unit ii_materials management

8/2/2019 UNIT II_Materials Management

1/50

MATERIALS CONTROL


2/50

MATERIALS: MEANING

The term materials, generally used in manufacturingconcerns, refer to raw materials used for production.


3/50

STORES: MEANING

Stores is wider in meaning and comprises many otheritems besides raw materials, such as tools, equipments,maintenance and repair items, factory supplies,components, fixtures etc.

Sometimes finished goods are also included within thescope of this term.


4/50

MATERIALS CONTROL: MEANING

Systematic control and regulation of purchase,storage and usage of materials to maintain an evenflow of production and at the same time avoidingexcessive investment in inventories.

Efficient material control cuts out losses and wastage ofmaterials.

It is a system which ensures availability of the requiredquantity of material of proper quality at proper time andavoidance of unnecessary blocked capital in materials.


5/50

OBJECTIVESOFMATERIAL / INVENTORYCONTROL

1. Availability of material

2. Avoidance of wastage

3. Promote manufacturingefficiency

4. Avoidance of out of stockdanger

5. Better service toconsumers

1. Economy in purchasing

2. Optimum investment andefficient use of capital

3. Effective utilization of

materials

Operating Objectives Financial Objectives


6/50

ESSENTIAL REQUIREMENTSFOR MATERIALCONTROL

Proper co-ordination

Proper purchase system

Proper storage system

Proper issue system Perpetual inventory system

Budgetary control system

Proper documentation

Proper accounting system Proper reporting system


7/50

PROCEDUREOFMATERIALCONTROL

1. Purchase of material

2. Storage of material

3. Issue of material4. Accounting and audit of material

5. Control of material losses


8/50

PURCHASEOFMATERIALS

It is performed by purchase department.

It can be :

CENTRALIZED PURCHASING: purchases are made bya specialized unit.

DECENTRALISZED PURCHASING: each branchmakes its own purchases.


9/50

Purchasing and Receiving Procedure:

1. Purchase requisition: a formal request for purchase of material made to the purchase department,

showing quantity, quality, and other specifications.

2. Purchase order: Formal contract for the supply of materials.

Purchase dept. places an order with supplier to buy certain materials atstated price and terms.

The order should clearly state the materials required, and price; and shouldprovide information such as delivery period and the dept. for whom thematerials are purchased.

3. Receiving materials: Receiving Dept. performs the function of unloading and unpacking materials

which are received by an organization.

Needs an inspection report which is sometimes incorporated in the receivingreport, indicating the items accepted and rejected, with reasons.


10/50

4. Approval of Invoices: Indicates that goods according to purchase order have been received and

payment can now be made.

If goods not in accordance to the specifications, or are damaged, thepurchasing dept. issues a return order.

5. Making Payment: Payments depends on the terms agreed upon on any particular order, any

terms which differ from normal practice should be considered individually.


11/50


12/50


13/50


14/50

STORAGEOFMATERIALS1. Checking of materials

2. Proper storage systema. Classification: process of arranging items into groups according to

their nature / usage. It prevents mixing of one type of material intoother.

b. Codification:process of assigning a symbol or code number to itemsin different groups and sub-groups. It can be alphabetical, numerical,

or alpha-numerical codification.

Benefits of Codification:

Simplicity in identifying and tracing the stores.

Full particulars need not be given and thus clerical labour and time

are saved. Secrecy is maintained about the details of the stores and all

employees may not know them.

3. Maintenance of proper records of materials.


15/50

TECHNIQUESOF MATERIAL / INVENTORYCONTROL

1. ABC analysis

2. Fixation of various Stock Levels minimum,maximum, reorder level etc.

3. Economic Order Quantity

4. Stock / Inventory Turnover Ratio

5. Just-in-Time (JIT) Inventory system

6. VED Analysis


16/50

1. ABC TECHNIQUE (ALWAYSBETTERCONTROL) Materials are analyzed according to their value so that costly and

more valuable materials are given greater attention and care.

All items of materials are classified according to their value high,medium and low values which are known as A, B, and C itemsrespectively.

A items: high value items, may consists of only a small % of totalitems. Due to their high cost, these materials should be under thetightest control and responsibility of the most experienced personnel.

B items:medium value material, should be under normal controlprocedure.

C items: low value material, may represent large no. of items,should be under simple and economic methods of control.


