MODULE 6

Materials Management

5 M’s important to production process are Men, Machine, Money , Methods and Material .

Early days from Men to Methods it was varying, now-a-days materials have more important.

There are several reasons behind it,

1) Amount spent on materials is higher than other inputs

2) Materials offer considerable scope for reducing cost and

improving profit

3) Improving return on investments depends on the

effective utilisation of materials.

4) Materials “add value” to a product. 5) Materials contribute to the quality of the end product6) Material management assume responsibility for whatever

happen in purchasing , storing, inventory or any other area connected with materials.

7) Need for preservation of scarce resource for posterity.8) Increasing demand for ensuring environmental safety.9) The efficiency of any organization depends upon the

availability of right materials ,in right quality, at right time and at right price.

10)Relationship between man and materials is indivisible

Objectives of material management If contribution of material to over all company

achievement is direct, it is called as primary and if it is indirect contribution, then it is called as secondary.

Primary objective1. Low Prices2. High inventory turnover3. Low cost acquisition and possession4. Continuity of supply5. Consistency of quality6. Low Payroll costs7. Favorable supplies relations8. Development of personnel9. Good records

Secondary Objectives

1. Reciprocal relations2. Now materials and products3. Economic make or buy4. Standardization5. Product Improvement 6. Inter departmental harmony7. Forecasts8. Acquisitions

Importance of material management

1. Lower prices for material and equipment2. Faster inventory turnover3. Continuity of supply4. Reduced lead time5. Reduced transportation cost6. Less duplication of efforts7. Elimination of buck passing8. Reduced Materials Obsolescence9. Improved supplier relationship and better

records and information10.Better inter departmental co operations11.Personnel development

Purchasing 4 different groups of buyers,

a) Consumers

b) Middlemen

c) Government agencies

d) Manufactures

DefinitionThe act of buying an item at a price.

Importance of purchasing1. Purchasing function provides materials to the factory

without which wheels of machines cannot move.2. A one percent saving in materials cost is equivalent to a

10 percent increase in turnover. Efficient buying can achieve this.

3. Purchasing manager is the custodian of his firm's purse as he spends more than 50 per cent of his company's earnings on purchases

4. Increasing proportion of one's requirements, are now bought instead of being made as was the practice in the earlier days. Buying, therefore, assumes significance.

5. Purchasing can contribute to import substitution and save foreign exchange.

6. Purchasing is the main factor in the timely execution of industrial projects.

7. Materials management organisations that exist now have evolved out of purchasingdepartments.

8. Other factors like (i) post-war shortages, (ii) cyclical swings of surpluses and shortages and the fast rising materials costs, (iii) heavy competition, and (iv) growing worldwide markets have contributed to the importance of purchasing.

Objectives of purchasing

1. To pay reasonably low prices for the best values obtainable, negotiating and executing all company commitments.

2. To keep inventories as low as is consistent with maintaining production.

3. To develop satisfactory sources of supply and maintain good relations with them.

4. To secure good vendor performance including prompt deliveries and acceptable quality.

5. To locate new materials or products as required:6. To develop good procedures, together with adequate

controls and purchasing policy.

7. To implement such programmes as value analysis, cost analysis, and make-or-buy to reduce cost of purchases.

8. To secure high caliber personnel and allow each to develop to his maximum ability.

9. To maintain as economical a department as is possible, commensurate with good performance.

10. To keep the top management informed of material development which could affect company profit or performance.

11. To achieve a high degree of co-operation and co-ordination with other departments in the organisation.

Functions of purchasing department

1. Responsibilities often fully delegated to the purchasing function:

a) Obtaining prices.b) Selecting vendors. c) Awarding purchase orders.d) Following up on delivery promises.e) Adjusting and settling complaints.f) Selecting and training of purchasing personnel.g) Vendor relations.

