MAT ERIAL MANAGEMENT

MANAGEMENT
UNIT 6
MATERIAL MANAGEMENT
CIVIL DEPARTMENT
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SYLLABUS
6.1. Inventory Management ( No Numericals)
• Meaning & Objectives
6.2 ABC Analysis
6.3 Economic Order Quantity:
• Introduction & Graphical Representation
6.4 Purchase Procedure
• Objectives of Purchasing
• Functions of Purchasing Department
• Steps inPurchasing
6.5 Modern Techniques of Material Management
• Introductory treatment to Just inTime( JIT)/System
Applications & Products (SAP) /Enterprise
Resource Planning (ERP)
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FUNCTIONS OF MATERIALS MANAGEMENT
1.Materials Planning : It involves forecasting demand and
quantity of materials required, preparing materials budget,
forecasting the levels of inventories and scheduling the
orders.
2. Purchasing : It involves choosing right sources of material
supply, placing of purchase orders, follow-up, keeping good
relations with suppliers, payments to suppliers and evaluating
suppliers.
3.Procurement : Procurement of materials, transportation,
quality control and inspection of purchased materials and
components.
4.Stores Management : It includes conservation of materials in
stores, efficient handling, maintaining stores records, proper
location and stocking, scrap, surplus and obsolete materials
disposal.
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5.Inventory Control : Efficient inventory control is a

must to ensure timely availability of materials at
minimum cost.
6.Preparing Standardization, Simplification and
Specifications of materials.
7.Value analysis of costly materials.
8.Ensuring smooth flow of materials in and out of the
organization.
9.Packaging, warehouse planning, accounting,
finished goods safety and care.
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INVENTORY
“ Inventory is a detailed list of movable items which
are required for manufacturing products and
maintaining the equipments and machines in good
working order”.
The inventory might consist of raw material, work-in-
progress, finished products, consumables, spares
parts/components.
1. Raw materials inventory : It includes raw material,
semi finished components, standard
components/subassemblies purchased from
suppliers.
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2. In-process inventory : It consists of semi-finished

components, subassemblies and products at various
stages of the manufacturing cycle. In-process
inventory is the term used for all material on the shop
floor at various machines or in various departments.
3. Finished product inventory : It includes the finished
products lying in the warehouse and waiting for
dispatch.
4. Indirect inventory : It includes consumables like
lubricants, cutting fluids, cotton waste, stationery,
cutting tools and spare parts needed for proper
operation, repair and maintenance.
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INVENTORY MANAGEMENT
“ Inventory management is the process of
maintaining the optimum number of each inventory
item”.
Inventory management deals with maintaining such
inventory levels which will result in uninterrupted
production, sales and customer service at the
minimum cost.
It efficiently oversees the constant flow of units into
and out of an existing inventory. This process usually
involves controlling the transfer of units in order to
prevent the inventory from becoming too high
inventory.
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1.The first aspect is to understand how long it takes

for a supplier to process an order and execute a
delivery. Knowing the lead time makes it possible to
know when to place an order and how many units
must be ordered to keep production running
smoothly.
Calculating buffer stock is a key to effective inventory
management. ( buffer stock is additional units above
and beyond the minimum number required to
maintain production levels)
2.The second aspect is to keep a record of the
delivery of raw materials and the movement of those
materials into various stages of the operational
process. Tracking materials as they are transformed
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into finished goods helps to adjust the ordering

amounts to control the raw material inventory; also it
helps to control in process inventory.
3.The third aspect is keeping accurate records of
finished goods that are ready for shipment. This helps
to quickly inform the sales excecutive as to what is
available and ready for shipment at any given time.
Inventory management is required at different
locations within a facility or within multiple locations of
a supply network to protect the regular and planned
course of production.
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OBJECTIVES OF
INVENTORY MANAGEMENT
The main objectives of inventory management are
operational, financial and property protection.
Operational objectives :
1.To ensure continuous supply of materials, spares
and finished goods so that production should not
suffer at any time and the customers demand should
also be met.
2.To avoid both over-stocking and under-stocking of
inventory.
3.To minimize losses resulting from inventory
deterioration, obsolescence or price declines.
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Financial objectives :
1.To maintain investments in inventories at the
optimum level as required by the operational and
sales activities.
2.To keep material cost under control so that they
contribute in reducing cost of production and overall
costs.
Property protection objectives
1.To safeguard inventory against theft, wastage,
damage or unauthorized use.
2.To ensure that, materials actually lying in the stores
are shown in stock ledgers and the value of inventory
is correctly stated on the companys books.
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INVENTORY ANALYSIS
Any average medium size organization consumers a
few thousand components. For example, a car
service center may have to keep an inventory of
12000 to 15000 components. It is not practicable to
have high degree of control on all items. Moreover, all
items are usually not of equal importance. Hence, it is
desirable to group the items and subject each group
of items to different controls based on their
importance.
Different types of analysis each having its own
specific advantages and purpose, can be used to get
a pactical solution to the control of inventory. The
various inventory analyses are listed below.
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ABC Analysis – Always better control analysis.

