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Importance of materials_management


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Importance of materials_management

  1. 1. IMPORTANCE OF MATERIALS MANAGEMENT <ul><li> Average Materials Expenditure </li></ul><ul><li>Average expenditure Industry groups </li></ul><ul><li>of materials percent </li></ul><ul><li>Above 65 Cotton yarn, earthmoving equipment, sugar,wool,jute,commercial vehicles, fabrication. </li></ul><ul><li>60-65 Cotton textiles, bread. </li></ul><ul><li>55-60 Engineering, non-ferrous. </li></ul><ul><li>50-55 Shipbuilding, chemicals,tyre, machine tools, cement,electricity. </li></ul><ul><li>45-50 Pharmaceuticals. </li></ul><ul><li>40-45 Steel, newspaper, fertilizer, aircraft. </li></ul>
  2. 2. KEY ISSUES IN MATERIALS MANAGEMENT <ul><li>Right Source </li></ul><ul><li>Right Price </li></ul><ul><li>Right Quality </li></ul><ul><li>Right Quantity </li></ul><ul><li>Right Time </li></ul><ul><li> COSTS </li></ul><ul><li>Average Procurement Cost </li></ul><ul><li>Cost of processing a purchase order through purchase department. </li></ul><ul><li> a) Salaries and wages of the purchase department. </li></ul><ul><li>b) Paper and Postage </li></ul><ul><li>c) Follow-up costs- the follow up required to ensure timely supplies- includes the travel cost for purchase follow-up,telex,telephone bills,fax, e-mail etc. </li></ul><ul><li> d) Receiving and inspection. </li></ul>
  3. 3. <ul><li>2)  Inventory Carrying Cost </li></ul><ul><li>a)      Indirect Cost-COST OF CAPITAL </li></ul><ul><li>b)      Direct Costs </li></ul><ul><li>I)    Provision of Storage area and facilities like racks, bins etc. </li></ul><ul><li>II)    Salaries of stores Staff </li></ul><ul><li>III)   Insurance </li></ul><ul><li>IV)   Obsolescence, deterioration, breakage, pilferage etc. </li></ul><ul><li>VI) Heat,light,refrigeration etc. </li></ul><ul><li>V) Cost of chemicals,preservatives etc. </li></ul><ul><li> </li></ul><ul><li>3)   Shortage Cost </li></ul><ul><li>a)  Cost of lost production </li></ul><ul><li>b) Downtime Costs </li></ul><ul><li>  c)   Extra Cost which may have to be paid for a rush purchase </li></ul>
  4. 4. Actual Cost of ordering - W 1 A Actual Inventory Cost - W 2 I A and I are estimates D = 20,000 units A = Rs.100 I = 40% C = Rs.20 Then Q = 707 units Actual A = Rs 200 ( W 1 = 2) Actual I = 20% (W 2 =0.5) Then Q -- 1414 units Order Quantity 707 units No of orders = 20,000/707 = 28 Ordering Cost = 200 x 28 = Rs.5600 Inventory Carrying Cost 707/2 x 0.20 x 20= Rs 1414 Total Cost = Rs.7014 Cost AD/Q ICQ 2 K=AD + ICQ Q 2 ~ Q
  5. 5. Order quantity 1414 units <ul><li>Ordering Cost = Rs.2800 </li></ul><ul><li>Inventory Carrying Cost = Rs.2800 </li></ul><ul><li>Total Cost = Rs.5600 </li></ul><ul><li>i.e.25% increase in costs </li></ul><ul><li>Economic Purchase Quantity (EPQ) </li></ul><ul><li>Rounding off </li></ul><ul><li>Low D and High C </li></ul><ul><li>Economies of Transport </li></ul><ul><li>Shelf life for perishable goods </li></ul><ul><li>Discounts </li></ul><ul><li>Imports. </li></ul>
  6. 6. <ul><li>Cumulative Percent issue value </li></ul>A B C 75 90 100 100 25 10 Cumulative Percent number A items: over Rs.10,000 B items: between Rs.1000 and Rs.10,000 C items: below Rs.1000.
