MODULE 6

Materials Management
5 M’s important to production process are Men, Machine,
Money , Methods and Material .

Early days from Men to Methods it was varying, now-a-

days materials have more important.

There are several reasons behind it,

1)Amount spent on materials is higher than other inputs
2)Materials offer considerable scope for reducing cost and
improving profit
3)Improving return on investments depends on the
effective utilisation of materials.
4)Materials “add value” to a product.
5)Materials contribute to the quality of the end product
6)Material management assume responsibility for whatever
happen in purchasing , storing, inventory or any other
area connected with materials.
7)Need for preservation of scarce resource for posterity.
8)Increasing demand for ensuring environmental safety.
9)The efficiency of any organization depends upon the
availability of right materials ,in right quality, at right
time and at right price.
10)Relationship between man and materials is indivisible
Objectives of material management
If contribution of material to over all company
achievement is direct, it is called as primary and if it is
indirect contribution, then it is called as secondary.

Primary objective
1.Low Prices
2.High inventory turnover
3.Low cost acquisition and possession
4.Continuity of supply
5.Consistency of quality
6.Low Payroll costs
7.Favorable supplies relations
8.Development of personnel
9.Good records
Secondary Objectives

1.Reciprocal relations
2.Now materials and products
3.Economic make or buy
4.Standardization
5.Product Improvement
6.Inter departmental harmony
7.Forecasts
8.Acquisitions
Importance of material management

1.Lower prices for material and

equipment
2.Faster inventory turnover
3.Continuity of supply
4.Reduced lead time
5.Reduced transportation cost
6.Less duplication of efforts
7.Elimination of buck passing
8.Reduced Materials
Obsolescence
9.Improved supplier relationship
and better records and
information
10.Better inter departmental co
sing

ent groups of buyers,

a)Consumers
b)Middlemen
c)Government agencies
d)Manufactures
Definition
The act of buying an item at a price.

Importance of purchasing
1.Purchasing function provides materials to the factory
without which wheels of machines cannot move.
2.A one percent saving in materials cost is equivalent to a
10 percent increase in turnover. Efficient buying can
achieve this.
3.Purchasing manager is the custodian of his firm's purse as
he spends more than 50 per cent of his company's
earnings on purchases
4.Increasing proportion of one's requirements, are now
bought instead of being made as was the practice in the
earlier days. Buying, therefore, assumes significance.
1.
6.Purchasing can contribute to import substitution and
save foreign exchange.
7.Purchasing is the main factor in the timely execution of
industrial projects.
8.Materials management organisations that exist now have
evolved out of purchasing
departments.
9.Other factors like (i) post-war shortages, (ii) cyclical
swings of surpluses and shortages and the fast rising
materials costs, (iii) heavy competition, and (iv)
growing worldwide markets have contributed to the
importance of purchasing.
Objectives of purchasing

1.To pay reasonably low prices for the best values

obtainable, negotiating and executing all company
commitments.
2.To keep inventories as low as is consistent with
maintaining production.
3.To develop satisfactory sources of supply and maintain
good relations with them.
4.To secure good vendor performance including prompt
deliveries and acceptable quality.
5.To locate new materials or products as required:
6.To develop good procedures, together with adequate
controls and purchasing policy.
7.To implement such programmes as value analysis, cost
analysis, and make-or-buy to reduce cost of purchases.
8.To secure high caliber personnel and allow each to
develop to his maximum ability.
9.To maintain as economical a department as is possible,
commensurate with good performance.
10.To keep the top management informed of material
development which could affect company profit or
performance.
11.To achieve a high degree of co-operation and co-
ordination with other departments in the organisation.
Functions of purchasing department

1.Responsibilities often fully delegated to the purchasing

function:
a)Obtaining prices.
b)Selecting vendors.
c)Awarding purchase orders.
d)Following up on delivery promises.
e)Adjusting and settling complaints.
f)Selecting and training of purchasing personnel.
g)Vendor relations.
2. Responsibilities often shared with functions other than
purchasing function:
a)Obtaining technical information and advice.
b)Receiving sales presentations and arranging for
sales opportunities with interested personnel.
c)Establishing specifications.
d)Scheduling orders and deliveries.
e)Inspecting.
f)Specifying delivery method and routing.
g)Expediting.
h)Accounting.
i)Purchasing and market research.

