IMPORTANCE OF MATERIALS MANAGEMENT

Average Materials Expenditure

Average expenditure of materials percent Above 65 vehicles, 60-65 55-60 50-55

Industry groups

Cotton yarn, earthmoving equipment, sugar,wool,jute,commercial fabrication. Cotton textiles, bread. Engineering, non-ferrous. Shipbuilding, chemicals,tyre, machine tools, cement,electricity. Pharmaceuticals. Steel, newspaper, fertilizer, aircraft.

45-50 40-45

KEY ISSUES IN MATERIALS MANAGEMENT

1. 2. 3. 4. 5. 1. Right Source Right Price Right Quality Right Quantity Right Time

COSTS
Average Procurement Cost Cost of processing a purchase order through purchase department. a) Salaries and wages of the purchase department. b) Paper and Postage c) Follow-up costs- the follow up required to ensure timely suppliesincludes the travel cost for purchase follow-up,telex,telephone bills,fax, e-mail etc. d) Receiving and inspection.

2) Inventory Carrying Cost

a) b) Indirect Cost-COST OF CAPITAL Direct Costs

I) Provision of Storage area and facilities like racks, bins etc. II) Salaries of stores Staff III) Insurance IV) Obsolescence, deterioration, breakage, pilferage etc. VI) Heat,light,refrigeration etc. V) Cost of chemicals,preservatives etc.

3) Shortage Cost
a) b) c) Cost of lost production Downtime Costs Extra Cost which may have to be paid for a rush purchase

Cost

K=AD + ICQ Q 2 ICQ 2 AD/Q

Q
Actual Cost of ordering Actual Inventory Cost W1A W2 I

A and I are estimates D = 20,000 units A = Rs.100 I = 40% C = Rs.20 Then Q = 707 units Actual A = Rs 200 ( W1= 2) Actual I ~ 20% = (W2=0.5) Then Q -- 1414 units

Order Quantity 707 units

No of orders = Ordering Cost = Inventory Carrying Cost Total Cost = 20,000/707 = 28 200 x 28 = Rs.5600 707/2 x 0.20 x 20= Rs 1414 Rs.7014

Order quantity 1414 units

Ordering Cost = Inventory Carrying Cost = Total Cost = i.e.25% increase in costs Rs.2800 Rs.2800 Rs.5600

Economic Purchase Quantity (EPQ)

1. 2. 3. 4. 5. Rounding off Low D and High C Economies of Transport Shelf life for perishable goods Discounts

6.

Imports.

100

C
Cumulative Percent issue value

90

B
75

A
10

25

100

Cumulative Percent number

A items:over Rs.10,000 B items:between Rs.1000 and Rs.10,000 C items:below Rs.1000.

An Example of ABC Analysis

Item No.

Annual
Consumption value (Rs.)

No.of
Orders

Value per
order (Rs.)

Average
Inventory (Rs.)

1 2 3

60,000 4,000 1,000

4 4 4

15,000 1,000

7,500 500

250 125 Total: Rs 8,125 Average

Inventory (Rs.)

Item No.

No.of
Orders (Rs.)

Value per
order (Rs.)

1 2 3

8 3 1

7,500 1,333 1,000

3,750 667 500

Total: Rs 4,917

Limitations of ABC Analysis 1. 2. 3. a) Movement Availability Criticality Movement Analysis F S N Analysis Non-Moving

Fast Slow b)

XYZ Analysis- based on year end stores inventory value Fast

Fx

Inventory Value
X Top 10% number 70% Stock value Y Medium 20% Z Low 70% number 10% Stock Value

Slow Non-moving
Sx Nx

Fy Fz

Sy Sz

Ny Nz

Availability Analysis
a) S D E Analysis

Scarce Difficult Easy

b) G O L F Analysis
G: Govt.Controlled O: Available in open market L: Locally available F: Foreign Supplier or import purchase

c)

