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Importance of materials management :1. Materials input is very important as excess material as inventory causes costs to the company and shortage of material results into stoppage of conversion process and subsequently shortage of finished goods leading to customer dissatisfaction 2. Out of 5Ms, that are inputs to a conversion process, material is substantial in terms of its contribution to product cost, and current assets. 3. 51.1% of product cost is on account of materials. Hence the largest contributor to product cost. This marks out materials function as the largest potential avenue for productivity improvement. 4. Materials account for 70% to 80% of working capital. Effective and efficient management of materials can reduce substantial burden on the finances of company. 5. Accounts payable are mostly to materials suppliers. Hence the importance in management of finance of the company. 6. Quality of the Input and product quality: When the companies become leaner and leaner, it is crucial that inputs should remain in the plant only as long as the Through Put Time demands, and the output product should be Right First Time. The quality of inputs plays a vital role in this situation. 7. Management of materials is crucial in a Just In Time company. Production process needs very strong materials management support to gear up to face challenges of current market 8. Materials management provides information about availability of new products and services in the market which leads to cost efficient changes in the process
Materials management prepares the materials plan to meet the production schedule. Functions of Materials Management :[What is a function? Every person . The plan is then implemented and controlled. Against the authorized demand the material from the store is retrieved and issued. The market forecast is converted into production schedules by production planning and control. Procurement activity includes preparation placement of purchase order.Inventory control – . 4.Materials Planning & Control – This is the primary function of Materials Management. These sets of tasks are called functions of that particular entity. 2.] 1.Storage & Preservation – The procured material is to be stored and preserved against internal and external deterioration and theft. 5. 3. Procurement – Procurement function begins with sourcing the supply after short listing suppliers. Purchase order is placed on the source and the material is procured from the source. moved and positioned as per the storage plan. Handling – The material which reaches the company premise is to be unloaded. follow up. organization or a distinct part of an organization has to perform a set of tasks in order to deliver customer expectations satisfactorily. transportation and handling. An effective method is to rate the vendors on the basis of performance and choose the best.Types of materials :refer to types of inventory.
Product that is not right first time is scrap and thereby waste. Vendor development – The company makes the chosen vendors effective and efficient by providing necessary inputs of training and information. A good vendor is an asset as he makes his customer more effective and efficient 7. The same system is used continuously to assess strengths and weaknesses of short listed vendors for their effective development. The suppliers systems are audited to ensure adherence. When a product is processed two types of wastes are generated. 8. Value Analysis – Continuously trying to improve the value of the product mainly by material substitution is a function of the materials management . This is accepted as unavoidable. Waste control – Procuring standard material and continuously trying to improve yield is waste reduction and control function. Material management should address these wastes and not only should control but reduce the wastes. Vendor rating – Vendor rating is used as a tool for narrowing down the supplier base for productive management of materials function. 9. . Non moving obsolete material is another waste that cripples organization.Inventory control function controls the inventory levels to ensure shortage free and excess free stock to check the costs and ensure customer satisfaction 6. One type of waste is called as standard scrap.
. focus always being on the final outcome. Impact of excellence of one area on other functions was not taken into account. Every function tried to suboptimize their individual function. and some very good storekeepers. orchestrated to achieve company goals. The common thread that binds various functions into a winning combination is the focus on the big picture or the organization’s gain. materials management performs various functions to reach their well-set objectives. Initiatives for individual excellence are undertaken only after ascertaining their favorable impact on final outcome. some excellent movement managers. Unity of command balances conflicting interests of individual functions under integrated approach to materials management. like a compeer’s baton. Performance of this kind did not bring cost benefits to the parent organizations that continued to suffer cost burden. Organizations wondered why do they struggle under the cost burden in spite of such talented managers being their employees. Various functions now come under one control. The big picture should never be lost sight of. These functions are performed by business organizations since a very long time as trade and business have been taking place much before scientific management was thought of.Integrated Materials Management : As we have seen earlier. Traditional Approach Traditionally the organizations performed their functions aiming to achieve excellence in respective areas. This approach created some excellent buyers. like some times we wonder why our rivals win the Cricket World Cup when we have such great individual performers! Integrated Approach This approach ties all functions together. but often this functional excellence was at the cost of each other. while trying to solve the jigsaw puzzle.
