UNIT 1

Materials Management
Materials Management is the planning, directing, controlling and
coordinating those activities which are concerned with materials and
inventory requirements, from the point of their inception to their
introduction into the manufacturing process. It begins with the
determination of materials quality and quantity and ends with its
issuance to production to meet customer’s demand as per schedule and
at the lowest cost. Materials Management is a basic function of the
business that adds value directly to the product itself. Materials
Management embraces all activities concerned with materials except
those directly concerned with designing or manufacturing the product.
Materials Management deals with controlling and regulating the flow of
material in relation to changes in variables like demand, prices,
availability, quality, delivery schedules etc. Thus, material management
is an important function of an organization covering various aspects of
input process, i.e., it deals with raw materials, procurement of machines
and other equipment’s necessary for the production process and spare
parts for the maintenance of the plant.
PURPOSE OF MATERIALS MANAGEMENT:
1. To satisfy demand during period of replenishment
2. To gain Economy in purchasing
3. To carry reserve stock to avoid stock out
4. To Stabilized fluctuations in consumption
5. To provide Reasonable level of client services
FUNCTIONS OF MATERIAL MANAGEMENT
 Material management covers all aspects of material costs, supply and
utilization. The functional areas involved in material management
usually include purchasing, production control, shipping, receiving and
stores.
1. Production and Material Control:
Production manager prepares schedules of production to be carried in
future. The requirements of parts and materials are determined as per
production schedules. Production schedules are prepared on the basis of
orders received or anticipated demand for goods. It is ensured that every
type or part of material is made available so that production is carried on
smoothly.
2. Purchasing:
Purchasing department is authorized to make buying arrangements on
the basis of requisitions issued by other departments. This department
keeps contracts with suppliers and collects quotations etc. at regular
intervals. The effort by this department is to purchase proper quality
goods at reasonable prices. Purchasing is a managerial activity that goes
beyond the simple act of buying and includes the planning and policy
activities covering a wide range of related and complementary activities.

3. Non-Production Stores:
Non-production materials like office supplies, perishable tools and
maintenance, repair and operating supplies are maintained as per the
needs of the business. These stores may not be required daily but their
 availability in stores is essential. The non-availability of such stores may
lead to stoppage of work.
4. Transportation:
The transporting of materials from suppliers is an important function of
materials management. The traffic department is responsible for
arranging transportation service. The vehicles may be purchased for the
business or these may be chartered from outside. It all depends upon the
quantity and frequency of buying materials. The purpose is to arrange
cheap and quick transport facilities for incoming materials.
5. Materials handling
It is concerned with the movement of materials within a manufacturing
establishment and the cost of handling materials is kept under control. It
is also seen that there are no wastages or losses of materials during their
movement. Special equipment’s may be acquired for material handling.

6. Receiving
The receiving department is responsible for the unloading of materials,
counting the units, determining their quality and sending them to stores
etc. The purchasing department is also informed about the receipt of
various materials.
OBJECTIVES OF MATERIAL MANAGEMENT
Materials management contributes to survival and profits of an
enterprise by providing adequate supply of materials at the lowest
possible costs.
1. Material Selection:
Correct specification of material and components is determined. Also
the material requirements in agreement with sales programme are
assessed. This can be done by analyzing the requisition order of the
buying department. With this standardization one may have lower cost
and the task of procurement, replacement etc. may be easier.
2. Low operating costs:
It should endeavor to keep the operating costs low and increase the
profits without making any concessions in quality.
3. Receiving and controlling material safely and in good condition.
4. Issue material upon receipt of appropriate authority.
5. Identification of surplus stocks and taking appropriate measures to
produce it.
The outcome of all these objectives can be listed as given below:
a. Regular uninterrupted supply of raw-materials to ensure continuity of
production.
b. By providing economy in purchasing and minimizing waste it leads to
higher productivity.
c. To minimize storage and stock control costs.
d. By minimizing cost of production to increase profits.
e. To purchase items of best quality at the most competitive price.
ADVANTAGES OF MATERIALS MANANGEMENT
1. Material cost can be lowered
2. Controlling of indirect cost
3. Risk of inventory loss minimized
4. Reduction in the laws of time of direct labour
5. Cost of material used in different department ascertained
6. Control of manufacturing cycle
7. Material congestion in storage avoided
8. Improvement in delivery of the product
PHASES IN MATERIAL MANAGEMENT
1. Planning: Plans for capacity or production levels and required inventory
levels.
2. Material utilization: efficiency of the flow of materials through the plant.
3. Physical: storing, receiving and issuing of materials and physical
checking of inventory of raw materials, work in process, finished goods
and record keeping.
4. Control or follow up: feedback and corrective action involved.
AIM OF MATERIALS MANAGEMENT
To get:
1. The right quality
2. Right quantity of supplies
3. At the right time
4. At the right place
5. For the right cost
CHALLENGES OF MATERIAL MANAGEMENT
1. Selection of appropriate vendors.
2. Land and storage cost increase.
3. Difficulty in forecasting demand accurately.
4. Scarce capital for investment in materials inventory.
5. Diversification of product lines.
6. Optimizing time and quantity for products
7. Management of information.
 RELATIONSHIP OF MATERIAL MANAGEMENT WITH
OTHER AREAS OF MANAGEMENT FUNCTIONS
1. Materials and profitability: The materials department can contribute
effectively to corporate profits because this function results in a major
portion of the cash Outflow in a business. Materials manager can
substantially contribute in saving material cost by effectively managing
the materials. The material manager can suggest the new alternatives to
reduce the cost or dependence on imports of materials. The import
substitution also results in savings of valuable foreign exchange, thereby
helping in the growth of the economy.
2. Material Management and Production department: Material department
helps in a long way in providing uninterrupted supply of materials.
Unless there is a close harmony and mutual trust between these two
departments, the unrestricted flow of production cannot be maintained.
There is a tendency in a majority of production departments to blame the
materials department for poor quality of goods. The high rejection of
goods is because of poor quality and may be on account of poor
handling of materials in the production department. The materials
department advises the production department promptly of any change
in quality, quantity, increased rejection, thereby enabling any changes in
scheduling to be carried out with minimum delay. For spare parts
needed in the production department, a similar interrelationship exists
between the materials department and maintenance department. Material
cost is the major component of the cost of production. Any pricing or
engineering or development decision can be taken only after getting
proper advice from the purchasing department. This provides an
opportunity to the materials department to play an advisory role in its
relation to the production department. Thus, the production and material
department are interrelated and interdependent.
3. Material Management and Finance department: The relationship
between the material and finance departments can be compared to the
relationship between the examinee with an examiner. The finance
department is concerned with providing finance for the materials
purchased and it may find fault with the materials purchased. If finances
are not quickly made available the relationship with the suppliers would
be adversely affected, it is the duty of the materials department to create
a relationship of mutual trust and understanding with the finance
department for proper allocation of funds for purchasing the materials. It
must be assured that the cash outflow in materials is properly planned by
preparing a materials budget fixing economic order quantity, maximum,
minimum and danger levels, so that, there is neither overstocking nor
understocking.
4. Materials Management and Personnel department: The personnel
required in the materials department are recruited and selected by the
personnel department. The materials department should not employ the
unwanted or rejected people from the other departments. Instead, the
employees should be expert in handling various activities such as
inviting tenders, preparing comparative statements, meeting the
suppliers, drafting order for materials and taking up the follow up action.
The manpower planning of materials department should be done well in
advance, taking into account the purchasing functions, import
substitutions, vendor rating, cost reduction and purchase intelligence.
The basic mantra of success of management lies in the principle that
there should be right man for the right job must be strictly followed
while developing the organizational structure. The success or failure of
any department depends on the people working there. The persons who
are selected should be such who are ready to learn new skills and are
sincere and dedicated towards the organization. An effort should be
made to avoid understaffing and overstaffing of personnel in the
 materials department as both adversely affect the functioning of the
department.
5. Relationship between Material and Marketing department: Consumer is
the king in the modern marketing scenario. The consumer must feel that
the finished products purchased by him are of high quality and are
durable. He expects that a right quality product is being purchased by
him at the right price and right time. The success or failure of an
organization ultimately depends on the acceptance of products by the
ultimate consumers. The material being the prime component plays a
vital role in creating and maintaining the satisfied consumers.

