UNIT-5

 FUTURE OF MATERIAL MANAGEMENT

The future of material management is poised to undergo significant transformations due to advancements in
technology, evolving consumer demands, and the need for sustainable practices. Here are some key points to
consider in a short note format:
1. Digitalization and Automation:
A. Material management processes will increasingly rely on digital technologies, including RFID, IoT,
and AI-driven systems.
B. Automation of tasks such as inventory tracking, order processing, and demand forecasting will
enhance efficiency and reduce human errors.

2. Predictive Analytics:
A. Predictive analytics will play a vital role in material management, enabling organizations to
anticipate demand patterns and optimize inventory levels.
B. Data-driven insights will facilitate smarter decision-making, reducing excess inventory and
minimizing stockouts.

3. Supply Chain Transparency:

A. Greater emphasis on transparency within the supply chain, enabled by blockchain technology, will
ensure traceability and authenticity of materials.
B. Consumers and businesses will demand more visibility into the origin, production, and
transportation of materials, driving ethical and sustainable practices.

4. Sustainability and Eco-friendly Materials:

A. The future will witness a shift towards sustainable sourcing and the use of eco-friendly materials in
response to environmental concerns.
B. Material managers will focus on reducing waste, promoting recycling, and adopting circular
economy principles to minimize the environmental impact.

5. Collaborative Supply Chains:

A. Collaboration between suppliers, manufacturers, and distributors will be enhanced through digital
platforms, fostering real-time communication and efficient coordination.
B. Agile supply chains will respond promptly to market changes and customer preferences, ensuring
quicker adaptation to evolving demands.

Significance of material management for new projects.

Material management plays a crucial role in the success of any new project. Properly managing materials
ensures that the project progresses smoothly, stays within budget, and is completed on time. Here's the
significance of material management for a new project:

1. **Cost Control:**
- Effective material management helps in controlling costs by preventing overstocking or understocking of
materials.
- It enables accurate budgeting, cost estimation, and cost monitoring throughout the project lifecycle.

2. **Optimized Inventory Levels:**

- Maintaining optimal inventory levels prevents wastage, reduces storage costs, and ensures materials are
available when needed.
 - Just-in-time inventory practices can be implemented to minimize excess inventory and associated carrying
costs.

3. **Timely Project Completion:**

- Proper material planning ensures that necessary materials are available when required, preventing project
delays due to material shortages.
- Timely completion is essential for meeting deadlines, client satisfaction, and maintaining the project's overall
schedule.

4. **Quality Control:**
- Material management involves sourcing high-quality materials from reliable suppliers, ensuring that the
project meets quality standards and specifications.
- Quality control measures help prevent rework, save costs, and maintain the project's reputation.

5. **Supplier Management:**
- Efficient material management involves building good relationships with suppliers, ensuring timely deliveries,
negotiating favourable terms, and resolving issues promptly.
- Reliable suppliers contribute to the project's success by providing quality materials and support when
needed.

6. **Resource Optimization:**
- Proper material management optimizes the use of resources by preventing shortages or excess, thereby
maximizing the utilization of labour and equipment.
- It ensures that resources are allocated efficiently, reducing downtime and increasing productivity.

7. **Risk Mitigation:**
- Material management strategies include risk assessment and mitigation plans for potential supply chain
disruptions, price fluctuations, or changes in material specifications.
- Proactive risk management minimizes the impact of unforeseen events, ensuring project continuity.

8. **Sustainability and Compliance:**

- Material management practices can be aligned with sustainable initiatives by promoting the use of eco-
friendly materials, recycling, and waste reduction.
- Compliance with regulations and standards related to materials, such as environmental and safety
requirements, is ensured through effective material management.

9. **Documentation and Accountability:**

- Proper documentation of material transactions, receipts, and usage provides transparency and accountability
in project management.
- Accurate records enable tracking of expenses, reconciliation of invoices, and efficient financial management.

In summary, material management is indispensable for new projects as it directly impacts costs, timelines,
quality, and overall project success. By implementing efficient material management practices, project managers
can mitigate risks, optimize resources, and enhance the project's overall performance and reputation.