Now split the target cost of the product into its components developing a fishbone diagram for product cost. maximizing the profits rapidly. Every competitor closely follows the above equation and identifies the resultant cost after keeping the profit needs of the company intact. This is the profit that materials management is responsible for. Make them earn this profit for justifying their existence in the organization. Fix the identified cost package to materials management and make materials management accountable for reduction by a percentage. A certain cost package gets attached to every individual integrated function and any reduction in this package results into profit for the company. Keeping the above equation in mind. thereby making the company stronger organization . any saving in the cost results into profit. visualizing profit may become a bit difficult. as price is controlled by market. Like a business has to earn profit to justify existence in competition. One should remember the universal equation. entire becomes a strong integrated whole forging ahead in business. This approach makes individual functions accountable for every cost and drives them to innovate ideas to add value continuously as the competition pushes the price to new lower levels. We easily understand concept of profit and its driving force in business when a product is sold for a price higher than the cost.Profit Center Approach When every integrated function of management works like a profit center in an organization. But when sale does not occur. Price = Cost + Profit. Case study:- . This cost is called target cost for competitor. Any successful attempt to reduce this cost without harming the QCD objectives of the company results into profit.
makes a profit of Rs. Return on Investment: an approach to measure profitability ROI= Profit/Sales Sales/[capital assets + current assets] As materials managers if we consciously reduce current assets company’s profits will rise which will be indicated by the ROI.100 crores.3crores]? To increase the profit by 10% one has to raise the sales by 30%. No man’s lands of cost between various functions are now addressed effectively by integrated materials management function. Other expenses are Rs.60 crores] by just 5% same objective can be achieved. Adaptability to EDP – . We should always remember that inventory forms 80% of current assets of the company. Better Accountability – Accountability for materials is now specifically fixed to one position.10 crores [10%] Cost of materials is Rs. Better performance – Performance of Materials management improves on account of the first two results of integration. 4.A company with a turn over of Rs. The company will have to make and sell 30 crores worth products in a tough market like the one which exists today.60 crores. How can you increase profit by 30%? [Rs. Accountability reduces costs and teamwork improves productive performance. 2. Benefits of Integration :1. The inter departmental conflicts are balanced. But keeping the profit center approach in mind. 3. Coordination Various functions are now streamlined.30 crores. As a result various functions work like a team under the control of Materials Manager. if we reduce the materials cost[Rs.
subcontractors. Engineering and Quality control in the process of performing the functions to meet the objectives of customer satisfaction. Only this ensures unfailing satisfaction and delight of the external customer. transportation service providers and internal departments subordinate to the function. Other advantages Present & Future: At present industry in our country is passing through the transition from traditional systems to just in time like production. Finance. production support warehouses. Internal conflicts make computerization untenable 5. Materials management and Finance – . Definition and scope :Definition – Coordination and planning of all functions for controlling materials in an optimum manner to meet customer expectations at minimum cost. Scope of materials management function decisions includes suppliers. Production department is the internal customer for Materials management. Materials management and Production – As we saw earlier JIT system needs very reliable procurement and delivery systems for inputs and outputs. Just In Time needs dependable procurement systems. Only an integrated materials management function can provide such support to operations . Scope Materials management works closely with Production.Computerization requires preparatory work that calls for integrated efforts where there is no scope for conflicts. Hence very close interaction with production department is primary to meet internal customer expectations and customer delight.