2. Responsibilities often shared with functions other than purchasing function:

a) Obtaining technical information and advice.b) Receiving sales presentations and arranging for sales

opportunities with interested personnel.c) Establishing specifications.d) Scheduling orders and deliveries.e) Inspecting.f) Specifying delivery method and routing.g) Expediting. h) Accounting.i) Purchasing and market research.

j) Inventory and warehousing policy and/or control.k) Forward buying and hedging policies and procedures.

l) Construction contracting,m) Service contracts and agreements,n) Sale of scrap, salvage and surplus.o) Purchasing for employees. p) Contracting for machines and equipment,q) Development of specifications.r) General considerations of quantities or timing on

planning deliveries,s) Transportation and traffic,t) Determination of whether to make or buy.u) Customs,v) Other functions.

3. Responsibilities often divorced from purchasing but of particular interest to purchasing:

a) Receiving and warehousing.b) Payment of invoices.c) Other functions.

Purchasing Cycle

1. Recognition of need.2. Description of need.3. A suitable source is selected for the supply. Often a

source has to be developed.4. Price and availability are determined.5. Purchase order is prepared and sent out to the supplier.6. Acceptance of the purchase order is obtained from the

supplier.7. Follow up is done by the purchasing department to

ensure timely delivery of the material.8. Checking the invoice and approving it for making

payment to the supplier.

Purchasing Policies

The purchasing function is influenced by certain policies,

1. Ancillarisation2. Make or buy decision3. Speculative buying4. Vendor rating5. Ethics in purchasing 6. Reciprocity7. Purchasing for employees8. Gifts9. Value Analysis

Ancillary Development

Deciding to buy a part from outside supplies (i.e.) called sub contractor. The unit is called as ancillary unit

Advantage

Spread of entrepreneurial base Industrial development Regular supply of right quality of raw materials

Disadvantages

When expansion occurs in a company then ancillary unit cannot meet the demand. So they may have competitors

Make or Buy

There are 3 problems associated with it

Making or buying something which it never before procured

Making something which it is now buying

Buying something which it is now making

Types of make or buy investigation

I category1. Firm currently has production potential2. With small capital outlay for tooling and machining

II Category3. Firm cannot produce in its existing operations4. A large amount of additional investment is required

for tooling and facilities

Factors influencing make or buy decisionThere are two primary factors1. Cost 2. Availability of production capacity

Considerations which favour making the parts are

1. Cost considerations (less expensive to make the part).2. Desire to integrate plan operations.3. Productive use of excess plant capacity to help absorb

fixed overheads4. Need to exert direct control over production and /or

quality5. Design secrecy.6. Unreliable suppliers. 7. No suitable supplier quotation.8. Desire to maintain a stable workforce (in periods of

declining sales).

Considerations which favour buying the parts are

1. Cost considerations (less expensive to buy the part). 2. Supplier's research and specialised know-how3. Small volume requirements.4. Limited production facilities.5. Desire to maintain a stable workforce (in periods of

rising sales).6. Desire to maintain multiple source policy.7. Government's policy favoring ancillarisation.8. Monopoly items which are rationed by the government

and on which, the buyer has no option.

Other factors are,

1. By tradition2. Stable or declining industry3. Age of industry

Young industry have the following risks

A.Working capital is not enough B.Risk of product acceptance,C.Failure in the manufacturing process andD.Countless actions and reactions by competitions,

government and labour. These risks are sufficient enough to make young companies avoid making an item.

What ever may be the inputs given by the purchasing manger at the end only the top management will decide will decide whether to buy or make a part

The decision is taken by forming a committee which has representatives from , production, accounting , engineering, marketing & purchasing

Speculative Buying:Scope of making profit out of price changeTwo TypesType 1: Buying certain item at low prices and selling then when their prices shoots up.Type 2: Buying of raw materials in large quantity when their prices are cheap

Vendor Rating

Depending upon the vendors, we know about the purchasing department of any industryGood vendor is an asset to the company

Rating Techniques Price Discounts received Maintenance of specifications Compliance with other specifications Promptness of delivery Freight and delivery charges Installation costs Service

Market information Co-operation Management competence Credit terms, Disposition of rejects Employee training, Adjustment policies, Cost reduction suggestions, Inventory plans and Financial position.

