PRODUCTION & OPERATION MANAGEMENT

UNIT-3
MATERIALS MANAGEMENT

Meaning:
Material Management refers to an approach for Planning, organizing and controlling all those activities
principally concerned with the flow of materials into an organization.
It is the function of business that is responsible for the coordination.

Definition:
According to Bailey & Farmer, “Material Management is the management of the flow of material into an
organisation to the point where those materials are converted into the end products”

Objectives:
1. Primary objectives:
 Low Price: Obtaining the least possible price for purchased materials is the most obvious
purchasing objective and certainly one of the most important.
 High inventory turnover: When inventories are low in relation to sales efficiency, less
capital is tied up in inventories.
 Continuity of supply: When there are disruptions in the continuity of supply, excess cost are
inevitable. Continuity of supply is important for highly automated processes.
 Continuity of Quality: Quality of the end product depends on materials that go into it.
When materials purchased are homogeneous and in a primary stage quality is rarely a
problem for purchasing personnel.
 Favourable supplier relations: Maintaining cordial relations with suppliers the buying
company in more than one way.
 Good records: It is considered as primary objective in procurement of materials
management. Good records along with well planned administration controls and periodic
audits can discourage corruption.
2. Secondary Objective:
 Reciprocal relations: When a company deliberately buys as much as possible from its own
customers, it is said to practice reciprocity.
 New materials and products: Engineering and manufacturing managers are always
interested in new products and materials that will help them more efficiently and thereby
achieve one of their objective.
 Economic make or buy decision: It is generally made by committees consisting of
departmental heads. The purchasing manager should spot the need for a make or buy decision
and refer it to the committee for action.
 Interdepartmental harmony: It deals with all most all department of the company. It can
greatly contribute to the success of every other department and at the same time, success of
material management depends on cooperation from the personnel of the other department.
Importance of Materials management:

a. Effective materials management ensures the low prices for materials and equipment.
b. It helps to ensure the continuity of supply.
c. It helps to ensure the faster inventory turnover.
d. It helps for reducing lead time.
e. It facilitates the less transportation cost.
f. It support for reducing duplication of efforts.
g. It helps to reduce materials obsolescence.
h. It helps to maintain supplier relationship.
i. It ensures the better and systematic records.
j. It helps to obtain personnel development.

Purchasing: It refers to the activity of acquiring goods or services to accomplish the goals of an
organisation.
Purchasing Management: It refers to the process of efficient, effective and economical purchasing of
materials.
Objectives of Purchasing:
1. To provide benefits of materials, suppliers and equipment at the minimum possible costs:
These are the basic inputs in the manufacturing operations. The minimization of the input cost
increases the productivity and resultant profitability of the operations.
2. To ensure the continuous flow of production: Purchasing department helps in ensuring the
interrupted production flow through conditions supply of raw material, components, supplies,
tools etc. And good equipment with repair and maintenance services.
3. To increase the asset turnover: The effect of purchase department result in formation of fixed
assets and also in the inventories should be kept at minimum in relation to the corresponding
volume of sales. This will increase the turnover of the assets and thus the profitability of the
company
4. To develop the alternative sources of supply: Exploration of alternative sources of supply of
materials increases the bargaining ability of the buyer, minimization of costs of materials and
increases the ability to meet the emergencies.
5. To establish and maintain the good relations with the suppliers: Maintenance of good
relations with the supplier helps in evolving a favourable image in the business circle.
6. To achieve maximum integration with other department: The purchase department is related
with production, engineering and marketing department of the company.
7. To ensure the efficient record keeping and management recording: Paper processing is
inherent in the purchase function. Such paper processing should be standardized so that the record
keeping is facilitated.
 Steps in Material Purchasing Processing:

Step1: Identification of the need: The needed item is brought to the attention of the purchasing
department by following issue of requirements/ demand notes by the user department

Step2: Description of the need: The purchase requisition describes the required item. It ensures accurate
and complete information by including all the necessary information in a form that can be readily checked
and verified.

Step3: Sources selection: A right source of supply needs to be selected based on quality, service and
price consideration. It maintains the register of approved suppliers. Tenders are invited by placing
advertisement in newspaper. Other factors have to be considered while selecting a supplier.

Step4: Determination of price and availability: The next step is to secure the right price for the
materials to be purchased. For standard items the catalogue price and price lists from the basis. The
second method of establishing the price is Negotiation. It involves bargaining between buyer and seller.

