Importance – Most manufacturing and construction concerns spend 60-70% of the money for materials. This means materials soak up substantial portion of the capital invested in. So even a small saving in materials can reduce production cost and add to the profits. Material management involves controlling the type, amount, location, movement, purchases of various materials used in production (Construction).
Functions of Materials Management / Material Manager
1. Materials planning
2. Procurement and purchasing of materials
3. Receiving and warehousing
4. Storage and store administration
5. Inventory control
6. Standardization, simplification and value analysis
7. External transportation and materials handling
8. Disposal of scrap, surplus and obsolete materials.
Objectives of Materials Management
1. To minimize materials cost
2. To procure and provide material of desired quality when required at lowest cost.
3. To reduce investment tied in inventories for use in other productive .
4. To purchase, receive, transport and store materials efficiently.
5. To develop new sources of supply and maintain cordial relations with suppliers.
6. To take cost control measures through standardization, value analysis etc.
7. To keep watch on market conditions, undertake market analysis and modify the policies.
Stores Management
Takes care of
i. Required material is never out of stock.
ii. No material is store in excess to large extent.
iii. To purchase material on principle of economic order quantity.
iv. To protect material against damage, theft etc.
Functions of stores department / Duties of store keeper
i. To receive materials, goods and equipments and to check them for identification.
ii. To receive parts and components processed in factory.
iii. To record receipt of goods
iv. To correct positioning of all materials and supplies in the store so to get it easily.
v. To issue items after authorized requisitions.
vi. To maintain store clean.
vii. To prevent unauthorized entry in stores.
viii. To initiate purchasing cycle at appropriate time.
Inventory is a detailed list of those movable items which are necessary to manufacture a product or which are required to put in the construction and to maintain the equipment and plant in good working order. The quantity and value of every item is also mentioned in the list. Inventory is actually money kept in the stores in the form of materials.
Inventory Control
It is a planned method of determining what to purchase, when to purchase, how much to purchase and how much to stock so that procurement and carrying costs are lowest possible without affecting the construction progress.
When company has too little inventory, then stock outs are more. Stock outs of essential materials create interruption in production / construction. It keeps men and machines idle, increasing cost of production / construction. If too much inventory is there, much more capital will be blocked in it and inventory carrying cost will be increased. Further some of the material will deteriorate and become obsolete. Hence maintaining proper inventory is very much necessary to increase return on capital.
Necessity of inventory
1. To maintain speed of production/ construction as per schedule.
2. Protection against uncertainty – Inventories protect the project against unforeseen failures in supply or increase in demand.
3. Inventories act as cushions between the operation or process. Every stage of production / construction operates at different rate than other. Production / construction will stop if inventory is not there.
4. Transit and handling – The material travels thousands of km before it is actually used on site. The delay in transportation may delay production / construction. Hence it is necessary to carry safety stock to keep production / construction on.
Objectives of inventory control
· To minimize investment in inventory
· To maximize the service levels of the store.
1. Stock out: Non availability of inventory when needed leads to what is called as stock out. This will lead to idling of equipment and men, emergency purchases at high cost, increased transportation cost, delay in production / construction.
2. Lead time : The interval between the need for the material determined and the time, the material actually delivered.
3. Safety stock : If the supplier fail to keep the delivery promises or delivery forecasts are inaccurate or rate of consumption increases, extra inventory is necessary to protect against these situations. This additional inventory stock is called safety stock. Most companies set their safety stock on trial and error basis.
Order quantity : is quantity orders at a time. The total requirement for the year divided by number of orders placed in a year gives order quantity.
Procurement cost includes expenditure incurred before the material is physically received in our stores. It includes processing purchase requisitions, calling quotations, comparing the offers, selection of vendor, placing order, following up and expediting purchase order, receiving and inspecting material, processing vendors invoice. Procurement cost decrease as order quantity increases.
Inventory carrying costs include cost incurred after the materials are received in our stores. It includes interest on capital investment, cost of storage facility, record keeping, up keeping of material, cost involving deterioration and obsolescence and cost of insurance, property tax or rent of property, insurance cost, etc. Inventory carrying cost is directly proportional to order quantity it increases with increase in inventory.
a) Economic Order Quantity
EOQ depends upon two types of costs Procurement costs and inventory carrying costs.
