MATERIAL

MANAGEMENT

Material Management
This

management is concerned with flow of material

in organisation. It uses functions like production,
storing, moving , distributing, dispatch etc.
Aims/Functions of Material ManagementPlanning & control of material
Purchasing & stock keeping of material
Distribution and allocation of material
Disposal of material
Inventory- It is collective stock of items that are
needed for routine functioning of industry.
Way of keeping material so that manufacturing do
not stops.
Buffer Stock- It is minimum assured stock available
in inventory. Its stock of materials maintained to
avoid effect of no stock.

Classification of Inventory
Raw

material Inventory: Material on which operations will

be performed. E.g. wood, rubber, etc.
Semi finished material inventory: Work in progress
material inventory. Material is halfly processed and is
waiting for next process
Finished material inventory: These material are ready for
dispatch.
Indirect Inventory:
Tools inventory: Tools needed for operations in
manufacturing. E.g. Drills, cutters, solder, construction
tools etc.
Machinery spares inventory: Spares needed to be used
during repair, breakdown of machines.
Supplies Inventory: They support activities but dont go in
to product. E.g. Stationary, oils, electric cables, welding
rods
Standard parts Inventory: The parts bought out from
market are Standard Parts. Nut bolts, washers etc.

Objectives of inventory management

Operational

Objectives: To ensure
continuous supply of materials, spares
and finished goods. So that production is
ready and no delay in customer
demand.
Financial Objectives: To maintain
inventories at optimum level as needed
by operational and sales activities.
To keep cost under control
Property Protection objectives: To
safeguard inventory from theft, damage,
wastage, unauthorized use etc.

ABC Analysis
Also

called as Always Better Control

Category of
Items

Quantity of
Items

10-20%

Importance
due to
consumptio
n

Importance

70-80%
Outstandingly

15-25%

10-20%

65-75%

5-10%

Average
Unimportant

items purchased in small

quantities
B items purchased in intermediate
quantities
C items purchased in sufficient

Steps to do ABC analysis

Steps
Prepare list of all items & estimate their annual
consumption
Determine unit price of each
item
Obtain annual consumption in rupees by
multiplication
Arrange items in descending order
Calculate cumulative annual usage and number of
items in %
Draw the Graph
Classify in A,B,C categories

Decide the policies of Inventory Control

Economic Order Quantity

Keeping

optimum stocks in inventory is economical.

Stock availability depends on consumption rate of each
department, previous stock and new purchased stock.
If stock is more than requirement then inventory cost is
more.
It creates balance between annual inventory carrying
cost and annual procurement cost.
Assumptions in EOQ:
a. Ordering cost is constant
b. The rate of demand /consumption is known
c. Inventory carrying cost is proportional to size of
inventory
d. Quantity discounts are not available
e. Lead time is zero. (Its difference between time of
placing replenishment order and actually receiving
items in stock)

Quantity to be ordered(EOQ) depends on

two type of costs
A.

Procurement Costs: It includes

a. Receiving quotations
b. Cost of processing quotation
c. Cost of issuing purchase order
d. Follow up and complete
purchase orders
e. Receiving, inspecting and
stocking of material
f. Stationary
g. Processing vendors invoice

B.

Inventory Carrying CostMore you hold inventory more is increase in cost.

It includes
a. Storage cost
b. Handling cost
c. Taxes
d. Interest charges, property tax, administrative
tax
C. Under stocking cost: Any item short or out of
stock then this cost occurs. Extra cost due to
sudden purchase are added.
D. Over stocking cost: If stock is more than
required then more space is needed for storage.
Capital gets locked in extra material. Due to
storage for more duration , inventory carrying
cost increases.

Buffer Stock
Also

known safety stock.

It is reserved stock in inventory
Ups and down in consumption are absorbed
by buffer stock.
Limitations of EOQ
After calculations also it is difficult to order odd
number of items.
EOQ is not whether item is difficult to get, we
have to adjust the order.
EOQ value must be altered as per our
convenience
If we get discount on large order then why
EOQ?