17/50

ADVANTAGESOF ABC TECHNIQUE

Ensures control on high value items

Saves time and cost of monitoring

Reduces total investment in inventory

Facilitates faster decision making

Better utilization of resources

Better physical control of stock


18/50

2. FIXATIONOF STOCKLEVELS:

Purpose: to avoid under-stocking and over-stocking.

These levels are:

Maximum level Minimum level

Re-order level


19/50

FACTORSINFLUENCINGSTOCKLEVELS:

1. Anticipated rate of consumption

2. Amount of capital available

3. Availability of storage space

4. Cost of storing5. Procurement costs

6. Reliability of suppliers

7. Risk of loss due to Obsolescence Deterioration

Evaporation

Fall in market prices, etc.


20/50

A) MAXIMUMLEVEL

The level above which stocks should not normally beallowed to rise.

Purpose: to avoid unnecessary blockage, to avoid loss dueto obsolescence and deterioration.


21/50

B) MINIMUMLEVEL

Level below which stock should not normally beallowed to fall.

In case of stock falling below this level, there is arisk of stoppage in production.


22/50

C) RE-ORDERLEVEL (ORDERINGLEVEL)

The level of material at which purchase requisitionis initiated for fresh supplies. This level is fixedsomewhere above minimum level.

This is fixed in such a way that by re-ordering whenmaterials fall to this level, then in the normal courseof events, new supplies will be received just beforethe minimum level is reached.


23/50

D) DANGERLEVEL

Level at which normal issues are stopped and materialare issued for important jobs only.

This level is fixed somewhat below the minimum level.

When the stock reaches danger level, urgent action isneeded for the replenishment of stock so that stoppage

in production can be avoided.


24/50

E) AVERAGESTOCKLEVEL

It indicates the average stock held by an enterprise

during a year.


25/50

Danger Level

Minimum Level

Re-order Level

Average Level

Maximum Level


26/50

FORMULAE:


27/50

FORMULAE: Maximum level = Re-order level + Re-order quantity (minimum consumption x

minimum re-order period)

or = Economic order quantity + Minimum stock

Minimum level = Re-order level (average consumption x average re-order period)

Re-order Level = Maximum consumption X Maximum re-order period or max.lead time

Danger level = average consumption X maximum re-order period under emergency

conditions

= minimum consumption x minimum re-order period

Avg. stock level = minimum level + maximum level

2

or = Minimum level + (Re-order quantity)


28/50

3. ECONOMICORDERQUANTITY (EOQ) /RE-ORDERQUANTITY /

The quantity for which order is placed when stock reaches re-orderlevel.

By fixing this quantity the purchaser has not to recalculate the

quantity to be purchased each time he orders for material.

EOQ is that size of the order which gives maximum economy inpurchasing any materials and ultimately contributes towardsmaintaining the material at the optimum level and at minimum cost.


29/50

While calculating EOQ, two types of costs should be taken intoaccount:

1. Ordering Cost: cost of placing an order with the supplier. Mainlyincludes cost of stationary, salaries of those engaged in receivingand inspection, salaries of those engaged in placing orders, etc.

2. Carrying Cost: cost of holding the stock in storage. Includes cost

of operating the store (salaries, rent, stationary, etc.), insurance,interest on capital locked up in store etc.


30/50
http://1.bp.blogspot.com/_DJEIRrK4tl4/TF-7ak7xVLI/AAAAAAAAF0s/sSQ8xu775T8/s1600/economic+order+quantity+2.PNG


31/50

FORMULA:

EOQ = ((2AB)/C)

A= Annual Usage

B = Buying Cost (per order)

C = Carrying Cost (per unit)


32/50

4. STOCK /INVENTORYTURNOVER

It measures the number of times a firms averageinventory is sold during a year.

It points out how many times the stock is used up andreplaced.

Inventory Turnover = Cost of Materials Consumed

Average Stock of Materials


33/50

5. JUST IN TIMEINVENTORYSYSTEM

JIT is a purchasing and inventory control method in whichmaterials are obtained just in time for production to providefinished goods just in time for sale.

There are two aspects of JIT Just in Time (JIT) Production : Producing only what is needed, when is

needed, and in quantity just needed

Just in Time (JIT) Purchasing:Raw materials are purchased just in timeto proceed to the production process. It requires better coordination withsuppliers so that materials arrive immediately prior to their use.

The chances of leakage, spoilage etc. are reduced to theminimum.


34/50

6. VED ANALYSIS(VITAL ESSENTIAL DESIRABLE)

It is based on the classification of materials on the basis of their criticalityfor production.

VITAL: materials are very critical for production. Shortage of suchmaterials would result in immediate stoppage of production.