VED Analysis – Vital, Essential, Desirable Analysis.
SDE Analysis – Scarce, Difficult, Easily available
analysis.
HML Analysis – High, Medium, Low cost analysis and
FSN Analysis – Fast, Slow, no moving items analysis.
The most important of all these analyses is ABC
Analysis.
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ABC ANALYSIS
ABC Analysis can be used for analysing a range of
items like activities, customers, documents, inventory
levels, and sales territories and so on. The analysis is
based on the principle “ vital role”- “trival many” and
the goal is to categorize items which would be
prioritized, managed, or controlled in different ways.
In ABC Analysis the inventory is classified into three
groups A,B and C on the basis of annual
consumption cost as follows :
Items ‘A’ : Complex and expensive parts are items
that require careful management and control. These
are high value, low volume type of inventories.
Despite less volume, their annual consumption cost is
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quite high, as these are very costly items ( vital few)

Generally, only a small percentage of items (around
10 to 20%) account for major percentage (around 70-
80%) of total annual consumption cost of inventories.
These items are called A-type items.
Items ‘B’ : Moderately complex and expensive
material that requires moderate levels of
management. These represent around 20-30
percentage of items which account for 15 to 25
percentage of annual consumption cost. These are
termed as B –Type items.
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Items ‘C’ : Low complex and low cost items that are
typically commercially available and requires little
management control. Majority of the items ( around
60-70 percent ) account for a minor fraction of the
total annual consumption cost ( around 5 to 10
percent). These items are C-type items (trivial many).

For example, in a car assembly factory the high value

items like engine is given ‘A’ rating, a moderate value
item such as ‘tyre’ is given B rating and low value
items like nuts, bolts,screws etc. are given C rating.
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STEPS IN ABC ANALYSIS

1. List all the items used in industry.
2.Obtain the cost data and consumption volume for
each part.
3.Calculate the consumption cost : The consumption
cost is calculated by multiplying the item cost by t he
quantity used in the period.
4.Arrange all items in descending order of the
consumption cost.
5.Calculate cumulative consumption cost of all items.
6.Calculate cumulative consumption cost of each
items in percentage.
7.Plot a graph of cumulative percentage cost on y
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and cumulative percentage items on x axis.

8.Mark the points where the curve sharply changes
its shape. This will give three segments A,B and C.
Thus, the classification of items may be fixed.

Table 6.1: classification of items in ABC analysis

Class of item % of total % of total number of
consumption cost items
A 70 to 80 10 to 20

B 15 to 25 20 to 30

C 5 to 10 60 to 70
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1.The control policies for A,B and C items are

decided on two principles:
a) To keep the capital tied up in inventories minimum.
b) To ensure that all the materials would be available
when required.
The control strategy for the different items is as
follows
Sr no Factors A-Items B-Items C-Items

1 Type of control Very close to reduce the Moderate control Loose control rather
capital tied up. controlling them is
uneconomical
2 Controlling authority Top executives Middle excecutives User department

3 Quantity of safety stock Very very low or nil Moderate High

4 Reorder point One week supply Two week supply Three week supply

5 suppliers Don’t rely on one supplier. Two to three reliable Two to three bulk
Supplier must be highly suppliers suppliers
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6 Delivery frequency Weekly maximum efforts Bi weekly Every four weeks
to expedite the delivery

7 Forecasting and planning Accurate to ensure items Moderate on the basis of Rough estimates are
arrive just before past requirement. sufficient
consumption.
8 Frequency of review Continuous Occasional Infrequent

9 Value analysis and waste Maximum efforts Moderate efforts Minimum efforts
reduction

10 Types of records Complete and accurate Good Simplified to reduce

paper work
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ADVANTAGES OF ABC ANALYSIS
1.Preference for keeping inventory can be placed
suitably after ABC analysis.
2.Stores personnels time can be utilized in a better
manner.
3.Storing, handling and delivery of material to
production department becomes better.
4.ABC analysis results in reduction of annual
inventory cost.
5.The system is easy to understand and interpret as it
is accesible, useable and practically implementable
across all norms of business set-ups.
6.The system also works exceptionally with
performance with performance management systems
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are employed by most human resource dwhich

epartments in contemporary business.

