MATERIALS MANAGEMENT

Importance of materials management :1. Materials input is very important as excess material as inventory causes costs to the company and shortage of material results into stoppage of conversion process and subsequently shortage of finished goods leading to customer dissatisfaction 2. Out of 5Ms, that are inputs to a conversion process, material is substantial in terms of its contribution to product cost, and current assets. 3. 51.1% of product cost is on account of materials. Hence the largest contributor to product cost. This marks out materials function as the largest potential avenue for productivity improvement. 4. Materials account for 70% to 80% of working capital. Effective and efficient management of materials can reduce substantial burden on the finances of company. 5. Accounts payable are mostly to materials suppliers. Hence the importance in management of finance of the company. 6. Quality of the Input and product quality: When the companies become leaner and leaner, it is crucial that inputs should remain in the plant only as long as the Through Put Time demands, and the output product should be Right First Time. The quality of inputs plays a vital role in this situation. 7. Management of materials is crucial in a Just In Time company. Production process needs very strong materials management support to gear up to face challenges of current market 8. Materials management provides information about availability of new products and services in the market which leads to cost efficient changes in the process

Types of materials :refer to types of inventory.

Functions of Materials Management :[What is a function? Every person , organization or a distinct part of an organization has to perform a set of tasks in order to deliver customer expectations satisfactorily. These sets of tasks are called functions of that particular entity.]

1.Materials Planning & Control

This is the primary function of Materials Management. The market forecast is converted into production schedules by production planning and control. Materials management prepares the materials plan to meet the production schedule. The plan is then implemented and controlled.
2.

Procurement
Procurement function begins with sourcing the supply after short listing

suppliers. An effective method is to rate the vendors on the basis of performance and choose the best. Purchase order is placed on the source and the material is procured from the source. Procurement activity includes preparation placement of purchase order, follow up, transportation and handling.
3.

Handling
The material which reaches the company premise is to be unloaded,

moved and positioned as per the storage plan.

4.Storage & Preservation

The procured material is to be stored and preserved against internal and external deterioration and theft. Against the authorized demand the material from the store is retrieved and issued.

5.Inventory control

Inventory control function controls the inventory levels to ensure shortage free and excess free stock to check the costs and ensure customer satisfaction
6.

Vendor development
The company makes the chosen vendors effective and efficient by

providing necessary inputs of training and information. The suppliers systems are audited to ensure adherence. A good vendor is an asset as he makes his customer more effective and efficient
7.

Vendor rating
Vendor rating is used as a tool for narrowing down the supplier

base for productive management of materials function. The same system is used continuously to assess strengths and weaknesses of short listed vendors for their effective development.
8.

Waste control
Procuring standard material and continuously trying to improve yield is

waste reduction and control function. When a product is processed two types of wastes are generated. One type of waste is called as standard scrap. This is accepted as unavoidable. Product that is not right first time is scrap and thereby waste. Non moving obsolete material is another waste that cripples organization. Material management should address these wastes and not only should control but reduce the wastes.
9.

Value Analysis Continuously trying to improve the value of the

product mainly by material substitution is a function of the materials management .

Integrated Materials Management : As we have seen earlier, materials management performs various functions to reach their well-set objectives. These functions are performed by business organizations since a very long time as trade and business have been taking place much before scientific management was thought of.

Traditional Approach Traditionally the organizations performed their functions aiming to achieve excellence in respective areas. Every function tried to suboptimize their individual function. This approach created some excellent buyers, some excellent movement managers, and some very good storekeepers, but often this functional excellence was at the cost of each other. Impact of excellence of one area on other functions was not taken into account. Performance of this kind did not bring cost benefits to the parent organizations that continued to suffer cost burden. Organizations wondered why do they struggle under the cost burden in spite of such talented managers being their employees, like some times we wonder why our rivals win the Cricket World Cup when we have such great individual performers!

