UNIT IV

UNIT IV :

Materials management – functions – material planning and

budgeting – Value Analysis - purchase functions and
procedure - inventory control – types of inventory – safety
stock – order point – service level – inventory control
systems – perpetual – periodic JIT – KANBAN.
 MATERIAL
S
- any commodity used directly or indirectly in producing a
product or service - considered as the lifeblood and heart of
any manufacturing system.
 MATERIALS MANAGEMENT

- process of management
concerned with planning,
organizing and controlling of
the flow of materials to,
through, and out of an
organization in an integrated
fashion
DEFINITION OF MATERIAL MANAGEMENT
o Material management organizing &
coordinating all management function
that are responsible for every aspect of
material, storage & transformation.

o Material management is a scientific

technique, concerned with
organizing & control of flow of materials
planning,
form their purchase to
initial destination.
 CLASSIFICATION
S
a. PURCHASED MATERIALS
-these are the raw materials,
components, spare parts, and items
that are used and usually do not
appear in the end product

b. WORK-IN PROCESS
MATERIALS
-these are materials that are
in the semi-finished stage.
 CLASSIFICATION
S
c. FINISHED GOODS
- these are the final products
which are ready for final delivery
or distribution

d. SUPPLIES
- these are the consumable
goods.
 FUNCTION/ACTIVITIES INVOLVED IN
MATERIALS MANAGEMENT

a.) Materials Requirements Planning

b.) Purchasing
c.) Inventory Control
d.) Expediting
e.) Transportation
f.) Materials Handling
AIM OF MATERIAL MANAGEMENT
o To get
o The right quality
o Right quantity of supplies

o At the right time

o At the right place

o For the right costs

OBJECTIVE OF MATERIAL MANAGEMENT
o Buying, storage and movement of
material are the 3 basic objectives of
Material management.
o Optimum investment in inventory is the
prime objective of material management.

o Main objective divided into 2 categories:-

i. Primary objective
ii. Secondary objective
OBJECTIVE OF MATERIAL MANAGEMENT CONT.
o Primary objectives:-
i. Lower prices
ii. High inventory turnover
iii. Low cost acquisition & possession
iv. Continuity of supply
v. Consistency of quality
vi. Favorable supplier relations
OBJECTIVE OF MATERIAL MANAGEMENT CONT.
o Secondary objectives:-
i. Reciprocal Relations
ii. New materials and products
iii. Economic make or buy
iv. Standardization
v. Product improvement
vi. Inter departmental harmony
vii. Forecasts
viii. acquisitions
 PURCHASING

Purchasing is the act of buying an item at a

price
Purchasing is responsible for obtaining the
materials , parts , supplies and services needed
to produce a product or provide a service.
INTRODUCTION

Purchasing is the function of buying Goods & Services from External

Source to an Organization.
Purchase department buys Raw Materials, Spare parts, services etc. as

Required by the company or Organization.

Purchase management is One of the most Crucial Area of the Entire

Organization. Thus, Needs Intensive management.

Purchase is the Main Activity in Area of Material management.
Purchasing management is a department in an organization responsible

for purchasing activities.

Purchase is Most Important Function in any Organization.
Purchase is the first element which affects the product cost.
Purchase management decides profitability of the Company.
Purchasing management also covers the areas of outsourcing and

insourcing.
Purchasing management is the management of purchasing process, and
OBJECTIVES
Buying raw materials of the right quantities, in the right-
quality at the right time, at the right price, and from the
right source.
 To pay reasonably low prices for best values obtainable.

 To keep inventories as low as possible

 Collaborative relationship with supplies

 To secure good vendor performance – delivery and quality

 To locate new materials or products as required

 To develop good procedure together with adequate control

and purchasing policies
 To implement Programme like value analysis , cost
analysis and make or buy decision
PURCHASING FUNCTIONS
 Responsibilities often fully delegated to the
purchasing function
a. Obtaining prices

b. Selecting vendors
c. Awarding purchase orders
d. Following up on delivery promises
e. Selecting and training of purchasing personnel
f. Vendor relations
 Functions other than purchasing functions
a. Obtaining Technical information and advice
b. Scheduling orders and delivers
c. Inspecting
d. Accounting
e. Expediting
f. Determination of whether to make or buy

Other functions
Receiving and warehousing
 Payment of invoices
 PURCHASING
CYCLE
Purchasing cycle comprising of eight steps.

