Material Management (Unit v)

Material Management

Most manufacturing concerns spend more than 60% of the money they take in, for material, i.e., materials
soak up a substantial portion of the capital invested in an industrial concern. This emphasizes the need for
proper material management and control because even a small saving in materials can reduce the
production cost to a fair extent.
Material management is the planning, directing, controlling and coordinating those activities which are
concerned with materials. It begins with the determination of materials’ quantity and quality and ends
with its issue to production to meet customer’s demand as per schedule.
Materials management includes all activities concerned with material except those directly concerned with
designing and manufacturing of product.

Functions of Materials Management

The functions of materials management are as follows:

1) Material planning and programming.
2) Stores and stock control.
3) Procurement and purchase of materials.
4) Receiving and issue of materials.
5) Simplification standardization and coding of materials.
6) Transportation and handling of materials.
7) Disposal of scrap, surplus and obsolete materials.
Inventory Control
Inventory is defined as the list of movable goods which helps directly or indirectly in the production
of goods for sale. It may also be defined as comprehensive list of movable items which are required for
manufacturing the products and to maintain the plant facilities in working condition. The quantity and
value of every item is also mentioned in the list.
Inventory is actually ‘money’ kept in the store room in the shape of a high speed steel bit, a mild steel rod,
milling cutter or welding electrodes.
Inventory can be classified as: (i) Direct Inventories and (ii) Indirect Inventories.

Inventory Control
Inventory control means making the desired item of required quality and in required quantity,
available to various departments when needed. Too much inventory creates the problem of their storage,
huge investment and maintenance of stored items from deterioration, pilferage, damage etc. However,
low inventory leads to chances of stoppage of production, increase in overheads and disruption in
production schedule and delivery promises. Therefore, optimum amount of inventory should be
maintained in stores.
• Inventory control is concerned with achieving an optimum balance between two competing
objectives. The objectives are:
i. To minimize investment in inventory,

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ii. To maximize the service levels to the firm’s customers and own operating departments.
• Inventory control may be defined as “the scientific method of finding out how much stock should
be maintained in order to meet the production demands and be able to provide right type of
material at right time in the right quantities and competitive prices.”

According to Gardon B. Carson, “Inventory control refers to the process whereby the investment in
materials and parts carried in stock is regulated within predetermined limits set in accordance with the
inventory policy established by management.”

Functions of Inventory Control

1. To run the store effectively.
2. To ensure timely availability of material and avoid build-up of stock level.
3. Technical responsibility for the state of materials. This includes methods of storing, maintenance
procedure, studies of deterioration and obsolescence.
4. Stock control system. Physical verification (stock taking) records, ordering policies and procedures
for the purchase of goods.
5. Maintenance of specified raw material, general supplies, work in-process and component parts in
sufficient quantities to meet the demand of production.
6. Protecting the inventory from losses due to improper handling and storing of goods and
unauthorized removal from stores.
7. Pricing all the material supplied to the shops so as to estimate material cost.

Quantity Standards

Quantity
B
B

E D
Reserve Stock

O B’ D’

L Time (Days)

OA - Maximum Quantity; OE - Minimum Quantity; EA - Standard Order;

OB – Ordering Point; B’D’ (L)- Lead Time.

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There are five important quantity standards used as tool to control inventory.
1. The Maximum Store.
2. The Minimum Store.
3. The Standard Order.
4. The ordering Point.
5. Lead or Procurement Time.
1. The Maximum Store: This term is applied to designate the upper limit of inventory and represents the
largest quantity which in the interest of economy should generally be kept in store.
2. The Minimum Store: This term is applied to designate the lower limit of the inventory and represents a
reserve or margin of safety to be used in case of emergency.
3. The Standard Order: It is the quantity to be purchased at any time. Repeat order for a given product is
always for this quantity until this is revised.
4. The Ordering Point: When the balance falls to the level of ordering point, it is an indication that a new
purchase order must be placed. If not done so, the inventory may exhaust and even the reserve stock will
be consumed before the new material arrives. It may result in stoppage of production.
5. The Lead Time: It is the time which takes the stock to reach from Re- order point to Minimum stock
level.

Economic Order quantity

A problem which always remains is that how much material may be ordered at a time. An industry making
bolts will definitely like to know the length of steel bars to be purchased at any one time. This length of
steel bars is called ‘Economic Order Quantity’.
An economic order quantity is one which permits lowest cost per unit and is most advantageous.
The evaluation of the most economic quantity to be purchased involves calculation of the following
two costs:
(a) Procurement cost or buying cost or set up cost.
(b) Inventory carrying cost.
(a) Procurement Cost. This cost includes the expenditures made on:
i. Calling quotations.
ii. Processing quotation.
iii. Placing purchase orders.
iv. Following up
v. Receiving material and inspecting it.
vi. Verifying and payment of bills.
vii. Other incidental charges etc.
Procurement cost decreases as the order quantity increases.
(b) Inventory carrying Cost. This consists of expenditures made for:
i. Interest on capital investment;
ii. Storage and handling;
iii. Upkeep of material and record keeping;
iv. Insurance;
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v. Cost involving deterioration and obsolescence;

vi. Cost of insurance, property tax, etc..
Carrying costs are almost directly proportional to the order size of lot size or order quantity.
The economic order quantity is obtained by the quantity whose procurement cost is equal to inventory
carrying cost.

