Chapter 4

Material Management
Materials Management

 Is an approach for planning, organizing, and controlling all those

activities principally concerned with the flow of materials into an
organization.
Objectives:

 The fundamental objectives of the Materials Management function ,often called the
famous 5 Rs of Materials Management, are acquisition of materials and services:
 of the right quality

 in the right quantity

 at the right time

 from the right source

 at the right price

From
 the management point of view , the key objectives of Material Management are :
To buy at the lowest price , consistent with desired quality and service
To maintain a high inventory turnover , by reducing excess storage , carrying costs and inventory losses

occurring due to deteriorations , obsolescence and pilferage

To maintain continuity of supply , preventing interruption of the flow of materials and services to users
To maintain the specified material quality level and a consistency of quality which permits efficient and

effective operation.
 To develop reliable alternate sources of supply to promote a competitive
atmosphere in performance and pricing

 To minimize the overall cost of acquisition by improving the efficiency of

operations and procedures

 To hire, develop, motivate and train personnel and to provide a reservoir of

talent .
 To develop and maintain good supplier relationships in order to create a supplier
attitude and desire furnish the organization with new ideas , products, and better
prices and service

 To achieve a high degree of cooperation an coordination with user departments

 To maintain good records and controls that provide an audit trail and ensure
efficiency and honesty

 To participate in Make or Buy decisions

Scope of Materials Management:

 Basically, under its scope are :

 emphasis on the acquisition aspect

 inventory control and stores management

 material logistics, movement control and handling aspect

 purchasing, supply , transportation , materials handling etc

 supply management or logistics management

 all the interrelated activities concerned with materials

Sub Functions of Material Management:

 The broad materials function has the following as identified and

interlinked sub functions:
 Materials planning and control:

 Purchasing:

 Stores:

 Inventory control:
PROCEDURE FOR MATERIAL PROCURMENT AND USE:

 Although production processes and materials requirements vary

according to the size and type of industry, the cycle of procurement
and use of materials usually involves the following steps:
 Engineering, Planning and Routing:

 The Production Budget:

 The Purchase Requisition:

 The Purchase Order:

 The Receiving Report:

 The Materials Requisitions:

 The Material Ledger Cards:

Purchases of productive materials:

Purchase department

 The purchasing department is responsible to:

 Receive purchase requisitions for materials, supplies, and equipment;

 Keep informed concerning sources of supply, prices and shipping and delivery schedules;

 Prepare and place purchase orders, and

 Arrange the purchasing, the receiving, and the accounting departments.

Purchases of productive materials:

Purchasing Forms

Purchase Requisition:

 The purchase requisition originates with:

 A stores or warehouse clerk, who observes that the quantity on hand is at a set ordering
minimum,

 A materials ledger clerk, who may be responsible for notifying the purchasing agent
when to buy,
 A works manager, who foresees the need for materials or unusual quantities

 A research, engineering or other department employee or supervisor who needs materials or

supplies of special nature, or

 An information system that has been installed or developed to produce replenishment advice for the
purchasing department.

 One copy remains with the originator, and the original is sent to the purchasing department.
Purchase Order:
 The purchase order, signed by is a written authorization to a vendor to supply specified
quantities of described goods at agreed terms and at designated time and place.

 The purchase order gives the vendor a complete description of the goods and services
described the terms, the prices, and the shipping instructions.
Receiving:

 The fundamentals of the receiving department are to:

 Unload and unpack incoming materials,

 Check quantities received against the shipper’s packing list,

 Identifying goods received with descriptions on the purchase order,

 Notifying the purchasing department of discrepancies disco…….,

 Arrange for inspection when necessary,

 Notifying the traffic department and the purchasing department of any damage in transit, and

 Route accepted materials to the appropriate factory location.

Issuing and costing of materials

 To control the quantity and cost of materials, supplies, and services requires a
systematic and efficient system of purchasing, recording, and storing. Equally
necessary is a systematic and efficient procedure for issuing materials and
supplies.

