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Module 6 Materials Management

Inventory Management

Meaning and Definition

The term inventory includes raw material, work-in-process, finished goods and stores and spares. MRO inventories Production Inventories In-process inventories Finished goods inventories

Objectives of Inventories
The primary objective of inventory management is to ensure continuous supply of raw materials and facilitate uninterrupted production. Obtaining a reasonable utilisation of people and equipment is one of the reasons for holding inventories.


Inventory costs Ordering Costs Carrying Cost Out-of-stock Cost Capacity costs

Ordering Costs
Cost of placing a order with the vendor of materials
Preparing a purchase order Processing payments Receiving and inspecting the material

Ordering from the plant

Machine set-up Start up scrap generated from getting a production run started

Carrying Costs
Cost connected directly with materials
Obsolescence Deterioration Pilferage

Carrying Costs (According to G.Aljian)

Capital Costs

Storage Space Costs

Inventory Service Costs

Handling equipment costs

Financial costs
Inventory risks costs






Out of stock Costs

Capacity Costs

Back Ordering Lost Sales

Overtime payments when capacity is too small

Lay-offs and idle time when capacity is too large

Factors Influencing Inventory Management and Control


Other Factors Influencing Inventory Management and Control

The objectives of company Qualification of staff personnel Capabilities of personnel Nature and size of inventories Data processing equipment capabilities Potential savings from improved inventory control Availability of data to control inventory Present method of controlling inventories Degree of commitment by management

Type of Product Type of Manufacture Volume of Production


Inventory Control Techniques

ABC HML VED SDE Max-Min System Two Bin System MRP JIT FSN EOQ

Always Better Control Analysis The objective of ABC :
Vary the expenses associated with maintaining appropriate control.

Paretos Law Vital few, trivial many

Procedure for developing ABC Analysis

List each item carried in the inventory by a number

ABC Analysis
% of total annual usage

Determine the annual volume of usage and rupee value of each item

Multiply volume by its rupee value for each item


Compute each items % of total inventory in rupees

Select top 10% of items and classify as A

Select next 20% of items as B

% of total number of inventory items

The next 70% as C


Item A Very Strict Control Very low safety stocks Frequent ordering Control statementsweekly follow up and expediting - Maximum value analysis - Rigorous As many sources as possible Accurate forecast Minimisation of waste review 15 days Individual postings Central purchasing and storage Maximum efforts to reduce lead time Handled by senior officers

Item B Moderate control Low safety stock Ordering 3 months Control statement monthly Follow up periodic Value analysis Moderate Reliable sources 2 or more Estimate based on past data Quarterly review Small group posting Combination purchases Moderate efforts to reduce lead time Handled by middle management

Item C Loose Control High safety stock Bulk Ordering 6 months Control statement Quarterly Follow up in exceptional cases Value analysis Minimum Reliable sources 2 Rough Estimates Annual review Group posting Decentralised purchases Minimum efforts to reduce lead time Can be fully delegated

VED Classifications
Desirable Essential





Fast Moving FSN Slow Moving Non Moving


Q = optimum quantity or EOQ D = Annual demand S = cost of placing a order or Ordering cost H = Holding or carrying cost per unit of average inventory per annum Carrying cost per unit = price per unit X Carrying cost (%)

Materials Management

Materials Management
Materials Management is simply the process by which an organization is supplied with the goods and services that it needs to achieve its objectives of buying, storage and movement of materials. Materials Management is related to planning, procuring, storing and providing the appropriate material of right quality, right quantity at right place in the right time.
Procurement Activities
Materials specifications Value Analysis Supply market research Negotiation Buying Quality Assurance Transportation inbound

Inventory Decisions

Physical Distribution Management

Goods in process inventory Finished good inventory Field inventory Customer

Raw Materials Sub Assemblies Manufactured parts Packing materials


Materials and Profitability

% of > 75 65 - 75 55 65 45 55 35 - 45 Manufacturing Groups Fabrication and construction , tea Wood, sugar, jute, scooters Textiles, ship building , bread Cement , Medicine , Explosives Steel, Cigarettes, newspaper

Materials and Profitability ROI

ROI = Profit Sales

Sales Fixed Assets + Current Assets

The act of buying a item at a price Is a managerial activity which goes beyond the simple act of buying, and included the planning and policy activities covering a wide range of related and complementary activities



Functions of purchasing department


Responsibilities often fully delegated to the purchasing function

Obtaining prices Selecting Vendors Awarding purchase orders Following up on delivery promises Adjusting and settling complaints Selecting and training for purchase personnel Vendor relations

Responsibilities often fully delegated to the purchasing function

Responsibilities often shared with functions other than purchasing function

Responsibilities often divorced from purchasing but of particular interest to purchasing

Responsibilities often shared with functions other than purchasing function


Responsibilities often shared with functions other than purchasing function


Obtaining technical information and advice Receiving sales presentation Establishing specifications Scheduling orders and deliveries Inspecting Specifying delivery methods and routing Expediting

Accounting Purchasing and market research Inventory and warehousing policy Forward buying and hedging policies and procedures Construction contracting Service contracts and agreements Sale of scrap, salvage and surplus Purchasing for employees








Responsibilities often shared with functions other than purchasing function


Responsibilities often divorced from purchasing but of particular interest to purchasing


Contracting for machine and equipment Development of specifications Quantitities or timing on planning deliveries Transportation and traffic Development of specifications Customs Other functions
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Receiving and warehousing Payment of invoices Other functions






Purchasing cycle
Recognition of need Oder Acknowledgement Follow up and expediting

Vendor Rating
Factors that affecting rating: Price Discounts received Maintenance of specifications Promptness of delivery Freight and delivery charges Installation costs Service Financial position Market information cooperation Management competence Credit terms Disposition of rejects Employee training Adjustment policies Cost reduction suggestions Inventory plans

Description of need

Placing the order

Checking the invoice and approval

Selection of source

Determination of price and availability


Techniques of vendor rating:


Categorical Plan
Personnel from various divisions maintain informal evaluation records For each major supplier each person prepares a list of performance factors, which are important to him. Each supplier is assigned an overall group evaluation preferred/neutral/unsatisfactory

Categorical Plan The weighted point plan Critical incidents method Checklist system

The weighted point plan

Each performance factor is given weights

Critical incidents method

Record of events and occurrences related to buyer vendor relationship is maintained Data should reflect positive and negative aspects of performance Discuss ways and means to overcome difficulties, improve performance, determine competence

Determine suppliers performance number Multiply each factor weight by performance number Total to get suppliers final rating.

Vendors should be classified as A, B, C



Checklist system
Buyers checklist to evaluating vendors:

Ethics in Purchasing

Reliability Technical capabilities After-sae service Availability Buying convenience Sales Assistance

Internal Ethics

External Ethics

Code of Ethics