Notes on Material Management

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CHAPTER – MATERIAL MANAGEMENT
Definition:
L.J. De Rose:
“Material management is the planning, directing, controlling and co-ordination of all those
activities concerned with material and inventory requirements, from the point of their
inception to their introduction into manufacturing process.”
As per De Rose all those functions which start with the procurement of materials and end
with completion of manufacturing are a part of material management.
N.K. Nair:
“Material management is the integrated functioning of the various sections of an organization
dealing with the supply of materials and allied activities in order to achieve maximum coordination.”
N.K. Nair has emphasized the co-ordination of all those activities which are related to the
efficient use of materials.
Importance of Material Management:
Material management is a service function. It is as important as manufacturing, engineering
and finance. The supply of proper quality of materials is essential for manufacturing standard
products. The avoidance of material wastage helps in controlling cost of production. Material
management is essential for every type of concern.
The importance of material management may be summarized as follows:
1. The material cost content of total cost is kept at a reasonable level. Scientific purchasing
helps in acquiring materials at reasonable prices. Proper storing of materials also helps in
reducing their wastages. These factors help in controlling cost content of products.
2. The cost of indirect materials is kept under check. Sometimes cost of indirect materials also
increases total cost of production because there is no proper control over such materials.
3. The equipment is properly utilized because there are no break downs due to late supply of
materials.
4. The loss of direct labour is avoided.
5. The wastages of materials at the stage of storage as well as their movement is kept under
control.
6. The supply of materials is prompt and late delivery instances are only few.
7. The investments on materials are kept under control as under and over stocking is avoided.
8. Congestion in the stores and at different stages of manufacturing is avoided.
Organization of Materials Management Department:
To facilitate planning, direction, control and co-ordination of various activities related to
material in an enterprise there should be a separate department of materials management.
The organisational structure of the department can be.
There can be more sub-sections of the department but in general, materials manager controls
the four major sections and is responsible for reporting to the president of the organisation.
Scope of materials management
1. Materials planning and control:
Based on the sales forecast and production plans, the materials planning and control
is done. This involves estimating the individual requirements of parts, preparing
materials budget, forecasting the levels of inventories, scheduling the orders and
monitoring the performance in relation to production and sales.
2. Purchasing:
This includes selection of sources of supply finalization in terms of purchase,
placement of purchase orders, follow-up, maintenance of smooth relations with
suppliers, approval of payments to suppliers, evaluating and rating suppliers.
3. Stores management or management:
This involves physical control of materials, preservation of stores, minimization of
obsolescence and damage through timely disposal and efficient handling,
maintenance of stores records, proper location and stocking. A store is also
responsible for the physical verification of stocks and reconciling them with book
figures. A store plays a vital role in the operations of a company.
4. Inventory control or management:
Inventory generally refers to the materials in stock. It is also called the idle resource
of an enterprise. Inventories represent those items, which are either stocked for sale
or they are in the process of manufacturing or they are in the form of materials,
which are yet to be utilized. The interval between receiving the purchased parts and
transforming them into final products varies from industries to industries depending
upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of
various kinds to act as a buffer between supply and demand for efficient operation
of the system. Thus, an effective control on inventory is a must for smooth and
efficient running of the production cycle with least interruptions.
5. Other related activities
a. 3S
i.
Standardization:Standardization means producing maximum variety
of products from the minimum variety of materials, parts, tools and
processes. It is the process of establishing standards or units of
measure by which extent, quality, quantity, value, performance etc.
may be compared and measured.
ii.
Simplification:The concept of simplification is closely related to
standardization. Simplification is the process of reducing the variety of
products manufactured. Simplification is concerned with the reduction
of product range, assemblies, parts, materials and design.
iii.
Specifications:It refers to a precise statement that formulizes the
requirements of the customer. It may relate to a product, process or a
service.
Example:
Specifications of an axle block are Inside Dia. = 2 ± 0.1 cm, Outside Dia. = 4 ± 0.2 cm and Length
= 10 ± 0.5 cm.
b. Value analysis: Value analysis is concerned with the costs added due to
inefficient or unnecessary specifications and features. It makes its contribution
in the last stage of product cycle, namely, the maturity stage. At this stage
research and development no longer make positive contributions in terms of
improving the efficiency of the functions of the product or adding new
functions to it.
c. Ergonomics (Human Engineering): The human factors or human engineering is
concerned with man-machine system. Ergonomics is “the design of human
tasks, man-machine system, and effective accomplishment of the job,
including displays for presenting information to human sensors, controls for
human operations and complex man-machine systems.” Each of the above
functions is dealt in detail.