Step5: Placing the order: After placing the purchase order orally, the purchase order is sent.

Step6: Acknowledgment of the order: The companies insist on order acknowledgement about the price,
quality, and date of delivery and terms of payment.

Step7: Delivery of materials: Material management ensures that items are delivered on time. If delivery
gets delayed hence it becomes necessary that follow up should be done.

Step8: Checking the invoice and payment of the bill: The invoice has to be checked and approved for
payment. The bill is compared with the order and the goods received note. If it is correct payment is
made.

Principles of purchasing:

1. Principle of right price: It is the primary concern of any manufacturing organisation to get an
item at the right price. But right price need not be the lowest price.
2. Principle of right quality: Right quality implies that quality should be available, measurable and
understandable as far as practicable.
3. Principle of right time: For determining the right time, the purchase manages should have lead
time information for all products and analyze its components for reducing the same.
4. Principle of right source: The source from which the material is procured should be dependable
and capable of supplying items of uniform quality.
5. Principle of right quantity: The right quantity is the most important parameter in buying.
Determining the right quantity after considering factors such as price structure, discounts,
availability of the items and make or buy consideration.
6. Principle of right attitude: The purchase manager should be innovative and his long term
objective should be to minimise the cost of the ultimate product.
7. Principle of right contracts: The buying has to adopt separate policies and procedures for
capital and consumer items.
 8. Principle of right material: Right type of material required for the production is an important
parameter in purchasing.
9. Principle of right transportation: Right mode of transportation has to be identified as this forms
a critical segment in the cost profile of an item.
10. Principle of right place of delivery: Specifying the right place of delivery, like head office or
works often minimise the handling the transportation cost.

Selection of supplier

Levels of vendor evaluation:

1. Product level: This level focus on establishing and improving the suppliers product quality,
incoming inspections and quality inspections are conducted, which result in establishing the
degree of quality conformance of incoming materials.
2. Process level: It is the production process that is closely investigated. The underlying idea is that
the quality of the product strongly relates to the suppliers manufacturing process.
3. Quality assurance system level: It means checking the way in which procedure regarding
quality inspection are developed, kept up to date maintained and refined.
4. Company level: In this approach auditors not only focus on quality aspects, they also take
financial aspects into consideration.

Steps involved in vendor selection

1. Discovering potential supplier: There are number of websites by different suppliers providing
details about their products. Supplier’s catalogs are also useful as they provide information about
the products of various suppliers with their prices and features.
2. Evaluating potential suppliers: Firms use supplier’s survey, financial condition analysis,
evaluator’s conference, quality capacity, e-commerce methods to evaluate suppliers.
3. Selecting suppliers: After evaluating process is complete, the next step is the selection process it
involves (a) Bidding versus negotiation (b) two step bidding or negotiation (c) Solicitation and
responsibility for selection (d) Personnel involved in source selection.
4. Managing suppliers: The buying firm should the best among the available suppliers and train
them to develop meet the firms present and future requirements.

Inventory Management:

It refers to the active control program which allows the management of sales, purchases and payments.
Inventory management helps to create invoices, purchase orders and can print bar coded labels.

Benefits of inventory management:

1. Inventory balance: Good inventory management helps to figure out exactly how much inventory
is required. This makes it easier to prevent product shortage and keep just enough inventories on
hand without having too much.
2. Inventory turnover: To keep a high inventory turnover ratio ensures that products are not
spoiling, becoming obsolete or sucking up the working capital.
 3. Repeat customers: Good inventory management leads to what every business owner wants
repeat customers.
4. Accurate planning: Using smart inventory management, it can go ahead of the demand curve,
keep the right amount of products on hand for seasonal changes. This goes back to keeping
customers happy all year long.
5. Cost cutting: Inventory management helps you avoid wasting money on slow moving products
so that can by putting it to better use in other areas of the business.

Material Handling:

It is a system or combination of methods, facilities, labour and equipment for moving, packing and
storing the materials to meet specific objectives.

Objectives of material handling:

1. To ensure full utilisation of the capacity.

2. To improve customers service.
3. To ensure better working conditions.
4. To facilitate higher productivity.
5. To ensure better space utilisation.
6. To reduce risk to personnel.
7. To increase efficiency of shipping and receiving.
8. To improve personnel comfort.
9. To decrease damages in handling and shipping.
10. To improve location of storage facilities.