This obviously has an impact on design of the product and process of manufacturing. Close interaction with finance function is needed to ensure the above.Timely payment to suppliers is important for the smooth working of the supply chain which is fundamental for strong and dependable delivery system. Organization & control Materials Management is growing in stature on account of changes in management thought process. Materials Management & Other functions of Management Materials Management function is in par with other functions of corporate management so that it can effectively interact with other functions for organizational effectiveness. Hence a close working is necessary between Materials management and Engineering. close working is necessary between Materials management and Quality control. Some of the conventional structures of materials organization are discussed below :- Internal Organization of Materials Management . This provides unity of command and thereby uniform direction. Materials Management & Corporate Organization structure A materials director is usually on the board to give overall directions to the material function in corporate bodies. Materials function has moved into board rooms which is an evidence of its importance in corporate structures. Materials management and Engineering – Materials Management in the course of discharge of their functions plan activities involving change in material inputs. Materials management and Quality control – For the same reasons that as above.
Every plant will have a materials function that receives overall direction from the top management. The control may be centralized or decentralized fully or in parts keeping in mind overall need. Concept of Centralization & De centralization As we were discussing earlier it is the need of the organization triggered by product. Internal Organization based on Commodities An organization needs number of inputs[commodities] for running the conversion process. . Internal Organization based on Function – At the corporate level. Internal Organization based on Location – An organization with multi plant locations structures its materials organization with focus on plant level. process and market that ultimately decides how the control should be exercised on the material function. Centralized headquarters control keeps most of the decision making at level delegating only routine level decision making. Management education can provide knowledge about available options in practice but the choice rests with the corporate management. A sub function can be created for dealing in an individual commodity in order to provide adequate focus. materials function is set up with respective sub functions. New options can be developed to satisfy specific needs conceptually combining various available options. These individual functions coordinate their respective sub functions in various plants or divisions providing function wise expertise to the entire organization.Internal organization is structured on the need of the organization keeping in mind the strengths and weaknesses of individual structures. The materials function in the plant coordinates materials sub functions of that plant. Materials organization can be structured internally with focus on the individual commodities.
5. Buying needs specialized skills specific to the commodity in market specially buying is in large quantities.Decentralized control delegates decision making to unit level enabling the units to respond to their respective environment. independently. Decentralized control can deal with the requirements effectively. 3. Benefit of specialized skills of one individual at the corporate level to all the units or plants. Centralized material research resulting in savings for the company . These problems can occur due to information flow. Decentralized control enjoys the benefit of being close to the customer. Decentralization overcomes problems posed by significant physical separation between Plants and Central Office. There is also the need to interact with various other functions in the plant. Interplant transfer of material to deal with emergencies in individual plants. They may occur due to lack of sensitivity to environment due to physical separation 2. Advantages of Decentralization 1. Knowledge of the market is essential to anticipate market trends in terms of price and availability. Combining the requirements of all units to buy in bulk and gain benefits of bulk buying. Advantages of Centralization 1. Better coordination with production & other functions of the plant: Production is the internal customer of material management function. their requirement is product specific and thereby unique. And interplant transfer to utilize surplus material available at some plant and thereby reduce overall inventory cost for the company. 2. . 4. Uniqueness of product line requirement of each Plant: When individual plants areengaged in production of different products. 3. Benefits of unity of command.
boring of tunnels 4. Laying of Pipe Lines 3. High ways. Specific and Critical performance objectives 3. Supportive to the concept of Profit Center: the concept of profit center as discussed earlier is applicable to each plant and the management functions within.Non repetitive activities 2. These are discussed below to understand the uniqueness of materials needs. Most of these projects are sponsored by Government and implemented by organizations in public and private sector . Building of Bridges. Projects are monitored and controlled with the help of OR tools like PERT/CPM 6. Long time spans Materials Needs of Projects :1. Types of Projects :Some of the project types are mentioned below. . Laying of railroads Features of Project form of production :- 1. Cost objective 4. delays invite heavy penalty 5.Decentralized control can take decisions based on these interactions effectively. A decentralized material management function can effectively work as a profit center and support the plant as a profit center within the corporate body.Time objective. Erection of Steel Plants. Timely Requirement of Materials to meet PERT/CPM needs . Materials production management function for project form of Materials need of projects is unique as the features of a project are unique. 1. 4. Refineries 2.
