MATERIALS MANAGEMENT

INTRODUCTION AND MEANING

Materials management is a function, which aims for integrated approach towards the management
of materials in an industrial undertaking. Its main objective is cost reduction and efficient
handling of materials at all stages and in all sections of the undertaking. Its function includes
several important aspects connected with material, such as, purchasing, storage, inventory
control, material handling, standardisation etc.

SCOPE OR FUNCTIONS OF MATERIALS MANAGEMENT

Materials management is defined as “the function responsible for the coordination of planning,
sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to
provide a pre-decided service to the customer at a minimum cost”.
From the definition it is clear that the scope of materials management is vast. The functions
of materials management can be categorized in the following ways: (as shown in Fig. 4.1.)
1.Material Planning and Control
2.Purchasing
3.Stores Management
4.Inventory Control or Management
5.Standardisation
6.Simplification
7.Erogonomics
8.Just-in-Time (JIT)
9.Value Analysis

Fig. 4.1 Scope of materials management

 1. Materials planning and control: Based on the sales forecast and production plans, the
materials planning and control is done. This involves estimating the individual requirements of
parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and
monitoring the performance in relation to production and sales.
2. Purchasing: This includes selection of sources of supply finalization in terms of
purchase, placement of purchase orders, follow-up, maintenance of smooth relations with
suppliers, approval of payments to suppliers, evaluating and rating suppliers.
3. Stores management or management: This involves physical control of materials,
preservation of stores, minimization of obsolescence and damage through timely disposal and
efficient handling, maintenance of stores records, proper location and stocking. A store is also
responsible for the physical verification of stocks and reconciling them with book figures. A store
plays a vital role in the operations of a company.
4. Inventory control or management: Inventory generally refers to the materials in stock.
It is also called the idle resource of an enterprise. Inventories represent those items, which are
either stocked for sale or they are in the process of manufacturing or they are in the form of
materials, which are yet to be utilized. The interval bet The interval between receiving the
purchased parts and transforming them into final products varies from industries to industries
depending upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of
various kinds to act as a buffer between supply and demand for efficient operation of the system.
Thus, an effective control on inventory is a must for smooth and efficient running of the production
cycle with least interruptions.
5. Other related activities
(a) 3S
(i) Standardization: Standardization means producing maximum variety of products from
the minimum variety of materials, parts, tools and processes. It is the process of establishing
standards or units of measure by which extent, quality, quantity, value, performance etc. may be
compared and measured.
(ii) Simplification: The concept of simplification is closely related to standardization.
Simplification is the process of reducing the variety of products manufactured. Simplification is
concerned with the reduction of product range, assemblies, parts, materials and design.
(iii) Specifications: It refers to a precise statement that formulizes the requirements of the
customer. It may relate to a product, process or a service.
± 0.2 cm and Length = 10 ± 0.5 cm.
Example: Specifications of an axle block are Inside Dia. = 2 ± 0.1 cm, Outside Dia. = 4

(b) Value analysis: Value analysis is concerned with the costs added due to inefficient or
unnecessary specifications and features. It makes its contribution in the last stage of product cycle, namely,
the maturity stage. At this stage research and development no longer make positive contributions in terms
of improving the efficiency of the functions of the product or adding new functions to it.
©Ergonomics (Human Engineering): The human factors or human engineering is concerned with
man-machine system. Ergonomics is “the design of human tasks, man-machine system, and effective
accomplishment of the job, including displays for presenting information to human sensors, controls
for human operations and complex man-machine systems.”
4.3 MATERIAL PLANNING AND CONTROL
Material planning is a scientific technique of determining in advance the requirements of raw
materials, ancillary parts and components, spares etc. as directed by the production programme. It
is a sub-system in the overall planning activity. There are many factors, which influence the
activity of material planning. These factors can be classified as macro and micro systems.
1. Macro factors: Some of the micro factors which affect material planning, are price
trends, business cycles Govt. import policy etc.
2. Micro factors: Some of the micro factors that affect material planning are plant capacity
utilization, rejection rates, lead times, inventory levels, working capital, delegation of
powers and communication.