Total Cost Carrying Cost

A’

Cost

A Procurement Cost
O
Order Quantity

Methods of Stock Control

Inventory in a company consists of thousands of different items in stock. The control of all these
items creates a serious problem to the management, if the same amount of control is exercised on each of
these items. Therefore in order to execute proper control it is necessary to take selective approach and
find the attention required for each item according to its importance. This is essential for achieving
maximum benefits with minimum efforts and cost.
Depending on the advantages and purposes different analyses have been developed. The commonly
used analyses can be classified as:
1. ABC Analysis: Always Better Control Analysis or Alphabetical Approach.
2. VED Analysis: Vital, Essential and Desirable Analysis.
3. SDE Analysis: Scarce, Difficult and Easily Available Analysis.
4. HML Analysis: High, Medium and Low Cost Inventory Analysis.
5. MNG Analysis: Moving, Non-moving items Ghost items Analysis.
ABC Analysis
ABC analysis divides inventories into three groups in terms of percentage of number of items and
percentage of total value. In ABC analysis important items (high usage valued items) are grouped in ‘A’,
while trivial items (low usage valued items) are grouped in ‘C’ and the remaining middle level items are
considered ‘B’ items.

Category % of item(approx.) %of value (approx.)

A High value items 10% 70%

B Middle value items 20% 20%
C low value items 70% 10%

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A Items: In the total inventory, A items are few in number and thus represent a small percentage of the
total items. However due to high cost and high consumption, they represent a large percentage of
company’s total expenditure.
B Items: These are middle level items which do not require as detailed and close control as A items, but
they need more attention and control than C items.
C Items: These are numerous and inexpensive items.
Control Policies for A items:
1. A items are high valued items hence they should be ordered more, but in small quantities in order
to reduce capital locked up at any time.
2. The future requirement must be planned in advance so that the required quantities arrive a little
before they are required for consumption.
3. Purchase and stock control of A items should be looked into by the top executives in purchasing
department.
4. Maximum effort should be made to expedite the delivery.
5. Ordering quantities, re order point and minimum stock level should be revised more frequently.
Control Policies for B items:
1. The policies for B items in general are in between those for A and C.
2. Order for these items must be placed less frequently.
3. The safety stock should be medium (3months or less).
4. B items are subjected to moderate control.
Control Policies for C items:
1. C items are the low valued items therefore the safety stock of such items should be liberal.
2. Annual or six monthly orders should be placed to reduce paper work and ordering cost and to get
advantage of quantity discount for large orders.
3. In case of these items only routine check is required.

VED Analysis
VED analysis is related to the classification of maintenance spare parts. The spare parts are divided
in to three categories on the basis of their importance and functional utility.
V stands for Vital items, without which production would come to halt.
E stands for Essential items, without which the performance or efficiency of the equipment will be
reduced.
D stands for Desirable items. The remaining items which do not cause any immediate loss in
production come under this category.
SDE Analysis
This analysis is based on availability position of each item. In this analysis:
S refers to Scarce items, which are short in supply and their availability is scarce. This includes
imported item
D refers to Difficult items, which cannot be procured easily.
E refers to Easily available items.

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Material Management (Unit v)

Material Handling
Handling of material is an integral part of the production process. It involves piling, loading,
unloading and transporting parts or raw materials from one place to another. Starting from the point, the
raw material enters the factory gate and goes out of the factory in the form of finished product it is
handled at all stages in between, from the stores to shop, from one shop to another or from one machine
to another on the shop floor.
Material handling may be defined as the handling of raw material, semi-finished parts and finished
products, mechanically or manually through the production as well as storage areas.
Material handling involves the handling of materials, manually or mechanically in batches or one
item at a time within the plant. The movement may be horizontal or vertical or the combination of
horizontal and vertical.
Steps for reducing material handling cost:
1. Lay out. Layout should be according to material handling requirements. For the purpose of layout,
Layout Engineer, Industrial Engineer and Material handling Engineer must work together.
2. Use of Gravity. Use of gravity must be taken as far as possible. For example, work of packaging can
be done at certain height so that packaging can be moved directly into the wagons or truck etc.
placed alongside the platform through an inclined slope.
3. Use of Devices. Material should be handled in lots by means of material handling devices, instead
of moving each item manually.
4. Proper Responsibilities. The work of material handling operations in a plant should be centralised
under a Transportation Officer, who will work in the supervision and guidance of Material Manager.
The idea is that if one man is made responsible.
Inventory Build up
Inventory build-up starts because of the reasons, either (i) items get ordered in excess of the requirement
or (ii) they do not get used at the same rate at which they are received.
Actions required to be taken for avoiding Inventory Build-up:
1) Items with no issues and receipts in last one year should be identified in the beginning of the
financial year. In consultation with production control and research and design department all the
pending purchase orders, if any for all these items should be cancelled.
2) In the cases where items have been received without any issues in the past, matter should be
investigated. These investigations may reveal either of the following:
(a) Items are for new project and utilization is expected to be started in near future.
(b) Items are received for the production planned a few months later.
(c) The item is a replacement for an obsolete item, but will be issued only after existing stock of the
obsolete items is exhausted.
(d) The item is for a product whose production has been suspended or delayed due to a temporary
slump in the demand.
(e) Item is supplied much ahead of the requirement.
(f) The item is not required.
No action is required in the case of (a), (b) and (c), whereas immediate action is called for in
case of (d) and (e), rescheduling the deliveries and reducing the total order quantities. In case of

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(f) total stoppage of further supplies and cancellation of pending purchase order has to be
done.
3) A list of items which are in excess of predetermined levels should be prepared and investigation is
to be done as to why the level has gone up and their supplies need to be slowed down.
4) Do not accept the following reasons for early supplies:
(a) We need the material any way.
(b) What difference does it make if we have a little extra stock?
(c) Let us not harass the poor supplier. Taking back the material will mean a lot of extra
expenditure to him.
(d) If we return the material today, he may not supply in time on the next occasion etc.
Therefore, at the risk of causing some inconvenience to the supplier, goods if received in advance
of intimated delivery schedules should be returned back.