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material and production management

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What material management? What are its importance and functions? An®. Meaning of Material Management Materials management may be thought of as an integrated functioning of the different sections of a company dealing with the supply of materials and other re lilted activities so as to obtain maximum coordination and optimum minimum expenditure on materials. Functions of Material Management The different functions of materials management are: (1 Material Planning !ales forecasting and aggregate planning are the basic inputs for materials planning. The different tas"s under planning are listed below: (1 #stimating the individual re$uirements of parts (ii %reparing materials budget (iii &orecasting the levels of inventories (iv !cheduling the orders' (v Monitoring the performance in relation to production and sales. (( Procurement or purchasing of materials :)The tas"s under purchasing are listed below: (* evaluating and rating sup pliers (ii !election of suppliers (iii &inali+ation of terms of purchase. (iv, %lacement of purchase orders (v &ollow)up (vi Approval of payments to supplier. (3) Receiving and warehousing (torage and tore!administration The different tas"s tinder stores are listed below: (* %hysical control of materials (ii %reservation of stores
(iii Minimi+ation of obsolescence and damage through handling

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(iv .isposal and efficient handling (v Maintenance of stores records

(vi %roper location and stoc"ing of materials (vii /econciling the materials with boo" figures0 (viii "nventor# $ontrol :)This includes the following: (* A12 Analysis (ix economical order $uantity (x /e) order %oint (3 (4 (5 !tandardi+ation' simplification and value analysis #xternal Transportation and material handling

.isposal of scrap' surplus and obsolete materials *f these systems are designed to function independently' there won6t be close coordination among them. 1ut we need complete integration of these functions for better operation of the system. "mportance of Materials Management (1 To minimi+e material cost (( To procure and provide materials of desired $uality when re$uired' at the lowest possible overall of the concern. (7 To reduce investment tied in inventories for use in other productive purposes and to develop high inventory turnover ratios. (- To purchase' receive' transport and store materials efficiently and to reduce the related costs. (.3 To ta"e new sources of supply and to develop cordial relations with them in order to ensure continuous material supply at reasonable rates. (4 To cut down cost through simplifications' standardi+ation' value analysis' import substitution etc.' (5 To report changes in the mar"et conditions and other factors affecting the concern' to the concern. (3 To modify paperwor" procedure in order to minimi+e delays in procuring materials.
((8 To conduct studies in areas such as $uality' consumption and cost of materials to minimi+e cast of production.

Q. %efine Purchasing Management. &lso e'plain purchase organi(ation and purchase s#stem. Ans. Purchase Management The purchasing department occupies a vital and a uni$ue position in the organi+ation of an industrial concern because purchasing is one of the main functions in the success of a modern manufacturing concern. The purchasing function is a liaison agency when operates between the factory organi+ation and the outside vendors on all matters of procurement. Purchasing )rgani(ation (1 %urchasing department is a staff function in the overall company structure.

(( (7 (-

The internal organi+ation of the purchasing department is on a line basis' with purchasing agent' director of purchases or purchasing manager being the incharge of purchase department. 9e is responsible for the overall efficient operation of the department. The purchasing manager is however' assisted in purchasing by a number of assistants and a few clerical staff. The purchasing manager has the powers to execute purchasing contracts for the concern. 9e divides the duties among the assistants according to the nature of purchases to be made. &or example) one assistant may purchase only electrical goods another raw material' third plant e$uipment and so on.

Purchasing Manage r
Assistant %urchasing t:rder 2ler" /ecord 2ler" &ile 2ler" 1uyer #lectrical ;oods %urchase !ervice Assistant /ecords and 2orrespondence Assistan

1uyer %lant e$uipments

1uyer raw materials

2ler" #lectrical :cods 2ler" raw materials 2ler" %lant e$uipments

The above figure shows an organi+ation of a typical purchasing department. There are three main sections namely purchasing' purchase services < records. (1 %urchasing sect ion places o orders with vendors (ii %urchase service station follows the progress of orders at vendors' (iii /ecords section maintains all records of $uotations' .costs' purchases etc. )*+ectives of Purchasing Management The ob,ective of the purchasing function is to ensure continuity of supply of raw materials' sub)contracted items and spare parts and at the same time reduce the ultimate cost of the finished goods. The different parameters of purchasing are as listed below: (11 %urchasing items with iigh =. pri ce (( %urchasing items with right $uality (7 %urchasing items at light time so that the items are available when needed. (- %urchasing items from right source. 7)*cre' the dependability of the vendors' are. estimated using vendor rating. The location of vendors'

