Professional Documents
Culture Documents
Materials Management
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Includes procuring materials, their transportation, storage, issuing material to various sites,
maintaining records and data for effective control and to provide useful guide for future
Procurement
o Deals with acquiring materials necessary for construction from suitable sources
o Aims to contribute to the overall reduction in material cost through efficient
procurement processes
Transportation
o Materials undergo considerable movement
Transport from source to stores
Classification of Materials
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Classification
ABC (Always Better Control)
Criteria
Annual Value of Consumption
2.
Unit Price
3.
Critical Nature
4.
Availability
7.
8.
XYZ
Inventory Value
5.
6.
Source
Issues from Stores
Seasonality
ABC Analysis
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ABC analysis, is a technique, which helps the management in classifying and controlling the
inventories in terms of their cost
It helps materials management concentrate its efforts more where the results are more
important
Materials are classified into three categories A, B and C , according to their costs
It is particularly useful in dealing with projects when a large number of items of varying costs
are used
o Procedure
For a given project, a list of materials along with their quantity requirements
is prepared and the cost of each material is also worked out
S. No.
Material
Quantity
Unit Rate
Percentage
Material
Quantity
Cost
10% of materials
20% of materials
70% of materials
Cost
Cumulative
Cost
70% of cost
20% of cost
10% of cost
% of items
% of cost
Category
Cumulative
%
70%
90%
100%
1.
10
70
2.
20
20
3.
70
10
The analysis does not depend on the unit cost but its total cost
Features
ABC analysis enables us to give a classification as A, B, C depending on its
cost in proportion to the total cost
Usually in a project, a small percentage of items account for a high
proportion of cost. A large number of items make up a small cost of materials,
while remaining materials form the middle order
Implications
Since A class items account for a major cost of the material, these items need
very careful control. The investment on the inventory of these items should
be reduced as much as possible. Planning should be done on a long term basis
as emergency purchasing may be costly. The buying should be as frequent as
possible. Safety stock should be calculated very carefully and should be as
small as possible
C class items, though large in number constitute a small proportion of cost of
materials. These materials may be purchased locally and bulk orders can be
placed. Large stocks can be held in reserve
ABC analysis not only helps in exercising selective control when dealing
with a large number of items of varying costs, but it also enables the material
manager to rationalize the number of orders and reduce the overall inventory
by readjusting the number of orders for the materials of different categories
Example
Item
P
Q
R
Coding
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o
o
o
o
Should cover range of all materials, not only present but also those likely to be used
in future
Must be consistent and logical
Should be simple and easy to understand
Should be flexible to accommodate new items
Source of Supply
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The purchasing department is interested in buying materials of the required quality in the
required quantity at a particular time and at the most competitive price
Though price is an essential criteria, it cannot be the only criteria for selecting a supplier
An objective approach to this problem is to introduce a quantitative assessment of the various
factors other than price into purchase formula. This is known as vendor rating
It helps in evaluating the factors of quality and delivery time offered by the supplier and
evolving an objective rating for the supplier
Rate of rejection can also be noted and the supplier can be assigned suitable rating
Qualities of a Good Supplier
o Provide materials of specified quality
o Adhere to the delivery schedules
o Caution the user ahead of time of the shortages
o Keep client aware of new/ substitute materials
o Help the client in the event of unexpected situations
o Promptly attend to the complaints
Qualities of a Good Purchaser
o Realistic quantity of the material to be purchased
o Prompt payment of suppliers bill
o Avoid frequent changing of suppliers
Price refers to the amount paid for materials and is expressed as Rs per unit
Cost covers other relevant expenses over and above price. Thus, price is a component of cost.