Principle of material handling:

1. Principle of plant layout: Good plant layout and minimum handling are next to each other. A
good layout will ensure minimum material handling.
2. Principle of delegation of responsibilities: The entire material handling activity should be
assigned to a separate department. The operations must have the materials that they have to work
on next to them.
3. Principle of minimisation of re-handling: Re-handling to cost, increase spoilage and leads to
wasted movement. Materials must be moved directly to the point of use, materials must be kept at
the height at which they are to be worked upon materials should never be kept on the floor
whenever it can be avoided.
4. Principle of space utilisation: Material should not be made to spread on floor since it occupies
more space and increases transportation distances.
5. Principle of material flow: Simple patterns of material flow should be used. A straight line path
of flow which minimise the handling distance between two points. Reduce back tracking cross
over and other congestion producing patterns as much as possible.

Material-handling equipment: Material handling equipment (MHE) is mechanical equipment used for
the movement, storage, control and protection of materials, goods and products throughout the process of
manufacturing, distribution, consumption and disposal.
Criteria for Selection of Material Handling Equipment
Selection of material handling equipment is an important decision as it affects both the cost and efficiency
of handling system. The following factors are to be taken into account while selecting the material
handling equipment.
1. Properties of the Material : Whether the material is solid, liquid or gas, and in what size, shape and
weight it is to be moved, are important decisions and can be lead to a preliminary elimination from the
range of available equipment under review. Similarly, if the material is fragile, corrosive or toxic this will
imply that certain handling method and containers will be preferable to others.

2. Layout and Characteristic of the building: Another restricting factor is availability of space for
handling. Low-level ceiling many preclude the use of hoist or cranes, and the presence of supporting
columns in awkward places can limit the size of material handling equipment. If the building is multi-
storeyed, chutes or ramp for industrial trucks may be used. Layout itself will indicate the type of
production operation (continuous, intermittent, fixed position or group) and indicate some items of
equipment that will be more suitable than others. Floor capacity also helps in selecting the best material
handling equipment.

3. Production Flow: If the flow is fairly constant between two fixed positions that are not likely to be
changed, fixed equipments such as conveyors or chutes can be successfully used. If, on the other hand,
the flow is not constant and the direction changes occasionally from one point to another because several
products are being produced simultaneously, moving equipments such as trucks would be preferable.

4. Cost Considerations: This is the most important consideration. The above factors can help narrow the
range of suitable equipment, while costing can help in taking the final decision. Several cost elements
need to be taken into consideration when comparisons are made between various items of equipment that
are all capable of handling the same load. Initial investment and operating and maintenance cost are the
major costs to be considered. By calculating and comparing the total cost of each items of equipment
under consideration, a more rational decision can be reached on the most appropriate choice.

5. Nature of Operations: Selection of equipment also depends on the nature of operations like whether
handling is temporary or permanent, whether the flow is continuous or intermittent and material, flow
pattern-horizontal or vertical.

6. Engineering Factors: Engineering factors such as door, ceiling dimensions, floor space, floor
conditions and structural strengths are also taken in consideration in the selection of equipment.

7. Equipment reliability: Reliability of the equipment and supplier reputation and the after sale services
plays an important role in selecting the equipment.

Standardisation:

It means producing maximum variety of products from the minimum variety of materials, parts,
tools and processes.

Acc to Dexter S. Kimball, “ Standardisation in the manufacturing sense is the reduction of any
one line to fixed type, size and characteristics”.
Advantages of standardisation:

1. Production in larger quantity can be planned which results in less set up cost.
2. Less skill is required in manufacturing cost and marketing expenses.
3. Reduction in repair and maintenance cost and marketing expenses.
4. Production planning and control is possible.
5. Reduction in book keeping and other paper work.

Disadvantages of standardisation:

1. Change in public taste or liking may seriously affect a company producing only
standardized product range.
2. Too much standardisation has an adverse effect on the efficiency and morale of the
workers.
3. Due to monotonous work the spirit of challenge and initiative vanishes with the passage
of time.
4. It becomes difficult to introduce new models because of less flexible production facilities
and due to the high cost of specialized production equipment.
5. Standard once set, resist change and thus standardisation may become obstacle to
progress.

Codification:

It means to allot a symbol or code number to every item to facilitate easy location and handling.
Classification should be accompanied with suitable system of codification. After classifying all
the item of stores, it becomes necessary to allot code number to classified items.