Limitations of EOQ
1. Space restrictions – EOQ in certain cases may have to be reduced to suit available space.
2. Risk of obsolescence – EOQ is to be modified for the items which are liable for modifications.
3. Seasonal demand – EOQ cannot be practiced for products which have seasonal demand.
4. Assembly requirement – EOQ formula cannot be adopted without modifications for the components that are used in assembly. Because requirement of different machines is different.
5. Tool life – EOQ does not take into consideration the average tooling productivity. As there is always a minimum quantity below which tooling cannot be justified.
a) Economic Order Quantity
EOQ depends upon two types of costs Procurement costs and inventory carrying costs.
Where Q = Economic lot size/ EOQ
C = Cost for one item
I = Inventory carrying cost in percentage
P = Procurement cost of one order
U = Total quantity used per period
a) Bulk order quantity : is greater than EOQ. The bulk order quantities are rounded off to 3,6,12 months requirements. Bulk order quantities can be obtained at better purchase prices. Procurement cost is reduced and work of purchase department is reduced. But carrying cost is more. This can be partly compensated by arranging, staggering the deliveries.
b) Arbitrary order quantity: If the market conditions are fluctuating i.e. steep rise or fall in prices. It is not always economical to buy at EOQ, when prices in the market are high. Hence purchases are made in smaller quantities at high prices and larger purchases when prices fall. Also it is better to buy large quantities if increase in prices is anticipated.
ABC system permits selective inventory control. It is a basic technique of material management, applicable to purchasing, receiving and inspection, store keeping, issue, verification of bills, inventory control, value analysis and sales.
If all the item contributing entire inventory are analysed in terms of annual consumption cost, it will be found that 70% of the total inventory cost is against 10% of the total items called as ‘A’ items, 20% of the cost is against 20% of the items called, ‘B’ items and 10% of annual consumption cost against a big bulk i.e. 70% of items called ‘C’ items.
ABC analysis does not depend upon unit cost of item but only on its annual consumption. Also it does not depend upon importance of item as all items are equally important for work.
‘A’ items – account for 70-80% of the total inventory cost and they constitute about 10% of total items, ‘A’ items are high valued but are limited or few in number. They need careful and close inventory control. Minimum and maximum limits and reorder point is set for A items. Such items should be thought of in advance and purchased well in time. A detailed record of their receipt and issues should be kept and proper handling and storage facilities should be provided for them. Such items being costly are purchased in small quantities oftenly and just before their use. This is of course increases the procurement costs and involves a little risk of non availability, however locked up inventory cost decreases and the problems of storage and care taking are minimized. A stock of week or fortnight Is kept. E.g – Steel, Cement, Sanitary ware,
‘B’ items – account for 20 to 15% of the total inventory cost and constitute about 15 to 20% of the total items. ‘B’items are medium valued and their number lies in between A & C items. Such items need moderate control. They are more important than C items. They are purchased on basis of past requirements, a record of receipts and issues is kept and procurement order is placed as soon as quantity touches reorder point. They are comparatively less costly; safety stock up to 3 months can be kept. E.g – sand, coarse aggregates, tiles, etc.
‘C’ items – account for 10 to 5% of the total inventory cost and they constitute about 75% of the total items. ‘C’ items are low valued, but maximum numbered items. These items do not need any control, rather controlling them is uneconomical. These are least important items like pins, washers, binding wire etc. They are procured just before they are finished. Safety stock of 3 months or even more is purchased in bulk.
Procedural steps
i. i. Identify all the items used in the product, prepare list of the items and estimate their annual consumption in units.
ii. Determine unit cost of each item.
iii. Multiply each annual consumption by its unit cost to obtain its annual consumption in rupees to get annual usage.
iv. Arrange items in the descending order of their annual usages, starting with highest annual usage.
v. Calculate cumulative annual usage and express the same as cumulative percentage. Also express the number of items into cumulative item percentages.
vi. Plot cumulative usage percentages against cumulative item percentages and segregate the items into A,B and C categories.