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MATERIALS CONTROL
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MATERIALS: MEANING
The term materials, generally used in manufacturingconcerns, refer to raw materials used for production.
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STORES: MEANING
Stores is wider in meaning and comprises many otheritems besides raw materials, such as tools, equipments,maintenance and repair items, factory supplies,components, fixtures etc.
Sometimes finished goods are also included within thescope of this term.
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MATERIALS CONTROL: MEANING
Systematic control and regulation of purchase,storage and usage of materials to maintain an evenflow of production and at the same time avoidingexcessive investment in inventories.
Efficient material control cuts out losses and wastage ofmaterials.
It is a system which ensures availability of the requiredquantity of material of proper quality at proper time andavoidance of unnecessary blocked capital in materials.
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OBJECTIVESOFMATERIAL / INVENTORYCONTROL
1. Availability of material
2. Avoidance of wastage
3. Promote manufacturingefficiency
4. Avoidance of out of stockdanger
5. Better service toconsumers
1. Economy in purchasing
2. Optimum investment andefficient use of capital
3. Effective utilization of
materials
Operating Objectives Financial Objectives
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ESSENTIAL REQUIREMENTSFOR MATERIALCONTROL
Proper co-ordination
Proper purchase system
Proper storage system
Proper issue system Perpetual inventory system
Budgetary control system
Proper documentation
Proper accounting system Proper reporting system
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PROCEDUREOFMATERIALCONTROL
1. Purchase of material
2. Storage of material
3. Issue of material4. Accounting and audit of material
5. Control of material losses
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PURCHASEOFMATERIALS
It is performed by purchase department.
It can be :
CENTRALIZED PURCHASING: purchases are made bya specialized unit.
DECENTRALISZED PURCHASING: each branchmakes its own purchases.
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Purchasing and Receiving Procedure:
1. Purchase requisition: a formal request for purchase of material made to the purchase department,
showing quantity, quality, and other specifications.
2. Purchase order: Formal contract for the supply of materials.
Purchase dept. places an order with supplier to buy certain materials atstated price and terms.
The order should clearly state the materials required, and price; and shouldprovide information such as delivery period and the dept. for whom thematerials are purchased.
3. Receiving materials: Receiving Dept. performs the function of unloading and unpacking materials
which are received by an organization.
Needs an inspection report which is sometimes incorporated in the receivingreport, indicating the items accepted and rejected, with reasons.
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4. Approval of Invoices: Indicates that goods according to purchase order have been received and
payment can now be made.
If goods not in accordance to the specifications, or are damaged, thepurchasing dept. issues a return order.
5. Making Payment: Payments depends on the terms agreed upon on any particular order, any
terms which differ from normal practice should be considered individually.
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STORAGEOFMATERIALS1. Checking of materials
2. Proper storage systema. Classification: process of arranging items into groups according to
their nature / usage. It prevents mixing of one type of material intoother.
b. Codification:process of assigning a symbol or code number to itemsin different groups and sub-groups. It can be alphabetical, numerical,
or alpha-numerical codification.
Benefits of Codification:
Simplicity in identifying and tracing the stores.
Full particulars need not be given and thus clerical labour and time
are saved. Secrecy is maintained about the details of the stores and all
employees may not know them.
3. Maintenance of proper records of materials.
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TECHNIQUESOF MATERIAL / INVENTORYCONTROL
1. ABC analysis
2. Fixation of various Stock Levels minimum,maximum, reorder level etc.
3. Economic Order Quantity
4. Stock / Inventory Turnover Ratio
5. Just-in-Time (JIT) Inventory system
6. VED Analysis
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1. ABC TECHNIQUE (ALWAYSBETTERCONTROL) Materials are analyzed according to their value so that costly and
more valuable materials are given greater attention and care.
All items of materials are classified according to their value high,medium and low values which are known as A, B, and C itemsrespectively.
A items: high value items, may consists of only a small % of totalitems. Due to their high cost, these materials should be under thetightest control and responsibility of the most experienced personnel.
B items:medium value material, should be under normal controlprocedure.
C items: low value material, may represent large no. of items,should be under simple and economic methods of control.
