MATERIAL

MANAGEMENT

Unit-2
Production and Operation Management-
BBA209
MATERIAL MANAGEMENT
Materials management involves planning,
programming, organizing, directing,
controlling, and co-ordinating the various
activities concerning the materials.
 Definition of Materials
• Materials are any commodities used
directly or indirectly in producing a product
such as raw materials, component parts or
assemblies.
 Definitions of Material Management
•Materials management is the management of the flow
of materials into an organization to the point, where,
those materials are converted into the firm’s end
product(s)
– Bailey & Farmer

•Materials management is the grouping of management

functions supporting the complete cycle of material flow,
from the purchase and internal control of production
materials to the planning and control of work in process to
the warehousing, shipping, and distribution of the finished
product.
– Thomas F. Wallace & John R.
Dougherty
Functions of Materials Management
• Materials planning and programming
• Raw material purchase
• Receiving, store keeping, and warehousing
• Issuing of material
• Inventory control
• Value engineering
• Transportation of materials
• Vendor development
• Vendor rating
• Disposal of scrap and surpluses
Focus of Material Management
• To procure right materials
– In Right Quantity
– Of Right Quality
– At Right Time
– From Right sources
– At Right prices
– 5 R’s, principles of purchasing
 MATERIAL
MANAGEMENT
OBJECTIVES
OBJECTIVES :
There are two types of objectives of material
management:

Primary
Secondary
  BEST ITEM LOW PRICE.
 REDUCTION IN REAL PRICE.

 HIGH INVENTORY TURN OVER

 LOW PROCUREMENT
 LOW STORAGE COST

 CONTINUITY IN SUPPLY.
 CONSISTENCY IN QUALITY.
 EFFICIENT HANDLING OF MATERIALS.

 GOOD SUPPLIER RELATIONS.

 MAINTAINING GOOD RECORDS.
  MAKE OR BUY DECISION

 PRODUCT DEVELOPEMENT

 STANDARDIZATION
 PRODUCT IMPROVEMENT

 INTER DEPARTMENTAL HARMONY

 FAVORABLE RECIPROCAL RELATIONSHIPS

 ASSISTANCE TO PRODUCTION
DEPARTMENT.
Material cost can be low.
 Better handling of materials.
Reduction in duplicate orders.
Materials will be on the side when need.
 Risk of inventory loss minimize.
Stock reduction.
Improvement in labor productivity.
Reduction of loss of time of direct labor or labor saving.
Quality control.
Better relations with supplier.
Better cash flow managements.
Control of manufacturing cycle.
Material congestion in storage places avoided.
Improvement in delivery of product.
 OF NT
S ME
S E GE
HA A
P N
MA
L CONTROL / FOLLOW UP
R IA
TE PHYSICAL
MA
MATERIAL
UTILIZATION

PLANNING
DEPARTMENTS OF MATERIAL MANAGEMENT

 MATERIAL
PLANNING
 PURCHASE
 STORE
 INVENTORY
CONTROL
 TRANSPORTATION
PURCHASING
Definition
Purchasing is the first phase of Materials
Management. Purchasing means procurement of
goods from some external agencies.
Purchasing, in a business environment , is one of the
most critical functions as it provides the input for the
organisation to convert into output.
According to Westing, Fine and Zenz
“Purchasing is a managerial activity
that goes beyond the simple act of
buying. It includes:
Research and development for the proper
selection
follow-up to ensure timely delivery
Inspection
Storekeeping
Accounting operations
 Objective Of Purchasing
The specific objectives of purchasing
are:
• To pay reasonably low prices for the best
values obtainable.
• To keep inventories as low as is consistent
with maintaining production.
• To develop satisfactory sources of supply.
• To maintain good relations with vendors.
• To achieve a high degree of co-operation.
 Centralized purchasing
If a company has production operation
at different places and if the nature of
operation is similar, then centralized
purchasing is preffered.
Decentralized purchasing
When different branches of a large
organization require different types of
materials, decentralized purchasing is
preffered.
Purchasing Process
Purchasing Process includes:

 Market survey
Requisitioning
 Approving
Making Purchase Decision
 Placing Orders
 Accounting Goods and Services
 Receiving Invoices and Making
Payment
 Credit note in case of material
defect
6 Major Principles of Purchasing
Some of the major principles of purchasing are:
1. Right Quality
2. Right Quantity
3. Right Time
4. Right Source
5. Right Price and
6. Right Place.
Importance of Purchasing:
Purchasing function provides materials to the
factory
Purchasing can contribute to import
substitution and save foreign exchange.
Every 1% saving achieved in purchasing
results to about 5% profit to an organization.
Efficient administration
Delivery on time
Quality of final product
Optimum utilization of capital
INVENTORY MANAGEMENT
 What is inventory?
A physical resource
that a firm holds in
stock with the intent
of selling it or
transforming it into a
more valuable state.