1. Recognition of Need
2. Description of Requirement
3. Selection of Source
4. Determination of Price and Availability
5. Placing the Order
6. Order Acknowledgement
7. Follow Up and Expediting
8. Checking The Invoice and Approval
Page 1
 CLASSIFICATION OF VALUE
Value is the minimum money that has to be expended in purchasing or
manufacturing a product to create the appropriate use or esteem factor.

• Utility value (Use or functional value) – how useful / functional the

product is seen to be.
• Esteem value – the value that customer / user gives to product attributes
(properties, features or attractiveness), not directly contributing to utility
but more relating to aesthetic and subjective value.
• Cost value – the sum of Labor, material and various other costs
required
• Exchange – Its properties or qualities, which enable us to
for producing a product.
value
exchange it for something else, we want.

Value of a product = Performance of the function / Cost

Page 21
VALUE ANALYSIS
Value Analysis is an effective tool for cost reduction and the results
accomplished are far greater.

• It improves the effectiveness of work.

• It is an organised approach to a problem.

• It is value applied at the design stage itself.

• It reduces unnecessary costs, obvious and hidden which can be

eliminated without adversely affecting quality, efficiency, safety and
other customer features.

Page 22
 Value
Analysis,
How???
‘VALUE ANALYSIS CONCEPT :
LOW COST, BEST VALUE’
Best Value = Low Cost + Justified Additions

High
Cost

Best
Valu
e
Low
Cost
Page 24
VALUE ANALYSIS- WHAT IT DOES ?

• Analyzes the functionality of a product.

• States an estimated cost for each function.
• Demonstrates a function as compared
with
that of a competitor’s.

Page 25
 WHEN TO USE VALUE ANALYSIS

• To identify needed product

improvements.
• To lower product costs.
• To prioritize product redesign activities.
• To determine the real value of each
component.
Page 26
 SIMPLE EXAMPLE

Eraser

Metal
Wooden Case band

Pain

t
Component Competitors Design Importance to customer Cost Priority for redesign

Eraser Same Low 0.12 6

Worse Medium 0.07 12
Same Medium 0.08 11
Same Low 0.06 13
Metal Band Better High 0.23 2
Same High 0.04 15
Better High 0.1 8
Wooden Case Same Medium 0.35 1
Paint Same High 0.2 4
Same High 0.15 5
Same Medium 0.05 14
Better High 0.02 17
Graphite Better Medium 0.03 16
Better High 0.2 3
Same Medium 0.1 9
Better High 0.11 7
Worse Low 0.09 10
 WHY VALUE ANALYSIS
IS NEEDED ?
• Assessing Customer Needs & Affordability
• Capturing Customer Needs and Priorities
• Obtaining Customer Feedback on Value
• Product Planning
• Reduced material use and cost
• Reduced distribution costs
• Reduced waste
• Improved Profit Margins
• Increased Customer Satisfaction

Page 29
 SAVING
Company IN
Image COST

Objectives
of Value Quality
Analysis Promotion

New product and

product design Important
Substitution

Elimination of Maximization
un- of the value of
necessary product
processes

Page 30
 PROCEDURE

VA process is based on the application of a systematic

workplan that may be divided into 7 steps as
mentioned below:
SELECTION & ORIENTATION

ANALYSIS

RECORDING IDEAS

INNOVATION/CREATIVI

TY EVALUATION

RECOMMENDATION

IMPLEMENTATION &
MONITORING
Page 31
# Stage Description
 To select those critical areas where a potential for cost
1. SELECTION & reductions is expected.
ORIENTATION  Use the common Pareto’s ABC analysis.
 General scope, restrictions and aims of the study is defined.

 Examine the data at a VA group/team meeting.