 Investment Decision
 What is Investment Decision?
Investment decision refers to financial resource allocation. Investors opt for the most suitable assets or
investment opportunities based on risk profiles, investment objectives, and return expectations.
 Firms have limited financial resources; therefore, the top-level management undertakes capital budgeting and
fund allocation into long-term assets. Managers overseeing business operations opt for short-term investments
to ensure liquidity and working capital. Investment decisions are also influenced by the frequency of returns,
associated risks, maturity periods, tax benefits, volatility, and inflation rates.
 Key Takeaways
1. An investment decision is a well-planned action that allocates financial resources to obtain the highest
possible return. The decision is made based on investment objectives, risk appetites, and the nature of the
investor, i.e., whether they are an individual or a firm.
2. Investments are primarily classified into short-term and long-term. Further, they are categorized into a
strategic investment, capital expenditure, inventory, modernization, expansion, replacement, or new
venture investments.
3. The investment process involves the following steps: formulating investment objectives, ascertaining the risk
profile, allocating assets, and monitoring performance.
 Investment Decision Explained
Investment decisions are made to reap maximum returns by allocating the right financial resource to the right
opportunity. These decisions are taken considering two important financial management parameters—risks and
returns.
Investors and managers dedicate a lot of time to investment planning—these decisions involve massive funds
and can be irreversible—impact on the investors and business is long-term.
Also, individuals and corporate investors have to decide between various options—assets, securities, bonds,
debentures, gold, real estate, etc. For businesses, investments could be in the form of new ventures, projects,
mergers, or acquisitions as well.Investment decisions are further classified into short-term and long-term. For
example, the final decision may involve a capital expenditure
on assets that pay off in the long run or an investment in inventory that converts into sales within a short
period. A company might attempt expansion by taking up new projects; a business might increase the capacity of
an existing facility. Capital investment is required for replacing an obsolete asset as well. In business, decision-
making is everywhere.

 Process
Investing in an asset, security, or project requires a lot of patience; ideally, the decision-making process should
be analytical. Following is a five-step process decision-making process that guides investors:
1. Analyze Financial Position: For financial management, one has to understand the company or individual’s current
financial condition.
2. Define Investment Objective: Then, investors must set up an investment objective—whether to invest short-
term or long-term. They should also be aware of their risk appetite (level of risk they desire to take).
3. Asset Allocation: Based on the objective, investors must allocate assets into stocks, debentures, bonds, real
estate, options, and commodities.
4. Select Investment Products: After narrowing down on a particular asset class, investors must further select a
particular asset or security. Alternatively, this could be a basket of assets that fit the requirements.
5. Monitor and Due Diligence: Portfolio managers keep an eye on the performance of each investment and monitor
the returns. In case of poor performance, they must take prompt action.
 Factors Affecting Investment Decision
An investment is a planned decision, and some of the factors that are responsible for these decisions are as
follows:
1. Investment Objective: The purpose behind an investment determines the short-term or long-term fund
allocation. It is the starting point of the decision-making process.
2. Return on Investment: Managers prioritize positive returns—they try to employ limited funds in a profitable
asset or security.
3. Return Frequency: The number of periodic returns an investment offer is crucial. Financial management is based
on financial needs; investors choose between investments that yield monthly, quarterly, semi-annual, or annual
returns.
4. Risk Involved: An investment may possess high, medium, or low risk, and the risk appetite of every investor and
company is different. Therefore, every investment requires a risk analysis.
5. Maturity Period or Investment Tenure: Investments pay off when funds are blocked for a certain period. Thus,
investor decisions are influenced by the maturity period and payback period.
6. Tax Benefit: Tax liability associated with a particular asset or security is another crucial deciding factor. Investors
tend to avoid investment opportunities that are taxed heavily.
7. Safety: An asset or security offered by a company that adheres to regulatory frameworks and has a transparent
financial disclosure is considered safe. Government-backed assets are considered the most secure.
8. Volatility: Market fluctuations significantly affect investment returns and, therefore, cannot be overlooked.
9. Liquidity: Investors are often worried about their emergency funds—the provision to withdraw money before
maturity. Hence, investors look at the degree of liquidity offered by a particular asset or security; they
specifically consider withdrawal restrictions and penalties.
10. Inflation Rate: In financial management, investors look for investment opportunities where returns surpass the
nation’s inflation rate.