Purpose of
inventory
management
• How many units to
order?
• when to order?
discount
 Types of Inventories

Raw materials

Purchased parts and supplies

Finished Goods
Work-in-process (partially completed
products )
Items being transported

Tools and equipment

 Nature of Inventories

Raw Materials – Basic inputs that are converted into finished

product through the manufacturing process

Work-in-progress – Semi-manufactured products need some

more works before they become finished goods for sale

Finished Goods – Completely manufactured products ready for

sale
Supplies – Office and plant materials not directly enter
production but are necessary for production process and do not
involve significant investment.
Inventory and Supply Chain
Management

• demand information is distorted as it moves

away from the end-use customer(forecast)
Bullwhip effect • higher safety stock inventories are stored to
compensate

Seasonal or cyclical demand

Sale of umbrella , dominos sale in weekend

Inventory provides independence from vendors

Take advantage of price discounts

Inventory provides independence between stages and avoids work
stoppages
WIP inventories
 Two Forms of Demand

Dependent Independent
(not used by customer directly)
• Demand for items
• Demand for items
used by external
used to produce final customers
products • Cars, computers, and
• Tires stored at a
houses are examples
plant are an example of independent
of a dependent demand inventory
demand item
Inventory and Quality
Management

Customers usually perceive quality

service as availability of goods when
they want them
Inventory must be sufficient to
provide high-quality customer service
 Inventory Costs

Carrying cost

• cost of holding an item in inventory

Ordering cost

• cost of replenishing inventory

Shortage cost

• temporary or permanent loss of sales

when demand cannot be met
 Inventory Control
Systems

• constant amount
Continuous ordered when
system (fixed-
inventory declines to
order-quantity)
predetermined level

• order placed for

Periodic system variable amount
(fixed-time-period) after fixed passage
of time
Economic Order Quantity
(EOQ) Models
• We want to determine the optimal
number of units to order so that we
EOQ minimize the total cost associated
with the purchase, delivery and
storage of the product.

Basic EOQ model

Production quantity
model
Assumptions of Basic EOQ
Model
Demand is known, constant, and
independent

Lead time is known and constant

Order quantity received is

instantaneous and
complete

No shortage is allowed
 Inventory Order
Cycle

Order quantity, Q
Deman
Inventory Level

d rate

Reorder point, R

0 Lead Lead Time

time time
Order Order Order Order
placedreceipt placedreceipt
 EOQ Cost Model

Co - cost of placing order D - annual demand

Cc - annual per-unit carrying cost Q - order quantity

Co D
Annual ordering cost =
Q
C cQ
Annual carrying cost =
2
CoD C cQ
Total cost = +
Q 2
 EOQ Cost Model

Deriving Qopt Proving equality

of costs at
Co D C cQ optimal point
TC = +
Q 2 Co D C cQ
- =
TC Co D C Q 2
= + c
Q Q2 2 2CoD
- Q2 =
C0 D Cc Cc
0= +
Q2 2
2CoD
2CoD Qopt =
Qopt = Cc
Cc
 EOQ Cost Model
(cont.)
Annual
cost ($) Total Cost
Slope = 0

Cc Q
Minimum Carrying Cost =
2
total cost

Co D
Ordering Cost =
Q

Optimal order Order Quantity, Q

Qopt
 Quantity Discounts

Price per unit decreases as order

quantity increases

Co D CcQ
TC = + + PD
Q 2

P = per unit price of the item

where
D = annual demand
 Reorder Point

Level of inventory at which a new order

is placed

R = dL

wher • d = demand rate per

period
e • L = lead time
 Variable Demand with a Reorder
Point

Q
Inventory level

Reorder
point, R

0
LT LT
Time
 Reorder Point with a Safety
Stock
Inventory level

Q
Reorder
point, R

Safety Stock
0
LT LT
Time
 Classifying Inventory Items
ABC Classification (Pareto Principle)