20 Principles of Material Management
These principles are guidelines for the application of sound judgment. Some principles
are in conflict with others, so only the situation being designed will determine what is
correct. The principles will be a good checklist for improvement opportunities.
1. Planning Principle
All material handling and storage activities need to be planned to obtain maximum
overall operating efficiency. Material handling planning considers every move, every
storage needs and any delay in order to minimize production costs.
2. System Principle
The system concept is that all material handling equipment should work together so
that everything fits. The system principle integrates as many steps in the process as
possible into a single system from the vendor through your plant and out to your
customers. It is to integrate as many handling activities as is practical into a
coordinated system of operations, covering vendor, receiving, storage, production,
inspection, packaging, warehousing, shipping, transportation and customer.
An example will be a oil company purchased plastic bottles from an outside
manufacturer. The bottles were packaged in a carton of 12 with separators in
between. These cartons were placed on a pallet and shipped out to the company’s oil
bottling plant. In the plant, the bottles were dumped onto a filing line and filled with
oil. The empty cartons were conveyed to the pack out end of the filing line and
repacked with 12 bottles, closed, stacked on a pallet and shipped to the customer.
3. Material Flow Principle
It is to provide an operation sequence and equipment layout optimizing material flow.
4. Simplification Principle
Using Cost Reduction Formula to simplify handling (Eliminate, combine and reduce
unnecessary movement and/or equipment).
5. Gravity Principle
There are many ways to make use of gravity to move materials between workstations.
Thus, utilize gravity to move material wherever possible.
6. Space Utilization Principle
It is to make optimum utilization of the cubic capacity of the warehouse. Racks,
mezzanines and overhead conveyors are a few of the material handling equipments
that maximize space utilization.
7. Unit Size Principle
Strength, durability, versatility, weight, size, cost and ease of use must all be
considered when choosing a unit load. It is to increase the quantity, size, or weight of
unit loads or flow rate.
8. Mechanization Principle
It is to add power to eliminate manual moving. Mechanization implies the use of
mechanical tools to aid in the movement of material.
9. Automation Principle
Automatic storage and retrieval systems place material into storage racks
automatically and remove it when needed. Many machines are automatic because
material handling equipment loads and unloads the machine. Automation is the way
of the future; thus, even users of the manual system must consider when it can be
justified. Provide automation to include production, handling and storage functions.
10. Equipment Selection Principle
In selecting handling equipment consider all aspects of the material being handled –
the movement and the method to be used.
11. Standardization Principle
It is to standardize handling methods as well as types and sizes of handling equipment.
Cost of material handling systems can be grouped into two categories: the cost of
ownership of the system (includes the initial purchase price and the subsequent
maintenance costs) and the cost of operation of the system (includes cost of training
personnel to use the system safely, energy cost and other direct and indirect costs
associated with the use of the system). An example will be choosing a material
handling equipment and stay with that brand, type and size because spare parts
inventory, maintenance and operation of this equipment will be most cost efficient.
12. Adaptability Principle
Use methods and equipment that can best perform a variety of tasks and applications
where special purpose equipment is not justified. Examples will be the purchasing of
standard size pallets that will handle a range of parts and purchasing of storage
equipments that can store a wide variety of products. In this way, change will be less
costly.
13. Dead Weight Principle
Do not buy equipment that is bigger than necessary. Tare / unladen weight refers to
the weight of the packaging material. Products are packaged to prevent damage while
moving. However, packaging is expensive and it costs as much as the product to ship
this tare weight. Thus, the goal is to reduce the tare weight and save money.
14. Utilization Principle
Material handling equipment and operators should be used fully. Identifying the work
required, the number of times per day and the time required per move will help
manage the workload of both labour and equipment. Plan for optimum utilization of
handling equipment and manpower.
15. Maintenance Principle
Material handling equipment must be maintained. Preventive maintenance (periodic
and planned) is cheaper than emergency maintenance. Hence, a preventive
maintenance program including schedules must be developed for each piece of
material
handling
equipment.