j)Inventory and warehousing policy and/or control.

k)Forward buying and hedging policies and
procedures.
l)Construction contracting,
m)Service contracts and agreements,
n)Sale of scrap, salvage and surplus.
o)Purchasing for employees.
p)Contracting for machines and equipment,
q)Development of specifications.
r)General considerations of quantities or timing on
planning deliveries,
s)Transportation and traffic,
t)Determination of whether to make or buy.
u)Customs,
v)Other functions.
 l)
3. Responsibilities often divorced from purchasing but of
particular interest to purchasing:
a)Receiving and warehousing.
b)Payment of invoices.
c)Other functions.
Purchasing Cycle

1.Recognition of need.
2.Description of need.
3.A suitable source is selected for the supply. Often a source
has to be developed.
4.Price and availability are determined.
5.Purchase order is prepared and sent out to the supplier.
6.Acceptance of the purchase order is obtained from the
supplier.
7.Follow up is done by the purchasing department to ensure
timely delivery of the material.
8.Checking the invoice and approving it for making
payment to the supplier.
Purchasing Policies

The purchasing function is influenced by certain policies,

1.Ancillarisation
2.Make or buy decision
3.Speculative buying
4.Vendor rating
5.Ethics in purchasing
6.Reciprocity
7.Purchasing for employees
8.Gifts
9.Value Analysis
Ancillary Development
Deciding to buy a part from outside supplies (i.e.) called
sub contractor. The unit is called as ancillary unit

Advantage
vSpread of entrepreneurial base
vIndustrial development
vRegular supply of right quality of raw materials

Disadvantages

When expansion occurs in a company then ancillary unit

cannot meet the demand. So they may have competitors
Make or Buy

There are 3 problems associated with it

vMaking or buying something which it never before

procured
v
vMaking something which it is now buying
v
vBuying something which it is now making
Types of make or buy investigation

I category
1.Firm currently has production potential
2.With small capital outlay for tooling and
machining
II Category
1.Firm cannot produce in its existing operations
2.A large amount of additional investment is
required for tooling and facilities
Factors influencing make or buy decision
There are two primary factors
1.Cost
2.Availability of production capacity
Considerations which favour making the parts are

1.Cost considerations (less expensive to make the part).

2.Desire to integrate plan operations.
3.Productive use of excess plant capacity to help absorb
fixed overheads
4.Need to exert direct control over production and /or
quality
5.Design secrecy.
6.Unreliable suppliers.
7.No suitable supplier quotation.
8.Desire to maintain a stable workforce (in periods of
declining sales).
Considerations which favour buying the parts are

1.Cost considerations (less expensive to buy the part).

2.Supplier's research and specialised know-how
3.Small volume requirements.
4.Limited production facilities.
5.Desire to maintain a stable workforce (in periods of
rising sales).
6.Desire to maintain multiple source policy.
7.Government's policy favoring ancillarisation.
8.Monopoly items which are rationed by the government
and on which, the buyer has no option.
Other factors are,
1.By tradition
2.Stable or declining industry
3.Age of industry

Young industry have the following risks

A.Working capital is not enough
B.Risk of product acceptance,
C.Failure in the manufacturing process and
D.Countless actions and reactions by competitions,
government and labour. These risks are sufficient enough
to make young companies avoid making an item.
What ever may be the inputs given by the purchasing
manger at the end only the top management will decide
will decide whether to buy or make a part

The decision is taken by forming a committee which has

representatives from , production, accounting , engineering,
marketing & purchasing

Speculative Buying:
Scope of making profit out of price change
Two Types
Type 1: Buying certain item at low prices and selling then
when their prices shoots up.
Type 2: Buying of raw materials in large quantity when
their prices are cheap
Vendor Rating