INTEGRATED MATERIAL MANAGEMENT

Integrated Material Management of a manufacturing firm is part of the
management which ensures coordination between different departments
of the firm.
The management needs to develop a comprehensive material
management system to establish a pathway for the most effective use of
the resources through new technological advancements, methods and
concepts. The major resources are the manpower, material and money,
and hence the material management attains its critical position for
growth of the manufacturing organization.
Integrated material management at a broader level refers to management
of resources in an integrative manner to facilitate economic development
of a nation through efficient utilization of MIS, advanced technologies
and innovative low-cost material procurement for manufacturing.
The areas which come under the framework of Integrated material
Management are:
1. Material Planning/material Requirement Planning
2. Purchasing
3. Receiving & Inspection
4. Storekeeping & Warehousing
5. Inventory Control
6. Handling and Transportation, including Logistics & Physical
Distribution Management
7. Scrap & Surplus Control and Disposal
8. Cost Reduction Techniques like Value Analysis, Standardization,
Variety Reduction etc.
9. Forecasting & Market Analysis
OBJECTIVES
1. Procuring better value
2. Obtaining better yield
3. Reducing investments in stock through Inventory control and material
flow.
ADVANTAGES
1. Better Accountability: By effective centralization of authority and
responsibility for all aspects of material function, a clear-cut
accountability is established. This helps in evaluating the performance of
material management in an objective manner.
2. Better Co-Ordination: When a material manager is responsible for all
functions related to material management, it results in better support and
co-operation in accomplishment of material function. Better co-
ordination creates an atmosphere of trust and better relation between the
user departments and the material management department.
3. Cost effectiveness: After the material are purchased by the organization
and brought into the production centers, their value begins to increase in
 the form of costs associated with material order, transferring them to
inventory, and their maintenance and handling.
4. Improved Performance: As all the inter-related functions are integrated
organizationally, better performance and effectiveness is achieved. The
need for materials is promptly brought to the notice by material planning
and purchase department is supplied with stock levels and orders status
by stores department.
5. Adaptability to Computerization: The Centralization of material
functions has made it possible to design data processing systems. The
integrated material management facilitates the collection, process and
analysis of data, leading to better decisions. Computerization can be
economically introduced under an integrated set-up.

