Materials Management

CALUCULATION OF EOQ: Total ordering cost = No of order placed per year x ordering cost per order = (A/S) B Total carrying cost per year = Avg inventory level carrying cost per year = (S/2) C Economic order quantity is that of order where ordering cost is equal to carrying cost.. (AB)/S = (SC)/2 2AB =s2 C S2 = 2AB/C S = (2AB/C) S = Economic Order Quantity A = Annual Demand B = Buying cost (or) Ordering cost C = Carrying cost ABC Analysis:The inventory of an organization of large no of large items with varying price & usage rate. It is not possible to pay equal attention on all the items. ABC analysis is a selective approach of inventory control. It enables the management where to be paid concentration and its efforts. Usually materials are classified into three categories. A class items: These items consist of hardly 10% of the total items and account for 70% of the total value of inventory. B class items: These items relatively less important. They may constitute 20% of the total items and the % of the investment in inventory about 20% of the total inventory value. C class items: These are about 70% in number but it consists of 10% investment in inventory value. (10% of the total expenditure on inventory) A class items required rigid and strict control and need to be stocked in smaller quantity. An attention should be paid in estimating requirements. Purchasing & storing them. A little attention should be paid on class B items. The control on these items should be intermediate between A & C, C items being less expensive does not required strict control. These are ordered in bulk quantity. ABC Analysis (Policy Guidelines) A class items B class items -Tight control on stock - Moderate control. H level. - Median safety stock -Low safety stock. - Quarterly check on -Regular & continuous wastage check on wastage. - Two or more reliable -Procure material through sources multip multiple sources. C class items Lesser control Large safety stock - Annual review on wastage - - Only one or two reliable sources

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Materials Management Stock Levels:Maximum Stock Level: - It is the level beyond which storage of raw materials are not allowed .The main purpose of this levels is to avoid blocking up of capital unnecessarily on material. Maximum stock level Reorder level +recorder quantity (minimum usage *minimum reorder period) Minimum stock level: - It is level below which material should not be allowed to fall. This level indicates the possibilities of stoppage of production unless quick arrangement is made for further purchase of material. Minimum stock level=reorder level-(normal usage *normal reorder period) Re - order level:-this id the level where the company should place an order for fresh procurement. This level is fixed in between minimum level and maximum level. Re order level = lead time *average usage (Or) Minimum stock level + consumption during lead time Danger level: - this level is fixed in between minimum level and zero stock level. As and when material stock level reached to this level the store keeper should make necessary special arrangements to procure material. Safety stock: - the safety stock is the additional stock of material to be maintained to be maintained in order to meet the unanticipated increase in demand. Safety stock = (maximum lead time-minimum lead time)*consumption rate Lead time: - it is the time gap between placing of an order and the time of actual receipt of material Purchasing Function: - For an organization. Purchasing is a window to the outside world. The prime function of purchasing is that of being sensitive to the external supply marker situation and also of feeding back this information to the other functions of the organization. However, it is usually understand to be to get the right quantity of material of the right quality at the right time, at the right place, from the right source and at the right cost. Objectives of Purchasing: 1. 2. 3. 4. 5. To ensure availability of proper quantities of materials for smooth functioning of the production department. To procure materials at reasonably low costs for the company. To ensure supply of quality materials. To select the proper sources of supply in order to ensure the above. To maintain functional relations with order department and provide up-to-date information and device about the availability of alternative materials.

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Materials Management 6. To train staff make policies and procedures and thus evolve a sound organization to achieve the objectives.

Centralized vs decentralized buying function: Whether to centralize of decentralize buying inventory is a question of policy. To decentralize the procurement function needlessly is to deny a firm some of its potential profit. Centralization of inventory procurement is essential for attaining both operating efficiency and maximum profit. When the entire responsibility of procurement of inventory lies with one single person, it is called as centralized buying. On the other hand the buying function is said to be decentralized when personal from other functional areas of business say production, Engineering, marketing, finance, personal decide on sources of supply. Negotiate with vendors directly or perform any of the other major function of buying inventories. Process of Purchasing:Purchasing procedure includes the following steps. 1. Receiving Purchasing requisitions: Purchase department collects all requisitions for purchase of material. The department which requires materials or stores prepares the purchase requisitions and sent to the purchase department. It does all the purchases belong to the organization. 2. Selection of possible sources of supply: It is the function of the purchase department to maintain the list of suppliers of every type of material. There could be alternative materials available as a result of technological development should explore such alternative materials that involve lower cost and additional benefits. 3. Making request for quotations: - Purchase department invites quotations from the selected suppliers. In the invitations it can be mentioned the particulars of details to be submitted. The details of price, quantity to be supplied. The time of delivering, discount, the terms of payment etc. are furnished in the quotations. The suppliers are short listed based on their post performance in terms of quality, reliability.. Objectives of Purchasing: 1. 2. 3. 4. 5. 6. To ensure availability of proper quantities of materials for smooth functioning of the production department. To procure materials at reasonably low costs for the company. To ensure supply of quality materials. To select the proper sources of supply in order to ensure the above. To maintain functional relations with order department and provide up-to-date information and device about the availability of alternative materials. To train staff make policies and procedures and thus evolve a sound organization to achieve the objectives.

Centralized vs decentralized buying function: Whether to centralize of decentralize buying inventory is a question of policy.