Depending upon the vendors, we know about the purchasing

department of any industry
Good vendor is an asset to the company

Rating Techniques
qPrice
qDiscounts received
qMaintenance of specifications
qCompliance with other specifications
qPromptness of delivery
qFreight and delivery charges
qInstallation costs
qService
qMarket information
qCo-operation
qManagement competence
qCredit terms,
qDisposition of rejects
qEmployee training,
qAdjustment policies,
qCost reduction suggestions,
qInventory plans and
qFinancial position.
Some important vendor rating techniques are

i.Categorical Plan
ii.Weighted point plan
iii.Critical incidents method
iv.Checklist System
I.Buyers checklist consists of
i.Reliability
ii.Technical capabilities
iii.After Sale Service
iv.Availability
v.Buying Convenience
vi.Sales Assistance
e.Ethics in purchasing
•Ethics is philosophy concerned with values of human
conduct
•Ethics refers to code of conduct that guides an
individual in dealing with others
Code of Ethics

Developed by Indian Institute of Material Management

vTo consider first the total interest of one's organisation

in all transactions without . impairing the dignity and
responsibility to one's office.
vTo buy without prejudice, seeking to obtain the
maximum ultimate value for each rupee of expenditure.
vTo subscribe and work for honesty and truth in buying
and selling, to denounce all forms and manifestations
of commercial bribery and to eschew anti-social
practices. To accord a prompt and courteous reception
so far as conditions will permit, to all who call upon
legitimate business missions.
vTo respect one's obligations and those of one's
organisation consistent with good business practice.

Reciprocity

•State of exchange and co-operation for a return in kind

•They have both proponents and opponents
• Arguments of proponents of the policy , on the
following lines
1.
2.When quality, price and service are assured, it is good to
give preference to own customers.
3.It adds to the sales of the buying company.
4.It creates better trade relations between the buyer and the
seller.
The opponents criticize the practice citing the
following lines:

1.False market can be created with companies that may later

change their minds or fall behind technically.
2.Reciprocity does not follow sound principles of buying and
selling on the fundamental criteria of quality, price and
service.
4.Companies may relax their competitive efforts in technical
and production causes as a result of reduced competition.
Consequently, purchasing costs may be higher.
5.Sales departments may develop a false sense of security,
resulting in the deterioration of a firm's selling effort.
6.Company reputation may be impaired because of bad
publicity resulting from reciprocity. Sellers of new,
advanced products and processes will not waste their time
with companies known to be tied up with reciprocal
agreement.
7.New customers may be hard to find because of pre-
established relationships with competitors.
8.Conspiracy and restraint on trade situations can develop
with attendant legal dangers.
Purchasing for Employees

Practice of using its facilities for obtaining

merchandise for employees of the company or its executive
at better terms than they could individually obtain the same
merchandise through their own effort

Arguments for buying for company personnel

1.Circumventing of normal channel of distribution for good

involved
2.Buyer at disadvantage while dealing with the supplier
3.Service available for purchase for consumer goods are not
so good
4.Some ill-will towards the company may be aroused
5. Short step for company people, occasionally getting things
for employees personnel work
6. Company credit is involved
7. If the service is to be self- sustaining a service or handling
charge to be made

Arguments for the purchase

Company should make provision for supplying its

employees with at-least necessacity of life parts?
f. Gifts
Accepting gifts is ethical / unethical

Arguments against receiving gift

1.Represent cost of doing business to donor firm

2.Exception increases , all the supplies are found to give
to get the orders from the company
3.Commercial bribery and has legal problems
Value Analysis

•Value Engineering
•Occurs between purchasing and methods engineering
•Modifying specifications of materials, parts and products
to reduce cost
•While examining a product following questions to be
asked
i.Is there a less expensive product which will perform the
required function?
ii.What does each component contribute?
iii.Can a less expensive material be used?
iv.Can parts be combined?
v.Can it be designed for easier assembly?
vi.Can it be fabricated by other
Stores
Store is a building where goods are kept stores is defined
as supplies of goods and storage is defined as the act of
storing goods

