BASICS OF INDUSTRIAL ENGINEERING

UNIT- IV: MATERIALS MANAGEMENT

Unit IV
 Materials Management
• Materials management is the process of planning, organizing, and
controlling the flow of materials in a company.

• What “materials” mean? Materials can basically be defined as those

objects or things that are to be moved in order to generate products.

• Material has been one of the 5M’s that a manager has at their
command, the other being Men, Machine, Methods and Money.
 Functions of Materials Management
• Materials can be categorized in three broad groups.
• First group is purchased materials like the raw materials, components, spare
parts and items that are used and do not appear in the end product.
• The second group is of in-process materials or the materials in the semi-
finished stages and lastly the finished goods that are ready for customers.
• One must manage these materials and its flows. The aim here is to obtain the
materials at the minimum possible price, along with maintaining quality also
and to maintain the inventories in such a way that minimum cost is incurred
while maintaining adequate materials for the production process.
• It is defined as a function that integrated purchasing, storage,
inventory control, materials handling and standardization etc in an
organization to achieve its objective of reducing the costs.

• Every organization wishes to maximize its profit by maximizing it

production and minimizing the cost of production.

• The average material cost in a manufacturing setup is around 50-70%

of the total expenditure, which further goes up if one takes into
account the inventory costs, storage, waste and other factors etc.
• It is therefore imperative for an organization to have a sound materials
management with an objective to reduce material costs, control
inventories, ensure uniform flow of materials and maintain good
relations with suppliers. Materials management has to do activities
related to planning, accusition and utilization of materials.
1. Materials planning and control: Materials planning and control lies at the
core of successful material management. This function works outs all the
material requirements in any manufacturing process.
2. Purchasing: This function identifies the sources of supply, market
research, call tenders and select suppliers, negotiate with them and thus make
available the raw materials.
3. Inventory control: This function is responsible for the location and
storage of materials so that they remain available at the minimum cost and
quickest time.
4. Store keeping: This function is responsible for the receipt and issue
of the materials. The materials are stored in such a way that minimum
handling is required, and wastage is minimal.

5. Material handling: This function aims at minimizing handling and

provision of equipment's for handling materials. This function is crucial
for minimizing space requirements, effective distribution and for
providing better working space.
6. Warehousing: This function is responsible for the storage facilities for
the materials, weighing facilities, materials handling equipment's,
material distribution facilities, fire fighting instruments etc.

7. Standardization & simplification: This function selects items of

great demand and sets the standards for quality, raw material, sizes and
performance of any product.

8. Organization & appraisal of materials: This function helps in

effective functioning by proving smooth flow. It provides coordination
and avoid delays and wastages
 INVENTORY CONTROL OR MANAGEMENT

Meaning of Inventory
• Inventory generally refers to the materials in stock. It is also called the idle resource of an
enterprise. Inventories represent those items which are either stocked for sale or they are in
the process of manufacturing or they are in the form of materials, which are yet to be
utilized.

• The interval between receiving the purchased parts and transforming them into final
products varies from industries to industries depending upon the cycle time of manufacture.

• It is, therefore, necessary to hold inventories of various kinds to act as a buffer between
supply and demand for efficient operation of the system.

• Thus, an effective control on inventory is a must for smooth and efficient running of the
production cycle with least interruptions.
 Strategic importance of materials in manufacturing industries

• 1. To stabilise production: The demand for an item fluctuates because of the number of
factors, e.g., seasonality, production schedule etc. The inventories (raw materials and
components) should be made available to the production as per the demand failing which
results in stock out and the production stoppage takes place for want of materials. Hence,
the inventory is kept to take care of this fluctuation so that the production is smooth.

• 2. To take advantage of price discounts: Usually the manufacturers offer discount for
bulk buying and to gain this price advantage the materials are bought in bulk even though
it is not required immediately. Thus, inventory is maintained to gain economy in
purchasing.
• 3. To meet the demand during the replenishment period: The lead time for
procurement of materials depends upon many factors like location of the source,
demand supply condition, etc. So inventory is maintained to meet the demand
during the procurement (replenishment) period.