UNIT 2
MATERIAL PLANNING
Materials Planning has been defined as the scientific way of determining
the requirements of raw materials, components and other items needed
for production within the economic investment policies.
The factors affecting materials planning can be classified into micro and
macro factors. Factor such as price trends, business cycles, government
policy, credit policy etc. form part of macro factors; while factors such
as corporate objectives, plant capacity utilization, working capital, lead
times, inventory levels, delegation of power, seasonality, communication
system etc. are micro in nature.
TECHNIQUES OF MATERIALS PLANNING:
Bill of Materials Explosion: The planning for materials management is
aimed at determining the demand for the end-products. This is possible
only through farsightedness or forecasting. Therefore, forecasting forms
“the basis for materials planning. There are various techniques for
forecasting. These techniques are equally applicable to demand
forecasting.
The techniques are:
Moving averages method
Exponential smoothing and Time series.
After demand forecast the exercise of materials planning starts.
Requirements for various materials are ascertained from the demand
forecast. For this purpose, the bill of materials is used through explosion
charts. Here the use of computers is very effective for “exploding” bill
of materials with demand forecasts. The bill of materials is prepared and
issued by the planning or engineering department in a standard form. An
explosion chart is just a series of bills of materials grouped together in a
matrix form so that combining the requirements for different
components can be done. Materials planning are usually made for a
short period on a quarterly basis and at the beginning of every quarter; it
is quite natural to find that some materials are in short supply and some
in excess. This can be ascribed to wrong forecasting. To rectify such
errors in the estimation of materials, quarterly planning is resorted to. In
engineering industries, even quarterly planning seems to be too long and
realistic ordering is placed with the suppliers.
Past Consumption Analysis: For continuously needed materials and the
materials where no bill of materials is possible, this technique of
analysis is adopted- The past consumption data is analyze and a
projection for the future on the basis of past experience and future need
is made. To prepare such a projection, “average” or “mean”
consumption and the “standard deviation” are taken as bases and as
guidelines for each item.
These are all statistical tools and are very effective to absorb the stock of
fluctuation in consumption of direct and indirect materials where no
straight-forward norms of consumption can be formulated. In the
process industries, this technique is particularly suitable.
FACTORS AFFECTING MATERIAL PLANNING
Material planning activity can be influenced by several factors,
classified into two categories:
Macro factors: These factors concern the rapid changes in global
environment, such as global price trends, business cycles, import/export
policies of the government, etc., which can influence the material
planning. The government’s credit policy plays a critical role in banks
following the guidelines mentioned therein, during the course of
extending financial support to a business enterprise.
Micro factors: These factors concern changes that may take place within
the organization, such as plant capacity utilization, production plan,
acceptable inventory holding, lead times, rejection rates, working
capital, delegation of power, communication, seasonality, etc. that can
affect the material planning.
MATERIAL REQUIRED PLANNING [MRP]
Material Requirements Planning (MRP) system is a planning and
decision-making tool used in the production process which analyses
current inventory levels vs production capacity and the need to
manufacture goods, based on forecasts. MRP schedules production as
per bills of materials while minimizing inventory. The technique is
computerized and looks at requirements within a fixed period.
Material requirements planning (MRP) is a computer-based inventory
management system designed to assist production managers in
scheduling and placing orders for items of dependent demand.
Dependent demand items are components of finished goods—such as
raw materials, component parts, and subassemblies—for which the
amount of inventory needed depends on the level of production of the
final product. For example, in a plant that manufactured bicycles,
dependent demand inventory items might include aluminum, tires, seats,
and bike chains.
MRP works backward from a production plan for finished goods to
develop requirements for components and raw Materials. MRP begins
with a schedule for finished goods that is converted into a schedule of
requirements for the subassemblies, the component parts, and the raw
materials needed to produce the final product within the established
schedule. MRP is designed to answer three questions: what is needed?
how much is needed? and when is it needed?"
MRP breaks down inventory requirements into planning periods so that
production can be completed in a timely manner while inventory levels
—and related carrying costs—are kept to a minimum. Implemented and
used properly, it can help production managers plan for capacity needs
and allocate production time. But MRP systems can be time consuming
and costly to implement, which may put them out of range for some
small businesses. In addition, the information that comes out of an MRP
system is only as good as the information that goes into it. Companies
must maintain current and accurate bills of materials, part numbers, and
inventory records if they are to realize the potential benefits of MRP.
OBJECTIVES OF MRP
1. Inventory reduction: MRP determines how many components are
required when they are required in order to meet the master
 schedule. It helps to procure the materials/ components as and
when needed and thus avoid excessive buildup of inventory.
2. Reduction in the manufacturing and delivery lead times: MRP
identifies materials and component quantities, timings when they
are needed, availabilities and procurements and actions required to
meet delivery deadlines. MRP helps to avoid delays in production
and priorities production activities by putting due dates on
customer job order.
3. Realistic delivery commitments: By using MRP, production can
give marketing timely information about likely delivery times to
prospective customers.
4. Increased efficiency: MRP provides a close coordination among
various work centers and hence help to achieve uninterrupted flow
of materials through the production line. This increases the
efficiency of production system.
MRP PROCEDURE
Exploding: achieved by using the Bill of Materials (BOM), i.e., how
many components are needed to prepare one item of manufacturing?
Netting: the net quantity of material calculated by computing the
difference between the stock available in the factory from the overall,
gross requirement. This figure is provided by exploding.
Offsetting: lead time is estimated for the entire operation that helps
practitioners to compute the expected time for manufacturing. It also
advises when the manufacturing process should begin so that items are
available on the promised date.