Principles of coding:

1. There must be consistency in the point of view so that, the basis of classification should
remain unchanged for all items.
2. The system of classification must cover the entire range of items for which it is devised
and at the same time, allow reasonable scope for extension.
3. The third principle is that of mutual exclusiveness which means that there must be only
one code number possible for any item.
4. The system developed should be simple enough to be understood and easily adopted by
the non specialist personnel.

Advantages of coding:

1. Avoiding of long description: It could be an alphabetic system or a numerical system or

a combination of both. In any case it should be a scientific system.
2. Accurate and logical identification: A separate code is allotted to each of the items
available in the storehouse indicating all the contents of the items concerned.
 3. Prevention of duplication: It shows how main code, sub code, description code and
vocabulary pin down any material with no chance of duplication.
4. Efficient purchasing department: An efficient coding system simplifies the job of
filling up of the purchase order.
5. Ease of computerisation: Codification systems are highly compatible with
computerisation. This is particularly true of large organisations.

Disadvantages of coding:

1. Mistake in coding: A coding mistake in the purchase requisition by the stares

department to the purchase department may result in wrong placement of orders to the
supplier and consequently wrong supply of materials to the stores department by the
suppliers.
2. Detection of coding mistake: It involves long time and hard labour to locate coding
mistakes. Finding out an exact code against a wrong code is a strenuous task.
3. Codes are often misunderstood: When human elements are at work, unconsciousness,
wrong belief, false notion, oral version is the common attitude. Codes are misunderstood
if they are not fully explained and extensively practiced.
4. Large number in one group: Code number may bring confusion and the advantage of
coding may not be achieved fully, if in one group a large number of items are put and
codes are allotted.

Inventory control:

It is a system which ensures the provision of the required quantity of inventories of the right
quality and at the right time with a reasonable amount of capital investment. It aims at obtaining
the maximum inventory turnover with sufficient stock to meet all requirements.

Benefits of inventory control:

1. It ensures maintenance of better balance among the quantities of finished items on hand.
2. It ensures better development of field warehouse inventories.
3. Keep down the manufacturing cost through better utilisation of labour, supervision and
elimination of idle time due to shortage of raw material.
4. It helps to reduce in investment in inventories, inventory carrying cost and obsolescence.
5. It eliminates duplication in ordering, reduction in purchase material costs through
measurement.
6. It ensures better utilisation of available materials in arranging inter department transfer.

Techniques of Inventory Control System

Some of the most important techniques of inventory control system are:
1. Setting up of various 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.
2. Preparation of Inventory Budgets:
Organisations having huge material requirement normally prepare purchase budgets. The purchase budget
should be prepared well in advance. The budget for production and consumable material and for capital
and maintenance material should be separately prepared.
At periodical intervals actuals are compared with the budgeted figures and reported to management which
provide a suitable basis for controlling the purchase of materials.
3. Maintaining Perpetual Inventory System:
This is another technique to exercise control over inventory. It is also known as automatic inventory
system. The basic objective of this system is to make available details about the quantity and value of
stock of each item at all times. Thus, this system provides a rigid control over stock of materials as
physical stock can be regularly verified with the stock records kept in the stores and the cost office.
4. Establishing Proper Purchase Procedures:
A proper purchase procedure has to be established and adopted to ensure necessary inventory control. The
following steps are involved.
(a) Purchase Requisition:
It is the requisition made by the various departmental heads or storekeeper for their various material
requirements. The initiation of purchase begins with the receipts of a purchase requisition by the purchase
department.
(b) Inviting Quotations:
The purchase department will invite quotations for supply of goods on the receipt of purchase requisition.
(c) Schedule of Quotations:
The schedule of quotations will be prepared by the purchase department on the basis of quotations
received.
(d) Approving the supplier:
The schedule of quotations is put before the purchase committee who selects the supplier by considering
factors like price, quality of materials, terms of payment, delivery schedule etc.
(e) Purchase Order:
It is the last step and the purchase order is prepared by the purchase department. It is a written
authorization to the supplier to supply a specified quality and quantity of material at the specified time
and place mentioned at the stipulated terms.
5. Inventory Turnover Ratio:
These are calculated to minimize the inventory by the use of the following formula:
Inventory Turnover Ratio= Cost of goods consumed/sold during the period/Average inventory held
during the period
The ratio indicates how quickly the inventory is used for production. Higher the ratio, shorter will be the
duration of inventory at the factory. It is the index of efficiency of material management.