 What Does Capital Equipment Mean?

Capital equipments are physical items acquired for a productive activity. Companies are frequently investing in
these items to expand their operations or to keep up with new techniques or technological advances. From an
accounting perspective they are normally recorded as fixed assets, but in order to be classified as such,
according to U.S. accounting rules, they must worth more than $5,000 and have an expected life spam of more
than 1 year. Some industries spend much more than others when it comes to capital equipment.
Capital intensive businesses such as airlines are an example of this, since most of its business comes from the
operation of aircrafts (equipments) the level of capital equipment investments is frequently higher than other
industries. On the other hand, manufacturing businesses are also more capital intensive than service businesses.
An example of these items would be machinery, trucks, lifting systems, inventory transportation equipment or
warehouse racks, among others.
 Example
Plastic Pipes Co. is a company that manufactures water pipes for the construction and domestic market.
Currently, the company’s Board of Directors is reviewing next year’s investment plan. The plan contemplates a
total investment of $5,400,000 that will be divided between the following programs: $1,400,000 for the
construction of a new building, $2,000,000 for capital equipment, $1,500,000 for stock investments and
$500,000 for new cafeteria facilities for employees.
The capital equipment investment contemplates the acquisition of new machinery to set up 3 new lines of
productions, the purchase of new packaging equipments and a modernization of the raw material warehouse.
The company expects that this investment program increases its earnings per share by 50% for the next fiscal
year.
 TECHNIQUES OF CAPITAL INVESTMENT DECISION
Capital investment decisions are critical for businesses and require careful evaluation to ensure the best
allocation of resources. Several techniques are commonly used to assess and make informed capital
investment decisions. Here are some of the key techniques:

1. Net Present Value (NPV):

 A. NPV calculates the present value of expected cash flows generated by the investment, minus the
initial investment cost.
B. If the NPV is positive, the investment is considered viable. A higher NPV indicates a more lucrative
investment opportunity.
2. Internal Rate of Return (IRR):

A. IRR is the discount rate at which the NPV of all future cash flows equals zero.
B. If the IRR is greater than the company's required rate of return, the investment is considered
acceptable. Higher IRR implies a better investment.
3. Payback Period:

A. Payback period measures the time it takes for the initial investment to be recovered from the
project's net cash inflows.
B. Shorter payback periods are generally preferred as they indicate a faster return on the investment.
4. Profitability Index (PI):

A. PI is the ratio of the present value of cash inflows to the initial investment.
B. A PI greater than 1 indicates a potentially profitable investment. The higher the PI, the more
financially attractive the investment.
5. Accounting Rate of Return (ARR):

A. ARR calculates the average annual accounting profit generated by the investment as a percentage of
the average investment cost.
B. It's expressed as a percentage, and investments with higher ARR are generally preferred.
6. Real Options Analysis:

A. Real options analysis considers the flexibility and strategic value associated with an investment
opportunity.
B. It evaluates the potential for altering or abandoning the investment based on future market
conditions, providing a more comprehensive view of the investment's value.
7. Sensitivity Analysis:

A. Sensitivity analysis involves testing the impact of variations in key variables (such as sales volume,
costs, or interest rates) on the investment's viability.
B. By assessing how changes in these variables affect the project's outcomes, decision-makers can
understand the investment's sensitivity to different factors.
8. Scenario Analysis:

A. Scenario analysis involves evaluating different scenarios based on varying assumptions about future
economic, market, or industry conditions.
B. Decision-makers can assess the investment's performance under different scenarios, allowing for a
more robust decision-making process.
9. Capital Rationing:

A. In situations where there are limited funds available for investment, capital rationing involves
selecting the best combination of projects that maximize returns within the budget constraints.
B. Decision-makers need to prioritize projects based on their individual merits and the overall strategic
goals of the organization.