FUNDAMENTAL CONCEPTS OF MRP

Independent Demand: An inventory of an item is said to be falling into
the category of independent demand when the demand for such an item
is not dependent upon the demand for another item. Finished goods
Items, which are ordered by External Customers or manufactured for
stock and sale, are called independent demand items.
Dependent Demand: If the demand for inventory of an item is dependent
upon another item, such demands are categorized as dependent demand.
Raw materials and component inventories are dependent upon the
demand for Finished Goods and hence can be called as Dependent
demand inventories.
Lead Time: The amount of time that elapses between when a process
starts and when it is completed. Lead time is examined closely in
manufacturing, supply chain management and project management, as
companies want to reduce the amount of time it takes to deliver products
to the market. In business, lead time minimization is normally preferred.
MRP SYSTEM
The inputs to the MRP system are:
1. A master production schedule,
2. An inventory status file
3. Bill of materials (BOM).
Using these three information sources, the MRP processing logic
(computer programme) provides three kinds of information (output)
for each product component: order release requirements, order
rescheduling and planned orders.
MRP INPUTS
MASTER PRODUCTION SCHEDULE (MPS): MPS is a series of
time phased quantities for each item that a company produces,
indicating how many are to be produced and when. MPS is initially
developed from firm customer orders or from forecasts of demand
before MRP system begins to operate. The MRP system whatever the
master schedule demands and translates MPS end items into specific
component requirements. Many systems make a simulated trial run to
determine whether the proposed master can be satisfied.
INVENTORY STATUS FILE: Every inventory item being planned
must have an inventory status file which gives complete and up to
date information on the on-hand quantities, gross requirements,
scheduled receipts and planned order releases for an item. It also
includes planning information such as lot sizes, lead times, safety
stock levels and scrap allowances.
BILL OF MATERIALS (BOM): BOM identifies how each end
product is manufactured, specifying all subcomponents items, their
sequence of buildup, their quantity in each finished unit and the work
centers performing the buildup sequence. This information is
 obtained from product design documents, workflow analysis and
other standard manufacturing information.
MRP PROCESS
Using information culled from the bill of materials, master schedule,
and inventory records file, an MRP system determines the net
requirements for raw materials, component parts, and subassemblies
for each period on the planning horizon. MRP processing first
determines gross material requirements, then subtracts out the
inventory on hand and adds back in the safety stock in order to
compute the net requirements.
MRP OUTPUTS:
1. Planned order schedule which is a plan of the quantity of each
material to be ordered in each time period. The order may be purchase
order on the suppliers or production orders for parts or sub-assemblies
on production departments.
2. Changes in planned orders (reschedule notices).
3. Planning reports like inventory forecast, purchase commitment
reports, stock-out incidences, etc.
4. To project capacity requirements.
ADVANTAGES
1. Assurance that materials and components will be available when
needed
2. Minimized inventory levels and costs associated
3. Optimized inventory management
4. Reduced customer lead times
5. Increased manufacturing efficiency
6. Increased labor productivity
 7. Increased overall customer satisfaction
DISADVANTAGES
1. Heavy reliance on input data accuracy (garbage in, garbage out)
2. MRP systems can often be difficult and expensive to implement
3. Lack of flexibility when it comes to the production schedule
4. Introduces the temptation to hold more inventory than needed
EVOLUTION OF MRP TO MRP II
Manufacturing Resource Planning (MRP II) is an integrated
information system used by businesses. Manufacturing Resource
Planning (MRP II) evolved from early Materials Requirement
Planning (MRP) systems by including the integration of additional
data, such as employee and financial needs. The system is designed to
centralize, integrate, and process information for effective decision
making in scheduling, design engineering, inventory management,
and cost control in manufacturing. Both MRP and MRP II are seen as
predecessors to Enterprise resource planning (ERP), which is a
process whereby a company, often a manufacturer, manages and
integrates the important parts of its business.
MRP II is a computer-based system that can create detailed
production schedules using real-time data to coordinate the arrival of
component materials with machine and labor availability. MRP II is
used widely by itself, but it's also used as a module of more extensive
enterprise resource planning (ERP) systems.
MRP I included the following three major functionalities:
1. master production scheduling
2. bill of materials
3. inventory tracking
 MRP II includes those three, plus the following:
1. machine capacity scheduling
2. demand forecasting
3. quality assurance
4. general accounting
MRP II systems are still in wide use by manufacturing companies today
and can either be found as stand-alone solutions or as part of an
enterprise resource planning (ERP) system. Enterprise Resources
Planning (ERP) software systems are regarded as the successors of MRP
II software.
MRP II MODULE
A typical MRP II system consists of following modules:
1. Business planning
2. Purchasing
3. Forecasting / demand management
4. Inventory control
5. Order entry and management
6. Shop floor control
7. Master production scheduling (MPS)
8. Distribution requirements planning (DRP)
9. Material requirements planning (MRP)
10. Service requirements planning (SRP)
11. Capacity requirements planning (CRP)
12. Accounting
Thus, MRP II covers all activities from business planning to servicing
the customer. In reality, business planning exercise triggers dependency
relationships for all resources in an organization. The
forecasting/demand management module and the order entry system
essentially interface with the outside world and bring recent information
into the planning system. Based on these, production planning, MPS and
other requirements planning can be done. Since the outcome of these
exercises is to procure all items and services from outside and perform
the in-house activities as per plan, the relevant modules are also included
to close the gap. Essentially, the focus is on planning for all the
resources that an operations system requires. The advantage of MRP II
lies in the ability to provide numerous feedback loops between different
modules and minimize re-planning on a piece-meal basis. As more and
more gaps are closed, it promotes a centralized approach to planning and
promises to bring additional benefits arising out of integration.
ADVANTAGES
Although it uses technology to apply the concepts in the manufacturing
environment, MRP II is not a proprietary software program. Instead, it is
an overall strategy that helps manufacturing leaders plan their resources
for maximum efficiency. This in itself is the top advantage, since
planning ensures that manufacturers have the materials and human
resources, they need to handle production on a day-to-day basis. This
preplanning also reduces waste, since it allows management to only
order what they need.
MRP II also creates standards that can be enacted across all areas of
operations. Once those standards are firmly put in place, leadership can
then regularly monitor performance and highlight areas where
improvements can be made. As the company grows and more demands
are placed on existing resources, the manufacturer will already have
processes in place that can be scaled to accommodate them. This also
will help provide guidelines to the employees tasked with doing the
work each day, since their job expectations will be clearly outlined from
the start.
DISADVANTAGES OF MRP II
As with any concept, MPR II isn’t without its imperfections. Often these
imperfections come from the humans implementing them. For instance,
even with a technology-driven process, one miskeyed number can throw
things off. Additionally, if teams rely heavily on software and the system
goes down for a few hours here and there, operations can come to a halt.
MRP II’s one-size-fits-all approach may not be right for certain
manufacturers. Those who specialize in engineer-to-order products may
find that the framework isn’t as useful as it would be for make-to-stock
manufacturers. However, there are enough useful components to the
methodology, that it might be worth using if only for the parts that work.
You may find that it works well for the human resource scheduling
aspects of your plant, but that you should leave ordering and inventory
management to your previous processes.
PURCHASING
Purchasing is the first phase of Materials Management. Purchasing
means procurement of goods and services from some external agencies.