Unused equipment. Material budget is to be prepared taking into account above need. Banks. 3. Bought out parts and Finished goods] as against a few days in Japan and a month in the US and Europe 4. WIP and Finished goods. which lies in stock without participating in value adding process. WIP and Finished goods.Japanese companies focused their attention on Inventory through now well known concept of 5S at is Inventory? - . bought out parts. Cost overruns are unacceptable in commercial projects. tools and tackles. PSUs 5. it is a big liability 7. gauge and fixtures etc. 6.Inventory is an unused asset. conventional storage arrangements are Interchangeability of Materials and equipment between projects Ability to forecast Costs within the span of project as materials not available on most of the project sites . as companies are engaged in similar types of projects . in fact. 2. INVENTORY MANAGEMENT :1.In our country inventory is always viewed as asset [working capital].Reluctance to scrap useless inventory in time is one of the reasons why we carry huge stocks 8. 5.2. though it is called an asset.Inventory is biggest source of waste 9. 4. WIP.In India 9 to 12 months of sales quantity lies in the form of Inventory [R/M. are needed at different stages of project. raw material. Unconventional Storage. consumables .Huge amount of NPAs in our country. spare parts. 3.If we look around in our facilities we find stocks lying unused for years catching dust and rust in the form of plant and equipment. raw material.
maintenance. 5. Inventory overcomes obstacles due to geographical separation between suppliers and customers.Taxes. De couples internal processes. insurance 3. security 5. 1. components. 2. Inspection gauges and instruments 5. Manufacturing facilities are located at places that make manufacturing economical.Capital cost Costs of carrying inventories - 2. Manufacturing: R/M. F/G. Location inventory: inventory at a fixed location 6. space. MRO: Maintenance. seasonal consumption and production during some other season [woolen garments and umbrellas]. De coupling from uncertainties of market 3.Obsolescence 4. Two machines running sequentially are separated by inventory to make them independent of each other. This is also known as pipeline inventory FUNCTIONS OF INVENTORY :- 1. 2. Tools and fixtures 4.Storage: handling. In transit inventory: inventory in the process of transfer or under going transportation and waiting to be transported.TYPES OF INVENTORY :1. This fact geographically separates manufacturing and market. 3. WIP. Overcomes obstacles due to poor infrastructure 4.Cost of bad quality . Buffer uncertainties of lead time and demand 6. repairs and operating supplies. Balancing supply and demand: seasonal production and year round consumption [agricultural products].Opportunity cost 6.
Materials in many processes are flow controlled ie. 4. The demand or usage is constant . 2. 6. 5. Process is continuous No constraints are imposed on quantities ordered. The demand or usage is predictable . Hence EOQ model is formulated under some limitations. refer to your class notes . storage capacity. If the concept of EOQ is applied without taking into account the limitations results can be disastrous. The price of the item remains constant through out the procurement cycle . 3. If we are not conversant with these limitations. 4. Replenishment is instantaneous All costs are time invariant No shortages are allowed Quantity discounts are not considered itations of Classical EOQ model We have seen that Classical EOQ model made assumptions that are really not realistic. budget etc. managerial application of this concept can be counter productive. Economic order quantity– umptions of Wilson’s lot size formula or Classical EOQ model Demand is at a constant rate and continuous 1. When the model is put to practical use we find that so many adjustments are needed to be made. 3. INVENTORY CALCULATIONS :Please . . materials move in pipe lines starting and stopping depending on operational requirements . jor limitations are some of the assumptions made 1. 2.