Material Requisition:

 The materials requisition is a written order to the storekeeper to deliver materials

or supplies to the place designated or to give the materials to the person
presenting a properly executed requisition.
Issuing and costing of materials
Material Requisition Journals:
 Material Requisitioned Journal is necessary to post the materials withdrawals from the store.
The journal is form of materials summary. At the end of the month, the totals of the various
columns are posted directly to the ledger accounts.
Bill of Materials:
 The bill materials, a kind of master requisition, are a printed or duplicated form that lists all
materials and parts necessary for a typical job or production run. Time is saved and efficiency
is promoted through the use of a bill of materials. When a job or production run is started, all
the materials listed on the bill of materials are sent to the factory are issued on a pre arranged
time schedule.
Issuing and costing of materials

Just-In-Time Inventory Procedures:

 Manufacturing processes are increasingly being based on the receipt of raw

materials from suppliers “Just-In-Time” for their use on the plant floor. When a
firm’s raw materials can be handled in this immediate use mode, the traditional
storeroom, receipt, storage and issuance procedures are abbreviated. Storage,
except for brief periods directly on the plant floor is eliminated. Receipt and
issuing documentation can be combined. As a result, there is saving in paperwork
and, more importantly a savings in inventory investment, storage and handling.
Issuing and costing of materials

Material Ledger Card:

 Perpetual Inventory: In perpetual inventory system, an entry is made each time

the inventory is increased or reduced.

 Materials ledger cards or stock ledger sheets constitute a subsidiary materials

ledger controlled by the materials or inventory accounts in the general ledger.
Materials ledger cards commonly show the account number, description or type
of material, location, unit measurement, and maximum and minimum quantities
to carry.
Issuing and costing of materials

Physical Inventory:

 The alternative to a perpetual inventory system is the periodic inventory system,

whereby purchases are added to the beginning inventory, the ending (remaining)

inventory is considered the cost of material issued. Regardless of whether a

periodic or a perpetual inventory system is used, periodic physical counts are

necessary to discover and eliminate discrepancies between the actual count and

the balances on materials ledger cards. These discrepancies may be due to errors

in transferring invoice data to the cards, mistakes in costing requisitions,

unrecorded invoices or requisitions or spoilage, breakage and theft.

Material costing methods

 The ultimate objective of material management is to produce accurate and meaningful

figures of the cost of goods sold for cost accounting.

 The figures can be used for purpose of control and analysis and are eventually matched
against revenue produced in order to determine operating income.

 The more common methods of costing materials revenue produced in order to determine
operating income.
 The more common methods of costing materials issued and inventories are:
 First-In-First-Out (FIFO)

 Average Costing

 Last-In-First-Out (LIFO)

 Other Methods-such as
 Market Price at date issue, or Last purchase price,

 Standard Cost
First-In-First-Out (FIFO) Method of Costing:

 The FIFO method is recommended whenever:

 The size and cost of materials units are large,

 Materials are easily identified as belonging to a particular purchased lot, and

 Not more than how two or three different receipts of the materials are on a
materials card at one time.
Average Costing Method:

 Issuing materials at an average cost assumes that each batch taken

from the storeroom is composed of uniform quantities from each
shipment in stock at the date of issue.

 Average costing may be used even though the physical withdrawal

is in an identifiable order. If materials tend to be made up of
numerous small items low in unit cost and especially if prices are
 It is realistic costing method to management in analyzing operating
results and appraising future production.

 It minimizes the effect of unusually high or more stable cost

estimates for future work.

 It is a practical and less expensive perpetual inventory system.

Last-In-First-Out (LIFO) Method of Costing:

 The last-in-first-out (LIFO) method of costing materials issued is based on the

promise that materials units issued should carry the cost of the most recent
purchase, although the physical flow may actually be different.

 The method assumes that the most recent cost (the approximate cost to replace
the consumed units) is most significant in matching cost with revenue in the
income determination process.
Other Materials Costing Method:

 Besides LIFO, FIFO & Average Cost methods of costing materials

units into work in process, various other methods exist:
 Market Price at Date of Issue or Last Purchase Price:

 Standard Cost:
Market Price at Date of Issue or Last Purchase Price:

 Materials precisely standardized and traded on commodity

exchanges such as cotton, wheat, copper, or crude oil, are
sometimes costed in to production at
the quoted price at the date of issue.