Techniques of Material Planning

One of the techniques of material planning is bill of material explosion. Material planning
through bill of material explosion is shown below in Fig. 4.2.

Fig. 4.2 Material planning

The basis for material planning is the forecast demand for the end products. Forecasting
techniques such as weighted average method, exponential smoothening and time series models
are used for the same. Once the demand forecast is made, it is possible go through the excerse of
material planning. Bill of materials is a document which shows list of materials required, unit
consumption location code for a given product. An explosive chart is a series of bill of material
grouped in a matrix form so that combined requirements for different components can be done
requirements of various materials are arrives at from the demand forecast, using bill of materials,
through explosion charts. Thus material requirement plan will lead to be the development of
delivery schedule of the materials and purchasing of those material requirements.
 4.4 PURCHASING
 Purchasing is an important function of materials management. In any industry purchase
means buying of equipments, materials, tools, parts etc. required for industry.
 The importance of the purchase function varies with nature and size of industry. In small
industry, this function is performed by works manager and in large manufacturing
concern; this function is done by a separate department.
 The moment a buyer places an order he commits a substantial portion of the finance of
the corporation which affects the working capital and cash flow position. He is a highly
responsible person who meets various salesmen and thus can be considered to have been
contributing to the public relations efforts of the company. Thus, the buyer can make or
mar the company’s image by his excellent or poor relations with the vendors.
Objectives of Purchasing -
The basic objective of the purchasing function is to ensure continuity of supply of raw materials,
sub-contracted items and spare parts and to reduce the ultimate cost of the finished goods. In
other words, the objective is not only to procure the raw materials at the lowest price but to
reduce the cost of the final product.
The objectives of the purchasing department can be outlined as under:
1. To avail the materials, suppliers and equipments at the minimum possible costs:
These are the inputs in the manufacturing operations. The minimization of the input cost
increases the productivity and resultantly the profitability of the operations.
2. To ensure the continuous flow of production through continuous supply of raw
materials, components, tools etc. with repair and maintenance service.
3. To increase the asset turnover: The investment in the inventories should be kept
minimum in relation to the volume of sales. This will increase the turnover of the assets
and thus the profitability of the company.
4. To develop an alternative source of supply: Exploration of alternative sources of
supply of materials increases the bargaining ability of the buyer, minimisation of cost of
materials and increases the ability to meet the emergencies.
5. To establish and maintain the good relations with the suppliers: Maintenance of good
relations with the supplier helps in evolving a favourable image in the business circles.
Such relations are beneficial to the buyer in terms of changing the reasonable price,
preferential allocation of material in case of material shortages, etc.
6. To achieve maximum integration with other department of the company: The
purchase function is related with production department for specifications and flow of
material, engineering department for the purchase of tools, equipments and machines,
marketing department for the forecasts of sales and its impact on procurement of
materials, financial department for the purpose of maintaining levels of materials and
estimating the working capital required, personnel department for the purpose of
manning and developing the personnel of purchase department and maintaining good
vendor relationship.
7. To train and develop the personnel: Purchasing department is manned with varied
types of personnel. The company should try to build the imaginative employee force
through training and development.
8. Efficient record keeping and management reporting: Paper processing is inherent in
the purchase function. Such paper processing should be standardised so that record
keeping can be facilitated. Periodic reporting to the management about the purchase
activities justifies the independent existence of the department.
 Parameters of Purchasing
The success of any manufacturing activity is largely dependent on the procurement of raw
materials of right quality, in the right quantities, from right source, at the right time and at right

price popularly known as ten ‘R’s’ of the art of efficient purchasing. They are described as the basic
principles of purchasing. There are other well known parameters such as right contractual terms, right
material, right place, right mode of transportation and right attitude are also considered for
purchasing.