. But as the concept is now enlightened and minimization of the costs in the supply chain is the focus. the company never used to worry about this aspect.00 per order 302 U rate R1 [applicable to EOQ $1.ustments to EOQ 1.00 quantity = 300 U] Shipment rate R2 [applicable to 480 U quantity] Alternative 1 Q [EOQ] = 300 Inventory carrying cost $150 Ordering cost $152 Transportation cost @ $1 per U $2400 Total cost $2702 Alternative 1 Q = 480 $240 $1800 $2135 2. In the traditional approach when inbound logistics are totally vendor’s responsibility. Hence we should always evaluate batch sizes from total cost perspective. Volume transportation rates – EOQ model does not consider cost of transportation of goods from vendors place to the purchaser. this aspect is very significant Annual demand Unit value Inventory charge Ordering cost Shipment 2400 U $ 5.00 $19. If the quantity suggested by EOQ model does not get favorable transportation cost. Transportation costs are sensitive to weight of consignment. Quantity discount – Impact of quantity discounts is seen if we look at the costs by doing summation of inventory costs and relief derived out of quantity discounts. summation of inventory cost and transportation cost may be detrimental to the interests of the organization.
The budget has to satisfy the requirement of entire product line. c) d) e) ABC Analysis 80 – 20 rule. if EOQ suggests one and a half package then transporting half package becomes more expensive than transporting two packages with enhanced order quantity.Quantity discounts can upset the benefit of EOQ if we don’t evaluate the situation from total costs perspective. Identification significant 15% to 20%items responsible for 80% of value for close management control – selective management control Effective management of inventory – results in short span of time . refer to your class notes Benefits of ABC Analysis - 1. 2. Other EOQ adjustments a) Production lot size – Buyers EOQ and suppliers EBQ some times do not match. b) Multiple item purchase – When a combination of several products are sourced from a supplier. Then some adjustment will have to be made to the EOQ to make it practicable. the impact of quantity discounts and transportation costs will be different from that for individual product. So adjustment is required to EOQ from the angle of total cost for the combination of products Limited capital – Budgetary allocations play a significant role in buying. getting a full truck becomes significant from cost perspective Standard package – When a standard package is used for transportation. 3. So the EOQ of various items requires adjustment Private trucking – If the company uses private transport for procurement. also known as Pareto’s rule – Pl.
Essential & Desirable items– Pl. E. refer to your class Comparison of Indian & Global industries Comparison factors Japanese companies US/European co. lead time and its fluctuation of all items is necessary. Slow moving & Non moving items– Pl. 5. criticality of the item is not taken into account. reduction in clerical work and time. INVENTORY POLICIES :P Model. Helps in selection of appropriate inventory control models or systems.5 to 2 years . 4. refer your notes for the matrix for ABC & VED items in the store.g. 1. B. Allocation of management resources to significant items. 3. Q Model. Optional replenishment Model– Pl. refer to your class notes also pl. FSN Analysis – Fast moving. General Indian co. Price of an item is assumed to be same through out the year. ‘Q’ model or ‘P’? Helps in formulation of inventory policy Limitations of ABC Analysis An exhaustive analysis of all items in the whole organization is required to make ABC analysis a useful effort. refer to your class notes notes . To carry out this exercise high degree of standardization and codification is primary. In practice it is unlikely to be so. This exercise is obviously time consuming.3. 2. 1. VED Analysis Vital. Focus is only on money value. A.Cycle time from production1 to 2 years 3 to 6 years 0. & C items should be identified for the whole organization for which data regarding consumption pattern. Only then the benefits can be felt.
2. rejection rate 3 to 4 PPM 30 to 40 PPM TO 20 RPH 8 5. inventory level A few days of sales One month of t0 12 months of sales 9 sales 3. 32 4.5 Lacs Rs. quality cost with respect to5% TO 10% 35% TO 45% 3% TO 5% .to development 2. 12 Lacs Rs. output per employee Lacs Rs.
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