CHAPTER IV

MATERIAL MANAGEMENT
 PURCHASING
 Purchasing is an important function of material
management.
 Buying of equipment, materials, tools, parts, etc.,
 It varies with nature and size of industry.
Objectives of purchasing:
 To avail the materials, suppliers and equipment's at
the minimum possible costs. – Manufacturing
operations.
 To ensure the continuous flow of production – supply
raw material, tools, repair and maintenance.
 To increase the asset turnover – Investment in
inventories should be minimum in relation to the
volume of sales.
 PURCHASING
Objectives of purchasing: Conti...
 To develop an alternative source of supply – Alternative
source, bargaining of buyers.
 To establish and maintain the good relations with the
suppliers – Helpful to changing the reasonable price,
allocation of material.
 To achieve maximum integration with other department
of the company – (Production department– flow of
material), (Engineering department – Tools, equipment’s
and machines), (Marketing department – sales).
 To train and develop personnel – It is manned varied
types of personnel.
 Efficient record keeping and management reporting –
Paper processing should be standardized.
PARAMETERS OF PURCHASING
 The success of manufacturing activity is dependent on the
procurement of raw material of right quality, in right
quantities, etc., (TEN ‘R’s’)
1. Right Price
2. Right quality
3. Right time
4. Right source
5. Right quantity
6. Right attitude
7. Right Contracts
8. Right material
9. Right transportation
10. Right place of delivery
PARAMETERS OF PURCHASING
1. Right Price
 It is the primary concern of any manufacturing
organization to get an item at the right price.
 General guidance – Tender system
 The price can be kept low by proper planning and not by
rush buying.
 Price negotiation also helps to determine the right prices.
2. Right quality
 Right quality implies that quality should be available,
measurable and understandable as far as practicable.
 Sampling schemes will be useful
 Cost of materials and technical characteristics as suited
for specific requirements.
PARAMETERS OF PURCHASING
3. Right time
 Purchase manager should have lead time information for all
products.
 This covers the entire duration of the materials cycle, pre-
contractual lead time, manufacturing, inspection time.
 He should have contingency plans (strike, lock-out, floods and
earthquakes)
4. Right source
 The source from which the material is produced should be
dependable and capable of supplying items of uniform quality.
 Source selection, Source development and vendor rating. In
emergencies, open market purchases and bazaar purchases
are restored to.
PARAMETERS OF PURCHASING
5. Right quantity
 The right quantity is the most important parameter in buying.
 Economic order quantity, economic purchase quantity, fixed period
and fixed quantity.
 To determine the quantity after considering factors such as price
structure, discounts availability of the item and make or buy
consideration.
6. Right attitude
 Purchasing knows the prices of everything and value of nothing.
 The purchase manager should innovative and his long-term
objective should be to minimize the cost of the ultimate product.
 Techniques such as value analysis, materials intelligence, purchase
research, SWOT analysis, purchase budget lead time analysis, etc.,
PARAMETERS OF PURCHASING
7. Right Contracts
 The buyer has to adopt separate policies and procedures for
capital and consumer items.
 He should be able to distinguish between indigenous and
international purchasing procedures, and legal contractual.
8. Right material
 Right type of material required for the production, value analysis
will enable the buyer to locate the right material.
9. Right transportation
 Modes of transportation to be identified.
 Cost of shipping not more than cost of time.
10. Right place of delivery
 Specify right place of delivery, like head office or industry to
minimize handling and transportation cost.
PURCHASING PROCEDURE
 PURCHASING PROCEDURE
1. Recognition of the need
 The initiation procedure starts with the need.
 Requisition form forwarded by the authorized person.
 It specifies the details of material, quantity, quality.
 It should be approved by board of directors and copy is sent to the
purchase department.
2. The selection of the supplier
 Searching for all possible sources.
 Short listing out of the identified sources.
 The complete information about the supplier.
 Select economical supplier with required quantity and quality
standards.
3. Placing the order
 After selecting the supplier, place the purchase order.
 At least six copies of purchase order are prepared and each copy is
separately signed by the purchase officer.
 One copy each is sent to store-keeper, supplier, account section,
inspection department and to the department placing the
requisition.
PURCHASING PROCEDURE
4. Follow-up of the order
 Follow-up procedure tries to see that the purchase order is
confirmed by the supplier and delivery is promised.
 Generally, a routine urge is made to the supplier by sending a
printed card or a circular letter to confirm that the delivery as per
agreement.
5. Receiving and inspection of the materials
 The receiving department receives the materials supplied by the
vendor.
 The quantity are verified and tailed with purchase order..
 Record the details of vendor and purchase order number also
records any discrepancy, damaged condition.
6. Payment of invoice
 When goods are received in satisfactory condition.
 The invoice is checked before it is approved for the payment.
PURCHASING PROCEDURE
7. Maintenance of the records
 Maintenance of the records is an important part.
 Most of the purchases are repeat orders and hence the
past records serve as a good guide.
8. Maintenance of vendor relations
 Frequent transactions with same supplier will establish
good relation with them.
 Good relations develop mutual trust and confidence.
 The efficiency of the purchase department can be
measured by the amount of goodwill.
MAKE OR BUY DECISION
The industry considers which
components it should make and which it
should buy.
The decision can be made by two levels
Strategic decisions
Tactical decisions
MAKE OR BUY DECISION
STRATEGIC DECISIONS:
 After analyzing strength, design skills, production
skills, equipment and employee.
 Choose the strategy with thorough investigation
of many questions and existing core competencies.