 RIGHT PRICE
 RIGHT QUALITY
 RIGHT TIME
 RIGHT SOURCE-
 RIGHT QUANTITY
 RIGHT MATERIAL
 RIGHT CONTRACTS
 RIGHT PLACE OF DELIVERY
 RIGHT TRANSPORTATION
 RIGHT ATTITUDE
Purchasing Procedure
STORES MANAGEMENT
Stores play a vital role in the operations of company. It is in direct touch with the user departments in
its day-to-day activities. The most important purpose served by the stores is to provide uninterrupted
service to the manufacturing divisions. Further, stores are often equated directly with money, as
money is locked up in the stores.
FUNCTIONS OF STORES
The functions of stores can be classified as follows:
1. To receive raw materials, components, tools, equipment’s and other items 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 minimise obsolescence, surplus and scrap through proper codification, preservation
and handling.
5. To highlight stock accumulation, discrepancies and abnormal consumption and effect
control measures.
6. To ensure good house keeping so that material handling, material preservation, stocking,
receipt and issue can be done adequately.
7. To assist in verification and provide supporting information for effective purchase action.

Codification
 It is one of the functions of stores management. Codification is a process of representing each
item by a number, the digit of which indicates the group, the sub-group, the type and the
dimension of the item.
 Many organizations in the public and private sectors, railways have their own system of
codification, varying from eight to thirteen digits.
 The first two digits represents the major groups, such as raw materials, spare parts, sub-
contracted items, hardware items, packing material, tools, oil, stationery etc. The next two
digits indicate the sub-groups, such as, ferrous, non-ferrous etc.
 Dimensional characteristics of length, width, head diameter etc. constitute further three digits
and the last digit is reserved for minor variations.
 Whatever may be the basis, each code should uniquely represent one item. It should be
simple and capable of being understood by all. Codification should be compact, concise,
consistent and flexible enough to accommodate new items. The groupings should be logical,
holding similar parts near to one another. Each digit must be significant enough to represent
some characteristic of the item.
Objectives of Codification
The objectives of a rationalized material coding system are:
1. Bringing all items together.
2. To enable putting up of any future item in its proper place.
3. To classify an item according to its characteristics.
4. To give an unique code number to each item to avoid duplication and ambiguity.
5. To reveal excessive variety and promote standardization and variety reduction.
6.To establish a common language for the identification of an item
 7. To fix essential parameters for specifying an item.
8. To specify item as per national and international standards.
9. To enable data processing and analysis.

Advantages of Codification-

 As a result of rationalized codification, many firms have reduced the number of items.
 It enables systematic grouping of similar items and avoids confusion caused by long
description of items since standardization of names is achieved through codification, it
serves as the starting point of simplification and standardization.
 It helps in avoiding duplication of items and results in the minimisation of the number of
items, leading to accurate record. Codification enables easy recognition of an item in
stores, thereby reducing clerical efforts to the minimum. If items are coded according to
the sources, it is possible to bulk the items while ordering.
 To maximise the aforesaid advantages, it is necessary to develop the codes as concerned,
namely, personnel from design, production, engineering, inspection, maintenance and
materials.

INVENTORY CONTROL & MANAGEMENT

Meaning of Inventory
Inventory generally refers to the materials in stock. It is also called the idle resource of an
enterprise. Inventories represent those items which are either stocked for sale or they are in the
process of manufacturing or they are in the form of materials, which are yet to be utilised. The
interval between receiving the purchased parts and transforming them into final products varies
from industries to industries depending upon the cycle time of manufacture. It is, therefore,
necessary to hold inventories of various kinds to act as a buffer between supply and demand for
efficient operation of the system. Thus, an effective control on inventory is a must for smooth and
efficient running of the production cycle with least interruptions.

