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It is the planning ,directing, controlling & coordinating those activities which are concerned with materials & inventory requirements, from the point of their inception to their introduction into the manufacturing process. It begins with the determination of materials quality & quantity & ends with its issuance to production to meet the customer’s demand as per the schedule & at the lowest cost.
Objectives of material management
1. 2. 3. 4. 5. Material selection Low operating costs Receiving material safely & in good condition Issue material upon receipt of appropriate authority Identification of surplus stocks & taking appropriate measures to reduce it. 6. Regular uninterrupted supply of raw materials to ensure continuity of production 7. Providing economy in purchasing & minimizing waste 8. To minimize storage & stock control costs 9. To minimize cost of production to increase profits 10. To purchase items of best quality at the most competitive prices.
4.Functions of material management 1. 6. 5. 2. Material planning Purchasing Receiving Stores Inventory control Waste management . 3.
About items & is to be signed by competent authority. communicate to the purchase dept. Location & choice of suppliers Potential vendors are contacted by authorized representatives. on the basis of findings from inspection. their sample of items are inspected & examined. of co.Material purchase planning It consists of following steps Processing the requisition The dept. suppliers are approved for placing orders. It is prepared in duplicate & original copy is sent to the purchase dept. . their requirements for various items by requisition form which contains the details of quality & other necessary info. 2.
so it is necessary to review the outstanding orders at regular intervals. it must contains detail abt supplier. their prices & amounts 4.Late deliveries can close the co. all purchase must be made by purchase order in a specified form duly signed by authorized person. Placing the orders-Purchase dept. try to purchase required items at most advantageous terms.Criterion for choice of vendor Reliability of vendor Assurance of timely delivery After sale service 3. 5. description of items . Follow up. Invoices received from suppliers are checked with order specifications .
Inventory management • Inventory means stock of raw material. . semi finished & finished goods maintained by co. • Inventory control-the tool of maintaining the size of inventory at some desired level keeping in view the best economic interest of org.
4. 6. 7.Objectives of inventory control 1. 3. 8. 5. Protection against fluctuation in demand Better use of 5 M’s Protection against fluctuation in output Control of stock volume Protecting against quality problems To ensure reliable delivery to customers Smoothing production flows Reducing input costs (purchase in advance of price increases) . 2.
e.. i.Inventory Costs • Costs associated with ordering too much (represented by carrying costs) • Costs associated with ordering too little (represented by ordering costs) • These costs are opposing costs. as one increases the other decreases • The sum of the two costs is the total stocking cost (TSC) .
Inventory Costs (continued) • Carrying (or holding) costs: sum of all costs that are proportional to the amount of inventory physically on hand at any point in time – Cost of capital (opportunity cost) – Breakage. handling. loss. utility etc. spoilage. . deterioration. obsolescence. book-keeping. insurance etc. – Physical storage. refrigeration.
.Inventory Costs (continued) • Ordering cost: Sum of all costs related to the amount of inventory that is ordered for replenishment. etc. associated with the order – Variable cost: incurred on a per unit basis . – Fixed cost: incurred independently of the size of the order as long as it is not zero.g. book-keeping and paper work. mailing. e.
changing the production process or setting up equipment. . and any other costs associated with obtaining the materials.• Penalty cost (or stockout or shortage costs): cost of not having sufficient stock on hand to meet demand when it occurs – – – – Loss of good will Loss of profit Extra costs of emergency measures Delay cost (including book-keeping) in case of backorder Inventory Costs (continued) set-up costsWhen the part or component is being made in-house these may be called set-up costs which refer to the cost of preparing the production order.
Model I: Basic EOQ • Typical assumptions made – annual demand (D). carrying cost (C) and ordering cost (S) can be estimated – average inventory level is the fixed order quantity (Q) divided by 2 which implies • • • • no safety stock orders are received all at once demand occurs at a uniform rate no inventory when an order arrives .
. and other costs are inconsequential – acquisition cost is fixed. customer responsiveness. i. no quantity discounts • Annual carrying cost = average inventory level X carrying cost = (Q/2)C • Annual ordering cost = average number of orders per year X ordering cost = (D/Q)S .Model I: Basic EOQ • Assumptions (continued) – Stockout.e.
set it equal to zero and solve for Q) EOQ = 2 DS / C .Model I: Basic EOQ • Total annual stocking cost (TSC) = annual carrying cost + annual ordering cost = (Q/2)C + (D/Q)S • The order quantity where the TSC is at a minimum (EOQ) can be found using calculus (take the first derivative.
. þ Class B – constitutes 15% of total items & accounts for 15% of total money spend on inventories þ Class C .constitutes 75% of total items & accounts for 10% of total money spend on inventories Above rule is called as PARETO’S lawStates that a few high usage value items constitute a major pat of the capital invested in inventories whereas bulk of inventories having low usage value constitute insignificant part of capital.Inventory decisions ABC (ALWAYS BETTER CONTROL) analysisþ Class A –constitutes 10% of total items & accounts for 75% of total money spend on inventories.
ABC Analysis Percent of annual dollar usage 80 70 60 50 40 30 20 10 0 A Items – – – – – – – B Items – | | | | – 10 20 30 40 C Items | | | | | | 50 60 70 80 90 100 Percent of inventory items .
mod.very important B . important C .least important High Annual $ value of items Low A B C Few Many Number of Items . A .ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly.
ABC Classification Solution Stock # 206 105 019 144 207 Total Vol. 26.000 10 70.000 .000 600 120.000 200 2.316. % ABC $ 36 $936.000 7.000 1.000 55 110.000 Cost $ Vol.000 4 80.000 20.
4 6.000 20.1 5.000 600 120.000 55 110.000 200 2.000 Cost $ Vol.000 100.000 1.000 7.3 ABC A A B B C $ 36 $936.0 .316.1 9.000 4 80.000 10 70.1 8. 26.ABC Classification Solution Stock # 206 105 019 144 207 Total Vol. % 71.
Essential items are those items whose stock out costs are very high. So this analysis is mainly carried out to identify critical items. 1. . 3. Desirable items will not cause any immediate production stoppage & their stock out costs are nominal. essential & desirable.VED analysis This analysis represents the classification of items based on the criticality. Vital items are those items the unavailability of which will stop the production 2. The analysis classifies the items in 3 groups called vital.
Uncertainty in demand 2. .Buffer stock • The min. level of inventory to cover some unforeseen & uncalled for situations is called safety or buffer stock Factors affecting choice of buffer stocks1. Degree of insurance for any item 3. Size of batch Larger the uncertainty associated with any factor. larger should be the buffer stock. Uncertainty in lead time 4.
L.T variesB. When only L.R variesB.S=(L. demand rate-Av.T*M. Situation where demand rate variesB.L.S=(M.R) 3.D.T)*D.L.T*A.T)*(Max.D.S=(M.T & D.Determination of buffer stocks • Its size depends both on lead time & variation in demand.T-A. When both L.T=servicing time+ delivery time+ receiving time .R)-(A. 1. Demand rate) 2.L. L.R Lead time is the time gap between placement of an order & the time of actual supply.
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