Integrated Approach This approach ties all functions together, like a compeers baton, orchestrated to achieve company goals. Various functions now come under one control, focus always being on the final outcome. Initiatives for individual excellence are undertaken only after ascertaining their favorable impact on final outcome. The big picture should never be lost sight of, while trying to solve the jigsaw puzzle. The common thread that binds various functions into a winning combination is the focus on the big picture or the organizations gain. Unity of command balances conflicting interests of individual functions under integrated approach to materials management.

Profit Center Approach When every integrated function of management works like a profit center in an organization, entire becomes a strong integrated whole forging ahead in business, maximizing the profits rapidly. We easily understand concept of profit and its driving force in business when a product is sold for a price higher than the cost. One should remember the universal equation, Price = Cost + Profit. But when sale does not occur, visualizing profit may become a bit difficult. Keeping the above equation in mind, as price is controlled by market, any saving in the cost results into profit. Every competitor closely follows the above equation and identifies the resultant cost after keeping the profit needs of the company intact. This cost is called target cost for competitor. Any successful attempt to reduce this cost without harming the QCD objectives of the company results into profit. Now split the target cost of the product into its components developing a fishbone diagram for product cost. A certain cost package gets attached to every individual integrated function and any reduction in this package results into profit for the company. Fix the identified cost package to materials management and make materials management accountable for reduction by a percentage. This is the profit that materials management is responsible for. Make them earn this profit for justifying their existence in the organization. Like a business has to earn profit to justify existence in competition. This approach makes individual functions accountable for every cost and drives them to innovate ideas to add value continuously as the competition pushes the price to new lower levels, thereby making the company stronger organization .

Case study:-

A company with a turn over of Rs.100 crores, makes a profit of Rs.10 crores [10%] Cost of materials is Rs.60 crores, Other expenses are Rs.30 crores. How can you increase profit by 30%? [Rs.3crores]? To increase the profit by 10% one has to raise the sales by 30%. The company will have to make and sell 30 crores worth products in a tough market like the one which exists today. But keeping the profit center approach in mind, if we reduce the materials cost[Rs.60 crores] by just 5% same objective can be achieved. Return on Investment: an approach to measure profitability ROI= Profit/Sales Sales/[capital assets + current assets]

As materials managers if we consciously reduce current assets companys profits will rise which will be indicated by the ROI. We should always remember that inventory forms 80% of current assets of the company.

Benefits of Integration :1.

Better Accountability
Accountability for materials is now specifically fixed to one position.

No mans lands of cost between various functions are now addressed effectively by integrated materials management function.
2.

Coordination Various functions are now streamlined. The inter departmental

conflicts are balanced. As a result various functions work like a team under the control of Materials Manager.
3.

Better performance
Performance of Materials management improves on account of the

first two results of integration. Accountability reduces costs and teamwork improves productive performance.

4.

Adaptability to EDP

Computerization requires preparatory work that calls for integrated efforts where there is no scope for conflicts. Internal conflicts make computerization untenable

5.

Other advantages Present & Future: At present industry in our country is passing

through the transition from traditional systems to just in time like production. Just In Time needs dependable procurement systems. Only an integrated materials management function can provide such support to operations .

Definition and scope :Definition

Coordination and planning of all functions for controlling materials in

an optimum manner to meet customer expectations at minimum cost.

Scope Materials management works closely with Production, Finance,

Engineering and Quality control in the process of performing the functions to meet the objectives of customer satisfaction.

Materials management and Production

As we saw earlier JIT system needs very reliable

procurement and delivery systems for inputs and outputs. Production department is the internal customer for Materials management. Hence very close interaction with production department is primary to meet internal customer expectations and customer delight. Only this ensures unfailing satisfaction and delight of the external customer. Scope of materials management function decisions includes suppliers, subcontractors, production support warehouses, transportation service providers and internal departments subordinate to the function.

Materials management and Finance

Timely payment to suppliers is important for the smooth working of the supply chain which is fundamental for strong and dependable delivery system. Close interaction with finance function is needed to ensure the above.