Reasons for Keeping Inventories

1. To stabilise production: The demand for an item fluctuates because of the number of
factors, e.g., seasonality, production schedule etc. The inventories (raw materials and
components) should be made available to the production as per the demand failing which results
in stock out and the production stoppage takes place for want of materials. Hence, the inventory is
kept to take care of this fluctuation so that the production is smooth.
2. To take advantage of price discounts: Usually the manufacturers offer discount for bulk
buying and to gain this price advantage the materials are bought in bulk even though it is not
required immediately. Thus, inventory is maintained to gain economy in purchasing.
3. To meet the demand during the replenishment period: The lead time for procurement
of materials depends upon many factors like location of the source, demand supply condition, etc.
So inventory is maintained to meet the demand during the procurement (replenishment) period.
 4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the
delivery schedules at 100 per cent service level, means they cannot afford to miss the delivery
schedule which may result in loss of sales. To avoid the organizations have to maintain inventory.
5. keep pace with changing market conditions: The organizations have to anticipate the
changing market sentiments and they have to stock materials in anticipation of non-availability of
materials or sudden increase in prices.
6. Sometimes the organizations have to stock materials due to other reasons like suppliers
minimum quantity condition, seasonal availability of materials or sudden increase in prices.

Objectives of Inventory Control

1. To ensure adequate supply of products to customer and avoid shortages as far as possible.
2. To make sure that the financial investment in inventories is minimum (i.e., to see that the
working capital is blocked to the minimum possible extent).
3. Efficient purchasing, storing, consumption and accounting for materials is an important
objective.
4. To maintain timely record of inventories of all the items and to maintain the stock within
the desired limits.
5. To ensure timely action for replenishment.
6. To provide a reserve stock for variations in lead times of delivery of materials.
7. To provide a scientific base for both short-term and long-term planning of materials.

Benefits of Inventory Control

It is an established fact that through the practice of scientific inventory control, following are the
benefits of inventory control:
1. Improvement in customer’s relationship because of the timely delivery of goods and
service.
2. Smooth and uninterrupted production and, hence, no stock out.
3. Efficient utilisation of working capital. Helps in minimising loss due to deterioration,
obsolescence damage and pilferage.
4. Economy in purchasing.
5. Eliminates the possibility of duplicate ordering.

Techniques of Inventory Control

In any organization, depending on the type of business, inventory is maintained. When the number of
items in inventory is large and then large amount of money is needed to create such inventory, it
becomes the concern of the management to have a proper control over its ordering, procurement,
maintenance and consumption. The control can be for order quality and order frequency.
The different techniques of inventory control are: (1) ABC analysis, (2) HML analysis,
(3) VED analysis, (4) FSN analysis, (5) SDE analysis, (6) GOLF analysis and (7) SOS analysis.
The most widely used method of inventory control is known as ABC analysis. In this technique,
the total inventory is categorised into three sub-heads and then proper exercise is exercised for
each sub-heads.
1. ABC analysis: In this analysis, the classification of existing inventory is based on annual
consumption and the annual value of the items. Hence we obtain the quantity of inventory item
consumed during the year and multiply it by unit cost to obtain annual usage cost. The items are
then arranged in the descending order of such annual usage cost. The analysis is carried out by
drawing a graph based on the cumulative number of items and cumulative usage of consumption
cost. Classification is done as follows:
Table 4.1
Category Percentage of items Percentage of annual
consumption value
A 10–20 70–80
B 20–30 10–25
C 60–70 5–15
The classification of ABC analysis is shown by the graph given as follows (Fig. 4.5).

Fig. 4.5 ABC classification

Once ABC classification has been achieved, the policy control can be formulated as follows:
A-Item: Very tight control, the items being of high value. The control need be exercised at
higher level of authority.
B-Item: Moderate control, the items being of moderate value. The control need be exercised
at middle level of authority.
C-Item: The items being of low value, the control can be exercised at gross root level of
authority, i.e., by respective user department managers.
2. HML analysis: In this analysis, the classification of existing inventory is based on unit
price of the items. They are classified as high price, medium price and low cost items.
3. VED analysis: In this analysis, the classification of existing inventory is based on
criticality of the items. They are classified as vital, essential and desirable items. It is mainly used
in spare parts inventory.
4. FSN analysis: In this analysis, the classification of existing inventory is based consumption of
the items. They are classified as fast moving, slow moving and non-moving items.
5. SDE analysis: In this analysis, the classification of existing inventory is based on the items.