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ADVANTAGESOF ABC TECHNIQUE
Ensures control on high value items
Saves time and cost of monitoring
Reduces total investment in inventory
Facilitates faster decision making
Better utilization of resources
Better physical control of stock
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2. FIXATIONOF STOCKLEVELS:
Purpose: to avoid under-stocking and over-stocking.
These levels are:
Maximum level Minimum level
Re-order level
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FACTORSINFLUENCINGSTOCKLEVELS:
1. Anticipated rate of consumption
2. Amount of capital available
3. Availability of storage space
4. Cost of storing5. Procurement costs
6. Reliability of suppliers
7. Risk of loss due to Obsolescence Deterioration
Evaporation
Fall in market prices, etc.
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A) MAXIMUMLEVEL
The level above which stocks should not normally beallowed to rise.
Purpose: to avoid unnecessary blockage, to avoid loss dueto obsolescence and deterioration.
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B) MINIMUMLEVEL
Level below which stock should not normally beallowed to fall.
In case of stock falling below this level, there is arisk of stoppage in production.
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C) RE-ORDERLEVEL (ORDERINGLEVEL)
The level of material at which purchase requisitionis initiated for fresh supplies. This level is fixedsomewhere above minimum level.
This is fixed in such a way that by re-ordering whenmaterials fall to this level, then in the normal courseof events, new supplies will be received just beforethe minimum level is reached.
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D) DANGERLEVEL
Level at which normal issues are stopped and materialare issued for important jobs only.
This level is fixed somewhat below the minimum level.
When the stock reaches danger level, urgent action isneeded for the replenishment of stock so that stoppage
in production can be avoided.
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E) AVERAGESTOCKLEVEL
It indicates the average stock held by an enterprise
during a year.
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Danger Level
Minimum Level
Re-order Level
Average Level
Maximum Level
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FORMULAE:
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FORMULAE: Maximum level = Re-order level + Re-order quantity (minimum consumption x
minimum re-order period)
or = Economic order quantity + Minimum stock
Minimum level = Re-order level (average consumption x average re-order period)
Re-order Level = Maximum consumption X Maximum re-order period or max.lead time
Danger level = average consumption X maximum re-order period under emergency
conditions
= minimum consumption x minimum re-order period
Avg. stock level = minimum level + maximum level
2
or = Minimum level + (Re-order quantity)
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3. ECONOMICORDERQUANTITY (EOQ) /RE-ORDERQUANTITY /
The quantity for which order is placed when stock reaches re-orderlevel.
By fixing this quantity the purchaser has not to recalculate the
quantity to be purchased each time he orders for material.
EOQ is that size of the order which gives maximum economy inpurchasing any materials and ultimately contributes towardsmaintaining the material at the optimum level and at minimum cost.
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While calculating EOQ, two types of costs should be taken intoaccount:
1. Ordering Cost: cost of placing an order with the supplier. Mainlyincludes cost of stationary, salaries of those engaged in receivingand inspection, salaries of those engaged in placing orders, etc.
2. Carrying Cost: cost of holding the stock in storage. Includes cost
of operating the store (salaries, rent, stationary, etc.), insurance,interest on capital locked up in store etc.
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FORMULA:
EOQ = ((2AB)/C)
A= Annual Usage
B = Buying Cost (per order)
C = Carrying Cost (per unit)
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4. STOCK /INVENTORYTURNOVER
It measures the number of times a firms averageinventory is sold during a year.
It points out how many times the stock is used up andreplaced.
Inventory Turnover = Cost of Materials Consumed
Average Stock of Materials
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5. JUST IN TIMEINVENTORYSYSTEM
JIT is a purchasing and inventory control method in whichmaterials are obtained just in time for production to providefinished goods just in time for sale.
There are two aspects of JIT Just in Time (JIT) Production : Producing only what is needed, when is
needed, and in quantity just needed
Just in Time (JIT) Purchasing:Raw materials are purchased just in timeto proceed to the production process. It requires better coordination withsuppliers so that materials arrive immediately prior to their use.
The chances of leakage, spoilage etc. are reduced to theminimum.
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6. VED ANALYSIS(VITAL ESSENTIAL DESIRABLE)
It is based on the classification of materials on the basis of their criticalityfor production.
VITAL: materials are very critical for production. Shortage of suchmaterials would result in immediate stoppage of production.