Materials management and Engineering

Materials Management in the course of discharge of their functions

plan activities involving change in material inputs. This obviously has an impact on design of the product and process of manufacturing. Hence a close working is necessary between Materials management and Engineering.

Materials management and Quality control

For the same reasons that as above, close working is necessary

between Materials management and Quality control.

Organization & control

Materials Management is growing in stature on account of changes in

management thought process. Materials function has moved into board rooms which is an evidence of its importance in corporate structures.

Materials Management & Corporate Organization structure

A materials director is usually on the board to give overall directions to the material function in corporate bodies. This provides unity of command and thereby uniform direction.

Materials

Management

&

Other

functions

of

Management
Materials Management function is in par with other functions of corporate management so that it can effectively interact with other functions for organizational effectiveness. Some of the conventional structures of materials organization are discussed below :-

Internal Organization of Materials Management

Internal organization is structured on the need of the organization keeping in mind the strengths and weaknesses of individual structures.

Internal Organization based on Commodities An organization needs number of inputs[commodities] for running the

conversion process. Materials organization can be structured internally with focus on the individual commodities. A sub function can be created for dealing in an individual commodity in order to provide adequate focus.

Internal Organization based on Location

An organization with multi plant locations structures its materials

organization with focus on plant level. Every plant will have a materials function that receives overall direction from the top management. The materials function in the plant coordinates materials sub functions of that plant.

Internal Organization based on Function

At the corporate level, materials function is set up with

respective sub functions. These individual functions coordinate their respective sub functions in various plants or divisions providing function wise expertise to the entire organization.

Concept of Centralization & De centralization As we were discussing earlier it is the need of the organization triggered by product, process and market that ultimately decides how the control should be exercised on the material function. The control may be centralized or decentralized fully or in parts keeping in mind overall need. Management education can provide knowledge about available options in practice but the choice rests with the corporate management. New options can be developed to satisfy specific needs conceptually combining various available options. Centralized headquarters control keeps most of the decision making at level delegating only routine level decision making.

Decentralized control delegates decision making to unit level enabling the units to respond to their respective environment.

Advantages of Centralization 1. Combining the requirements of all units to buy in bulk and gain benefits of bulk buying. 2. Interplant transfer of material to deal with emergencies in individual plants. And interplant transfer to utilize surplus material available at some plant and thereby reduce overall inventory cost for the company. 3. Benefit of specialized skills of one individual at the corporate level to all the units or plants. Buying needs specialized skills specific to the commodity in market specially buying is in large quantities. Knowledge of the market is essential to anticipate market trends in terms of price and availability. 4. Benefits of unity of command. 5. Centralized material research resulting in savings for the company .

Advantages of Decentralization 1. Decentralization overcomes problems posed by significant physical separation between Plants and Central Office. These problems can occur due to information flow. They may occur due to lack of sensitivity to environment due to physical separation 2. Uniqueness of product line requirement of each Plant: When individual plants areengaged in production of different products, their requirement is product specific and thereby unique. Decentralized control can deal with the requirements effectively, independently. 3. Better coordination with production & other functions of the plant: Production is the internal customer of material management function. Decentralized control enjoys the benefit of being close to the customer. There is also the need to interact with various other functions in the plant.

Decentralized control can take decisions based on these interactions effectively. 4. Supportive to the concept of Profit Center: the concept of profit center as discussed earlier is applicable to each plant and the management functions within. A decentralized material management function can effectively work as a profit center and support the plant as a profit center within the corporate body.

Materials production

management

function

for

project

form

of

Materials need of projects is unique as the features of a project are unique. These are discussed below to understand the uniqueness of materials needs.