nature of items' mode of transportation' vendor>s commitment to due dates' etc. should be ta"en into account' (3 %urchasing items of right $uantity. ;enerally' there is a trade)off between cost of ordering and cost of carrying inventory. 9ence' orders should b placed with optimal $uantity. Purchase #stem The purchase system may be classified into %/#) %?/29A!# !@!T#M' :rdering !ystem and %ost)%urchase system. (,) Pre!Puichas e #stem This mcludes: (i Ma"ingre$uisitions (ii /e$uirement programmes (iii !election of suppliers (iv :btain Auotations and evaluating thein. (( )rdering #stem :nce the decision on supplier and the rates are finali+ed' the order is placed with the selected supplier) The next tas" is to place order. The details of order form are listed as: (i %urchase order /eference number (ii .escription ofthe materials and detailed specifications'
(iii Auantity re$uired and delivery schedule.

(iv %rice and discounts (v !hippinginstructions (vi =ocation where the materials are to be shipped (vii !ignature of the materials manager (viii .etailed term of conditions. (7 Post!Purchase s#stem The activities which are included under this system are follow)up procedure' receipt and chec"ing invoices. Bhenever an order is placed' it should be continuously monitored. pecial Purchase #stem :)The following are some special purchase systems: (i Forward -u#ing *n forward buying' the purchasing decision for a period (say lyear will be ta"en in advance and the organi+ation will commit accordingly in terms of order $uantity' rate and delivery schedule' by ta"ing into consideration the availability of funds and the re$uirements. (ii .ender -u#ing in trader buying the steps arc: C %reparing bidder>s list C Advertising =enders C /eceiving bids C #valuating bids C %lacing order with the bidderwith the lowest cost. (iii -lan/et )rders*n blan"et order system' the organi+ation will enter into

an agreement with its supplies to receive items for a re$uired $uantity at a particular rate over a period of time. (ivD 0ero toc/ Eero stoc" purchase system is in)line with using ,ust)in) time manufacturing system. The main idea of this system is to operate the plant with near +ero)inventories. Q. 1'plain the &spects of Purchase Management. Ans. &spects of purchase management :)The different aspects of purchasing management arc as> follows: (1 %ricc &orecasting (( %urchasing of capital e$uipments (7 *nternational purchasing (- %ublic 1uying. (1 Price Forecasting &orecasting is nothing but prediction of a future event. *n materials management predicting the prices of materials is of utmost importance. The precise prediction of prices would help us in buying the materials in right time and of right $uantity. Methods ofFrice Forecasting (i 2harting Method (ii Moving Average Method (iii /egression Method (iv #xponential !moothing Method. (( Purchasing of $apital 12uipments Alt machineries and e$uipments which are used in value addition process are termed as capital e$uipments. The fre$uency of purchase of these e$uipment is very less' may be once in five years or ten years. 1ut' these e$uipments involve huge capital outlay which is treated under fixed overhead. 9ence' a careful analysis should be done before buying these items. Bhile comparing different alternatives' one can use any one of the following approaches to select the best alternative: (i %aybac" %eriod Method (ii /ate of /eturn Method (iii %resent Borth Method (iv Annual #$uivalent Method (v &uture Borth Method The various options to satisfy the demand for capital e$uipment are listed below: a Purchase of new e2uipment&or the purchase of new e$uipments' any one of the methods which are mentioned above may be used to ,udge each alternative, Then the hest alternative is to be.selected.