The relevant expenses would be transport, storage, etc
Value would depend on the need of the material, its urgency and availability
Centralized purchasing indicates that the entire purchase is done at one place
Beneficial when various projects are located within a reasonable distance as discounts are
available for bulk purchase and better control over quantity and quality
However, may not yield desired benefits if the works are scattered over a larger area or
different materials are needed for different works
Decentralization indicates that materials are purchased at different places
Involves purchasing of smaller quantities and entire procedure is duplicated at each
purchasing centre
Decentralization may be necessary because of the scattered works, dissimilar nature, etc
Scrutiny of Offers
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It is necessary to look for the conditions for payment, place of delivery and any other
modifications in conditions
Purchasing department
Engineering/ Design department
Tendering/ Planning department
Stores department
Transportation department
- Accounting department
- Stock/ Inventory
Contract
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There is an implied warranty that in case the materials do not fulfil the
intended use, the purchaser can claim damages
Sample based Contract of Sale
Materials to be supplied on the basis of sample have many advantages form
purchasers point of view
Authentic samples must be signed by all the parties and must be preserved
properly like any other contract document
Payment for Materials Supplied
Time of Payment
Place of Payment
Mode of Payment
Guarantee and Warranty
Guarantee: The promisor undertakes to be answerable to promise for any
default either of his own or any other person whose primary liability exist or
is contemplated
Warranty: Only of a collateral nature to the main purpose of the contract. The
breach of condition gives rise to claim for the damages but does not make the
contract liable to be rejected
Settlement of Disputes: Whenever any dispute arises between the parties to a contract,
generally arbitration is resorted to. Arbitration is less time-consuming than litigation. It is,
therefore, desirable to include a clause for arbitration in the conditions of sale
Law of Agency
o This law is relevant to materials purchased
o A person or a party who is legally competent to enter into a contract with another
person/ party can do so either by himself or through a third person/ party. If he
employs third person/ party for entering into a contract he is said to have employed or
be acting through an Agent
o The person on whose behalf the agent acts is known as Principal
o As per Law of Agency, person/ party who does anything through another principal/
party does it by himself
o Agreement between agent and principal may not necessarily involve any
consideration
o Relationship between the agent and the principal may be express or implied
agreement
Inventory Control
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Inventory Control has to be based on the formal consideration of various factors such as
o Demand of the material
o Lead time
o Price of the material
o Minimum size to be offered at a time
o Discounts available on bulk purchase
o Mode of transport
o Minimum quantity that can be economically transported
o Uncertainty associated with availability of material
o Cost of handling and storage
o Deterioration due to handling and storage
There has to be a compromise between understocking and overstocking as both will have
adverse effects on project economics
Types of Inventory
o Consumable/ Raw Material: Goes into construction and forms part of the structure
o Supporting Consumables: Petrol, diesel, etc
o Purchased Items: Plumbing fixtures, fixtures for doors and windows, etc
o Items Produced on Site: Bricks, tiles, etc
o Spares
Classification helps in identifying the characteristics of the material and arrange for its proper
storage
As the inventory/ stock represents idle locking up of the capital, one would desire that there
should preferably be no inventory/ stock. The materials should be so procured that they are
directly consumed in the construction
One of the factors to be considered in procurement of material is lead time. It is the period
that elapses between the point of time when the need for material is contemplated and the
point of time the material is actually available on the site of construction for use
Inventory Costs
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The Economic Order Quantity can be arrived at analytically. The relation is based on
following assumptions
o The demand over the period of cycle is constant and is known in advance
o Consumption of materials occurs at a uniform rate
o The price of the material is independent of the order
o There is no lead time in replenishment
Let
o A be the annual demand in terms of units
o Q be the lot size ordered at a time in units
o P be the price of the materials
o H be the inventory holding cost expressed in Rs
o S be the ordering cost in Rs
Q = Square root of (2AS/ PH)
Example from Study Material
If the EOQ is less than the quantity, which can attract discount, then it needs to be examined
what will be the total cost if a bulk quantity is ordered. In this event, the ordered size being
more, the inventory holding cost will be reduced and the number of orders will also be
reduced, thus reducing the ordering costs
Example from Study Material
A little variation or rounding up of either the costs or the EOQ will not have adverse effect on
the total cost
An approximation of 10-15% may not affect the cost by more than 1%
This is an advantage as EOQ can be suitably rounded off to the nearest unit available in the
market
EOQ may work out to 57 but the material may be sold in the market in packs of dozens. In
such a case the EOQ can be 60 without affecting the economy of purchase and storage
EOQ is mainly governed by the ordering cost and holding cost irrespective of the description
of the material. Therefore, for a project after working out ordering cost and holding cost, a
ready reckoner table can be prepared for EOQ. For any material whose cost of annual demand
is known, we can find out EOQ value from which the physical quantity can be worked out
The assumptions of simple deterministic model are too simple to be realized in actual practice
o Rate of consumption will always be varying and never be constant
o Lead time can never be zero
It is not possible to wait till the stocks are completely exhausted but start replenishment
