Unit 4 materialsmanagement 140105053839 phpapp01
- 1. MATERIALS MANAGEMENT UNIT 4 Dr. Rashmi Panwar
- 2. Concept of materials management According to Bethel “Materials management is a termusedto connote controlling the kind, amount , location, movement and timing of the various commodities used inn and produced by the industrial enterprise.”
- 3. An Integrated approach to materials management • Materials planning • Make or Buy decisions • Purchasing • Receiving and inspection • Storage • Inventory control • Distribution of materials • Transportation • Disposal of surplus, obsolete and scrap materials • Developing new sources of supply • Import substitution • Market research • Waste management
- 4. Objectives of Materials Management • Is to minimize cost • Procure and provide material at lowest cost • Reducing investment tied up in inventories • Purchase, receive , transport and store materials efficiently and reduce related costs. • Continuous supply of materials • Cut down costs through simplification, standardization , value analysis and import substitution • Minimizing procedural delays in procuring materials
- 5. Functions of Materials Management • Materials planning • Purchasing of materials • Reducing store keeping and warehousing • Inventory control • Standardization simplification and value analysis • Transportation and material handling • Dispose of scrap surplus and obsolete materials
- 6. Importance of Materials Management • Planning and programming of materials • Purchasing of materials • Inventory control • Store keeping • Stores accounting • Transportation • Materials economics • Waste management
- 7. The objectives of purchasing • Acquire materials at competitive price • Ensure supply of materials according to production requirements • Guarantee production of better quality products at competitive price • To suggest betteralternative materials for production • To encourage standardization • To advice various depts on feasible prices , timely deliveries and improved performance • To maintain goodwill of the company by fair dealing
- 8. The functions of purchase Department • Sources for supply of capital goods and equipments • It studies market and keeps track of new developments • It supports engineering and other depts • It scrutinizes purchase indents • It conducts discussions and releases of purchase order • It helpsin pre delivery transcription and shortage chasing of purchased items
- 9. • It coordinates with inward inspection • It sanctions suppliers statements for payments • It processes suppliers requests for increase in price of production materials • It arranges discussions and meetings between suppliers representatives and company officials • It disposes excess, outdated and leftover materials • It handles management of raw materials and new products in the market • It researches and studiesthe possibility of substituting native materials for imported ones • Acts as a link between company's financial dept and suppliers • It attendsto general activities like applying
- 10. The Purchasing Procedure • Intending a purchase requirement • Inspecting purchase intends • Market study and selection of sources of supply • Order preparation • Follow up with suppliers • Receiving materials • Inspection of goods • Storage and record keeping • Invoicing and payment • Scrutiny of invoices
- 11. Inventory Control • It includes the tasks and activities that help maintain the inventory levels of the organization. The most important inventory control decisions are: 1. How much of an item is to be ordered during inventory replenishment 2. When to replenish the inventory of that item? Objectives of Inventory Control • Minimizing blocked capitals in inventories • Reducing surplus stocks • Ensuring proper control over inventory
- 12. Types of inventory • Raw Materials Inventory • Work –In –progress (WIP) Inventory • Finished goods Inventory • Replacement Parts Inventory • Supplies Inventory •Transportation Inventory Additional risks • Manufacturing • Wholesale • Retail
- 13. Just In Time (JIT) System • JIT can be defined as an operations management philosophy . Its dual objectives are: • To reduce waste • To increase productivity • JIT increase profits and return on investment by bringing down levels of inventory and variability , improving quality of product, bringing down lead times of production and delivery, and reducing other costs like those related to setting up of machines equipment breakdown. • In JIT excess capacity is used as a substitute of buffer inventories for hedging against problems that may arise • JIT is useful generally for repetitive manufacturing process.