The object of purchase department is to arrange the supply of materials,
spare parts and services or semi-finished goods, required by the
organization to produce the desired product, from some agency or source
outside the organization. The purchased items should be of specified
quality in desired quantity available at the prescribed time at a
competitive price. In the words of Alford and Beatty, “Purchasing is the
procuring of materials, supplies, machines, tools and services required
for equipment, maintenance, and operation of a manufacturing plant”.
According to Walters, purchasing function means „the procurement by
purchase of the proper materials, machinery, equipment and supplies for
stores used in the manufacture of a product adopted to marketing in the
proper quality and quantity at the proper time and at the lowest price,
consistent with quality desired.” Purchasing in an enterprise has now
become a specialized function. It was experienced that by giving the
purchase responsibility to a specialist, the firm can obtain greater
economies in purchasing. Moreover, purchasing involves more than
50% of capital expenditure budgeted by the firm.
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 is purse as he
spends more than 50 per cent of his company’s earnings on
purchases.
4. Increasing proportion of one’s requirements is now bought instead
of being made as was the practice in the earlier days. Buying,
therefore, assumes significance.
5. Purchasing can contribute to import substitution and save foreign
exchange.
6. Purchasing is the main factor in timely execution of industrial
projects.
7. Materials management organizations that exist now have evolved
out or purchasing departments.
OBJECTIVES OF PURCHASING
The specific objectives of purchasing are:
To pay reasonably low prices for the best values obtainable, negotiating
and executing all company commitments.
To keep inventories as low as is consistent with maintaining production.
To develop satisfactory sources of supply and maintain good relations
with them.
To secure good vendor performance including prompt deliveries and
acceptable quality.
To locate new materials or products as required.
To develop good procedures, together with adequate controls and
purchasing policy.
To implement such programmes as value analysis, cost analysis, and
make-or-buy to reduce cost of purchases.
To secure high caliber personnel and allow each to develop to his
maximum ability.
To maintain as economical a department as is possible, commensurate
with good performance.
To keep top management informed of material development which could
affect company profit or performance.
PURCHASING PROCEDURE
1. Determining Purchase Budget:
Purchase Manager prepares a purchase budget for the forthcoming
financial year. Purchase budget is prepared with the help of production
planning department. It contains detailed information regarding quantity
to be purchased, quality of materials, time of purchase and the sources of
procurement. A schedule of materials and components needed for
various jobs, known as bill of materials, is also prescribed for working
out details of purchase budget. A bill of materials is also useful in
exercising control over the utilization of materials.
2. Receipt of Purchase Requisition: The purchase officer initiates action
for the purchase of materials only when he receives a request for the
same. The store-keeper and departmental heads send requisition slips to
purchase department giving details of materials required by their
departments etc. A purchase requisitions is a form used as a formal
request to the purchasing department to purchase materials. This form is
prepared by the store keeper for regular stock materials and by the
departmental head for specific materials not stocked as regular items.
The storekeeper knows when an action or fresh procurements is to be
initiated. He will send the requisition when materials reach reordering
level. He retains one copy of the requisition with him for future
reference. It is on the basis of purchase requisition that orders are placed
for materials.
3. Determining Sources of Supply: Purchase Manager remains in touch
with various suppliers of materials. The quotations are invited for the
purchase of specific items. After receiving quotations, a comparative
study is made regarding terms and conditions offered. The factors to be
considered include price, quantity, quality, time of delivery, terms of
payment, trade discount and reputation of suppliers. After looking at
various factors a final decision is taken about the supplier of goods.
4. Placing Order: After selecting a supplier a formal purchase order is
sent for the supply of goods. A purchase order is sent on a printed form
and is duly authorized by the purchase manager. This order should
contain details about the quantity, quality, price, mode of delivery, terms
of payment etc. The purchase order authorizes the vendor to dispatch
 goods specified in it. It establishes a contractual relation between the
buyer and the vendor.
5. Follow-Up of Purchase Order: A purchase order normally bears a date
by which the goods must be delivered It is in the interest of the
organization that goods are received in time for keeping uninterrupted
flow of materials. The suppliers may be reminded of the date of
delivery of goods. A follow-up of purchase order is necessary to receive
stocks in time.
6. Receipt and Inspection of Materials: In big concerns the task of
receiving materials is assigned to the purchase department whereas in
small concerns this work is done by the store keeper. After unpacking
goods their quantity is compared to that given in delivery challans. Any
discrepancy in items is reported to the purchase department. The
specifications and quality of goods is also checked at this stage.
7. Checking Invoices: Lastly, purchase department checks the invoices
supplied by the vendor with that of its own records. The quantity,
quality, price, terms etc. are compared with those given in purchase
order. After making full checking the invoices are sent to accounts
department for payment.
TYPES OF PURCHASING SYSTEM
Centralized Purchase refers to purchasing of all the requirements under
the central point of the organization. Likewise, Decentralized Purchase
refers to purchasing of requirements of each production center in an
organization.
NEGOTIATION
Negotiation has been accepted as a policy by some material managers,
since perfect competition does not exist in Indian situations and hence
 the concept of lowest bid does not always work. Selling at a loss will
drive the supplier out of business reducing the Sources of supplies. Art
of negotiation is treated as a forum for exchange of views rather than cut
throat buying. In negotiating both the buyer and seller try to evaluate
each other with regard to price and quality. The word Negotiation is
derived from Latin civil laws. It refers to ‘Trading and Deliberations’
leading to purchase or sale agreement of goods and services. Negotiation
may be defined as “what passes between the parties’ incident to the
making of a contract”. According to another definition negotiation
means “to discuss or arrange business transactions.” For Harold bloom,
“Negotiation is essentially a communication.” Thus, a negotiation is
essentially a discussion on business transactions leading to finalization
of purchase and sale contract of goods and services. It is not a discussion
on price only; it is only one of the important points of discussion in any
negotiation between the parties who deliberate to make a contract. A
negotiation is a discussion on all aspects of a contract. It includes
deliberations between trading parties on:
1.Quality.
2.Quantity.
3.Price.
4.Time of delivery.
5.Place of delivery.
6.Mode of transportation.
7.Packing and packages.
8.After sale service.
9.Mode of payment, etc.
OBJECTIVES OF NEGOTIATION
The basic objectives of negotiation are not only to purchase materials on
favorable terms but to maintain the continuity of supply of raw materials
 and at the same time to reduce the cost of production. It is the primary
concern of the negotiator to react at proper agreements regarding price,
quality, time, etc. Negotiation leads to an agreement; an agreement
results into a contract which becomes both legally and morally binding
on the parties to the agreement. Therefore, it is necessary to know what
to negotiate and how to negotiate. The objectives of negotiation in each
case will also differ sometimes materially. But fundamentally the
objective of negotiation will obviously be:
1.To see that the interest of the organization is not bartered out.
2.To see that the organization is not put in a disadvantageous position.
5.To see that the organization gets all the benefits which can easily and
comparatively come to it in normal circumstances?
6.To see that distant future is not bargained for the present.
7.To see that long as well as short term effects are properly measured and
pros and coins are fully weight.
8.To see those times, etc. are settled in unambiguous terms and nothing is
left to interpretations which may lead to misunderstanding and
bitterness.