In any Retail organization there are large

numbers of inventories to be maintained. It is
not practical to have very stringent inventory
control system for each & every item. So with
the modus of having an effective Purchase &
stores control we implement ABC Inventory
Classification model Known as Always Better
Control (ABC) based upon Pareto rule ( 80/20
rule)
ABC Analysis
Divides inventory into three classes based on
Consumption Value
Consumption Value = (Unit price of an item) (No. of units consumed per annum)
 Class A - High Consumption Value
 Class B - Medium Consumption Value
 Class C - Low Consumption Value
ABC Analysis

Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit Consump consumpti
Number Stocked (units) x Cost = tion value on value Class

#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A

72%
#11526 500 154.00 77,000 33.2% A

#12760 1,550 17.00 26,350 11.3% B

23%
#10867 30% 350 42.86 15,001 6.4% B

#10500 1,000 12.50 12,500 5.4% B

ABC Analysis
Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit cons. cons.
Number Stocked (units) x Cost = value value Class
#12572 600 $ 14.17 $ 8,502 3.7% C

#14075 2,000 .60 1,200 .5% C

#01036 50% 100 8.50 850 .4% 5% C

#01307 1,200 .42 504 .2% C

#10572 250 .60 150 .1% C

8,550 $232,057 100.0%

ABC Analysis
A Items
% of Consumption Value

80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 – B Items
C Items
| | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
% of inventory items
CONTRACT FORMS
Definition :
AN AGREEMENT ENFORCEABLE BY LAW IS
A CONTRACT.
Types of Contracts
Purchase order for stores, spares or equipment
Rate Contract
Service Contract
Annual Maintenance Contract
Works Contract
Consultancy Contract
General