S O S Analysis

Seasonal

Off -seasonal Long Lead Time Short Lead Time

Combining all three

Criticality Analysis a) V E I N Analysis for equipment

Vital Essential Normal Important

b) VED Analysis for components/parts Desirable Vital Essential Combining the two Critical Non-critical

MUSIC 3D ANALYSIS
Basis:Consumption value, availability and criticality

HCV items
CRITICAL

LCV items LLT C LLT 3 LCV NC LLT 7 LCV SLT C SLT 4 LCV NC SLT 8 LCV

LLT C LLT 1 HCV

CRITICAL

SLT C SLT 2 HCV NC SLT 6 HCV

NC LLT 5 HCV

NON

Policy for an item in cell 3

Large purchase quantity with annual ordering (even two years) subject to storage space being available and item not being perishable . High inventory as working capital commitment is small. Service level should be nearly 100% without stock-outs.

Policy for items falling in Cell 6

These items constitute the opposite of items in cell 3. The purchase quantity will be minimal as the item is non-critical and have high consumption value, or these items should be bought as and when needed. Stock outs to be allowed with low service level as the item is costly but non-critical.

Policy for items falling in cells 1 and 2

Very strict control to be exercised by very accurate forecasts. Frequent orders or weekly deliveries. Maximum follow up and expediting with as many reliable sources as possible. The postings to be immediate and up-to-date continuous monitoring of information on stocks status, consumption, withdrawal, delivery, supply status etc.

Q-System
Fixed quantity varying interval order EOQ= Reorder level is sum of: 1. 2. Buffer stock: Providing for average demand during average lead time. Reserve stock: Providing for maximum variation in average demand during average lead time. This will depend upon the service level which in turn will depend on the shortage cost. Safety stock: Providing for maximum delay in average lead time.This will be computed as:average consumption during maximum delay x probability of such 2AD
IC

3.

P-System
Varying quantity fixed interval Fix a review period = EOQ/ D Desirable inventory level (DIL) is sum of 1. Providing for average demand during average lead time plus review period. 2. Reserve stock: Providing for maximum variation in average demand during average lead time plus review period.This will depend upon the service level which in turn will depend on the shortage cost. 3. Safety stock: Providing for maximum delay in average lead time.This will be computed as: average consumption during maximum delay x probability of such delay. Quantity to be ordered= DIL- ( on hand inventory + on order) Buffer stock:

Item

Annual Demand (D) 1,20,000 80,000 600

Unit Price (C) Rs. 3 Rs. 2 Rs.96

C.D

CD

No.of K. CD

I II III

3,60,000 1,60,000 57,600

600 400 240

17.4 11.6 7.0

K=

36 600+400+240

1 34.44

BROAD POLICY GUIDELINES FOR SELECTIVE INVENTORY CONTROL A ITEMS

HIGH CONSUMPTION VALUE VALUE

B ITEMS
MODERATE VALUE

C ITEMS
LOW CONSUMPTION

1. 2. 3. 4. 5.

Very strict control Moderate control No safety stocks Low safety stocks (or very slow) Frequent ordering or Once in three ordering weekly deliveries months Weekly control statement Maximum follow-up and expediting cases Rigorous value analysis Monthly control reports Periodic follow-up

Loose control High safety stocks Bulk once in 6 months Quarterly control reports Follow-up and expediting in exceptional Minimum value analysis Two reliable for each item

6. 7. 8. 9.

Moderate value analysis

As many sources as Two or more sources possible for each item reliable sources Accurate forecasts in materials planning

Estimates based on Rough estimates past data on present for planning plans

Minimization of Quarterly control Annual review over waste, obsolete and over surplus and surplus and obsolete surplus(review every obsolete items material 15 days) Maximum efforts to reduce lead time Must be handled by senior officers Moderate Can be handled by middle manaMinimum clerical efforts Can be fully delegated

10. 11.

gement