When making capital investment decisions, businesses often use a combination of these techniques to gain a
comprehensive understanding of the potential risks, returns, and overall feasibility of the investment
 opportunities under consideration. Each technique provides unique insights, allowing decision-makers to
make well-informed choices aligned with the organization's financial objectives and risk tolerance.

 Attributes of Capital Equipment’s

2. Not Disposable or Consumable
Capital expenditures cannot be decided only on the basis of cost. Consumables, by definition, are goods that are
used up fast. Some healthcare expenditures may reach the cost criterion, but they may not qualify as capital if
they are acquired to be utilized, or “consumed.”
Capital equipment is a type of asset that should be identified and inventoried as such, as well as being subject to
depreciation.
3. Stand Alone
Even if a big component acquisition meets both the cost and non-consumable criteria, it may not be considered
capital equipment on its own. The term “stand-alone” refers to an item that may be utilized on its own.
Understanding this feature can assist you in appropriately grouping components so that they may be priced and
documented with the major capital equipment if necessary.
Keep in mind, however, that your procurement process may allow you to add value or prolong the life of an
existing piece of capital equipment by purchasing subsequent components such as capital equipment. The value
of the sponsored equipment might be increased by the subsequent purchase.
4. Useful Life of One Year or More
A basic definition of a capital asset is one that is bought with the intention of making a profit and will benefit the
firm for at least a year. Additionally, your capital equipment must have a useful life of more than one year in
order to meet present value and future value in computing depreciation. If it doesn’t, it’ll be classified as
consumable by most accounting systems.
5. Qualifies as Tangible Property
Non-tangible assets that benefit a firm, such as trademarks and intellectual property, are included in the
definition of capital assets. However, in order to comprehend capital equipment purchase, the final feature
should be that it is a physical asset.
Tangible property is defined by taxing jurisdictions as everything that can be moved and is used in the company.
Items acquired for resale may not qualify as tangible property and would be classified as inventory rather than
capital equipment.
Final Thoughts
Capital Equipment is classified as a non-current asset in the financial world, indicating it is depreciated and
capitalized over the course of its useful life. In general, we choose contemporary technology and equipment that
can produce a higher-quality product at a cheaper cost and with less waste.
long-term objectives, future technology developments, the need for new goods, and other considerations
unique to each firm must all be considered when making capital investment decisions.
 Objectives of Capital Investment
The major objectives of capital investments are as follows:
1. Get additional capital assets for expanding, allowing the business to increase the production, create new
products and add value.
2. Take the privilege of new technology or advancements in equipment or machinery to augment Efficiency and
reduce cost.
3. Replace the existing asset that has reached the end-life.
  What Are the Characteristics?
It’s helpful to understand the breakdown of the characteristics that define capital equipment.
1. One of the main characteristics is cost. Again, one business may define capital equipment as more than
$1,000, but others with more expensive needs might define it as more than $5,000. It can also be
independent or supplementary. This means they could work alone or might need other equipment to
function.
2. Another characteristic is durability, so these items must be durable and able to function for a year.
These items are not bought with the intention to be sold or thrown away in the short term. They need to
meet a certain threshold of use.
3. Size can sometimes also be a characteristic. Often, the term is associated with large items. This is not
always the case. Something smaller like a defibrillator for a hospital would be considered capital
equipment.
4. This type of equipment is also tangible and physical. This means the equipment needs to be items that
can be touched and can be inventoried.
5. Finally, the use life is a characteristic. It doesn’t mean that the items are permanent and never
depreciate, but they need to have a longer life than a year. Some even last a full decade. Essentially,
these are items that are not purchased on a regular or recurring basis.

 Importance of capital investment

1. Increase productivity if capital investment is more efficient than prior methods

2. Result in higher quality manufactured goods
3. Be cheaper in the long-run when compared against rented or monthly expensed solutions
4. Create a barrier to entry that yields a competitive advantage
5. Provide a benefit for the company at some point in the future by generating profits, reducing expenses,
sold for cash or retain some of it's value over a long period of time