2. ANALYSIS  Record the minutes of each brainstorming session.
 Apply the Tests for Value.
 Propose further action.

RECORDING  Write down the minutes of analyses meetings and

3. circulate them to group/team members for further
IDEAS
queries.
 It includes the agenda for the next meeting.
 Arrange team meetings in order to discuss the ideas
4. INNOVATION/ analyzed and any new information obtained.
CREATIVITY  Think upon practical measures for reducing costs and
increasing value.
# Stage Description
 Investigate suggestions for reducing costs and to make
them practical and acceptable to client management.
5. EVALUATION  Obtain definite prices and costs in order to estimate
cost
reductions accurately.
 Recommend cost reductions to client management.
 Present the recommendations in a comprehensive report.
6. RECOMMENDATIONS
 Recommend a member to act as an implementation
consultant for VA recommendations.
 Implement the recommendations accepted by the
company management. Monitor the results as suggested
IMPLEMENTATION in VA report.
7. & MONITORING  Jot down the feedback of the management
upon completion of VA assignment.
ADVANTAGES
 It leads to improvements in product design so that ,most appropriate
products are produced .
 High quality (value) is maintained.
 All-round efficiency is achieved by eliminating waste of various types.
 New ideas are generated and incorporated.
 Teams spirit and morale are improved.
 VA improves profitability of products.
 VA provides a process to systematically improve the existing goods and
services. It builds value into a product or service.
INVENTORY CONTROL
 WHAT IS
INVENTORY?
• Inventory is stock of items held to meet future
Demand.

• It is a list for goods and materials, or those

goods and materials themselves, held available
in stock by a business.

• It is collection of goods processed to form

desired output to the organization.
WHAT IS INVENTORY MANAGEMENT?

Inventory management is the management of

inventory and stock. As an element of supply
chain management, inventory management
includes aspects such as controlling and
overseeing ordering inventory, storage of
inventory, and controlling the amount of
product for sale.
INVENTORY CONTROL
 Inventory control means to monitor the
stock of goods used for production,
distribution and captive (self)
consumption.

 InventoryControl means maintaining the

inventory at a desired level. The desired-
level keeps on fluctuating as per the 
demand and supply of goods.
WATER TANK ANALOGY FOR
INVENTORY
Inventory Level
Supply Rate

Buffers Demand
Rate from Supply
Inventory Level Rate

Demand Rate
 TYPES OF INVENTORIES

Firm or Organization

Work in
progres C
s u
s
Raw
Finishe t
material Work in
d o
progress m
goods
e
Work in r
progres
s

6/10/2012 4
0
 TYPES OF
INVENTORIES
• Raw Material Goods
– Basic inputs that are converted into finished product through the
manufacturing process.

• “Work in progress” Goods

– Semi-manufactured products need some more works before they
become finished goods for sale.

• Finished Goods
– Completely manufactured products ready for sale.

• Supplied Goods
– Office and plant cleaning materials not directly enter production but
are necessary for production process and do not involve significant
investment.

4
1
 INVENTORY MANAGEMENT-FLOW CYCLE

Raw Material  InspectionMoving Processing  Setup

Final Product

4
2
 DETERMINATION OF STOCK
LEVELS
To avoid over-stocking and under stocking of
materials, the management has to decide about:
• The maximum level, minimum level,
• Re-order level,
• Danger level and
• Average level of materials to be kept in the store
(A) RE-ORDERING LEVEL:
It is a point at which order for supply of material
should be made.

Reordering level is calculated with the following

formula:
Re-order level =Maximum Rate of consumption x
maximum lead time
 (B) MAXIMUM LEVEL:

Maximum level is the level above which stock should

never reach. It is also known as ‘maximum limit’ or
‘maximum stock’.
This level can be determined with the following
formula.

Maximum Stock level = Reordering level +

Reordering quantity —(Minimum Consumption x
Minimum re-ordering period)
 (C) MINIMUM
LEVEL:
It represents the lowest quantity of a particular
material below which stock should not be allowed
to fall. This level must be maintained at every time
so that production is not held up due to shortage of
any material.

This level is usually determined through the

following formula:

Minimum Level = Re-ordering level — (Normal

rate of consumption x Normal delivery period)
 (D) AVERAGE STOCK LEVEL:

Average stock level is determined by averaging the

minimum and maximum level of stock.

The formula for determination of the level is as follows:

Average level =1/2 (Minimum stock level + Maximum

stock
level)

This may also be expressed by minimum level + 1/2 of Re-

 (E) DANGER LEVEL:

Danger level is that level below which the stock

should under no circumstances be allowed to fall

This level can be calculated with the help of

following
formula:

Danger Level =Average rate of consumption x

Emergency
supply time.