 In effect, this production substitute replacement cost for

experienced or consumed cost and has the virtue of changing
Standard Cost:

 This method change issued materials at a predetermined or estimated cost

reflecting a normal or is expected future cost.

 Receipts and issues of materials are recorded in quantities only on the

materials ledger cards or in the computer data bank, thereby simplifying
the record keeping and reducing clerical or data processing costs.
Material planning and control

 An inventory planning and control method should have but one

goal that might be expressed in two ways:
 To minimize total cost, or

 To maximize profit within specified time and resource allocations.

Planning Materials Requirements:

 To plan manufacturing requirements, every stock item or class of items must be analyzed
periodically to:
 Forecast demand for the next month, quarter, or year.

 Determine acquisition lead time.

 Plan usage during the lead time.

 Establish quantity on hand.

 Place units on order.

 Determine reserves or safety stock requirements.

Materials Control:

 The control of materials must meet two opposing needs:

 Maintenance of an inventory of sufficient size and diversity for efficient
operations, and

 Maintenance of a financially favorable inventory.

Materials Control Objectives:

 A basic objective of materials control is the ability to place an order at the appropriate time
the best source to acquire the proper quantity at the right price and quality. Effective
inventory control should:
 Provide a supply of required materials and parts for efficient and uninterrupted operations.

 Provide ample stock in periods of short supply (seasonal, cyclical, or strike), and anticipate price changes.
 Store materials with a minimum of handling time a cost and protect them from loss by fire,
theft elements and damage through handling.

 Keep inactive, surplus, and obsolete items to a minimum by systematic reporting of product
changes which affect materials and parts.

 Assure adequate inventory for prompt delivery to customers.

 Maintain the account of capital invested in inventories at a level consist with operating
requirements and management’s plans.
Control Principles:

 Inventory control systems and techniques should be based on the following

principles:
 Inventory is created by purchasing:
 Materials and parts, and

 Additional labor and overhead to process the materials into finished goods.

 Inventory is reduced through sales and spoilage.

 Accurate sales and production schedule forecasts are essential for efficient purchasing,
handling, and materials investment.
 Management policies, which attempt to balance size and diversity of inventory, are
the greatest factor in determining inventory investment.

 Ordering materials is a response to forecasts, scheduling production controls

inventory.\Inventory records alone do not achieve inventory control.

 Control is comparative and relative, not absolute. It is exercised by people with

varying experience and judgment.

 Rules and procedures guide these individuals in making evaluations and decisions.
Organizing for Materials Control:

 A materials management department may include some or all of the following sections:
 Planning and Scheduling
 Purchasing
 Receiving
 Inspection
 Stores
 Warehousing
 Packing
 Traffic
 Shipping
 Statistical Analysis
Material Control Methods:

 Materials control methods differ primarily in the care and cost expanded. Critical
items and high-value items require greater attention than do low-value items.
Control methods include the:
 Order cycling,

 The min-max, and

 Just-in-time
Order Cycling Method or Cycling Review Method:

 This method examines periodically (e.g. each 30, 60, or 90 days) the status of quantities
on hand of each item or class. Different companies use different time periods between
reviews and may use different cycles for different types of materials. High value items
and that would tie up normal operations if out of stock usually require a short review
cycle. On low-cost and non critical items, a longer review cycle is common, since these
materials would be ordered in large quantities and stock out would not be as costly.
Min-Max Materials:

 This method is based on time premise that the quantities of most stock items are
subject to definable limits. A maximum quantity for each item is established. A
minimum level provides the margin of safety necessary to prevent stock outs
during a recorder cycle. The minimum level sets the order point, and the
quantity to order will usually bring inventory to the maximum level.
Just-in-Time Materials Control:

 The saving that can result from a minimum inventory investment and associated carrying
costs has led to increasing attention to a just-in-time (JIT) system. Such a procedure calls
for heightened coordination with suppliers so that materials arrive immediately prior to
their use. Japanese industry is credited with pioneering this procedure that is now being
used by some U.S. manufacturers. For example, General Motors has implemented this
approach, with a fully automated JIT parts inventory system.
Selective Control:

The ABC Plan:

 Segregation of materials for selective control called the ABC plan is an analytical approach
based upon statistical averages. The ABC Plan, measures the cost significance of each
materials item.
 A” or High Value, items would be under the tightest control and the responsibility of the most experienced
personnel

 “B” or Medium-Value, items would under the less strict control as compare to A.