earlier to cover the consumption during the lead time. Hence, there must be a provision for
safety stock
Inventory systems designed to cover the two possibilities mentioned above are
o Reorder Point System or Fixed Order Quantity System
An inventory level is fixed known as reorder level or reorder point
If the stock of material touches this level, an order of predetermined fixed
quantity (generally EOQ) is placed
The fixed level of stock is created to cater to
Average consumption during lead period
Fluctuations in rate of consumption
The system works satisfactorily if two conditions are satisfied. If not, safety
stock will be depleted and there may be stock out position
Lead time in not prolonged
Fluctuations in the consumption are not wide
A check for the working of this system would be that at any time stock at
hand plus the orders pending should be equal to or more than the lead time
consumption
o Periodic Review System: Varying Lead Time and Varying Consumption Rate
For materials which are not very costly or do not deteriorate appreciably on
stocking, safety stock is generally worked out on adhoc basis and is as far as
possible on the safer side
For materials that are costly and likely to deteriorate, the approach has to be
more scientific. In both methods a continuous review is taken
P-System
o Number of orders to be placed are fixed but the quantity
ordered every time varies based on the results of the review
Q-System
o Quantity ordered is fixed
o Period of order is not the same
Economic Lot Size of Production
o Some items are produced at site rather than purchasing from the market, hence there
is economic lot size to be produced per batch
o Rate of production should match the consumption when no stocks pile up
o At times, the same set up is used for manufacturing different items. In such cases, a
certain quantity of an item is manufactured and held in stock and the set up is
changed over for some other item, till the time stock of first item is depleted
o Set up cost in this case is similar to ordering cost and is considered constant per set up
o Let
D be the rate of demand (constant)
P be the rate of production (constant)
Q be the quantity produced in the batch
M be the maximum inventory held
H be the inventory cost per day in Rs
S be the set up cost
o
o
o
o
o
o
o
Types of Storage
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Mainly responsible for the administration of the storage of materials entrusted to his charge
He should know to handle materials even if not aware of technical qualities
He should be aware of the problems such as dampness, temperature effects, fire hazards, etc
associated with the storage
He should be fully aware of the stocks of the materials he has in the store and must be able to
lay hands on it when there is demand
He deals not only with materials but also people from different sources. He should develop
good relations with all concerned
He should be honest and dependable
The main responsibility relates to holding the materials in good condition and making it
available when needed on the construction site. Maintaining up to date records and
submission of timely reports
Transportation
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By analysing the data of the materials transactions, useful information can be generated which
can serve as the basis for estimation or tendering for new construction works
This analysis can be carried out in the Engineering department, Accounts department or
Materials department depending on the size of the organization
Data to be analyzed will be
o Cost of Materials
o Cost of Transport
o Storage
o Consumption
o Miscellaneous
The above data can be combined to work out useful information
o Overall unit cost of material
o Cost of transporting unit material over a unit distance
o Cost of storage of unit material
o Cost of placing an order
o Requirement of materials
Proper coordination and control can be implemented through a well designed system of
reports and records
o Requisition Form
o Advice note to Purchase
o Inviting quotations
o Scrutiny of the quotations
o Placement of Order
o Rejection of Materials
Classification of Materials
o Materials in a project can be broadly classified into three categories
Capital equipments
One-off type of materials and are required in limited numbers
Performance of these equipments ultimately governs the benefits
from the implementation of the project
Construction machinery
Procured in initial phase of the project
Include earthmoving equipments, cranes, compressors, etc
Consumables
Materials which are consumed at different rates throughout the entire
span of the project such as cement, steel, etc
Codification of Materials
o Codification serves two purposes
Proper and Easy identification
Material accounting and Control
o Following codification system may be adopted for different classes of materials
Capital equipment
Capital equipments are associated with particular activity and this
needs to be incorporated in the coding of these materials
The same code as the activity can be used with the advantage of easy
identification of the capital equipment
110013/V1, 110013/M1
Construction machinery
Construction machinery is used as a resource in project
Code for these materials are used for the allocation of these resources
and for procurement of relevant spares for the machinery
Project Code/BD1, Project Code/COMP1
Consumables
Not worth spending much time in codification as the life span is
limited by project duration
A simple three to five digit code is preferable to be used for these
materials
1-50 (steel plates), 51-100 (steel rods)
Material Planning
o Capital equipments are to be planned in such a way that these are available at the site
just before the erection/ installation of these. Since different equipments are to be
erected/ installed at different periods, a sequential arrival of capital equipments based
on their respective installation period is desired
o Demand for construction is known as soon as the resource requirement for the project
is finalized. The construction machinery is required before the construction can start
and are to be planned for availability prior to construction phase of the project
o To take into account the varying demand rate in the planning of consumable materials
it is desirable to draw the aggregate demand pattern of the material for the entire
project duration. The concept of EOQ can be used in planning for consumables
Procurement
o Vendor selection plays an important role
o Contingency procurement plans are also necessary to minimize the effect of
undesirable performance by vendors