UNIT 3
INVENTORY
Inventory is the accounting of items, component parts and raw materials
a company uses in production, or sells. As a business leader, you
practice inventory management in order to ensure that you have enough
stock on-hand and to identify when there’s a shortage.
NEED FOR INVENTORY
1. Time lag between placing orders and getting supplies at the point of
consumption – Whenever we place a replenishment order, there is a time
lag between placing the order and getting the materials at the point of
use. This is called “replenishment lead time.” In most cases the lead time
is nonzero, and at times it is quite high. This necessitates holding of
inventory to take care of demand during the lead times.
2. Variability of lead times – In most cases, particularly in Indian supply
environment, there is some degree of variability in lead times because
the supply environment is perhaps “just-in-case” (JIC) type. Inventory
has to be maintained as a shield to cope with the supply uncertainty.
Inventory is the premium an organization pays for operating in a just-in-
case supply environment. If there was no such uncertainty and if demand
and supply are deterministic, then in just-in-time (JIT)-type
environment, no or low inventory will be required. The greater the
amount of supply uncertainty, the greater the amount of additional
inventory required.
3. Demand variability – If either we are unable to estimate the demand
correctly or if there are uncertainties in demand, additional inventory
will be required to act as a shield to absorb the demand variability. The
greater the demand variability, the greater the amount of additional
inventory required.
4. Seasonal inventory – If the demand is cyclic or seasonal, then
sometimes building inventory in the lean period to meet the peak period
demand is employed as a strategy in aggregate production planning. This
strategy results in inventory in some part of the year.
5. Pipeline inventory – This is the inventory due to the distribution of a
product or a commodity over long distances, so that the “goods in
transit” become substantially important. This constitutes the pipeline
inventory. In the context of production processes, this is called in-
process inventory or work in progress (WIP) which is also inventory in
terms of idle resource blocked in the nonproductive form. This can be
reduced by making the supply chain move faster.
6. Other factors – Sometimes inventory is maintained to take care of
other situational parameters such as inflationary pressures, shortage of
materials in the markets, and quantity discounts to encourage bulk
purchasing or simply the desire to spend the budget allocated for
materials before the end of the financial year resulting in large and at
times unnecessary purchases which eventually become dead stock.
MERITS
Wholesale Pricing: Many business owners can take advantages of lower
wholesale costs when they buy larger quantities of units. This makes
sense for regular items that the business knows will sell, because the
business is confident it will move product effectively and not be left
with it. The lower costs could be significant depending on the price
points of the product.
Fast Fulfillment: When things are in stock, customers get products in
hand much faster. Even when customers don't have an immediate need
for the product, when the decision to buy is made, the customer likes to
walk out with the product in hand. This is a fundamental part of quality
customer service.
Low Risk of Shortages: There are times when demand spikes higher. For
some items, demand might be cyclical around a specific holiday or
season. When you have excess inventory, you don't run the risk of being
the business that ran out of stock when everyone was looking for one
particular product.
Full Shelves: When you keep just enough inventory to get through the
normal sales cycle, shelves can look sparse as you get closer to the next
time to order. The appearance of full shelves sends a positive message to
the customer that business is good and the store is ready for business.
Keeping a store stocked with items to sell requires adequate inventory.
Business owners should look at several types of inventory control to
determine the best method.
DEMERITS
Obsolete Inventory: Overstocking on products runs the risk of the
product becoming obsolete. This is true especially in technology sectors
such as smartphones and televisions, but no industry is exempt. Even the
latest kid's game craze might inspire you to place a large order. If the
buzz dissipates quickly and kids aren't looking for the game, you'll be
left holding a lot of inventory you can't move.
Storage Costs: The more stuff you have, the more space you need.
Commercial space is leased per square foot. Consider the costs to store
excess inventory compared to the savings on wholesale orders. It also
costs to do more inventory control and audits, potentially requiring
additional manpower to work the warehouse.
Potential Insurance Costs and Loss: Insurance costs go up with larger
storage areas and larger inventory values. This factor needs to be
considered and compared to wholesale savings. If there is a fire, theft or
another natural disaster, not only will the business be recuperating, it
will need to pay higher premiums as insurance rates go up.
Tying Up Capital: When you have excess inventory, you pay for the
order, the storage and insurance. You can't get around this. For
businesses that are working with small margins and on tight monthly
budgets, this can hamper business development decisions because they
don't have cash on hand.
CLASSIFICATION
Raw Materials: Raw materials are the materials a company uses to create
and finish products. When the product is completed, the raw materials
are typically unrecognizable from their original form, such as oil used to
create shampoo.
Components: Components are similar to raw materials in that they are
the materials a company uses to create and finish products, except that
they remain recognizable when the product is completed, such as a
screw.
Work In Progress (WIP): WIP inventory refers to items in production
and includes raw materials or components, labor, overhead and even
packing materials.
Finished Goods: Finished goods are items that are ready to sell.
Packing and Packaging Materials: There are three types of packing
materials. Primary packing protects the product and makes it usable.
Secondary packing is the packaging of the finished good and can include
labels or SKU information. The tertiary type of packing is bulk
packaging for transport.
Safety Stock and Anticipation Stock: Safety stock is the extra inventory
a company buys and stores to cover unexpected events. Safety stock has
carrying costs, but it supports customer satisfaction. Similarly,
anticipation stock comprises raw materials or finished items a business
purchases based on sales and production trends. If a raw material’s price
is rising or peak sales time is approaching, a business may purchase
safety stock.
Machinery, equipment’s & spares: All machineries, equipment’s and
spares which are procured to facilitate the process of manufacturing can
have a common class.
Consumables: Those materials which get consumed during the
manufacturing process and cannot be used for the second time for the
same purpose are consumables. All these items can be classified
together.
Fuels and Chemicals used in the manufacturing process: can come under
the same class.
Other items: Usually in all organization a variety of items are required
for day-to-day operations, e.g., furniture, scrap, packaging materials,
stationeries etc. Depending upon the nature of the business and
organization, these requirements might change. Therefore, all
organization devise different systems to classify the materials according
to their requirement for ensuring operational ease.
Finished and semi-finished items: Finished goods are those items which
are ready for sale as their manufacturing has been completed. On the
contrary, in case of semi-finished items, some further processing is
required before they are ready for sale.
Unused items: These items cannot be used for manufacturing as they are
defective or damaged. Due to this reason, they are rendered unusable.
CLASSIFICATION OF INVENTORY ACCORDING TO
CONDITION IN MATERIAL
Dead Stock: Inventory that doesn’t turn over – that doesn’t sell – is often
referred to as dead stock. With businesses that don’t use inventory
management software, dead stock can remain on warehouse shelves
forgotten and useless.
UNUSED STOCK
SERVICEABLE, UNSERVICEABLE AND OBSOLETE STORES
DEAD STOCK ITEMS
UNUSED STOCK