  7. 7. BROAD POLICY GUIDELINES FOR SELECTIVE INVENTORY CONTROL <ul><li>A ITEMS B ITEMS C ITEMS </li></ul><ul><li>HIGH CONSUMPTION VALUE MODERATE VALUE LOW CONSUMPTION VALUE </li></ul><ul><li>Very strict control Moderate control Loose control </li></ul><ul><li>No safety stocks Low safety stocks High safety stocks </li></ul><ul><li>(or very slow) </li></ul><ul><li>3. Frequent ordering or Once in three Bulk ordering </li></ul><ul><li>weekly deliveries months once in 6 months </li></ul><ul><li>Weekly control Monthly control Quarterly control </li></ul><ul><li>statement reports reports </li></ul><ul><li>Maximum follow-up Periodic follow-up Follow-up and and expediting expediting in exceptional cases </li></ul><ul><li>Rigorous value Moderate value Minimum value </li></ul><ul><li>analysis analysis analysis </li></ul><ul><li>7. As many sources as Two or more Two reliable sources possible for each item reliable sources for each item </li></ul><ul><li>8. Accurate forecasts Estimates based on Rough estimates </li></ul><ul><li>in materials planning past data on present for planning plans </li></ul><ul><li>Minimization of Quarterly control Annual review over </li></ul><ul><li>waste, obsolete and over surplus and surplus and obsolete </li></ul><ul><li>surplus(review every obsolete items material </li></ul><ul><li>15 days) </li></ul><ul><li>10. Maximum efforts to Moderate Minimum clerical </li></ul><ul><li>reduce lead time efforts </li></ul><ul><li>Must be handled by Can be handled Can be fully delegated </li></ul><ul><li>senior officers by middle mana- gement </li></ul>
  8. 8. An Example on ABC Analysis <ul><li> Item No . Annual No.of Value per Average Consumption Orders order Inventory value (Rs.) (Rs.) (Rs.) 1 60,000 4 15,000 7,500 2 4,000 4 1,000 500 3 1,000 4 250 125 </li></ul>Item No. No.of Value per Average Orders (Rs.) order (Rs.) Inventory(Rs.) 1 8 7,500 3,750 2 3 1,333 667 3 1 1,000 500 Total: Rs 4,917 Total: Rs 8,125
  9. 9. <ul><li>Movement </li></ul><ul><li>Availability </li></ul><ul><li>Criticality </li></ul><ul><li>Movement Analysis </li></ul><ul><li>F S N Analysis </li></ul><ul><li>XYZ Analysis- based on year –end stores inventory value </li></ul><ul><li>Inventory Value Fast Slow Non-moving </li></ul><ul><li>X </li></ul><ul><li>Top 10% number Fx Sx Nx </li></ul><ul><li>70% Stock value </li></ul><ul><li>Y </li></ul><ul><li>Medium 20% Fy Sy Ny </li></ul><ul><li>Z </li></ul><ul><li>Low 70% number Fz Sz Nz </li></ul><ul><li>10% Stock Value </li></ul>Limitations of ABC Analysis Fast Slow Non-Moving
  10. 10. Availability Analysis <ul><li>S D E Analysis </li></ul><ul><li>G O L F Analysis </li></ul><ul><li>G: Govt.Controlled </li></ul><ul><li>O: Available in open market </li></ul><ul><li>L: Locally available </li></ul><ul><li>F: Foreign Supplier or import purchase </li></ul><ul><li>S O S Analysis </li></ul><ul><li>Combining all three </li></ul>Easy Difficult Scarce Seasonal Off -seasonal Long Lead Time Short Lead Time
  11. 11. <ul><li>Criticality Analysis </li></ul><ul><li>a) V E I N Analysis for equipment </li></ul>Vital Normal Essential Important <ul><li>VED Analysis for components/parts </li></ul><ul><li>Combining the two </li></ul>Critical Non-critical Vital Essential Desirable
  12. 12. MUSIC –3D ANALYSIS <ul><li>Basis:Consumption value, availability and criticality </li></ul><ul><ul><ul><ul><ul><li>Policy for an item in cell 3 </li></ul></ul></ul></ul></ul><ul><li>Large purchase quantity with annual ordering (even two years) subject to storage space being available and item not being perishable . High inventory as working capital commitment is small. Service level should be nearly 100% without stock-outs. </li></ul>HCV items LCV items LLT SLT SLT LLT C LLT HCV C SLT HCV C LLT LCV C SLT LCV NC LLT HCV NC SLT HCV NC LLT LCV NC SLT LCV CRITICAL NON CRITICAL 5 3 4 1 2 7 6 8
  13. 13. Policy for items falling in Cell 6 <ul><ul><li>These items constitute the opposite of items in cell 3. The purchase quantity will be minimal as the item is non-critical and have high consumption value, or these items should be bought as and when needed. Stock outs to be allowed with low service level as the item is costly but non-critical. </li></ul></ul><ul><ul><li>Policy for items falling in cells I and 2 </li></ul></ul><ul><ul><li>Very strict control to be exercised by very accurate forecasts. Frequent orders or weekly deliveries. Maximum follow up and expediting with as many reliable sources as possible. </li></ul></ul><ul><ul><li>The postings to be immediate and up-to-date continuous monitoring of information on stocks status, consumption, withdrawal, delivery, supply status etc. </li></ul></ul>
  14. 14. Q-System Fixed quantity varying interval. Order EOQ= <ul><li>Buffer stock: Providing for average demand during average lead time. </li></ul><ul><li>Reserve stock: Providing for maximum variation in average demand during average lead time. This will depend upon the service level which in turn will depend on the shortage cost. </li></ul><ul><li>Safety stock: Providing for maximum delay in average lead time.This will be computed as:average consumption during maximum delay x probability of such delay. </li></ul>I C Reorder level is sum of: 2AD
  15. 15. P-System Varying quantity fixed interval Fix a review period = EOQ/ D Desirable inventory level (DIL) is sum of <ul><li>Buffer stock: Providing for average demand during average lead time plus review period. </li></ul><ul><li>Reserve stock: Providing for maximum variation in average demand during average lead time plus review period.This will depend upon the service level which in turn will depend on the shortage cost. </li></ul><ul><li>Safety stock: Providing for maximum delay in average lead time.This will be computed as: average consumption during maximum delay x probability of such delay. </li></ul><ul><li>Quantity to be ordered=DIL-( on hand inventory plus on order) </li></ul>
  16. 16. <ul><li>Item Annual Unit No.of orders </li></ul><ul><li> Demand Price C.D C D K. CD </li></ul><ul><li> (D) (C) </li></ul><ul><li>I 1,20,000 Rs. 3 3,60,000 600 17.4 </li></ul><ul><li>II 80,000 Rs. 2 1,60,000 400 11.6 </li></ul><ul><li>III 600 Rs.96 57,600 240 7.0 </li></ul><ul><li>36 1 </li></ul><ul><li> 600+400+240 34.44 </li></ul><ul><li> </li></ul>K = =