ESSENTIAL: materials are very important for production. Shortage ofsuch material will not result in immediate stoppage. Productiondepartment can do without such materials for a day or two. If shortagecontinue for a longer period, production will stop.

DESIRABLE: These are required for production but production dept.can manage without them for sometime, say a week, because they havesome substitute or production process or production process can bemodified in such a way that it can go on without such materials.


35/50

Incoming Material:

The incoming material should be valued at invoice price plusall expenses of whatever nature incurred up to the point ofplacing materials in a condition suitable for issuance from the

stock room.

These include:

Transportation charges

Receiving, unpacking and inspecting costs,

Insurance and storage costs,

Accounting and purchasing costs.

3. ISSUEOF MATERIAL


36/50

Outgoing Material:

Materials are priced according to the different inventorysystems.

Inventory Systems:

1. Periodic Inventory System

2. Perpetual Inventory system


37/50

Under this system the quantity and the value of inventoryis found out only at the end of the accounting period afterhaving a physical verification of the units in hand.

This system does not provide the information regardingthe quantity and the value of material in hand oncontinuous basis.

PERIODIC INVENTORY SYSTEM


38/50

Under this system, the stores ledger gives balance ofmaterial on a continuous basis.

Objective is to make available details about the quantityand value of stock of each item at all times.

It provides a rigid control over stock of materials, asphysical stock can regularly be verified with the stockrecords.

PERPETUAL INVENTORY SYSTEM


39/50

TOOLSOFPERPETUALINVENTORYSYSTEM

1. BIN CARD: It is a quantitative record which showsinformation relating to the physical movement ofmaterial, i.e. receipt, issue and balance of material,minimum and maximum levels, ordering level etc.

2. STORES LEDGER: It shows information relating tomovements of material in quantity as well as in value,i.e. receipt, issue and balance of material, minimum

and maximum levels, ordering level, and also the priceof the material.


40/50

METHODSOF VALUATIONOF

INVENTORIES

:


41/50

1. FIRST IN FIRST OUT (FIFO)

Under this method, it is assumed thatthe materials first received are the first

to be issued/sold.


42/50

2. LAST IN FIRST OUT (LIFO)

The last items of materials/goods purchasedare the first to be issued/sold.


43/50

3. HIGHEST IN FIRST OUT (HIFO)

The inventory of materials/goods purchased atthe highest prices are treated as being firstissued/sold irrespective of the date of purchase.

This method has not been adopted widely.


44/50

4. NEXT IN FIRST OUT (NIFO)

The issues are made or the cost of goods sold is takento the next price, i.e. the price of materials or goodswhich have been ordered but not yet received.

This method has not been adopted widely.


45/50

5. WEIGHTED AVERAGE PRICE METHOD

This method is based on the presumption that once thematerials or goods are put into a common bin, they losetheir separate identity. The inventory consists of nospecific batch of goods.

The inventory is priced on the basis of average pricespaid for the goods, weighted according to the quantitypurchased at each price.


46/50

4. ACCOUNTINGANDAUDITOFMATERIAL

Stock Accounting is basically the recording of material.

Stock Audit implies physical verification of stock withinventory records. It is necessary to check the accuracyof inventory records and to segregate materials whichhave become obsolete or useless.


47/50

5. MATERIAL LOSSES

Material loss is the difference between the input ofmaterial in the process and the output.

It may be of the following forms:-

Waste

Scrap

Spoilage

Defectives


48/50

Waste

It is defined as material loss during production or storage. It may arise due to evaporation, chemical reaction,

shrinkage etc.

It may be visible or invisible.

Types:

Normal Waste: arise due to nature of material. It is unavoidable.Treated as part of the cost of production.

Abnormal Waste: arises due to external factors. It is avoidable.It is not a part of cost, but it is transferred to Costing profit andloss a/c


49/50

Scrap

Scrap is a portion of visible wastage having a moneyvalue (low).

It is discarded material which is usually disposed off.

Spoilage

Spoilage means the produced units that does not meetwith dimensional or quality standards in such a way that it

cannot be rectified economically.


50/50

Defectives

These are semi-finished or finished products which arenot according to quality standards.

May arise due to poor workmanship, poor quality of raw

material, lack of supervision, unsound working conditionsetc.

Types:

Reworks: defectives which can be brought up to thestandards by putting in additional resources.

Rejects: defectives which cannot meet the quality standardseven after putting in additional resources

unit ii_materials management

Documents