Pallets, storage facilities need to be repair. Missing slats on pallets can cause product
damage and safety problems. Thus, plan for preventive maintenance and scheduled
repairs of all handling equipments.
16. Obsolescence Principle
As equipment wears out, good maintenance records will help identify worn-out
equipments. Replace obsolete handling methods and equipment when more efficient
methods or equipment will improve operations.
17. Control Principle
Materials are costly and material handling systems can be a part of the inventory
control system. With the aid of technology (e.g. conveyor, RFID, barcode), quality
inspection, inventory control and item tracking can be incorporated into the material
handling systems. It will reduce or eliminate the need to count or track the material
physically. A good material handling system allows a tremendous savings in operation
time and significant improved costs, accuracy and reliability. Hence, use material
handling activities to improve control of production inventory and order handling.
18. Capacity Principle
Use handling equipment to help achieve desired production capacity.
19. Performance Principle
It is to determine effectiveness of handling performance in terms of expense per unit
handled. Material handling labour moves material and a measurement of output
could be units of materials moved. Input is labour hours. Therefore, productivity can
be improved by increasing the units of material moved or reducing the labour hours.
Performance of material handling can also be calculated by ratios:
Percent of Material Handling = (material handling hours)/(total labour hours)
Performance includes a lot more than labour. Segregating material handling cost from
total operation costs would result in a better ratio.
20. Safety Principle
Manual handling is probably the most dangerous method of material handling.
Material handling equipment can also be a source of safety problems, so safety
methods, procedures and training must be part of any material handling plan. It is
management responsibility to provide a safe work environment. Safety considerations
must be a major factor in selecting material handling equipment. Therefore, it is
important to provide suitable methods and equipment for safe handling.
Inventory Management
Meaning of inventory management
Inventory Management is a practice of tracking and controlling the inventory orders,
its usage and storage along with the management of finished goods that are ready for
sale. If the inventory in not managed properly, it can lead to increase in storage
cost, capital crunch, wastage of labour resources, increase in idle time, disruption of
the supply chain, etc. All this leads to a reduction in sales and unsatisfied customers.
Therefore, inventory management is an important aspect of the business which
should not be ignored and must be managed properly.
Objectives:
(i) To minimise capital investment in inventory by eliminating excessive stocks;
(ii) To ensure availability of needed inventory for uninterrupted production and for
meeting consumer demand;
(iii) To provide a scientific basis for planning of inventory needs;
(iv) To tiding over the demand fluctuations by maintaining reasonable safety stock;
(v) To minimise risk of loss due to obsolescence, deterioration, etc.;
(vi) To maintain necessary records for protecting against thefts, wastes leakages of
inventories and to decide timely replenishment of stocks.
Functions of Inventory Control:
The functions of inventory control are listed below:
1. To Develop Policies, Plans and Standards Required:
So as to achieve the inventory control objectives.
2. Effective Running of Stores:
This may include problems of layout, utilization of storage space, issuing and receiving
procedures of items kept in stock.
3. Technological Responsibility for the State of Different Materials:
This may include the method of storage, maintenance procedures, studies of
deterioration and obsolete materials and corrective action required.
4. Stock Control System:
This includes purchase procedures of materials, ordering policies, physical verification
and records of items stored.
5. To Ensure the Timely Availability:
Of requisite input materials and avoid building up of stock levels of final product.
6. Maintenance of Specified Inputs:
Specified raw materials, finished components/parts work m process, general supplies
in sufficient quantities are maintained to meet the production requirements of the
enterprise.
7. Protection of Inventories:
The inventories are to be protected from improper material handling; wrong and
unauthorized removal from the stores.
8. Pricing:
Pricing of all input materials being supplied to various shops is essential for further
cost estimation of final products.
Advantages of Inventory Control:
Scientific inventory control provides the following benefits:
1. It improves the liquidity position of the firm by reducing unnecessary tying up of
capital in excess inventories.
2. It ensures smooth production operations by maintaining reasonable stocks of
materials.
3. It facilitates regular and timely supply to customers through adequate stocks of
finished products.
4. It protects the firm against variations in raw materials delivery time.
5. It facilitates production scheduling, avoids shortage of materials and duplicate
ordering.