Importance
1.Ready accessibility of major materials permitting
efficient service to users.
2.Efficient space utilization and flexibility of arrangement.
3.A reduced need for materials handling equipment.
4.A minimization of materials deterioration and pilferage.
5.Ease of physical counting.
6.
Functions
1.To receive raw materials 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 minimize obsolescence, surplus and scrap through
proper codification, preservation and handling.
5.highlight stock accumulation, discrepancies and abnormal
consumption and effect control measures.
6.To ensure good house-keeping so that, materials handling,
materials preservation, stocking, receipt and issue can be
done adequately.
7.To assist in verification and provide supporting
information for effective purchase action.
Store Layout

Fundamental factor in efficient performance of the

department

Factors for planning store layout

1.Provisions for easy receipt, storage and disbursement of
materials, nearness to point of use.
2.Minimum handling and transportation of materials, good
accessibility for handling equipment and personnel.
3.Adequate capacity provision for flexibility for future
expansion.
4.Efficient utilization of floor space and height.
5.Clear identification of materials, quick location of items
and ease of physical counting.
1.
7.Protecting against waste, deterioration, damage and
pilferage.
8.Design the building's physical appearance to create
goodwill and to invite business.
9.Arrange storage for fast and easy customer order
processing.
10.Use compatible storage or display equipment to create
good interior appearances.
11.Install good lighting to prevent theft, parts damage and
errors in stocking.
12.Plan storage for easy shelf-life rotation to permit first-in-
first-out control.
6.
13.Segregate rebuilt, re-manufactured, used and new
merchandise.
14.Include safety as apart of the facility plan.
15.Maintain a periodic house-keeping and re-arrangement
plan.

Two aspects of stores layout are

1.Storage System
2.Type of stores layout
Storage System
Means dealing with a number of interacting and often
conflicting factors
Degree of mechanization affects layout
Scarcity of space leads to racking

3 basic ways of locating stock

a)Fixed location
b)Random location
c)Zoned location

Types of stores layout

a)Comb type – one side of the aisle
b)Tree type – On either side of aisle
Stores Manual

Written statement of policies and procedures

Assigning responsibilities and authority of store keeping
Standardizing store-keeping activities
Simulating new ideas and suggestions for improving and
stream lining storage operations

Measurement of stores efficiency

a)Store efficiency index = No of requisition delivered on time

Total no of requisitions

b) Storage loss index = Deterioration, Obsolescence's and pilferage

Average value of inventory
c) Obsolescence Index = Value of non-moving items
Total inventory value

d) Space utilization index = Area used for storage

Total storage area available

Stock verification

Three Ways
a)Periodic verification or fixed annual inventory
b)Perpetual or Continuous inventory
c)Low point inventory
Classification and Codification
Advantages

1.Systematic grouping of similar items for correct

identification of each and every item.
2.The usage of long descriptions is simplified and possible
confusion avoided.
3.Avoids duplicate stocks of the same item being held
under different names, descriptions, brand names, part
number and different stores.
4.Enables reduction in sizes and varieties.
5.Helps in standardisation of materials and helps in finding
substitutes.
1.
7.Can be used as a basic for setting up different stores.
8.To arrange bin cards and records in stores, accounts and
inventory control sections in the same uniform manner.
9.Ensures accuracy in correspondence, records and posting
of receipts and issues in appropriate records.
Principles of classification and codifications
1.There must be a consistency in the point of view so that, the
basis of classification should remain unchanged for all items.
2.The system of classification must cover the entire range of
items for which, it is devised and at the same time, allow
reasonable scope for extension. This principle is that of
comprehensiveness.
3.The third principle is that of mutual exclusiveness which
means, that there must be only one code number possible for
any item.
4.The system developed should be simple enough to be
understood and easily adopted by the non-specialist
personnel. This also means that the codification basis when
once understood, the code numbers should be self-
explanatory to a certain possible extent.
Methods of Classification and coding
Based on nature, they are classified as

1.Raw Material
2.Components
3.Consumable stores
4.Space Parts
5.Tools
6.Packing Materials
7.Work-in – Progress
8.Finished Goods
9.Hardware
10.Motors
11.Gear Box
12.CKD – Completely Knocked down items