INVENTORY COSTS
ITEM COST: The Item Cost is what a retailer owes a supplier
for an item the retailer has sold and needs fulfilled to its
customer. The Item Cost is also the basis for setting your retail
price through our Pricing Rules.
CARRYING COST: A carrying cost is the expense associated
with holding inventory over a period of time. In other words, it’s
the cost of owning, storing, and keeping inventory to be sold to
customers.
ORDERING COST: Ordering costs are the expenses incurred to
create and process an order to a supplier. These costs are
included in the determination of the economic order quantity for
an inventory item.
STOCK OUT COSTS: Stockout cost is the lost income and
expense associated with a shortage of inventory. This cost can
arise in two ways, which are:

Sales-related. When a customer wants to place an order and

there is no inventory available to sell to the customer, the
company loses the gross margin related to the sale. In addition,
the customer may be lost permanently, in which case the
company also loses the margins associated with all future sales.
Internal process-related. When a company needs inventory for a
production run and the inventory is not available, it must incur
costs to acquire the needed inventory on short notice. For
example, the firm may need to pay a rush fee and overnight
delivery charges to obtain the inventory. In addition, the
production planning staff must scramble to adjust the production
plan, advancing some other job in the schedule to replace the job
that cannot be run until the required inventory has been
received.
CAPACITY-ASSOCIATED COSTS: An expenditure or cost
incurred by a company in order to expand its business
operations. In other words, these are expenses incurred by an
organization to increase its capacity to conduct business
operations.

INVENTORY CONTROL
Inventory control is the processes employed to maximize a
company's use of inventory. The goal of inventory control is to
generate the maximum profit from the least amount of inventory
investment without intruding upon customer satisfaction levels.
Given the impact on customers and profits, inventory control is
 one of the chief concerns of businesses that have large inventory
investments, such as retailers and distributors.
OBJECTIVES:
 To minimize capital investment in inventory by eliminating
excessive stocks.
 To ensure availability of needed inventory for uninterrupted
production and for meeting consumer demand
 To provide a scientific basis for planning of inventory needs
 To tiding over the demand fluctuations by maintaining
reasonable safety stock
 To minimize risk of loss due to obsolescence, deterioration, etc.
 To maintain necessary records for protecting against thefts, wastes
leakages of inventories and to decide timely replenishment of stocks.