• 4. To prevent loss of orders (sales): In this competitive scenario, one has to meet
the delivery schedules at 100 per cent service level, means they cannot afford to
miss the delivery schedule which may result in loss of sales. To avoid the
organizations have to maintain inventory.
• 5. To keep pace with changing market conditions: The organizations have to
anticipate the changing market sentiments and they have to stock materials in
anticipation of non-availability of materials or sudden increase in prices.

• 6. Sometimes the organizations have to stock materials due to other reasons like
suppliers minimum quantity condition, seasonal availability of materials or sudden
increase in prices.
 REASONS FOR KEEPING INVENTORIES

1. To stabilise production

2. To take advantage of price discounts

3. To meet the demand during the replenishment period

4. To prevent loss of orders (sales)

5. To keep pace with changing market conditions:

6. Sometimes the organizations have to stock materials due to other reasons like
suppliers minimum quantity condition, seasonal availability of materials or
sudden increase in prices.
 Meaning of Inventory Control

• Inventory control is a planned approach of determining what to order, when to order and how much to
order and how much to stock so that costs associated with buying and storing are optimal without
interrupting production and sales.

• Inventory control basically deals with two problems:

(i) When should an order be placed? (Order level), and

(ii) How much should be ordered? (Order quantity).

• These questions are answered by the use of inventory models.

• The scientific inventory control system strikes the balance between the loss due to non-availability of
an item and cost of carrying the stock of an item.

• Scientific inventory control aims at maintaining optimum level of stock of goods required by the
company at minimum cost to the company.
 Inventory Model

• Inventory model is a mathematical model that helps business in determining the

optimum level of inventories that should be maintained in a production process,
managing frequency of ordering, deciding on quantity of goods or raw materials to
be stored, to provide uninterrupted service to customers without any delay in
delivery.

• There are two types of Inventory model widely used in business.

1. Fixed Reorder Quantity System

2. Fixed Reorder Period System

 Fixed Reorder Quantity System

• Fixed Reorder Quantity System is an Inventory Model, where an alarm is raised

immediately when the inventory level drops below a fixed quantity and new
orders are raised to replenish the inventory to an optimum level based on the
demand.

• The point at which the inventory is ordered for replenishment is termed

as Reorder Point.

• The inventory quantity at Reorder Point is termed as Reorder Level and the
quantity of new inventory ordered is referred as Order Quantity.
Fixed Reorder Quantity System
• Average Demand (Dav): It is the average number of order requests made per day.

• Average Lead Time (TL): The time required to manufacture goods or product.

• Average Lead Time Demand (DL): Average number of orders requested during the
Lead Time

• (DL) = (Dav) X (TL).

• Safety Stock (S): It is the extra stock that is always maintained to mitigate any
future risks arising due to stock-outs because of shortfall of raw materials or supply,
breakdown in machine or plant, accidents, natural calamity or disaster, labour strike
or any other crisis that may the stall the production process.
• Reorder Level (RL): Reorder level is the inventory level, at which an alarm is
triggered immediately to replenish that particular inventory stock. Reorder level is
defined, keeping into consideration the Safety Stock to avoid any stock-out
and Average Lead Time Demand because even after raising the alarm, it would
take one complete process cycle (Lead Time) till the new inventories arrive to
replenish the existing inventory.

(RL) = Safety Stock (S) + Average Lead Time Demand (DL)

• Order Quantity (O): Order quantity is the Demand (Order requests) that needs to
be delivered to the customer (needs to be placed to the vendor).
• Minimum Level: At least Safety Stock has to be always maintained to avoid any
future stock- outs as per the standard practices of inventory management.

• Minimum Level (LMin) = Safety Stock (S)

• Maximum Level: The maximum level that can be kept in stock is safety stock
and the demand (the quantity ordered).