TACTICAL DECISIONS:
 After the strategic make and outsourcing
decisions are finalized.
 Unsatisfactory supplier performance in the case of
some outsourced items.
 Small investments in tooling, minor equipment.
 The investigations to be driven by operating
considerations, control of quality, cost, capacity
utilization.
 BREAK-EVEN ANALYSIS FOR
MAKE-OR-BUY DECISION
 To evaluate an idea for a new product,
the performance of an existing one.
 Determine the volume sales at which the
product or service breaks even is useful.
 The break-even point is the volume at
which total revenues equal total costs.
 Break-even analysis can also be used to
compare production methods by finding the
volume.
 INVENTORY CONTROL OR
MANAGEMENT
INVENTORY DEFINITION
 Inventory represent those items which are
either stocked for sale.
 They are in the process of manufacturing of
in the form of materials.
 The interval between receiving the
purchased parts and transferring them into
final manufacture.
 REASONS FOR KEEPING
INVENTORIES
1.To Stabilize production
 The demand for an item fluctuates because
of the number of factors (season,
production schedule)
 Results in stock out – stoppage takes place
for want of material.
2.To take advantage of price discounts
 Manufacturers offer discount for bulk
buying.
 The materials are bought in bulk even
though it is not required immediately.
 REASONS FOR KEEPING INVENTORIES
3. To meet the demand during the replenishment
period
 The lead time for procurement of materials depend
upon many factors (Source, demand, supply condition.
 Inventory is maintained to meet the demand during the
procurement.
4.To prevent loss of orders
 Competitive scenario – maintain delivery schedules at
100 percent service level.
 They cannot afford to miss the delivery schedule which
may result in loss of sales.
5.To keep pace with changing market conditions
 The organizations have to anticipate the changing
market .
 Sometimes the organizations have to stock material due
to other reasons like suppliers minimum quantity,
seasonal availability, sudden increase in price.
 INVENTORY CONTROL
 Itis the planned approach of determining
what to order, when to order and how
much to order.

Inventory control basically deals with

two problems:
 When should an order be placed? (Order level)
 How much should be ordered? (Order quantity)
OBJECTIVES OF INVENTORY CONTROL
 To ensure adequate supply of products to
customer and avoid shortage.
 To make sure that the financial investment in
inventories is minimum.
 Efficient purchasing, storing, consumption and
accounting for materials.
 To maintain timely record of inventories of all
the items.
 To ensure timely action for replacement.
 To provide a reserve stock for variations in
lead times of delivery of materials.
 To provide a scientific base for both short-
term and long-term planning of materials.
 BENEFITS OF INVENTORY CONTROL
 Improvement in customer’s relationship
because of the timely delivery of goods and
service.
 Smooth and uninterrupted production and
hence, no stock out.
 Efficient utilization of working capital, helps
in minimizing loss due to deterioration,
obsolescence damage and pilferage.
 Economy in purchasing.
 Eliminates the possibility of duplicate
ordering.