- 14. • The basic elements of JIT were developed in the 1950’s by Toyota, and it was known as the Toyota Production System(TPS). JIT was used in several Japanese plants by the early 1970’s. • The JIT concept is built around the philosophy that inventory is evil • But it is not just a method to reduce inventories. It is a method to produce what is needed and when needed and not more. JIT is fundamentally based on two tenets: a) Elimination of waste b) Respect for humans
- 15. • Elimination of waste: Shigeo Shingo , a prominent management guru who promoted the use of JIT in manufacturing listed the “ famous seven wastes” as follows: 1. Waste of over production 2. Waste of waiting 3. Waste of transportation 4. Waste of stocks 5. Waste of motion 6. Waste of making defects 7. Waste of processing ( when the product should not be made or the process should not be used)
- 16. The advantages of using JIT • Reduction in set-up times • Improvement in quality • Steps in production process • Emphasis on maintenance • Reduction in inventory • Consolidation of the supplier base
- 17. KANBAN SYSTEM • KANBAN means Signboard in Japanese • It is the name given to the small cards attached to containers which hold a standard quantity of a single part number . • To understand KANBAN system , imagine two work centers A and B . Work center A produces a part which is kept in a bin . Work center B uses the parts from that bin . When the bin gets empty, it is a signal for work centre A to refill it . This empty bin is the KANBAN signal
- 18. Two-card KANBAN system • In practice, companies use systems consisting of two types of KANBAN cards. • A move card to authorize the movement of parts from one work center to the next • A production card to authorize the production of parts by the work center
- 19. LIFO AND FIFO ► FIFO and LIFO are methods used in the cost of goods sold calculation. FIFO (“First-In, First-Out”) assumes that the oldest products in a company’s inventory have been sold first and goes by those production costs. ► The LIFO (“Last-In, First-Out”) method assumes that the most recent products in a company’s inventory have been sold first and uses those costs instead.
- 20. FIFO or LIFO? ► FIFO is considered to be the more transparent and trusted method of calculating cost of goods sold, over LIFO. Here’s why. ► By its very nature, the “First-In, First-Out” method is easier to understand and implement. Most businesses offload oldest products first anyway – since older inventory might become obsolete and lose value. As such, FIFO is just following that natural flow of inventory, meaning less chance of mistakes when it comes to bookkeeping. ► LIFO allows a business to use the most recent inventory costs first. These costs are typically higher than what it cost previously to produce or acquire older inventory. ► The problem with a company switching to the LIFO method is that the older inventory may stay on the books forever, and that older inventory (if not perishable or obsolete) will not reflect current market values. It will be understated. ► Lastly, under LIFO, financial statements are much more easier to manipulate. ► It is considered a best practice to go with FIFO.
- 21. Traceability ►Necessary information such as manufacturers, suppliers, and distributors is recorded. This information is tracked in all processes from procurement of raw materials and parts to machining, assembly, distribution, and sales to ensure that their histories can be traced.
- 22. Two Perspectives on Traceability : chain traceability and internal traceability
- 23. ► Chain Traceability ► The general concept of traceability in the world applies to chain traceability. Chain traceability means that the history from procurement of raw materials and parts to machining, distribution, and sales can be traced forward or backward. Manufacturers can monitor “to where their products have been delivered (= can trace forward)” while companies and consumers in the downstream can understand “from where the products in their hands have come (= can trace back)”. ► Internal Traceability Internal traceability means to monitor the movement of parts/products within a limited specific area in a whole supply chain, such as a single company or plant. For example, an engine assembly plant procures engine parts such as camshafts and pistons from suppliers and assembles them.
- 24. Economic Order Quantity • Economic Order Quantity (EOQ), is an inventory model that attempts to minimize total inventory cost by answering the following two questions. How much should I order? ( Economic Order Quantity ) How often should I place each order? ( Cycle Time ) • This model assumes that the demand equation faced by the firm is linear. • In other words, the rate of demand is constant or at least nearly constant. • That the purchase price of the product or the cost is not a function of the number items delivered at any given time but determine based on anticipated demand and a price arranged between purchaser and supplier based upon an agreement the anticipated number of units to meet the demand over the coming period, typically annually.
- 25. • The goal is to minimize total inventory cost. • Inventory cost are made up of holding and ordering cost. • Holding cost include the cost of financing the inventory along with the cost of physically maintaining the inventory. • These costs are usually expressed as a percentage of the value of the inventory. • Ordering cost include the cost associated with actually placing the order. These include a labor cost as well as a material and overhead cost. The equation for total inventory cost is developed as follows: Total Inventory Cost (TIC) = Holding Cost + Ordering Cost TIC = (Average Inventory)(Holding cost per unit) + (Number of orders per year)(Ordering cost per order) 1 D TIC = ——— QCH + ——— Co 2 Q
- 26. Where Ch = holding cost per unit; Co = ordering cost per order; D = annual quantity demanded; and Q = units per order. Using differential calculus techniques it is possible to show that total inventory cost are minimized when each order is made for the economic order quantity.