DISADVANTAGES OF ABC ANALYSIS

1.ABC Analysis does not give importance to
components which are critical for production.
2.Cannot be used if some of the items are scarce and
are not readily available.
3.It does not take into account seasonal variations of
costs.
4.Data collection process for this system is very time
consuming.
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ECONOMIC ORDER QUANTITY

EOQ, or Economic order quantity, is defined as “ the
opltimal quantity of orders that minimizes total
variable costs required to order and hold inventory”.
While deciding how to manage inventory, two
questions are to be answered.
1.How much should we order?
2.How often should we order?
EOQ is a formula that determines the quantity at
which the combination of procurement costs and
inventory carrying costs are the least. In purchasing
this is known as the order quantity, while in
manufacturing it is called the production lot size.
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ASSUMPTIONS IN CALCULATING EOQ

1.The ordering cost is constant.
2.The rate of demand/consumption does not change.
3.The lead time is fixed and does not vary with
ordered quantity.
4.The purchase price of the item does not change
with quuantity i.e no discount is available.
5.The total quantity ordered is delivered in one batch.

The quantity to be ordered (EOQ) depends upon

two types of costs:
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1.Procurrement costs
Each event of ordering has a certain cost associated
with it. A certain amount of paperwork needs to be
filled out; people need to be contacted and told how
much to order. When the inventory comes in, it has to
be inspected, and then stocked. Then the invoices
need to be processed.
Procurrement costs consist of expenditure connected
with:
1.Receiving quotations;
2.Processing purchase requisition
3.Following up and expenditing purchase order
4.Transportation, if the amounts vary according to the
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5.Receiving, inspecting and stocking material and

6.Processing vendors invoice
The procurrement costs are variable. They decrease
as quantity ordered increases.
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Carrying (holding) cost:

These costs increase as you hold more and more
inventory. When we purchase more inventories, we
need to take loans to pay for them and interest to be
paid increases as we take larger loans. When we
hold more inventories it may become obsolete or
deteriote with time. The more inventories you have on
hand, the more room you need to store it. This space
needs to be paid for.
1.Carrying cost consist of:
2.Interest on capital investment
3.Storage cost
4.Up-keep of inventory, record keeping etc
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5.Deterioation and obsolescence

6.Insurance, theft, property tax etc

Carrying costs are almost directly proportional to the

order quantity.
Total cost is calculated by adding procurement cost
and carrying cost. Total cost is minimum at point ‘T’
and thus represents the economic order quantity or
economic lot size.
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Total Cost
Slope = 0

CcQ
Minimum Carrying Cost =
2
total cost

CoD
Ordering Cost =
Q

Optimal order
Qopt
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PURCHASE PROCEDURE
Purchasing is the activity of acquiring goods,
materials, component, equipments, tools etc. to
accomplish the goals of the organsization.
The objectives of purchasing are as follows:
1.To procure right material : The specifications of
the material to be purchased must be constantly
examined and compared with the competitors to
maintain the companys position in the industry.
2.To ensure quality of purchased material : The
quality of the finished product largely depends upon
the quality of material used, hence it is very important
to ensure that the material purchased is of required
quality according to the specifications.
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3.To procure material in right quantities : The

quantity of material and supplies purchased must be
such that production schedule is not disrupted and
inventories throughout the supply chain are as low as
possible.
4.To procure material at reasonable price : The
cost of product depends upon the cost of material
consumed. In some industries this cost may be as
high as 80 percent of the total cost. Hence, it is very
important to get the materials, supplies and
equipment at the minimum possible costs.
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5.To develop reliable sources of supply and

maintain good relationship with them : It is
important to purchase from reliable sources so that
you get material of right quality at right time.
Moreover, good relations with suppliers are beneficial
in terms of getting reasonable price, preferential
allocation of materials in case of material shortages,
intimation about forthcoming shortages, information
about the newly developed substitute, delayed
payments etc.
6.To develop alternative sources of supply :
Alternative sources of supply should be developed to
increase the bargaining power and minimize the cost
of materials and also to meet the emergencies.
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7.To avoid duplication, waste and obsolescence :