CODIFICATION OF MATERIALS
After classifying and grouping the various items in an organization’s
stores, it is useful to codify them.
Codification is the process of assigning a number or symbol to each
store item, along with a name, in order to make it easy and convenient to
identify. The codification of store items thus leads to time-saving and
labor efficiencies. Different kinds of store codes are used today. Most
have been specially designed to suit the requirements of a particular
organization. These codes may be based on the nature of stock items, the
purpose for which the items are used, or on any other basis that is
viewed as suitable according to the local circumstances.
Also, the accurate identification of the materials may require a lengthy
description. This can be complicated and, hence, may add to the
confusion.
Codification is necessary because it involves the assignment of logical
and systematic numbers or alphabets (or both) to help in the simple but
accurate identification of the materials.
ADVANTAGES OF CODIFICATION
The main advantages of codification include:
1. Avoidance of long and unwieldy descriptions
2. Accurate and logical identification of items
3. Avoidance of duplication
4. Standardization of purchasing and storage
5. Reduction of variety
6. Effective planning and high-quality production
The use of codification also leads to efficiencies in the following areas:
Purchasing
Recording
Accounting
Computerizing pricing
Costing
Indexing
Inspection
SYSTEMS OF CODIFICATION
In materials departments, four main systems of codification are
commonly used. An overview of each system is given below.
Alphabetical System: In the alphabetical codification system,
alphabetical codes rather than numerical codes are applied to items.
Each item in the storehouse is first classified and grouped based on its
nature, use, and other factors. In turn, the items are analyzed to create a
unique and descriptive alphabetical identifier. For example, under an
alphabetical codification system, iron ore may be assigned the code IN-
O, whereas iron bars may be assigned the code IN-BA.
Numerical System: In a numerical system, the codes assigned to
materials are numerical. Numbers are allotted as codes, which is useful
for future expansion. For example, iron ore may receive the code of 05
—10 and iron bars may have 11—67.
Decimal System: Codes in a decimal system consist of numbers, but
instead of dashes in between two numbers, decimals (i.e., periods or full
stops) are placed. This makes the codes more flexible and makes future
expansion a straightforward affair. For example, iron may be assigned
the code 11.67.02 and iron bars may have 11.67.03.
Combined Alphabetical and Numerical System: Hybrid systems exist
that combine all three of the above. Codes in a hybrid system may look
like IN–05.10 (e.g., for iron ore) and IN-11.6 (e.g., for iron bars), and so
on.
Brisch System: The Brisch system consist of seven digits applied in
three stages. The items are grouped into suitable preliminary categories,
such as assemblies, sub-assemblies, components and off the shelf items.
After these preliminary categories, items are grouped within the
respective class in order to bring similar items together. The Brisch
system through it consists only of seven digits, is quite comprehensive
as the basis is on logical major groupings.
Kodak System: The Kodak system consists of 10 digits of numerical
code. The logic of major grouping is based on sources of supply. All
materials are divided into 100 basics classifications, contributed only by
procurement considerations. For instance, a bolt is listed as hardware
item if this is listed in hardware catalogues and available with hardware
suppliers. If this bolt is available as a part of the machine, it will be
available under maintenance.
STANDARDIZATION
Standardization means producing maximum variety of products from the
minimum variety of materials, parts, tools and processes. It is the
process of establishing standards or units of measure by which extent,
quality, quantity, value, performance etc., may be compared and
measured.
ADVANTAGES
1. Work study section is benefited with efficient break down of
operations and effective work measurement.
2. Costing can obtain better control by installing standard costing.
3. More time is available to the supervisors to make useful records
and preserve statistics.
4. Reduced reductions and scrap.
5. Helps supervisors to run his department efficiently and effectively.
TECHNIQUES OF INVENTORY CONTROL
FIXED ORDER SYSTEM: The Fixed Order Quantity is the
inventory control system, wherein the maximum and minimum
inventory levels are fixed, and maximum and fixed amount of
inventory can be replenished at a time when the inventory level
reaches the auto set reorder point or the minimum stock level.
TWO-BIN SYSTEM: Two-bin inventory control is a system used to
determine when items or materials used in production should be
replenished. When items in the first bin have been depleted, an order
is placed to refill or replace them. The second bin is then supposed to
have enough items to last until the order for the first bin arrives. In
short, the first bin has a minimum of working stock, and the second
bin keeps reserve stock or remaining material.
KARDEX SYSTEM: In the Kardex system, the critical items with
low stocks were identified by a thin red strip inserted in the card so
that procurement action could be initiated once a month to avoid
stockouts.
TOOLS OF INVENTORY CONTROL:
ABC ANALYSIS: ABC analysis is a method in which inventory is
divided into three categories, i.e. A, B, and C in descending value.
The items in the A category have the highest value, B category items
are of lower value than A, and C category items have the lowest
value.
Inventory control and management are critical for a business. They
help to keep their costs under control. The ABC analysis helps the
business to control inventory by letting the management focus on the
highest value goods (the A-items) and not on the many low-value
goods (the C-items).
It has become an indispensable part of a business and the ABC
analysis is widely used for unfinished good, manufactured products,
spare parts, components, finished items and assembly items. Under
this method, the management divides the items into three categories
A, B and C; where A is the most important item and C the least
valuable.
ABC inventory analysis is based on the Pareto Principle. The Pareto
Principle states that 80% of the sales volume are generated from the
top 20% of the items. It means that the top 20% of the items will
generate 80% of the revenue for the business. It is also known as the
80/20 rule.
This method is significant to identify the top category of inventory
items that generate a high percentage of yearly consumption. It helps
the managers to optimize the inventory levels and achieve efficient
use of stock management resources.
Item A: In the ABC model of inventory control, items categorized
under A are goods that register the highest value in terms of annual
consumption. It is interesting to note that the top 70 to 80 percent of
the yearly consumption value of the company comes from only about
10 to 20 percent of the total inventory items. Hence, it is crucial to
prioritize these items.
Item B: These are items that have a medium consumption value.
These amount to about 30 percent of the total inventory in a company
which accounts for about 15 to 20 percent of annual consumption
value.
Item C: The items placed in this category have the lowest
consumption value and account for less than 5 percent of the annual
consumption value that comes from about 50 percent of the total
inventory items.
The idea behind using the ABC analysis is to leverage the imbalances
of sales. This means that each item must be given the appropriate
amount of weight depending on their class:
Item A:
a) These are subjected to strict inventory control and are given highly
secured areas in terms of storage
b) These goods have a better forecast for sales
c) These are also the items that require frequent reorders on a daily or
a weekly basis
d) They are kept as a priority item and efforts are made to avoid
unavailability or stock-out of these items
Item B:
a) These items are not as important as items under section A or as
trivial as items categorized under C
b) The important thing to note is that since these items lie in between
A and C, they are monitored for potential inclusion towards category
A or in a contrary situation towards category C
Item C:
a) These items are manufactured less often and follow the policy of
having only one of its items on hand or in some cases they are
reordered when a purchase is actually made
b) Since these are low demand goods with a comparatively higher
risk of cost in terms of excessive inventory, it is an ideal situation for
these items to stock-out after each purchase
c) The questions managers find themselves dealing with when it
comes to items in category C is not how many units to keep in stock
but rather whether it is even needed to have to these items in store at
all.

UNIT 4
MATERIAL HANDLING
Material handling may be considered a specialized activity for
modern manufacturing units. From the time, the input material or raw
materials enter the industrial unit and go out of the unit in the form of
finished products, these are handled at all stages in between, no
matter, on the shop floor or in the stores.
It has been estimated that the average material handling cost is
roughly 30 to 60% of the cost of production. This is so since majority
of production time is consumed in handling materials before, during
and after the manufacture. However, this cost can be reduced by
proper selection, operation, maintenance and layout of material
handling devices but cannot be totally eliminated.
“Material handling” refers to the movement of materials from the
store room to the machine and from one machine to the next machine
or work station during the process of manufacture. The material
handling problem must be analyzed thoroughly at the time planning
of various machines and tools needed before erection of factory
building.

While designing new plants, materials handling is a prime

consideration and several existing plants can be modified by the
utilization of modem material handling devices. The cost of
production is decreased by the use of these devices since these
devices increase output, improve the quality and speed up the
deliveries.