ESSENTIAL: materials are very important for production. Shortage ofsuch material will not result in immediate stoppage. Productiondepartment can do without such materials for a day or two. If shortagecontinue for a longer period, production will stop.
DESIRABLE: These are required for production but production dept.can manage without them for sometime, say a week, because they havesome substitute or production process or production process can bemodified in such a way that it can go on without such materials.
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Incoming Material:
The incoming material should be valued at invoice price plusall expenses of whatever nature incurred up to the point ofplacing materials in a condition suitable for issuance from the
stock room.
These include:
Transportation charges
Receiving, unpacking and inspecting costs,
Insurance and storage costs,
Accounting and purchasing costs.
3. ISSUEOF MATERIAL
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Outgoing Material:
Materials are priced according to the different inventorysystems.
Inventory Systems:
1. Periodic Inventory System
2. Perpetual Inventory system
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Under this system the quantity and the value of inventoryis found out only at the end of the accounting period afterhaving a physical verification of the units in hand.
This system does not provide the information regardingthe quantity and the value of material in hand oncontinuous basis.
PERIODIC INVENTORY SYSTEM
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Under this system, the stores ledger gives balance ofmaterial on a continuous basis.
Objective is to make available details about the quantityand value of stock of each item at all times.
It provides a rigid control over stock of materials, asphysical stock can regularly be verified with the stockrecords.
PERPETUAL INVENTORY SYSTEM
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TOOLSOFPERPETUALINVENTORYSYSTEM
1. BIN CARD: It is a quantitative record which showsinformation relating to the physical movement ofmaterial, i.e. receipt, issue and balance of material,minimum and maximum levels, ordering level etc.
2. STORES LEDGER: It shows information relating tomovements of material in quantity as well as in value,i.e. receipt, issue and balance of material, minimum
and maximum levels, ordering level, and also the priceof the material.
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METHODSOF VALUATIONOF
INVENTORIES
:
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1. FIRST IN FIRST OUT (FIFO)
Under this method, it is assumed thatthe materials first received are the first
to be issued/sold.
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2. LAST IN FIRST OUT (LIFO)
The last items of materials/goods purchasedare the first to be issued/sold.
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3. HIGHEST IN FIRST OUT (HIFO)
The inventory of materials/goods purchased atthe highest prices are treated as being firstissued/sold irrespective of the date of purchase.
This method has not been adopted widely.
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4. NEXT IN FIRST OUT (NIFO)
The issues are made or the cost of goods sold is takento the next price, i.e. the price of materials or goodswhich have been ordered but not yet received.
This method has not been adopted widely.
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5. WEIGHTED AVERAGE PRICE METHOD
This method is based on the presumption that once thematerials or goods are put into a common bin, they losetheir separate identity. The inventory consists of nospecific batch of goods.
The inventory is priced on the basis of average pricespaid for the goods, weighted according to the quantitypurchased at each price.
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4. ACCOUNTINGANDAUDITOFMATERIAL
Stock Accounting is basically the recording of material.
Stock Audit implies physical verification of stock withinventory records. It is necessary to check the accuracyof inventory records and to segregate materials whichhave become obsolete or useless.
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5. MATERIAL LOSSES
Material loss is the difference between the input ofmaterial in the process and the output.
It may be of the following forms:-
Waste
Scrap
Spoilage
Defectives
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Waste
It is defined as material loss during production or storage. It may arise due to evaporation, chemical reaction,
shrinkage etc.
It may be visible or invisible.
Types:
Normal Waste: arise due to nature of material. It is unavoidable.Treated as part of the cost of production.
Abnormal Waste: arises due to external factors. It is avoidable.It is not a part of cost, but it is transferred to Costing profit andloss a/c
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Scrap
Scrap is a portion of visible wastage having a moneyvalue (low).
It is discarded material which is usually disposed off.
Spoilage
Spoilage means the produced units that does not meetwith dimensional or quality standards in such a way that it
cannot be rectified economically.
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Defectives
These are semi-finished or finished products which arenot according to quality standards.
May arise due to poor workmanship, poor quality of raw
material, lack of supervision, unsound working conditionsetc.
Types:
Reworks: defectives which can be brought up to thestandards by putting in additional resources.
Rejects: defectives which cannot meet the quality standardseven after putting in additional resources