareformednearereachproductionunit 3. CombinedStores:Acombinationofcentralizedanddecentralizedstores Advantagesofcentralizedstore Optimumutilizationofstoragespace,handlingandhumanresource. Highdegreeofconveniencetoreceiveissueandstoring Singlecontactpointforoutsidevendors,transportersetc. AdvantagesofDecentralizedStores For routine issue and return of tools spares and components a sub store in the unit is more convenient. Ithas advantageoffamiliarityoffrequentlyrequired materialsandtoolsandwhichgroupof employeesneedwhattype. Time gap of collection and usage of materials is minimum. Exchange of unsuitable materials canalsobedoneinshorttime. Advantagesofcombinedstores
ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin

15 Centralized stores also called as general stores or main stores will maintain commonly requireditemsforallunitsandhighvolumeitems. Decentralized stores also called as shop floor stores or substores keep only the items requiremdforspecificunits. Thecombinedsystemsuitsbetterforverylargecompanieslocatedinalargepremises.

Basedontherequirementoftheindustrystoresarecategorizedas 1. ReceivingInward,Quarantineandrejection 2. Mainstorageandissueofaccepted. 3. Warehousereceiptpackinganddespatchofthefinishedgoodstovariousdestinations 4. Special performs activities related to receipt, storage and issuance of special materials such as bank papers, petroleum product etc. The special stores is further divided into the followingtypes a. Bonded : This type is used to store materials that are related to banks, and stocks thatareexcisable. b. Statutory: It is used to store petroleum products such as kerosene and diesel that requiresafetyprecautions c. Temperature controlled: This store is used to store materials such as meat, fish vegetablesorgoodslikevitamins,medicinesetcthatrequiretemperaturecontrolled storerooms. LAYOUTOFSTORES E type or Comb type layout and Tree type or double comb type layout is commonly used layout for stores. Essentialsofstoreslayout For better space utilization racks system to be used for materials that can be manually handledeasily. Heavy materials to be kept at ground level and preferably nearer mechanical handling facilities. Passageshouldbeadequateformovementofworkersandtrolleysandforklifttrucks. Adequateprovisiontobemadefornaturallightandventilationinstoresarea. Thehazardousmaterialslikechemicals,gasesshouldbekeptseparatelywithsafetydevices. Frequentlyuseabletoolsandmaterialstobekeptnearertheissuezone. Safetygadgetstobeprovidedforstorespersonneltoavoidinjuries. Suitablenameplatestobeprovidedforeasyidentificationofdifferenttypesofmaterials.

ProductionManagementNotesCompiledby Santhosh.S,AssociateProfessor,SCMSCochin