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Materials Management To decentralize the procurement function needlessly is to deny a firm some of its potential profit. Centralization of inventory procurement is essential for attaining both operating efficiency and maximum profit. When the entire responsibility of procurement of inventory lies with one single person, it is called as centralized buying. On the other hand the buying function is said to be decentralized when personal from other functional areas of business say production, Engineering, marketing, finance, personal decide on sources of supply. Negotiate with vendors directly or perform any of the other major function of buying inventories. Process of Purchasing:Purchasing procedure includes the following steps. 1. Receiving Purchasing requisitions: Purchase department collects all requisitions for purchase of material. The department which requires materials or stores prepares the purchase requisitions and sent to the purchase department. It does all the purchases belong to the organization. 2. Selection of possible sources of supply: It is the function of the purchase department to maintain the list of suppliers of every type of material. There could be alternative materials available as a result of technological development should explore such alternative materials that involve lower cost and additional benefits. 3. Making request for quotations: - Purchase department invites quotations from the selected suppliers. In the invitations it can be mentioned the particulars of details to be submitted. The details of price, quantity to be supplied. The time of delivering, discount, the terms of payment etc. are furnished in the quotations. The suppliers are short listed based on their post performance in terms of quality, reliability.. Objectives of Purchasing: 1. 2. 3. 4. 5. 6. To ensure availability of proper quantities of materials for smooth functioning of the production department. To procure materials at reasonably low costs for the company. To ensure supply of quality materials. To select the proper sources of supply in order to ensure the above. To maintain functional relations with order department and provide up-to-date information and device about the availability of alternative materials. To train staff make policies and procedures and thus evolve a sound organization to achieve the objectives.

Centralized vs decentralized buying function: Whether to centralize of decentralize buying inventory is a question of policy. To decentralize the procurement function needlessly is to deny a firm some of its potential profit. Centralization of inventory procurement is essential for attaining both operating efficiency and maximum profit. When the entire responsibility of procurement of inventory lies with one single person, it is called as centralized buying.

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Materials Management On the other hand the buying function is said to be decentralized when personal from other functional areas of business say production, Engineering, marketing, finance, personal decide on sources of supply. Negotiate with vendors directly or perform any of the other major function of buying inventories. Process of Purchasing:Purchasing procedure includes the following steps. 1. Receiving Purchasing requisitions: Purchase department collects all requisitions for purchase of material. The department which requires materials or stores prepares the purchase requisitions and sent to the purchase department. It does all the purchases belong to the organization. 2. Selection of possible sources of supply: It is the function of the purchase department to maintain the list of suppliers of every type of material. There could be alternative materials available as a result of technological development should explore such alternative materials that involve lower cost and additional benefits. 3. Making request for quotations: - Purchase department invites quotations from the selected suppliers. In the invitations it can be mentioned the particulars of details to be submitted. The details of price, quantity to be supplied. The time of delivering, discount, the terms of payment etc. are furnished in the quotations. The suppliers are short listed based on their post performance in terms of quality, reliability.. Have to be utilized. If it is both for consumer and industrial markets. More than one channels to be employed. Market size:- If the size of the market is small. it will be worthwhile to go for direct marketing. In case of larger markets. On the other hand we have many channels. Size of consumer order: size and average frequency of consumer orders also influence the channel decision. If the volume of sales is large direct selling may be economically feasible. In the reverse situation i.e., in case of small quantity demand. Services of a retailers etc. may be availed of.

III consumer Factors:Marketing essentially constitutes people who have some unsatisfied wants and necessary financial resources to get their demand satisfied. Hence while determining the channels of distribution the convenience & inconvenience of the prospective customers will have to be taken note of. For e.g. Avery large number of people prefers buying from retailers simply because they provide them credit facilities. Similarly there are some commodities like air coolers, colour televisions whose prices are high, that do not reach the general customers. Hence installment selling may be a more logical method of marketing which in turn may require the services of the local dealers. Who may provide them such facilities.

IV Intermediary Factors:This factor also assumes considerable importance in the age of indirect selling. While selecting the channel of distribution a manufactures cannot overlook the services rendered by the middle men. If the product needs aggressive promotion campaigns or

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Materials Management special storage facilities which cannot be ordinarily provide by the manufactures. The service of middlemen such as whole sellers or dealers will have to be utilized.

Product Life Cycle:The PLC attempts to recognize distinct stages in sales history of the product. The success or failure of a products life depends on how well it makes adjustments to ever changing, saturation and decline stages. The length of each stage of PLC varies on product nature and environment conditions.

Maximize his own market share in the face of new competitors entering the growing market. Establish a strong brand image through effective advertisement campaigns. Reduce prices slightly to reach the more price sensitive potential customers.

III) Maturity:When the products sales growth sloes down, it is called maturity. Due to this slow down, the industry as a whole suffers from over capacity. At this stage, firms tend to attract the customers away from their competitors through cheaper prices and larger positional efforts and outlay. At maturity stage, the manufacturer has to Focus on more profitability Modify the product lines or extend the same to include least versions that appeal to the specific needs of segments within the total market. Spend more on sales promotion instead of restoring to price-cutting

IV) Saturation:When the sales growth slows down to zero, such a stage is called saturation. The size of the market does not increase beyond this stage. In other words any new customer

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Materials Management entering the market is replaced by old customers who have stopped buying the product. All sales are simply replacement sales or repeat purchases by the customers.

V) Decline
When sales of a product tend to fall, such a stage is called decline. When a product ceases to satisfy the customers needs in relation to those available in the market, it is no more preferred. As a result, its competing products offering superior benefits take over the market this leads to weakened profitability. At this stage the manufacturer has to Minimize marketing expenditure. Use his resources, especially cash, to support new, cash hungry products at the introduction or growth stages in their life cycles. Withdraw distribution licenses from the least effective distribution. Reduce promotional expenditure to a minimum level. Cut prices and rationalize the product range and retain only those items that appeal to the larger and more profitable.

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