Importance of materials management: -

An analysis of the financial statements of a large number of organisations indicates that materials form the major source of expenditure. Therefore, materials’ planning is important.

1. Profitability:-

   A rupee saved in materials directly contributes to the organization’s profits.

   For example, consider an Organisation whose profit is 10% of its turnover (say 10crores) and where materials account for 60% of turnover. For increasing the profit of the Organisation by a certain amount say, 0.3crores, there are two ways. One is by increasing the sales by 30% by additional marketing efforts that also require some expenditure on advertisement and marketing. The other option is by saving materials cost by 5%(0.3crores) without having to incur any expenditure as cost saved on materials directly contribute to the organization’s profit. Therefore, materials management is important.

2. Means are scarce and the ends are unlimited:-

   As the materials are scarce resources and have alternate uses, especially, in a shortage economy like India, we cannot afford to waste. Therefore, materials management is important.

3. ROI:-

As the following formula suggests;

ROI=(Profit / Sales)*(Sales/(Fixed assets+Current assets))

In the above, profit and FA have no scope of improvement on return value. Thus by effective management of current assets ROI can be improved. This can be done only by efficient management of materials, which form a bulk of current assets.

Materials planning is the scientific way of determining the requirements of raw materials, components, spares and other items that go into meeting production needs within the economic investment policies

This is the base for materials planning and budgeting. Bill of materials is arrived from the drawings received from clients for execution. Delivery schedule is arrived from our activities plan i.e. our PERT chart. Care is taken for the following, while planning for materials: -

1. Longest lead times that are anticipated and taken into account to cover them adequately.

2. Demand fluctuation and seasonal variation should be taken care of.

Computerisation of BOQ may be done wherever possible for easy planning and revision, thus saving in time and effort.

Past analysis, method may be used for planning of consumables. Here average and standard deviation are used to determine the requirement based on past production and future demand.

Budgets are prepared based on the materials plan and reviewed at regular intervals for controlling. In budgets both quantities as well as amounts are mentioned for effective comparison.

After material planning, is done the concerned department person indents for the materials.

1. Searching:-

   The need for a material or product is the starting point. The search process begins with the finalisation of specifications in consultation with the technical departments. It consists of identifying the sources of supply. Sometimes sub-vendors will be found from whom the main suppliers are traced back. Thus, this process leads to a list of potential suppliers of the material.

2. Selection:-

   This is the process where the above list is trimmed down. The focus here is on more specific information on the supplier’s financial strength, quality, facilities, efficiency, industrial relations, technical excellence and position in the industry. The sources shall meet the quality requirement, delivery schedule, other terms and conditions, payment conditions etc.,

3. Purchasing :-

Once the vendors are selected, the next function is purchasing the material from one or more of them. The basic objective of the purchasing function is to ensure continuity of materials at the same time reduces the ultimate cost of finished goods. It is the cost of finished goods whose cost should be the lowest and not the cost of the raw materials. Hence, parameters such as right price, right quality, right contractual terms, right time, right place, right mode of transportation, right quantity and right attitude should be taken care of.

Once the vendors are listed, for a given material to be purchased, quotations are called for from the vendors.

The rate of the lowest quotation should be compared with the other vendors. Care should be taken to see the other aspects as quality, delivery schedule, vendor creditability and other contractual terms. Once these things are evaluated on a weighted scale, a purchase order is placed on the preference vendor.

The purchase order copies are distributed to the persons concerned i.e., the indenting dept. head, indenting person, account dept., QA/QC.

After the receipt of the material in full or in part at the required site, the materials are checked for conformance with standards and specifications as per the P.O. the materials are taken up for further processing if found acceptable. Otherwise, sent back for replacement.

The indented person carries out the inspection. In addition to this, materials supplied to clients are inspected by clients’ personnel for conformance with standards and specifications.

1. To receive raw materials, components, tools, equipment and other items and account for them.
2. To provide adequate and proper storage and preservation of various items.
3. To meet the demands of the consuming department by proper issues and account for consumption.
4. To minimise obsolesce, surplus and scrap through proper codification, preservation and handling.
5. To highlight stock accumulation, discrepancies and abnormal consumption and effect control measures.
6. To ensure good house keeping so that material handling, material preservation, stocking, receipt and issues can be made adequately.
7. To assist in verification and provide supporting information for effective purchase action.

Material issue slips are given by persons authorised to receive items from stores for receiving the materials. This issue of materials is restricted to 3 hours. (1 hr in morning, 1 hr in afternoon and1 hr in the evening session).

The storekeeper checks the material issue slips and if the material is available against the P.O. mentioned, issues the same. The material issue vouchers are filed in one place and in the last session every day, the same is entered in the computer. After the entry is over, the stock available actually and as per records is verified and tallied. The vouchers are booked under different account heads to arrive at the actual cost of materials used under different activities of the job.

In financial parlance, inventory is defined as the sum of the value of raw materials, fuels and lubricants, spare parts, maintenance consumables, semi-processed materials and finished goods stock at any given point of time.

The operational definition of inventory would be the amount of raw materials, fuels and lubricant, maintenance consumables, semi-processed materials to be stocked for the smooth running of the plant. Since these resources are idle, when kept in the stores, inventory is defined as idle resource of any kind having an economical value.

• Raw materials
• Work in progress
• Finished goods

ABC analysis is carried out and raw materials are maintained and controlled, thereby accounted for. Verification is done on day to day basis.

Inventories at various stages of construction are maintained everyday in registers kept for this purpose, so that they can be traced back at any point of time.

Finished goods should be despatched as early as possible to . This should be done as and when an activity is over and the records should be properly maintained so that, they can be traced back at any point of time.

Care is taken to reduce the cost of carrying the inventories whenever possible.

Inventories as stated earlier are built to act as a cushion between supply and demand. In our case, the supply is static and the demand is certain. So, the EOQ model can be derived as follows;

Let the annual demand be M.

Let C_o be the cost of ordering.

Let C_c be the cost of carrying inventory

S, the unit price of an item

The annual quantity to be ordered is Q, then

Annual ordering cost = (M/Q) x C_o

The average inventory carried is Q/2 and its cost = (Q/2) x S x C_c

The total annual cost is (M/Q x C_o ) + (Q/2 x S x C_c )

For cost to be minimum,

Q = 2MC_o/SC_c

Due to operation of Organisation three types of materials which cannot be termed as finished goods, raw materials or work in progress are created, they are: -

• Scrap
• Wastage
• Obsolete materials

Out of these wastage and obsolete materials can be controlled by proper planning and execution.

Creation of scraps is unavoidable and their management requires prudence of a manager.

Scrap is generally disposed off in weight as per the prevailing market rates, quotation and negotiation with the selected vendors listed after an exhaustive market search.

The weight of the empty truck is first taken in two different weighbridges and their averages used. Proper care is to be taken that tyres, chain blocks and other heavy materials are not kept in the truck at the time of weighing, which would otherwise have adverse impact on the weight of scrap loaded, if taken off. The scrap is then loaded on the truck and weighed again in two different weighbridges and their average value is considered for all practical purposes.

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