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Notes POM Module 5

Notes POM Module 5

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Production and Operations Management
Module 5: Materials management
Scope of materials management

1. Amount of materials is high compared to other inputs . and it is increasing year to year.
Proper materials management is key to the survival and growth of the company.
2. Cost of materials could be as high as 70-75% of the cost of the product in engineering

industries. In other industries it could be between 40- 60 % . Hence reduction in the cost
of materials plays an important role in the profitability of a company
3. Materials form a important part of current assets of the organization. Its proper
utilization is vital for ROI ( return on Investment)

4. Added value of a product = Value of produced goods- value of materials purchased. It is imperative that not only that purchase cost of materials are to be low but also expenses incurred in purchasing, storing, handling should be as low as possible.

5. Quality of end product depends on quality of input materials. Hence it is important that right quality of products are to be procured at right time. Giving detailed description of requirements to supplier in the Purchase order ensures the same.

6. Materials management is one of the Key centers of accountability for performance. It
includes purchasing, handling of materials, maintaining appropriate inventory levels and
ensuring storage conditions.

7. Minimizing the use of scarce resources and finding alternatives
8. Ensuring safety during handling and storage of hazardous materials and compiling with
regulatory requirements

9. Efficiency of business depends on ensuring right quality of materials in right quantity ant the right time. Otherwise it hampers the production to a great extent. Cost of production shoots up.

Primary Objective of materials management
1. Low prices- to be lowest - includes transportation: enhances profit
2. High inventory Turnover- value of inventories to be low in relation to sales. Reduces

storage costs
3. Low cost acquisition and possession- reduced handling and storage costs.
4. Continuity of supply- alternative sources, , captive suppliers, flexible suppliers
5. Low payroll costs- Low operating costs of material management personnel
6. Favorable supplier relations- supplier development

Secondary objectives of Materials management
1. New materials and products- working closely with Design and research departments for
development of new materials and products
2. Economic make-buy- Coordinating and assisting other departments in Make-Buy

decisions
3. Standardization- coordinating with Design departments in reducing no. of items.
4. Product improvement- Contribution towards product improvement by giving appropriate

inputs and assisting Design department.
5. Interdepartmental Harmony- Success of materials management department depends on
the success of other departments . hence relations are to be harmonious
6. Forecasts- Forecasts in terms of prices, availability and general market conditions are to
be regularly monitored towards taking important business decisions.
Functions of Materials Management
1. Purchasing
2. Vendor selection and rating
3. Material storage and handling
4. Inventory management
Purchasing:
Objectives of Purchasing;

1. To pay reasonably low prices for best value of products
2. To keep inventories low
3. To develop satisfactory sources of supply
4. To secure good vendor performance
5. To locate new materials or products as required
6. To develop good purchasing policies and procedures
7. To implement programs like value analysis , cost analysis and make-or-buy decisions
8. To keep overheads of the department Low.
9. To have a high degree of coordination with other departments

Main Functions of Purchasing department
1. Selection of vendors
2. Obtaining quotations/prices

3. Awarding purchase orders
4. Follow-up for delivery
5. Handling complaints , if any
6. Supplier development/ vendor relations
7. Payment of invoices

Other functions of purchase department ( in coordination with other departments)

1. Establishing specifications
2. Scheduling orders
3. Inspection
4. Accounting
5. Market research
6. Inventory policy

7. Sale of scrap
8. Customs clearances ( during import of materials)
9. Transportation
10. Make-or-buy decisions
Steps in Purchasing

1. Receipt of Purchase requests ( qty, delivery, item description)
2. Development Purchase specifications
3. Obtaining quotations from sources
4. Selection of source
5. Release of purchase order and acceptance by supplier ( technical and commercial terms)
6. Follow up for receipt
7. Checking invoice and approval for payment

Vendor / supplier selection is based on the following considerations
1. Availability of Infrastructure ( equipment, building, inspection facilities etc)
2. Availability of human resources ( managerial, workers, Inspectors)
3. Technical capability
4. Meeting delivery requirements
5. Reasonable prices
6. Flexibility to take up variations in demand
7. Willing to work and grow with the company
Normally suppliers are selected on the basis of few trail orders . if the performance is satisfactory
, they are included in approved supplier list and future purchase orders are placed on them.
Single source or Multiple sources

Single source:
1. Quantities may be very small for multiple sources
2. Supplier may be exclusive ( eg patent)
3. Supplier is outstanding in quality and delivery and no need to consider others
4. Ordering and scheduling is very easy and less costly

Multiple sources:
1. Suppliers will be competitive
2. Delivery disruptions cannot be sustained (because of Breakdowns , strike, floods etc)
3. Quantities too huge for one supplier

4. Scheduling flexibility
Vendor rating

Vendor rating is carried out periodically (once in 6 months / 12 months ) to gauge the
performance of the approved supplier and to intimate him regarding improvement if needed.
Suppliers may be classified as( example)
A-good

> 80%
B-satisfactory
> 60 and < 80%
C-unsatisfactory
< 60%

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