Types of Projects :Some of the project types are mentioned below. Most of these

projects are sponsored by Government and implemented by organizations in public and private sector . 1. Erection of Steel Plants, Refineries 2. Laying of Pipe Lines 3. Building of Bridges, High ways, boring of tunnels 4. Laying of railroads

Features of Project form of production :-

1.Non repetitive activities 2. Specific and Critical performance objectives 3. Cost objective 4.Time objective, delays invite heavy penalty 5. Projects are monitored and controlled with the help of OR tools like PERT/CPM 6. Long time spans

Materials Needs of Projects :1. Timely Requirement of Materials to meet PERT/CPM needs .

2. 3.

Unconventional Storage, conventional storage arrangements are Interchangeability of Materials and equipment between projects Ability to forecast Costs within the span of project as materials

not available on most of the project sites . as companies are engaged in similar types of projects .
4.

are needed at different stages of project. Material budget is to be prepared taking into account above need. Cost overruns are unacceptable in commercial projects.
5.

INVENTORY MANAGEMENT :1.Inventory is an unused asset, which lies in stock without participating in value adding process. 2.Unused equipment, raw material, WIP and Finished goods, consumables , spare parts, bought out parts, tools and tackles, gauge and fixtures etc. 3.In India 9 to 12 months of sales quantity lies in the form of Inventory [R/M, WIP, Bought out parts and Finished goods] as against a few days in Japan and a month in the US and Europe 4.Huge amount of NPAs in our country, Banks, PSUs 5.If we look around in our facilities we find stocks lying unused for years catching dust and rust in the form of plant and equipment, raw material, WIP and Finished goods. 6.In our country inventory is always viewed as asset [working capital], in fact, though it is called an asset, it is a big liability 7.Reluctance to scrap useless inventory in time is one of the reasons why we carry huge stocks 8.Inventory is biggest source of waste 9.Japanese companies focused their attention on Inventory through now well known concept of 5S

at is Inventory? -

TYPES OF INVENTORY :1. Manufacturing: R/M, components, WIP, F/G. 2. MRO: Maintenance, repairs and operating supplies. 3. Tools and fixtures 4. Inspection gauges and instruments 5. Location inventory: inventory at a fixed location 6. In transit inventory: inventory in the process of transfer or under going transportation and waiting to be transported. This is also known as pipeline inventory

FUNCTIONS OF INVENTORY :-

1. Inventory overcomes obstacles due to geographical separation between suppliers and customers. Manufacturing facilities are located at places that make manufacturing economical. This fact geographically separates manufacturing and market. 2. De coupling from uncertainties of market 3. Overcomes obstacles due to poor infrastructure 4. Balancing supply and demand: seasonal production and year round consumption [agricultural products], seasonal consumption and production during some other season [woolen garments and umbrellas]. 5. Buffer uncertainties of lead time and demand 6. De couples internal processes. Two machines running sequentially are separated by inventory to make them independent of each other.

1.Capital cost

Costs of carrying inventories -

2.Taxes, insurance 3.Obsolescence 4.Storage: handling, space, maintenance, security 5.Opportunity cost 6.Cost of bad quality

INVENTORY CALCULATIONS :Please , refer to your class notes .

Economic order quantity

umptions of Wilsons lot size formula or Classical EOQ model Demand is at a constant rate and continuous 1. 2. 3. 4. 5. 6. Process is continuous No constraints are imposed on quantities ordered, storage capacity, budget etc. Replenishment is instantaneous All costs are time invariant No shortages are allowed Quantity discounts are not considered

itations of Classical EOQ model We have seen that Classical EOQ model made assumptions that are really not realistic. When the model is put to practical use we find that so many adjustments are needed to be made. Hence EOQ model is formulated under some limitations. If we are not conversant with these limitations, managerial application of this concept can be counter productive.

jor limitations are some of the assumptions made 1. 2. 3. 4. The demand or usage is predictable . The demand or usage is constant . The price of the item remains constant through out the procurement cycle . Materials in many processes are flow controlled ie, materials move in pipe lines starting and stopping depending on operational requirements . If the concept of EOQ is applied without taking into account the limitations results can be disastrous.

ustments to EOQ 1.