6. It helps to minimise loss by obsolescence, deterioration, damage, etc.
7. It enables the firms to take advantage of price fluctuations through economic lot
buying when prices are low.
Limitations of Inventory Control:
(i) Efficient inventory control methods can reduce but cannot eliminate business risk.
(ii) The objectives of better sales through improved service to customer; reduction in
inventories to reduce size of investment and reducing cost of production by smoother
production operations are conflicting with each other.
(iii) The control of inventories is complex because of the many functions it performs.
It should be viewed as shared responsibilities.
Causes of Poor Inventory Control:
1. Over buying without consideration of demand estimates in order to take advantage
of favourable market conditions leads to poor control.
2. Over production or keeping inventory stocks of finished products without
consideration of customer requirements.
3. In order to provide quick and better service to consumer over stocking may take
place. Also, to cut down the cost of production, bulk production will result in huge
inventories both these shall lead to poor inventory control.
4. Cancellation of orders may also give rise to large inventories thus may result in poor
inventory management.
7 MOST EFFECTIVE INVENTORY MANAGEMENT TECHNIQUES ARE AS FOLLOWS:
There are various types of inventory management techniques which can help in
efficient inventory management. They are as follows:
ABC ANALYSIS
ABC stands for Always Better Control technique. ABC analysis is an inventory
management technique where inventory items are classified into three categories
namely: A, B, and C. The items in A category of inventory are closely controlled as it
consists of high-priced inventory which may be less in number but are very expensive.
The items in B category are relatively lesser expensive inventory as compared to A
category and the number of items in B category is moderate so control level is also
moderate. The C category consists of a high number of inventory items which require
lesser investments so the control level is minimum.
JUST IN TIME (JIT) METHOD
In Just in time method of inventory control, the company keeps only as much
inventory as it needs during the production process. With no excess inventory in hand,
the company saves the cost of storage and insurance. The company orders further
inventory when the old stock of inventory is close to replenishment. This is a little risky
method of inventory management because a little delay in ordering new inventory
can lead to stock out situation. Thus, this method requires proper planning so that
new orders can be timely placed.
MATERIAL REQUIREMENTS PLANNING (MRP) METHOD
Material Requirements Planning is an inventory control method in which the
manufacturers order the inventory after considering the sales forecast. MRP system
integrates data from various areas of the business where inventory is utilized. Based
on the data and demand in the market, order for new inventory is placed with the
material suppliers.
ECONOMIC ORDER QUANTITY (EOQ) MODEL
Economic Order Quantity technique focuses on taking a decision regarding how much
quantity of inventory should the company order at any point of time and when should
they place the order. In this model, inventory is reordered when it reaches the
minimum level. EOQ model helps to save the ordering cost and carrying costs incurred
while placing the order. With EOQ model the organization is able to place the right
quantity of inventory.
MINIMUM SAFETY STOCKS
The minimum safety stock is the level of inventory which an organization maintains to
avoid stock out situation. It is the level at which the new order is placed before the
existing inventory is over. Like for example, if the total inventory in an organization is
18,000 units, they place a new order when the inventory reaches 15,000 units.
Therefore, the 3,000 units of inventory shall form part of minimum safety stock level.
VED ANALYSIS
VED stands for Vital essential and desirable. Organizations mainly use this technique
for controlling spare parts of inventory. Like, high level of inventory is required for vital
parts that are very costly and essential for production. Others are essential spare
parts, whose absence may slow down the production process, hence it is necessary to
maintain such inventory. Similarly, an organization can maintain a low level of
inventory for desirable parts, which are not often required for production.
FAST, SLOW & NON-MOVING (FSN) METHOD
This method of inventory control is very useful for controlling obsolescence. All the
items of inventory are not used in the same order; some are required frequently, while
some are not required at all. So, this method classifies inventory into three categories,
fast moving inventory, slow-moving inventory and non-moving inventory. The order
for new inventory is placed based on the utilization of inventory.
Conclusion
Inventory management is an essential part of every business. With effective inventory
management system in place, the business can significantly reduce its various costs
like warehousing cost, inventory carrying cost, ordering cost, cost of obsolescence,
etc. It improves the supply chain of the business. Managers are able to forecast the
level of production at which they need to place new orders for inventory. Hence,
organizations should take all the necessary steps to maintain an effective inventory
management and control system.
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