Some important vendor rating techniques are

i. Categorical Planii. Weighted point planiii.Critical incidents methodiv. Checklist System

I. Buyers checklist consists of i. Reliabilityii. Technical capabilitiesiii.After Sale Serviceiv. Availabilityv. Buying Conveniencevi.Sales Assistance

e. Ethics in purchasing• Ethics is philosophy concerned with values of human

conduct• Ethics refers to code of conduct that guides an

individual in dealing with othersCode of Ethics

Developed by Indian Institute of Material Management

To consider first the total interest of one's organisation in all transactions without . impairing the dignity and responsibility to one's office.

To buy without prejudice, seeking to obtain the maximum ultimate value for each rupee of expenditure.

To subscribe and work for honesty and truth in buying and selling, to denounce all forms and manifestations of commercial bribery and to eschew anti-social practices. To accord a prompt and courteous reception so far as conditions will permit, to all who call upon legitimate business missions.

To respect one's obligations and those of one's organisation consistent with good business practice.

Reciprocity

• State of exchange and co-operation for a return in kind• They have both proponents and opponents• Arguments of proponents of the policy , on the following lines

1. When quality, price and service are assured, it is good to give preference to own customers.

2. It adds to the sales of the buying company.3. It creates better trade relations between the buyer and the

seller. The opponents criticize the practice citing

the following lines:

4. False market can be created with companies that may later change their minds or fall behind technically.

5. Reciprocity does not follow sound principles of buying and selling on the fundamental criteria of quality, price and service.

4. Companies may relax their competitive efforts in technical and production causes as a result of reduced competition. Consequently, purchasing costs may be higher.

5. Sales departments may develop a false sense of security, resulting in the deterioration of a firm's selling effort.

6. Company reputation may be impaired because of bad publicity resulting from reciprocity. Sellers of new, advanced products and processes will not waste their time with companies known to be tied up with reciprocal agreement.

7. New customers may be hard to find because of pre-established relationships with competitors.

8. Conspiracy and restraint on trade situations can develop with attendant legal dangers.

Purchasing for Employees

Practice of using its facilities for obtaining merchandise for employees of the company or its executive at better terms than they could individually obtain the same merchandise through their own effort

Arguments for buying for company personnel

1. Circumventing of normal channel of distribution for good involved

2. Buyer at disadvantage while dealing with the supplier3. Service available for purchase for consumer goods are not

so good4. Some ill-will towards the company may be aroused

5. Short step for company people, occasionally getting things for employees personnel work

6. Company credit is involved7. If the service is to be self- sustaining a service or handling

charge to be made

Arguments for the purchase

Company should make provision for supplying its employees with at-least necessacity of life parts?

f. Gifts

Accepting gifts is ethical / unethical

Arguments against receiving gift

1. Represent cost of doing business to donor firm2. Exception increases , all the supplies are found to give

to get the orders from the company3. Commercial bribery and has legal problems

Value Analysis

• Value Engineering• Occurs between purchasing and methods engineering • Modifying specifications of materials, parts and

products to reduce cost• While examining a product following questions to be

askedi. Is there a less expensive product which will perform

the required function?ii. What does each component contribute?iii.Can a less expensive material be used?iv. Can parts be combined?v. Can it be designed for easier assembly? vi.Can it be fabricated by other

StoresStore is a building where goods are kept stores is defined as supplies of goods and storage is defined as the act of storing goods

Importance1. Ready accessibility of major materials permitting

efficient service to users.2. Efficient space utilization and flexibility of arrangement.3. A reduced need for materials handling equipment.4. A minimization of materials deterioration and pilferage.5. Ease of physical counting.