The accurate knowlegde of the items in hand and the
requirements of materials for a particular period is
necessary to avoid duplication, waste and
obsolescence with respect to various items
purchased.
8.To achieve integration with other department of
the company : The purchase function is related with
other departments of the company such as
production, engineering, marketing and finance.
Hence, coordination with them will ensure smooth
functioning of purchase department.
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FUNCTIONS OF PURCHASING DEPARTMENT
The main function of purchasing department are as
follows :
1.Receiving of properly authorized material requisition.
2.Receiving of material specifications from
simplification and standardization point of view.
3.Preparing of specifications and establishing contact
with reliable sources of supply.
4.Procuring and analyzing quotations and preparation
of comparative statement.
5.Negotiating contracts.
6.Checking legal conditions of contracts.
7.Issue of purchase order of the requistioned material
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with appropriate supplier.

8.Follow up purchase orders to ensure timely receipt
of material.
9.Maintenance of records of all purchases.
10.Inspection of purchased material to ensure its
quality and quantity.
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ENTERPRISE RESOURCE PLANNING (ERP)

“ERP is a computer-based designed to streamline
and integrate various operations and information
flows in the company”.
Instead of each department having its own database
of information , ERP puts all of the information into a
single place. This helps with the decision making
process for each department and a department no
longer has to wait for a reply from another department
in the company to make a decision. This makes
things a lot easier and satisfies customers as well.
For example, a sales person can access the
warehouse, inventory and delivery to give a customer
a quick update on the status on his order.
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Most large companies in the world use ERP to

manage various aspects of their businesses like
finance, human resource, products planning,
production, purchase, inventory control, interacting
with suppliers, providing customer service and
tracking orders.

FEATURES OF ERP
ERP is an integrated system which functions in real
time not requiring ypu to depend on periodic updates.
It has a common database.
Each module has the same look and feel to
uncomplicated things.
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Each department is able to access the system.

The main purpose of ERP is to facilitate the flow of
information between all business functions of the
organization.
The integration of the business processes improves
coordination between all the functions of a business
such as finance, production, purchasing, inventory
control, and sales and marketing.
Thus ERP synergizes the resources of an
organization.
The planning of the company can be done with the
use of this system since it contains all the necessary
decision making information.
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ERP are used in various industries and organization

like manufacturing, distribution, transportation,
education, healthcare, banking and others.

ERP MODULES
Generally ERP includes financial module, human
resource module, production module, Production
module, purchasing module, inventory control
module, product planning, product distribution,
tracking the order and sales and marketing module.
FINANCIAL MODULE : it gathers financial data
from various functions departments, and generates
valuable financial reports such general ledger, trial
balance, balance sheet and quarterly financial
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statements. It also manages various functions like

cash management, fixed assets, accounts receivable
and payable.
HUMAN RESOURCES MODULE : its maintains a
complete employee database including contact
information, salary details, attendance, performance
evaluation and promotion of all employees.
PRODUCTION MODULE : it optimizes the
utilization of manufacturing capacity, parts,
components and material resources using historical
production data and sales forecasting.
PURCHASING MODULE : purchase module
streamline procurement of required raw materials. It
automates the processes of identifying potential
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suppliers, negotiating price, awarding purchase order
to the supplier, and billing processes. Purchase
module is tightly integrated with the inventory control
and production planning modules. Purchasing module
is often integrated with supply chain management
software.
INVENTORY MODULE : it facilitates processes of
maintainig the stock level in a warehouse. The
activities involve are indentifying inventory
requirements, setting targets, providing replenishment
techniques and options, monitoring item usages and
reporting inventory status.
SALES AND MARKETING MODULE : it implements
functions of order placement, order scheduling,
shipping and invoicing.
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ERP system Implementation
The ERP software is complicated and it is more cost
efficient to hire consultants to implement it rather than
have it developed and implemented in house. The
implementation process is long, and can disturb the
employees.
The various steps in ERP implementation are as
follows :
Study the organization and the projects it
undertakes.
Test and train all the employees for ERP
implementation.
The employees who excel in the test are employed
in the management office and they are responsible
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for its smooth running.