Purchase Procedure
Objectives
1.

2.
3.
4.
5.
6.

of Purchasing:
To procure right material: Material to be
purchased should be examined and
compared with competitors.
To maintain continuity of to supply to
support manufacturing schedules
To avoid wastage, duplication &
obsolescence with respect to material
To invest minimum inventory
Purchasing correct material at
reasonable rates.
To develop alternative sources of supply

Functions/Duties of Purchasing Department

1.
2.
3.
4.
5.
6.
7.
8.
9.

Receiving proper material requisition

Analyze material specification for
simplification standardizing
Calling quotations, check legal conditions of
contract.
Maintaining of records
Checking material
Packing order
Inspection of purchase material to ensure
quantity and quality.
Maintain updated price list of all material
Maintenance of vendor/performance record
empty

Steps in purchasing

Material requisition
Request for quotation
Market analysis of material suppliers
Finalization of supplier(Select best quotation)
Purchase Order
Material receiving
Inspection

The requirement of material is given to stores or

purchase department through stores.
All details of required item, quantity, specification are
mentioned in requisition.
Original copy is kept to purchase, one copy to stores
and other copy is retained by department.
List of suppliers is made who deal with business of
that item
Then quotation request is sent to these suppliers
A comparative statement of rates, terms & conditions
in quotation are analyzed.
A supplier is selected and order is placed to
that firm after studying samples, rates, other conditions,
mentioning dates by which material will be received.
Copy of PO is sent to stores, requisitioner, accounts
dept. and to inspection department.
After material is received detailed inspection is done.
Then bill is passed and payment is given

Types of Purchase
Purchasing

as per requirement: It is sudden purchasing in

urgent conditions. Also known as Hand to mouth
purchasing.
Purchasing for specific period: Only specific items are
purchased to satisfy need of specific period. No sudden
decision of purchasing are taken.
Market purchasing: Systematic study of material
requirement is done. Market survey is needed.
Contract purchasing: Suppliers are already finalized. Huge
supply contract is given. Definite period is fixed for
contracts.
Central purchasing: Purchasing for many sections,
departments or plants can be done centrally. Discipline of
purchase is implemented. Local corruption is restricted.
Discounts are large.
Through DGSD(Director general of supplies and disposals):
It is central purchasing organization for purchasing activity.
At cheap rates material is provided. Rates of supply is
defined & care is taken to provide material in time

Searching and sources

Search

for suppliers
Visit industries
Buyers guide
Industrial exhibitions like EXPO, IMTEX.
Survey of Industrys directory
published by MCCIA or other such
agency
Visiting cards received in various
operations
Close study of industrial and
commercial journals

Selection of sources for purchasing

Material

quality
Pricing discounts
Seriousness about supply
Supplier status in market
Financial background of company
Flexibility in various supply issues
Ready to negotiate on terms
Major customers of that supplier
Service warranty
Past records of company
Readiness to accept new technology
Testing methods used
Wiilingness to provide support in difficulties

Difference
Procurement
Strategic function
Procurement includes
transaction of goods and
services, bargaining, logistics,
sourcing etc.
Systematic process
Scientific method to get
material at right time from right
place at minimum cost and
good quality

Purchasing
Administrative function
It includes actual transaction of
goods and services

Routine process
Traditional method of getting
goods from market

Material resource planning

A

planning technique that calculates material

requirements and schedules supply to meet
changing demand across all products and
parts
MRP converts master or main schedule of final
products into a detailed schedule for raw
material and components used to produce
final product.
Major purpose of MRP is to make sure right
material is components and required material
is available in right time and right place
MRP concentrates not only on demand but
also on timing of inventory demand.
MRP determines quantity and timing for
material planning

MRP
Firm order
from
known
customers
Engg.
Design
changes

Aggregat
e product
plan
Master
production
schedule

Bill of
material
file

MRP

Purchase
file(buy)

Capacity
plan(make)