Functions1. To receive raw materials and account for them.2. To provide adequate and proper storage and preservation

to the various items.3. To meet the demands of the consuming departments by

proper issues and account for the consumption.4. To minimize obsolescence, surplus and scrap through

proper codification, preservation and handling.5. highlight stock accumulation, discrepancies and

abnormal consumption and effect control measures.6. To ensure good house-keeping so that, materials

handling, materials preservation, stocking, receipt and issue can be done adequately.

7. To assist in verification and provide supporting information for effective purchase action.

Store Layout

Fundamental factor in efficient performance of the department

Factors for planning store layout1. Provisions for easy receipt, storage and disbursement of

materials, nearness to point of use.2. Minimum handling and transportation of materials, good

accessibility for handling equipment and personnel.3. Adequate capacity provision for flexibility for future

expansion.4. Efficient utilization of floor space and height.5. Clear identification of materials, quick location of items

and ease of physical counting.

6. Protecting against waste, deterioration, damage and pilferage.

7. Design the building's physical appearance to create goodwill and to invite business.

8. Arrange storage for fast and easy customer order processing.

9. Use compatible storage or display equipment to create good interior appearances.

10.Install good lighting to prevent theft, parts damage and errors in stocking.

11.Plan storage for easy shelf-life rotation to permit first-in-first-out control.

12.Segregate rebuilt, re-manufactured, used and new merchandise.

13.Include safety as apart of the facility plan.14.Maintain a periodic house-keeping and re-arrangement

plan.

Two aspects of stores layout are

15.Storage System16.Type of stores layout

Storage SystemMeans dealing with a number of interacting and often conflicting factorsDegree of mechanization affects layoutScarcity of space leads to racking

3 basic ways of locating stocka) Fixed locationb) Random locationc) Zoned location

Types of stores layoutd) Comb type – one side of the aislee) Tree type – On either side of aisle

Stores Manual

Written statement of policies and proceduresAssigning responsibilities and authority of store keepingStandardizing store-keeping activitiesSimulating new ideas and suggestions for improving and stream lining storage operations

Measurement of stores efficiency

a) Store efficiency index = No of requisition delivered on time Total no of requisitions

b) Storage loss index = Deterioration, Obsolescence's and pilferage

Average value of inventory

c) Obsolescence Index = Value of non-moving itemsTotal inventory value

d) Space utilization index = Area used for storage

Total storage area available

Stock verification

Three Waysa) Periodic verification or fixed annual inventoryb) Perpetual or Continuous inventoryc) Low point inventory

Classification and CodificationAdvantages

1. Systematic grouping of similar items for correct identification of each and every item.

2. The usage of long descriptions is simplified and possible confusion avoided.

3. Avoids duplicate stocks of the same item being held under different names, descriptions, brand names, part number and different stores.

4. Enables reduction in sizes and varieties.5. Helps in standardisation of materials and helps in finding

substitutes.

6. Can be used as a basic for setting up different stores.7. To arrange bin cards and records in stores, accounts and

inventory control sections in the same uniform manner.8. Ensures accuracy in correspondence, records and posting

of receipts and issues in appropriate records.

Principles of classification and codifications1. There must be a consistency in the point of view so that, the

basis of classification should remain unchanged for all items.2. The system of classification must cover the entire range of

items for which, it is devised and at the same time, allow reasonable scope for extension. This principle is that of comprehensiveness.

3. The third principle is that of mutual exclusiveness which means, that there must be only one code number possible for any item.

4. The system developed should be simple enough to be understood and easily adopted by the non-specialist personnel. This also means that the codification basis when once understood, the code numbers should be self-explanatory to a certain possible extent.

Methods of Classification and codingBased on nature, they are classified as

1. Raw Material2. Components3. Consumable stores4. Space Parts5. Tools6. Packing Materials7. Work-in – Progress8. Finished Goods9. Hardware10.Motors11.Gear Box12.CKD – Completely Knocked down items