b Purchase of used e2uipment *f we purchase used e$uipment' the mar"et value of the used e$uipment should be treated as the price of the e$uipment while comparing alternatives. e, =easing 1ut the organi+ation may have =imitation on fund or it may have very short lead tome to procure the e$uipment or it may want the e$uipment for a short duration or such e$uipment will he available only on lease. ?nder such cases' one has to lease the re$uired capital e$uipment. (7 "nternational Purchasing 0)*n view ofthe growing global economy' many countries are importing ma,or raw materials' sub assemblies which are available elsewhere at a cheaper rate at the same time the cost of procurement is cheaper when compared to indigenous product onFsupply of the same. 1ut in some cases' the raw material should be imported ,ust to have a minimum specified $uality standard' or ' if the raw materials are produced using hi)tech process which is not available within the country. (- %ublic 1uying Many organi+ations are duplicating the same tas" of purchasing ever though the specifications of the materials are the same. Bhenever' an order is to be placed' there is a minimum lead time involved to get the items in addition to the minimum time re$uired to source a supplier' These will certainly introduce delay in the purchase of materials and also adds a significant cost to the total cost of purchasing. Q. What is stores management? What are the functions of stores management? Ans. tores Management The purchased materials are to be !toredFwarehouses and issued for production as and when they are re$uired. As already stated' stores contains inventory mainly to provide uninterrupted
supply of materials to the production divisions.

Functions of stores management :)The functions of stores management tire: 1 To receive material goods and e$uipments' and to chec" them for identification. ( To receive parts and components which have been processed in factory 78 To rccord the receipt of goods' To correct positioning of all materials and supplies in the stores. 3 To issue items to the users only on the receipt of authori+ed store re$uisitions' 4 To record and update receipts and issues of materials' 5 To ma"e sure that stores are "ep t clean and in goof order' G >To prevent unauthori+ed persons from entering the stores. H To ma"e sure that materials are issued promptly to the users. 1I To ensure that the re$ui re d materials are located eas ily

11J To initiate purchasing cycle at the appropriate time so that the materials re$uired are never out of stoc". 3ocation and 3a#out of tores 3ocation (i =ocation of the stores should be carefully decided and planned so as to ensure maximum' efficiency. (ii The best location of stores is one that minimi+es total handling costs and other costs related to stores operation and at the same time provides the needed protection for stored items and materials. (iii !tores location depends upon the nature and value of the items to be stored and the fre$uency with which the items are received and issued' (iv *n general' stores are located close to the points of use raw materials are stored near the first operation' in)process materials close lo the next operation' finished goods near the shipping area and tools and supplies in a location central to the personnel and e$uipment served. (v All departments should have easy access to the stores andespeciaily those which re$uired heavy and bul"y materials should have stores located easily. 3a#out (i A good stores layout practice is one which usually brings the points or origin' store)room and point of use in ad,acent and proper se$uence for best law of materials. (ii !tores layout should be planned with flowing ob,ectives: C To achieve minimum wastage of space. C To ach ieve maximum e ase of operating. tores #stem :)The different systems in stores are as listed below: (1 Receipt #stem :)The receipt system maintains proper document about items which are received at the stores. The details on pending orders must be arranged in chronological order of dates which should help in scheduling labour force for unloading the items when they are received at the stores' (( toc/ing #stem At the time of receiving the items at the stores' necessary arrangement should be made to chec" the $uality' $uantity and weight of the items before they are accepted for stoc"ing in thestores. (7 "ssue #stem There should be a proper system for maintaining accounts of issues made to internal divisions or>external division. This should help timely to replenish stoc". Bhen items are issued to external divisions' controls should be formal and ade$uate enough to ta"e care of payments and claims. The methods ofissuing materials are:

increases profits arid causes substantial reduction in the wor"ing capital ofthe concern The following the important tools and techni$ues of inventory management and control: 1. /e)order point' (. #conomic :rder Auantity K#:A 7. A12 Analysis. L-. *nventory Turnover /atios0. L3. Aging !chedule>of *nventories. 3. Re!order paint The rc)ordcr point is that inventory level at which an order should be placed. 1oth the excessive and inade$uate level of inventory are not favourable for business. Therefore' re)order level should not be set up very high or very low. /e)order point is calculated by the following formula: /e)order =evelF%oint M =ead Time N Average ?sage 3ead .ime =ead time is the time period between the date of placing order and the date of receiving delivery =ead time may also be called procurement of inventory. &verage 4sage Average usage means the $uantity of inventory consumed daily. Therefore' re)order point tan be identified as the inventory level which should be maintained for consumption during the lead time. For 1'ample :) =ead time in a business is 13 days and average daily usage of inventory is ('III units. /e)order point of the business will be: /e):rder %oint O 13 days N (III units O7IIII units. afet# toc/ in determining re)order point' we have assumed that lead time and average usage rate have been correctly estimated. 1ut in actual practice' both of these factors are difficult to predict accurately' /eceipt of raw materials may be delayed beyond the estimated lead time due to stri"e' floods' transport problems ete. *n such situation' there)order point will be: /c)ordcr %oint O =ead Time N Average ?sage P !afety !toc". (. 1conomic )rder Quantit# (1)Q) #conomic order $uantity is that $uantity of materiaJ for which each order should be placed. %urchasing large $uantities at one time and "eeping the same as stoc"' increases carrying cost of inventories but reducing ordering cost of inventories. :n the other hand' small orders reduce the average *nventory level thereby reducing the cartying cost of inventories but increasing the.ordering costs because of increased number of purchase orders. Therefore' determination of economic order $u.au =ity is a trade)o ff be t ween two types of inventory costs: (i, )rdering costs :rdering costs includes costs of placing orders and cost of receiving delivery of goods such as clerical expenses in preparing a