Volume transportation rates

EOQ model does not consider cost of transportation of goods from vendors place to the purchaser. Transportation costs are sensitive to weight of consignment. If the quantity suggested by EOQ model does not get favorable transportation cost, summation of inventory cost and transportation cost may be detrimental to the interests of the organization. Hence we should always evaluate batch sizes from total cost perspective. In the traditional approach when inbound logistics are totally vendors responsibility, the company never used to worry about this aspect. But as the concept is now enlightened and minimization of the costs in the supply chain is the focus, this aspect is very significant Annual demand Unit value Inventory charge Ordering cost Shipment 2400 U $ 5.00

$19.00 per order 302 U rate R1 [applicable to EOQ $1.00

quantity = 300 U] Shipment rate R2 [applicable to 480 U quantity] Alternative 1 Q [EOQ] = 300 Inventory carrying cost $150 Ordering cost $152 Transportation cost @ $1 per U $2400 Total cost $2702 Alternative 1 Q = 480 $240 $1800 $2135

2.

Quantity discount
Impact of quantity discounts is seen if we look at the costs by doing summation of inventory costs and relief derived out of quantity discounts.

Quantity discounts can upset the benefit of EOQ if we dont evaluate the situation from total costs perspective. 3. Other EOQ adjustments a) Production lot size Buyers EOQ and suppliers EBQ some times do not match. Then some adjustment will have to be made to the EOQ to make it practicable.
b)

Multiple item purchase When a combination of several products are sourced from a supplier, the impact of quantity discounts and transportation costs will be different from that for individual product. So adjustment is required to EOQ from the angle of total cost for the combination of products Limited capital Budgetary allocations play a significant role in buying. The budget has to satisfy the requirement of entire product line. So the EOQ of various items requires adjustment Private trucking If the company uses private transport for procurement, getting a full truck becomes significant from cost perspective Standard package When a standard package is used for transportation, if EOQ suggests one and a half package then transporting half package becomes more expensive than transporting two packages with enhanced order quantity.

c)

d)

e)

ABC Analysis 80 20 rule, also known as Paretos rule Pl. refer to your class notes Benefits of ABC Analysis -

1. 2.

Identification significant 15% to 20%items responsible for 80% of value for close management control selective management control Effective management of inventory results in short span of time

3. 4. 5. 1.

Allocation

of

management

resources

to

significant

items,

reduction in clerical work and time. Helps in selection of appropriate inventory control models or systems. E.g. Q model or P? Helps in formulation of inventory policy Limitations of ABC Analysis An exhaustive analysis of all items in the whole organization is required to make ABC analysis a useful effort. A, B, & C items should be identified for the whole organization for which data regarding consumption pattern, lead time and its fluctuation of all items is necessary. Only then the benefits can be felt. To carry out this exercise high degree of standardization and codification is primary. This exercise is obviously time consuming. 2. 3. Focus is only on money value, criticality of the item is not taken into account. Price of an item is assumed to be same through out the year. In practice it is unlikely to be so.

VED Analysis Vital, Essential & Desirable items Pl. refer to your class notes also pl. refer your notes for the matrix for ABC & VED items in the store.

FSN Analysis
Fast moving, Slow moving & Non moving items Pl. refer to your class notes

notes .

INVENTORY POLICIES :P Model, Q Model, Optional replenishment Model Pl. refer to your class

Comparison of Indian & Global industries Comparison factors Japanese companies US/European co. General Indian co. 1.Cycle time from production1 to 2 years 3 to 6 years 0.5 to 2 years

to development 2. inventory level A few days of sales One month of t0 12 months of sales 9 sales 3. output per employee Lacs Rs. 12 Lacs Rs. 2.5 Lacs Rs. 32 4. rejection rate 3 to 4 PPM 30 to 40 PPM TO 20 RPH 8 5. quality cost with respect to5% TO 10% 35% TO 45% 3% TO 5%