 “C” or Low-Value, items would be under simple physical controls, such as the bin-system with safety
stocks.
CONTROLLING MATERIALS IN PROCESS

 Work in process inventory investment is largely determined by the time necessary for goods to
pass through the production process. The time involved includes:
 Set up time-preparing to run a job on a machine.

 Running time-actually performing the work.

 Queue Time- the amount of time that the job spends waiting to be worked on.

 Move time-transporting the goods to the next processing location.

 Wait time-time spent waiting to be moved.

Controlling Finished Goods:

 An accurate sales forecast is the key to effectively managing finished goods

inventories and meeting delivery dates. This forecast must be communicated to
production control departments in order to develop production schedules for
meeting sales commitments.

 To meet customer performances and competition, many product lines feature a

growing array of colors, sizes, and optional equipment. This results in added
finished goods inventory items and more work in process inventory. The need for
tighter control
Control of Obsolete and Surplus Inventory:

 Almost every organization is faced with the problem of surplus and obsolete
inventory at one time or other. Whatever the many possible reasons for such
conditions, some action is required in order to reduce or eliminate
these items from inventory and free the related capital.

 To accomplish a reduction, management should first make certain that the buildup
will not continue due to present ordering policies, and should then take steps to
dispose of stock.
Control of Obsolete and Surplus Inventory:

 Accurate perpetual inventory records showing acquisitions and issue quantities

and dates, as well as periodic review of the records, are necessary to identify
obsolete and surplus items.

 Obsolete inventory usually results from changing a design or dropping a product.

Prompt sale of the inventory for the first reasonable offer in often the best policy.
Reporting on Inventory Control:

 Management requires timely information concerning inventory

control efforts. This information should be reported in a concise,
easily understood form. Quantitative as well as graphic comparisons
of actual and budgeted inventory use to report inventory trend within
the organization.
THE IMPACT OF MODERNIZER FACTORY PROCESSES ON MATERIAL
MANAGEMENT
 In inventory numbers, factories are moving from manufacturing processes involving
manual and / or fixed automated systems. The shift is toward flexible manufacturing
system, which consist of an integrated collection of automated production processes,
automated materials movement, and computerized system controls to utilize the
facilities in the efficient manufacture of a highly flexible variety of products.
 The extent of product variety is constrained by the need for the products to share
certain broad characteristics that allow grouping within a particular family of products
while maintaining considerable
THE IMPACT OF MODERNIZER FACTORY PROCESSES ON
MATERIAL MANAGEMENT

 Flexible manufacturing systems impact upon and alter many of the factors that
management should consider in evaluating a system, especially the planning and
control of raw materials and work in process inventories. The affect of each
system manual, fixed automation and flexible manufacturing–on these factors is
summarizing as follows:
EDP (Electronic Data Processing) For Material Management:

 The preceding descriptions of invoice approval and payment were for manual
operations performed by an accounts payable clerk or an invoice clerk.

 In an electronic data processing (EDP) system, the computer-to a great extent-

replaces the clerk. Upon receipt of the invoice (the source document), the
accounts payable clerk enters the account distribution on the invoice. The data are
then directly inputted from the invoice to the computer data bank via a terminal
device. The data are edited, audited, and merged with the purchase order and the
receiving order data, both of which have been stored in the
 The common matching criterion on all documents is the purchase as all
documents is the purchase order number. Quantities, monetary values (amounts),
due
dates, terms and unit prices are matched. When in agreement, the cost data are
entered in the accounts payable computer file with a date for later payment,
or a printout of a check is transmitted for payment.

 Listings in journal form can be produced as needed.

 The above proceed are deals with the accounts payable phase of a purchase transaction of
equal importance is the need for posting the data in quantities and amounts to the materials
inventory file in the EDP system. The information
enters the EDP system from either the invoice or the invoice or the invoice approval from,
which would have to include all computer necessary data. The internal computer program
updates the materials inventory file. The withdrawal of
materials could also be computerized, so that manual postings to the materials inventory file,
as well as other manual operations, would be eliminated.
 END
OF
CHAPTER 4!!