purchase order' transportation expenses' receiving expenses' inspection expenses and recording expenses orgoods received' (ii $arr#ing $ost2arrying cost include costs of maintaining or carrying inventory' such as go down rent' insurance expenses etc. These costs vary with inventory si+e. The sum o( ordering costs and carrying costs represents the total costs of inventory. #conomic order $uantity is that order $uantity at which the total of ordering and carrying cost is minimum. #conomic order $uantity can be explained with the help of following diagram:

1QQ $an *e determined *v the following formula (x/x:

#:A O

N
#:A O #conomic :rder Auantity / O Annual purchase /e$uirements in units : Q :rdering cost per order 2 Qs 2arrying cot per unit. P:T 1'ample R) 2ompute the #conomic :rder Auantity from the following details: Annual *nventory /e$uirements O -'II'III units 2ost of placing each order 2arry ing cost for $ne year O /s' (I ) /s. - per unit)

( x/x:

#:A )

S
#:A O (x-'II'IIIx(I

S
O ('III )units 7' &-$ &nal#sis T) A.2 Analysis is a techni$ue of controlling different items of inventory. ?sually a firm has to maintain several different items as inventory. All these "erns are not e$ually important. Therefore' it is net desirable to "eep same degree of control on all these items. The firm should give more attention to those items whose value is higher in comparison to others. ?nder this analysis alt the items of inventory are classified into three categories:) (i *n category >A> those items are included which are small in number' say 0 13 perccnt of the total items but they arc $uite valuable' the value being 5I per cent ofthe total value of the>inventory. (ii 2ategory >1> stands midway and consists of items which arc 7I percent in number and (I percent of the total value. (iii *n category >2> those items are included which are $uite large in number' say. 33 percent of the total items but carrying little value' say' 1I percent of the total value of inventory. Thereby' all the items can be classified as follows: 2lass Uumber of *tems (*n terms of their "A> of total items 13 7I 33 *nventory Value (*n terms of their W of total items 5I (I 1I

A 1 2

T:T 1II 1II A= A12 Analysis can also be presented in the form of a diagram as follows:

-.

(i

(ii 3.

"nventor# .urnover Ratio 2ertain items of inventory are slow moving. *t means that their consumption is $uite slow and capital remains loc"ed up in such items for along period. As a result' carrying costs continue to incur on such items. !low> moving items can be identified with the help of inventory turnover ratios. Value of /aw Materials 2onsumed /aw Material Turnover Kin times O ))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Average stoc" of /aw Materials 2ost of ;oods !old &inis hed ;oods T urnover (in times O))))))))))))))))))))))))))))))))))))))))))))))))))
Average !toc" of &inished ;oods

&ging chedule of "nventor# r) Another techni$ue of inventory management is aging schedule. ?nder this techni$ue' all the items of inventory are classified into several age groups as on a particular date on the basis of dates of their purchase or manufacture. A specimen of aging schedule of inventory is as under:) Amount .ate of Age %ercentage %urchase 2lassification of Total FManufacturer I)13 March (I 1III 7 14)7I 71)-3 -4)4I 41 and above March 5 &eb (3 &eb (I 8an 17 Total (III 7III -III 1IIII (IIII 1I 13 (I 3I 1II

*t is clear from the above that 3IW of total inventory is in stoc" for more than 4I years.

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