Material

Management

 Material Management is a function

responsible for co-ordination of

planning, sourcing, purchasing,

moving, storing & controlling
material in optimum manner so as to
provide predetermined service to
customers at minimum cost.
Thus Material Management is
concerned with all the processes and
functions which directly affect flow,

utilization, conservation, quality

and cost of material.

Why material management?

A survey conducted by directorate of
industrial statistics showed that avg.
material cost is 64% of sales value and
inventory carrying cost is 20% of material
cost. Hence total cost of material is

64% + 20% of 64% = 77% of sales

value. Figures themselves indicate
importance of MM. Up till now efforts have
been made for saving in wages that form
only 16% of sales value & it has resulted
in labour problems.

Objectives of Material
Management

1. To minimize cost.
2. To achieve economy in material cost while
purchasing, storing & processing.
3. To ensure continuous and uninterrupted
production.
4. To improve quality of manufactured
goods.
5. To trace new source for supply of material.
6. To increase competitiveness of product by
value analysis.

Functions of Material
Management

Planning & Programming

Procurement
Storing & Administration
Inventory Control
Value Analysis, Standardization
External transport ( shipping, loading etc.
)
7. Material handling
8. Disposal of scrap, surplus & faulty
material.
1.
2.
3.
4.
5.
6.

Advantages of material
Management
1. Regular supply of material
ensures continuous production
process & supply of products to
market maintains reputation.
2. Minimization of wastage.
3. Better utilization of other
resources.
4. Effective storing & handling
avoid congestion.

Inventory
The detailed list of movable goods
such as raw material, material in
process, finished products, general
supplies and equipment etc.
excluding furniture, machinery,
fixtures etc. is known as inventory.
Inventory is idle resource as long
as it is not utilized.

Types of inventory
1. Direct Inventory.
a.Raw Material Inventory
b.In process inventory
c.Finished Good
inventory.
2.

Indirect Inventory.

Objectives of inventories
1. To minimize investment in inventory
and to maximize service level to customer.

supply product, raw material, semi

finished goods etc. to its end users at
right time & at right place.

2. To

3. To keep inactive, waste, scrap &

obsolete material to minimum

level.

Cost Associated with Inventory

1. Holding Cost ( C1 ) ( Inventory Carrying
Cost ):
Cost associated with holding goods in stock.
Very directly w.r.t. size & time.
It includes
-Interest on invested capital
-Record keeping & administrative cost
-Handling cost
-Rent of storage place
-Depreciation, deterioration & obsolesce cost.
-Taxes, insurance etc.

2. Shortage Cost ( C2 ) ( stock out cost ) :

Cost that are incurred as a result of
running out of stock.
Shortage of goods resulting in loss of
production time and loss of sale due to
delay in production.
3. Set up Cost ( C3 ) ( Procurement Cost ) :
Cost associated with obtaining goods
This include cost of purchase, requisition,
follow up, transport, inspection & quality
control.
These are per production cycle,
independent of quantity ordered.

Inventory Control
It is the technique by which material of

correct quality and quantity is made

available as and when required with
due regard to economy in storage cost,
ordering cost, set up cost, manufacturing
cost etc.
Planned approach of determining what to

order, when to order, how much to

order & how much to stock so that cost
associated with buying & storing are
optimal.

1.
2.
3.
4.

Objectives of Inventory
Control

Preventing loss of sales.

Effective use of capital.
Economy in purchasing.
Reduce risk of loss due to
obsolescence and deterioration.
5. Continuity in production operations.

Advantages of Inventory
Control
1. It creates buffer between supply &
consumption and ensures safety stock
so that no shortage is faced.
2. Allows gaining quantity discount.
3. Ensures safety against scarcity of
material in market.
4. Accurate delivery dates can be
ascertained.
5. Good quality of finished products.
6. Production cost reduced.

Inventory Control
Techniques

Number of techniques are adopted & these

use
cost reduction techniques as follows,
To reduce no. of items to be closely
attended.
To reduce variety of items.
To decide how much to order economically.
To decide when to order.
Some techniques indicate safe stock to be
maintained.