- 27. Graphical Solution If we minimize the sum of the ordering and carrying costs, we are also minimizing the total costs. To help visualize this we can graph the ordering cost and the holding cost as shown in the chart above. This chart shows costs on the vertical axis or Y axis and the order quantity on the horizontal or X axis. The straight line which commences at the origin is the carrying cost curve, the total cost of carrying units of inventory. As expected, as we order more on the X axis, the carrying cost line increases in a proportionate manner. The downward sloping curve which commences high on the Y axis and decreases as it approaches the X axis and moves to the right is the ordering cost curve. This curve represents the total ordering cost depending on the size of the order quantity. Obviously the ordering cost will decrease as the order quantity is increased thereby causing there to be fewer orders which need to be made in any particular period of time. The point at which these two curves intersect is the same point which is the minimum of the curve which represents the total cost for the inventory system. Thus the sum of the carrying cost curve and the ordering cost curve is represented by the total cost curve and the minimum point of the total cost curve corresponds to the same point where the carrying cost curve and the ordering cost curve intersect.
- 30. What is ABC Method of Inventory Control? • It has become an indispensable part of a business and the ABC analysis is widely used for unfinished good, manufactured products, spare parts, components, finished items and assembly items. • This method of management divides the items into three categories A, B and C; where A is the most important item and C the least valuable.
- 31. Why the need for prioritizing inventory? • Item A: In the ABC model of inventory control, items categorized under A are goods that register the highest value in terms of annual consumption. It is interesting to note that the top 70 to 80 percent of the yearly consumption value of the company comes from only about 10 to 20 percent of the total inventory items. Hence, it is crucial to prioritize these items. • Item B: These are items that have a medium consumption value. These amount to about 30 percent of the total inventory in a company which accounts for about 15 to 20 percent of annual consumption value. • Item C: The items placed in this category have the lowest consumption value and account for less than 5 percent of the annual consumption value that comes from about 50 percent of the total inventory items. Note: The annual consumption value is calculated by the formula:
- 32. The uses of ABC Analysis The ABC analysis is widely used in supply chain management and stock checking and inventory system and is implemented as a cycle counting system. It is most important for companies that seek to bring down their working capital and carrying costs. This done by analysing the inventory that is in excess stock and those that are obsolete by making way for items that are readily sold. This helps avoid keeping the working capital available for use rather than keeping it tied up in unhealthy inventory. When a company is better able to check its stock and maintain control over the high-value goods it helps them to keep track of the value of the assets that are being held at a time. It also brings order to the reordering process and ensures that those items are in stock to meet the demands. The items that fall under the C category are those that slow-moving and need not be re-ordered with the same frequency as item A or item B. When you put the goods into these three categories, it is helpful for both the wholesalers and the distributors to identify the items that need to be stocked and those that can be replaced.
- 33. What are the advantages of implementing the ABC method of inventory control? i) This method helps businesses to maintain control over the costly items which have large amounts of capital invested in them ii) It provides a method to the madness of keeping track of all the inventory. Not only does it reduce unnecessary staff expenses but more importantly it ensures optimum levels of stock is maintained at all times iii) The ABC method makes sure that the stock turnover ratio is maintained at a comparatively higher level through a systematic control of inventories iv) The storage expenses are cut down considerably with this tool v) There is provision to have enough C category stocks to be maintained without compromising on the more important items
- 34. Disadvantages of using the ABC analysis? i) For this method to work and render successful results, there must be proper standardization in place for materials in the store ii) It requires a good system of coding of materials already in operation for this analysis to work iii) Since this analysis takes into consideration the monetary value of the items, it ignores other factors that may be more important for your business. Hence, this distinction is vital
- 35. Material requirements planning (MRP) Most manufacturers use an organizational system called material requirements planning (MRP). • MRP is software that allows for the planning, scheduling, and overall control of materials used in the manufacturing process. Enterprise resource planning (ERP) • Others use an enterprise resource planning (ERP) system instead. In addition to meeting material requirements, ERP systems integrate organizational needs such as accounting, marketing, human resources, and supply chain management.
- 36. ERPs Cover Companies’ Functions More Broadly Than MRPs . Typical modules in ERP systems include: • accounting/finance, • sales and marketing, • human capital management (HCM), • customer relationship management (CRM), • purchasing management, • inventory management, • distribution management, and • quality management. • An MRP system, on the other hand, is the master production schedule. • This master schedule essentially helps with reconciling the final production output and the steps and inputs needed to achieve the production desired. • Orders and forecasts are linked to inventory and the time required for each stage of production to ensure the right amount of the right products are finished on schedule.
- 37. THANK YOU