Simultaneously create the tools that are required for
the business. The various tools required are like
inventory management, production monitors,
customer service, finance management, human
resource management etc.
Divide these modules so that it will be possible for
the employee to access their pages and check the
work and resources assigned to them.
Similarly create pages for team leaders, supervisors
and managers so that they will be able to monitor the
progress of the work and assign additional resources
if required.
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Also create pages for customers and clients, so

that, they would be able to monitor the pogress of
their work and their grievances if any could be
addressed.
Finally create pages for the top level management
to monitor the progress of projects, prioritize
particular projects and fast track orders if required.
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ADVANTAGES
Real time information is available throughout the
company.
Better visibility into the performance of operational
areas of enterprise.
Data standardization and accuracy across the
enterprise can be achieved.
Improves organizational efficiencies.
Allows for analysis and reporting for long term
planning.
Improves information access and management.
Better monitoring and quicker resolution of queries.
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Faster response and follow up on customers.

Improved cost control.

DISADVANTAGES
The system can only be customized to a very
limited extent.
It is very rigid and very difficult to adopt to.
The system is very expensive to set up.
Once the system is set up switching costs are very
high.
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SYSTEM APPLICATIONS AND PRODUCTS (SAP)

SAP is name of the ERP (Enterprise Resource

Planning) software as well name of a company .
The company SAP was started in 1972 by five
former IBM employees in mannheim, germany. It is
the world’s largest inter-enterprise software company.
The name SAP is acronym for systems,
Applications and products in data processing
SAP runs on a fourth generation programming
language called Advance Business Application
Programming (ABAP)
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SAP is capable of integrating multiple business

applications, with each application representing a
specific business area. These applications update
and process transactions in real time mode. It has the
ability to be configured to meet the needs of the
business.
SAP are categorized into 3core functional areas:
LOGISTICS
Sales and distribution (SD)
Material Management (MM)
Warehouse Management (WM)
Production Planning (PP)
General Logistics (LO) Quality Management (QM)
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FINANCIAL
Financial Accounting (FI)
Controlling (CO)
Enterprise Controlling (EC)
Investing Management (IM)
Treasury (TR)

HUMAN RESOURCES
Personnel Administration (PA)
Personnel Development (PD)
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Working of SAP/ERP
In a company, using SAP/ERP
All departments update data on a Central
Information System.
Data is shared with various departments, and
All departments have access to information or data
of other departments.
Let’s look at a business process to understand how a
SAP/ERP system helps to improve efficiency.
When a customer approaches the sales department
to buy a product on an urgent basis, the sales
department has real-time information access to the
products in inventory which is updated by the
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Thus, sales department can respond to the
customer on time and get order leading to increased
revenue and customer satisfaction.
In case, manufacturing is required, the sales
department updates the centralized database.
Production planning department is auto updated by
the centralized database for requirements. Production
planning team checks the availabilty of the raw
materials required via central database which is
updated by the inventory department.
Thus data duplication is avoided and accurate data
is made available.
The Shop floor Team updates their man power
status regularly in central database which can be
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by the HR department.
In case of shortage of workforce HR team starts
recruitment process with considerable lead time to
hire a suitable candidate at market price. Thus labour
cost goes down.
Vendors can directly sumbit their invoices to the
central enterprise system which can be accessed by
the finance department. Thus payments can be
planned and made on time.
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MODERN TECHNIQUES OF MATERIAL

MANAGEMENT
JIT (JUST IN TIME) MANUFACTURING
“ JIT is a philosophy of manufacturing based on
elimination of all the waste and continuous
improvement of productivity by receiving inventories
only as they are needed”.
In JIT inventory reduction is used as a tool for
improvement.
The goal of JIT manufacturing is to indentify the
perfect process, making the process as simple and
efficient as possible to:
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 Reduce cost
Improve quality
Improve performance
Improve delivery
Add flexibility
Increase innovativeness

The elements of JIT (TECHNIQUES USED IN JIT)

1.Continuous improvement
Strive for simplicity
A product oriented layout
Quality control
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2. Eliminate waste
Waste is defined as “ any activity that increases cost
but does not add value to the product. There are
seven types of wastes to be eliminated:
 Waste from overproduction
 Waste of waiting waste
 Transportation waste
 Processing waste
 Inventory waste
 Waste of motion
 Waste from product defects
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3. Good housekeeping
Maintain both cleanliness and order in the entire
industry.
4. Multi-process handling
A multi-skilled workforce has greater productivity,
flexibility and job satisfaction.
5. Jidoka (autonomation)
6. Kanban
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