Popular techniques are

ABC Analysis
Economic Order Quantity ( EOQ )
Re-Order Level ( ROL )

 Every industry consumes no. of items.

All items are not of equal importance
hence high degree control of each item is
neither applicable nor useful.
Hence items are classified according their
utility importance. This method is called
principle of selective control.
It is found that 10% of items are
responsible for 70% of total cost (A-type),
20% of items are responsible for 20% of
total cost (B-type), 70% of items are
responsible for 10% of total cost (C-type).

Class A items
Close control
reqd.
Size of order
as per
requirement

Class B items Class C items

Moderate
Loose control
Control
Size of order
Size of order
as per
as per
consumption
inventory

Frequent
ordering
Accurate
forecast
Low safety
stock

Less frequent Bulk ordering.

ordering
Less accurate
Moderate
forecast
forecast
Average
Large safety
safety stock
stock
Record of receipt Record of receipt
No record
& consumption

& consumption

Lead Time ( Procurement

Time )

time which the stock

takes to reach from reorder
point to minimum stock level.

It is defined as

From the time requisition

( requirement ) is raised, it may take
considerable time before the supplies

are received, inspected & taken

into stock. This time is called lead
time.

 It involves time for completion of all

or some of following activities.
- Raising of purchase requisition.
- Inquiry, quotation, scrutiny &
approval.
- Placement of an order.
- Suppliers time to make goods ready.
- Transportation
- Receiving and inspection
- Taking into stock.

 Hence in order to reach supply

before stock reaches zero level,
it is necessary to order
material much in advance i.e.
when stock available is
sufficient to last during lead
time.
Re-order level is stock
sufficient to last during lead
time.

Stock Out
When there is shortage of material
for production or service to be
rendered it is called stock out.
stock out will result if

- Usage during actual lead time

becomes greater than
anticipated, or
- Expected lead time itself
extends.

Effects of stock out

Customers Dissatisfaction &
following Losses.
Loss of production & loss of order.
Emergency purchase at high
rates.
Extra transport charges for
speedier modes of transport.
Poor quality of products since
defective material may be picked
up under pressure.

Safety Stock
It is provision to safeguard against stock
out.
Lower limit of stock below which stock
should not be allowed to fall.
Buffer stock or reserve stock.
It is needed when there is
- Delay in delivery.
- Increase in consumption.
- Excess rejections of finished products.
- Excess rejection at receipt for damage &
sub standard quality.

Factors affecting Safety Stock

Number of Suppliers
Lead time
Criticality of the item
Annual usage
Type of items
Service level desired by management
Order quantity
Risk of obsolescence & deterioration
Space restriction.

Economic Order Quantity

To reduce inventory
carrying cost ( CC )
it is better to
procure items in
small quantity. But
that would mean
large no. of orders
so more ordering
cost.

For a particular quantity total cost

which is sum of inventory carrying cost
and ordering cost is minimum & this

 Let
A = Total items consumed per year
P = Procurement cost per order
C = Annual carrying cost per item
Q = Economic Order Cost
Procurement cost/year
= No. of order placed X cost per order
= ( A/Q ) X P = ( AP ) / Q
Inventory carrying cost = Avg. qty. of
inventory X
Carrying cost per item
= ( Q/2 ) X C = QC/2
Total cost = T = AP/Q + QC/2
For T to be minimum dT/dQ = 0
dT/dQ = -AP/Q + C/2 = 0 Q = (2AP/C)

Limitations of EOQ
Economic order quantity is suited only
in static equilibrium or when there are
no uncertainties.
Where varying quantity discounts are
available with change in order size, the
resulting complexity can not be
handled by simple differential equation.
In reality many elements show step
variability which can not be built into
EOQ formula.

Re-Order Level ( ROL )

When inventories fall below certain level,
they are replenished by fresh purchase.
Re-order level deals with when to order
to replenish inventories.
It is decided on following considerations
- Lead time
- Avg. daily consumption
- Safety Stock
Re-order level = safety stock + stock
consumed during lead time
ROL = ( Lead time X avg. daily
consumption ) +
safety stock