Principles for Contract
The terms of contract must be precise, definite and
without any ambiguities. .
Price Variation Clause to be provided only in long-
term contracts, where the delivery period extends
beyond 18 months
The contract should also contain the mode and
terms of payment.
The terms of a contract, including the scope and
specification once entered into, should not be
materially varied.
All contracts shall contain a provision for recovery
of liquidated damages for defaults on the part of the
contractor.
A warranty clause should be incorporated in every
contract
Contract terms
Exchange between buyers and
suppliers ,both sides have to agree on who
will pay for the transportation.
The purchaser has to arrange and pay for
loading on to the vessel and all onward
transportation, insurance and documentation,
The main defnition of these terms are as
follows:
Ex works
purchaser accepts full responsibility.
this involves :
Arranging transportation, insurance and
documentation to move the goods to the
require source port air or sea .
Have them loaded on to the mode of
transport.
Transported to and unloaded at the
destination port
Cleared through customs and transported to
the purchaser’s location.
• FAS
suppliers agrees to deliver to the source
port specified by the purchaser ,also
responsible for the transportation and
insurance of goods.
FOB :arrange loading on to the outward
bound transportation.
C&F :it is a split responsibility
arrangement and pays for transportation. But
the purchaser has to pay insurance .
CIF : similar to C&F but here the
insurance during transportation is
Delivered:
opposite of ex-works the supplier has total
responsibility for the goods, their
transportation , insurance and all
documentation until they are delivered to the
purchaser.
Definition:
Supply chain management
is a set of approaches utilized to efficiently
integrate suppliers, manufacturers, warehouses,
and stores, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to
minimize system wide costs while satisfying
service level requirements. OR
SCM is the systematic and strategic co-ordination
management for supplying goods and products
that reaches to an end customer.
Keypoints:
supply chain management takes into
consideration every facility that has an
impact on cost and plays a role in making
the product conform to customer
requirements.
the objective of supply chain management
is to be efficient and cost-effective across
the entire system.
Time should be considered in priority list
to minimize consumer compliance
Long supply chain handled with difficulty
when there is two or more sets of end
costumers.
For eg: Pharmaceutical industry responsible
for making variety of products and to
distribute those products among variety of
consumers.
Types of Relationships in
Supply Chains
1- Integrated Hierarchy
2- Semi-Hierarchy
3- Co-Contracting
4- Coordinated contracting
5- Coordinated revenue links
1) Integrated hierarchy means that a
firm houses all activities in the supply
chain
From raw material source TO distribution
of products to end users. This is also
called Full Vertical Integration.
2) In a Semi-hierarchy organization, the
firms in the Supply Chain are owned by
the same holding Company, But they
operate as Separate Business Units.
For example, An Oil Company delegates
the following activities to the following
business units: Oil extraction, Oil refining,
Petrol Distribution, and Petrol Retailing.
3) Co-contracting is a term used to describe
alliances between organizations that have
Long term relationships but do not Merge
together.
They rather transfer some Equity (ownership),
technology, Information, AND People.
4) Coordinated Contracting involves a prime
contractor who employs a set of sub-
contractors.
For example, a building trader (or decorator)
employs a set of sub-contractors, such as
carpenters, electricians, and bricklayers AND
calls them when needed.
There is a long-standing relationship between
contractor and sub-contractors.
The contractor provides Materials and
usually take responsibility for the planning
and control of the entire job.
But the sub-contractor provides the
necessary equipment required for its
profession.
5) The category of Coordinated revenue
links is used primarily for Licensing and
Franchising. (e.g., fast food chains)
It is a form of relationship that transfers
ownership to other firms (usually smaller)
while guaranteeing an income for the
franchiser or the licensor.
In this form of contract Franchiser,
- Has the property rights of the product
- sets the territory in which the franchisee can
operate
- sets the process specification to be used in
operations, and
- monitors the performance of the franchisee.
Function of SCM
Supply chain management is a cross-
functional approach that includes managing
the movement of raw materials into an
organization, certain aspects of the internal
processing of materials into finished goods,
and the movement of finished goods out of
the organization and toward the end
consumer.
Logistics
Logistics is a part of SCM
Logistics function manages the total flow of
products from the plant to the customers.
As contrary to the materials management,
Logistics provides an emphasis on physical
distribution management.
Logistics network
Importance
Supply chain management is
essential to company success and
customer satisfaction because:
 SCM reduces inventory cost
 Provides better medium for
sharing information between
partners
 Improves customer satisfaction
as well as service
 Maintains trust between partners
 Provides efficient manufacturing
startegy
 Improves process integration
 Improves cash flow
TRANSPORTION
MANAGEMENT
Transportation:
transportation is the movement of products, material,
and servicies from one area to another both inbound
and outbound.
Transport happens to b the most fundamental parts of
logistics management
The average transport cost ranges from 5 to 6 %of the
recommended retail price of the product.
Mode of transportation:
By road
By railway
Airways
Water ways
Pipe line
Multi models
Selection of the mode of transport:
•Delivery speed
•Delivery dependability
•Quality deterioration
•Transport cost
•route flexibility
 Transportation costs
Transportation cost vary from less than 1%
(for machinery ) to over 30 %(for food ) of the
recommended selling price of products
depending upon the nature of the product
range and its market. However the average
transport cost is between 5 to 6 % to the
recommended retail price of the product.
Functionalities
Transportation management systems manage four key
processes of transportation management:
Planning and decision making – TMS will define the most
efficient transport schemes according to given parameters,
which have a lower or higher importance according to the
user policy: transport cost, shorter lead-time, fewer stops
possible to ensure quality, flows regrouping coefficient, etc.
Transportation Execution – TMS will allow for the
execution of the transportation plan such as carrier rate
acceptance, carrier dispatching, EDI etc..
Transport follow-up – TMS will allow following
any physical or administrative operation regarding
transportation: traceability of transport event by
event (shipping from A, arrival at B, customs
clearance, etc.), editing of reception, custom
clearance, invoicing and booking documents,
sending of transport alerts (delay, accident, non-
forecast stops…)
Measurement – TMS have or need to have a
logistics key performance indicator(KPI) reporting
function for transport.
•Various functions of a TMS include but not limited to:
•Planning and optimizing of terrestrial transport rounds
•Inbound and outbound transportation mode and
transportation provider selection
•Management of motor carrier, rail, air and maritime
transport
•Real time transportation tracking
•Service quality control in the form of KPI's (see below)
•Vehicle Load and Route optimization
•Transport costs and scheme simulation
•Shipment batching of orders