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 purchase
It is done by a committee, which includes an officer from stores,
accounts & purchasing departments.
Risk purchase
If 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 stock
Issue & use
Can 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

20000050020
19950050019
19900050018
19850050017
19800050016
19750050015
19700050014
19650050013
196000150012
194500150011
193000175010
19125027509
18850040008
18450045007
18000050006
17500075005
16750075004
160000200003
140000500002
90000900001
CUMMULATI VECUMMULATI VE
COSTCOST [Rs.]
ANNUAL COSTANNUAL COST
[ Rs.]
I TEMI TEM COST %COST %I TEM %I TEM %
70 %70 %
20 %20 %
10 %10 %
10 %10 %
20 %20 %
70 %70 %
ABC
A
N
A
L
Y
S
I
S
WO RK
SHEET
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 & CONTROL
CATEGORY 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 Note
It 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.

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.

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 equipment
•Code number
•Date of purchase
•Name of supplier
•Name of manufacturer
•Date of installation
•Place of installation
•Date of commissioning
•Environmental control
•Spare parts inventory
•Techn. Manual / circuit diagrams /
literatures
•After sales arrangement
•Guarantee period
•Warranty period
•Life of equipment
•Down time / up time
•Cost of maintenance
•Unserviceable date
•Date of condemnation
•Date of replacement
Maintenance of Equipment

Maintenance sheet:
Annual maintenance contract [AMC]
Starting date
Expiry date
Service / repair description
Materials / spares used
Cost of repairs
In-house
Outside agency

EQUIPMENT MAINTENANCE & CONDEMNATION
Maintenance & repairs:
Preventive maintenance
Master maintenance plan
Repair 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 repair
2. Non-functional & obsolete
3. Functional, but obsolete
4. Functional, but hazardous
5. 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

DISPOSAL
1. Circulate to other units, where it is needed
2. Return to the vendor, if willing to accept
3. Sell to agencies, scrap dealers, etc
4. Auction
5. 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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