Techniques of Material Planning

 Inventory Model
ECONOMIC ORDER QUANTITY (EOQ)-
Inventory models deal with idle resources like men, machines, money and materials. These
models are concerned with two decisions: how much to order (purchase or produce) and when to
order so as to minimize the total cost.
For the first decision—how much to order, there are two basic costs are considered namely,
inventory carrying costs and the ordering or acquisition costs. As the quantity ordered is
increased, the inventory carrying cost increases while the ordering cost decreases. The ‘order
quantity’ means the quantity produced or procured during one production cycle. Economic order
quantity is calculated by balancing the two costs. Economic Order Quantity (EOQ) is that size of
order which minimizes total costs of carrying and cost of ordering.
i.e., Minimum Total Cost occurs when Inventory Carrying Cost = Ordering Cost
Economic order quantity can be determined by two methods:
1. Tabulation method.
2. Algebraic method.

Fig. 4.6 Inventory cost curve

1. Determination of EOQ by Tabulation (Trial & Error) Method
This method involves the following steps:
1. Select the number of possible lot sizes to purchase.
2. Determine average inventory carrying cost for the lot purchased.
3. Determine the total ordering cost for the orders placed.
4. Determine the total cost for each lot size chosen which is the summation of inventory
carrying cost and ordering cost.
5. Select the ordering quantity, which minimizes the total cost.
The data calculated in a tabular column can plotted showing the nature of total cost,
inventory cost and ordering cost curve against the quantity ordered as in Fig. 4.6.

ILLUSTRATION 3: The XYZ Ltd. carries a wide assortment of items for its customers.
One of its popular items has annual demand of 8000 units. Ordering cost per order is found to be
Rs. 12.5. The carrying cost of average inventory is 20% per year and the cost per unit is Re. 1.00.
Determine the optimal economic quantity and make your recommendations.
 SOLUTION:
No. of Lot size Average Carrying Ordering Total cost/
orders/ (2) inventory (3) cost (4) cost (5) year
year (1) (6) =(4) + (5)
1 8000 4000 800.00 12.5 812.50
2 4000 2000 400.00 25 425.00
4 2000 1000 200.00 50 250.00
8 1000 500 100.00 100 200.00
12 666.667 333.333 66.67 150 216.67
16 500 250 50.00 200 250.00

The table and the graph indicates that an order size of 1000 units will gives the lowest total
cost among the different alternatives. It also shows that minimum total cost occurs when carrying
cost is equal to ordering cost.

2. Determination of EOQ by Analytical Method

In order to derive an economic lot size formula following assumptions are made:
1. Demand is known and uniform.
2. Let D denotes the total number of units purchase/produced and Q denotes the lot size in
each production run.
3. Shortages are not permitted, i.e., as soon as the level of the inventory reaches zero, the
inventory is replenished.
4. Production or supply of commodity is instantaneous.
5. Lead-time is zero.
6. Set-up cost per production run or procurement cost is C3.
7. Inventory carrying cost is C1 = CI, where C is the unit cost and I is called inventory
carrying cost expressed as a percentage of the value of the average inventory.
This fundamental situation can be shown on an inventory-time diagram, (Fig. 4.7) with Q on
the vertical axis and the time on the horizontal axis. The total time period (one year) is divided
into n parts.
 Fig. 4.7