Forecast of
demands
from
estimates
Inventory
transacti
ons
Inventory
record file

Functions of MRP
Based

on sales forecast and orders MRP takes

information fro three sources:
1. Master production schedule(MPS)
2. Bill of material
3. Inventory record file
These sources calculate
What parts are to be made or brought? (Purchasing
plan)(MRP determines raw material and
components required to get end product)
How many of these parts we need?(Capacity plan)
(MRP identifies quantities of each raw material and
required components)
When must be parts available? (Detail manufacturing
schedule) (MRP determines when item must be
ordered and delivered to complete production
schedule for final products)

Inputs to MRP

The master production schedule consists

of
. What end products are to be produced?
. How many of each product is to be
produced?
. When the products shall be ready for
dispatch?
. Master production schedule
It consist crucial information needed for
effectiveness of MRP. MRP generates
invalid priorities for manufacturing and
purchasing.
1.

Master production schedule

Material Production schedule
Week No.

Product P1
Product P2
Product P3

75
50

200
100

Bill of Material
It

has list of components parts and

sub assemblies needed to produce
final product.

Bill of material
Lead

time is required to
manufacture or purchase a
component or subassembly

Lead Time (Days)

Finished product
P1

Sub assembly
S1

Sub assembly
S2

Components
for
subassemblies
C1

Components for
subassemblies
C2

Inventory record file

It

keeps track of inventory status

for each item in database.
It keeps record of gross
requirement, scheduled receipt,
in hand orders and planned
orders at various time periods

Inventory record file

.
Inventory Record File
Part
name:

Part No.

Lot
Size:

Lead
time:

Safety
stock:

Scrap
allowanc
e:

Total

Period
1
Gross
requirement
Schedule
Inventor receipt
y Status
Segmen Available in
hand
t
Planned
orders

Steps in MRP
Master

production schedule specifies final

products to be manufactured and their
delivery dates.
Bill of material tells components needed
for each product
Inventory record file has information on
current and future inventory stats of each
component
MRP Program computes how many of
each component and raw material are
needed to manufacture
PI needs 200 units of S1&100units of S2

First number of P1 are scheduled. We have to place order in 5th

week to get material in 6th week
1
2
3
4
5
6
DAY
Required
P1

100

Order
Placeme
nt

100

We have to schedule sub assemblies S1 and S2 that

make P1
1
2
3
4
5
DAY
Required
S1

Order
Placeme
nt

200
200

100
Required
S2

Order
Placeme
nt

100

Final

DAY

material requirement plan

Required
P1

100

Order
Placeme
nt

100
200

S1

Required
Order
Placeme
nt

200

Required
S2

Order
Placeme
nt

100
100

MRP Outputs
The

purchasing plan and schedule:

It lays out prepared when purchase
orders should be released and
when purchased items must be
received to meet production dates.
Capacity Plan or Production
Schedule: It has details of start and
completion dates for steps of
production process

Benefits and Errors of MRP

Benefits:

Minimum level inventories

Material tracking becomes easy
Reduced purchase cost
Reduced overtime
Better machine utilization
Better inventory turnover
No shortage issue
Correct time to products as per demand
Errors: Following information sources may show errors if
incorrect
Master plan schedule
Bill of material
Inventory status & Inventory
Work in progress data
Lead times
Production size
Safety stock levels and times

Enterprise Resource Planning

It

is computer based system designed to

integrate various activities and operations in
company.
ERP puts all department data and processes in
one place.
Features:
No need of dependency for periodic updates
Common database
Each department is able to access system
Main function is flow of information between all
business functions of organization
Decision making gets easier
Transparency in operations
Duplication and repetition of work avoided

ERP Modules
ERP

finance module: Financial data from

various departments is collected. Using this
data financial reports (balance sheet, general
ledger) are prepared.
ERP Human resource Module: It mains complete
employees database. Database contains
contact information, salary details, attendance,
performance evaluation, career of employees.
ERP Purchase Module: It makes systematic
flowchart of required material. It processes
identifying of suppliers, billing, awareness of
purchase orders.
ERP of sales and marketing
ERP inventory modue