STANDARDIZATION
Standardization means producing maximum variety of products from the minimum variety of
materials, parts, tools and processes. It is the process of establishing standards or units of measure
by which extent, quality, quantity, value, performance etc., may be compared and measured.
Advantages of Standardization
All the sections of company will be benefited from standardization as mentioned below.
Benefits to Design Department
1. Fewer specifications, drawings and part list have to prepared and issued.
2. More time is available to develop new design or to improve established design.
3. Better resource allocation.
4. Less qualified personnel can handle routine design work.
Benefits to Manufacturing Department
1. Lower unit cost.
2. Better quality products.
3. Better methods and tooling.
4. Increased interchangeability of parts.
5. Better utilization of manpower and equipment.
6. Accurate delivery dates.
7. Better services of production control, stock control, purchasing, etc.
8. More effective training.
Benefits to Marketing Department
1. Better quality products of proven design at reasonable cost leads to greater sales volume.
2. Increased margin of profit.
3. Better product delivery.
4. Easy availability of sales part.
5. Less sales pressure of after-sales services.
Benefits to Production Planning Department
1. Scope for improved methods, processes and layouts.
2. Opportunities for more efficient tool design.
3. Better resource allocation.
4. Reduction in pre-production activities.
Benefits to Production Control Department
1. Well proven design and methods improve planning and control.
2. Accurate delivery promises.
3. Fewer delays arise from waiting for materials, tools, etc.
 4. Follow-up of small batches consumes less time.
Benefits to Purchase and Stock Control Department
1. Holding of stock of standard items leads to less paper work and fewer requisitions and
orders.
2. Storage and part location can be improved.
3. Newer techniques can be used for better control of stocks.
4. Because of large purchase quantities involved, favourable purchase contracts can be made.
Benefits to Quality Control Department
1. Better inspection and quality control is possible.
2. Quality standards can be defined more clearly.
3. Operators become familiar with the work and produce jobs of consistent quality.
Other Benefits
1. Work study section is benefited with efficient break down of operations and effective
work measurement.
2. Costing can obtain better control by installing standard costing.
3. More time is available to the supervisors to make useful records and preserve statistics.
4. Reduced reductions and scrap.
5. Helps supervisors to run his department efficiently and effectively.

Disadvantages of Standardization
Following are the disadvantages of standardization:
1. Reduction in choice because of reduced variety and consequently loss of business or
customer.
2. Standard once set, resist change and thus standardization may become an obstacle to
progress.
3. It tends to favour only large companies.
4. It becomes very difficult to introduce new models because of less flexible production
facilities and due to high cost of specialised production equipment.

SIMPLIFICATION
The concept of simplification is closely related to standardization. Simplification is the process of
reducing the variety of products manufactured. Simplification is concerned with the reduction of
product range, assemblies, parts, materials and design.
Advantages of Simplification
Following are the advantages of simplification:
1. Simplification involves fewer, parts, varieties and changes in products; this reduces
manufacturing operations and risk of obsolescence.
2. Simplification reduces variety, volume of remaining products may be increased.
3. Simplification provides quick delivery and better after-sales services.
4. Simplification reduces inventory and thus results in better inventory control.
5. Simplification lowers the production costs.
6. Simplification reduces price of a product.
7. Simplification improves product quality.
VALUE ANALYSIS
 Value analysis is concerned with the costs added due to inefficient or unnecessary
specifications and features. It makes its contribution in the last stage of product
cycle, namely, the maturity stage. At this stage, research and development no longer
make positive contributions in terms of improving the efficiency of the functions of
the product or adding new functions to it.
 Value is not inherent in a product, it is a relative term, and value can change with time
and place. It can be measured only by comparison with other products which perform
the same function. Value is the relationship between what someone wants and what he is
willing to pay for it. In fact, the heart of value analysis technique is the functional
approach. It relates to cost of function whereas others relate cost to product. It is denoted
by the ratio between function and cost.
Value  Function / Cost

Value Analysis Framework-

The basic framework for value analysis approach is formed by the following questions, as given
by Lawrence D. Miles:
1. What is the item?
2. What does it do?
3. What does it cost?
4. What else would do the job?
5. What would the alternative cost be?
Value analysis requires these questions to be answered for the successful implementation of
the technique.
4.6.6