• Maximum Level (LMax) = Safety Stock (S) + Order Quantity (O)

• Example: The order quantity of an Item is 600 Units. The safety Stock is 200
Units. The Average Lead Time is 5 Days and average consumption per days is 40
units.
• Order Quantity (O) = 600 Units

• Safety Stock (S) = 200 Units

• Average Lead Time (TL) = 5 Days

• Average Demand ( DAv ) = 40 Units

• Average Lead Time Demand (DL) = Demand (DAv) X Lead Time (TL) = 200
Units

• Reorder Level (RL) = Safety Stock (S) + Average Lead Time Demand (DL) =
400 Units

• Minimum Level (LMin) = Safety Stock (S) = 200 Units

• Maximum Level (LMax) = Safety Stock (S) + Order Quantity (O) = 800 Units
 Fixed Reorder Period System

• Fixed Reorder Period System is an Inventory Model of managing

inventories, where an alarm is raised after every fixed period of
time and orders are raised to replenish the inventory to an optimum
level based on the demand. In this case replenishment of inventory is a
continuous process done after every fixed interval of time.
• Regular Intervals (R): Regular Interval is the fixed time interval at the end of
which the inventories would be reviewed, and orders would be raised to replenish
the inventory.

• Inventory on Hand (It): Inventory on hand is the Inventory level measured at any
given point of time.

• Maximum Level (M): It is the maximum level of inventory allowed as per the
production guidelines. The maximum level is derived by analysing historical data.

• Order Quantity: In this system, inventory is reviewed at regular intervals (R),

inventory on hand (It) is noted at the time of review and order quantity is placed for
a quantity of (M) – (It).

Order Quantity (O) = (M) – (It).

Fixed Reorder Period System
• Example: Inventory is replenished at every regular interval of 5 days.
The maximum allowable inventory is 800 Units. The inventory
reviewed on Day-5, Day-10, Day -15 and Day -20 were 387 Units,
201 Units, 498 Units and 127 Units respectively.
• Regular Intervals (R) = 5 Days

• Maximum Level (M) = 800 Units

• Inventory on Hand: I5 = 387 Units, I10 = 201 Units, I15 = 498 Units and I20 =
127 Units

• Order Quantity (O) = (M) – (It).

• Order Quantity (O5) = 800 – 387 = 413 Units

• Order Quantity (O10) = 800 – 201 = 599 Units

• Order Quantity (O15) = 800 – 498 = 302 Units

• Order Quantity (O15) = 800 – 127 = 673 Units

 ECONOMIC ORDER QUANTITY (EOQ)

Inventory models deal with idle resources like men, machines, money and materials.
These models are concerned with two decisions:

• How much to order (purchase or produce) and

• When to order so as to minimize the total cost.

For the first decision—how much to order, there are two basic costs are considered
namely,

(i) inventory carrying costs and

(ii) the ordering or acquisition costs.

• As the quantity ordered is increased, the inventory carrying cost increases while the
ordering cost decreases.

• The ‘order quantity’ means the quantity produced or procured during one production
cycle.

• Economic order quantity is calculated by balancing the two costs.

• Economic Order Quantity (EOQ) is that size of order which minimizes total costs of
carrying and cost of ordering.

• i.e., Minimum Total Cost occurs when Inventory Carrying Cost = Ordering Cost

• Economic order quantity can be determined by two methods:

1. Tabulation method.

2. Algebraic method.
 Determination of EOQ by Analytical Method

• In order to derive an economic lot size formula following assumptions are made:

1. Demand (D) is known and uniform and denotes the total number of units purchase/produced

2. Q denotes the lot size in each purchase/production run.

3. Shortages are not permitted, i.e., as soon as the level of the inventory reaches zero, the inventory is
replenished.

4. Production or supply of commodity is instantaneous.

5. Lead-time is zero.

6. P is the Set-up cost per production run or Procurement cost or Ordering cost.

7. C is the cost per unit

8. I is the inventory inventory carrying cost expressed as a percentage of the value of the average
inventory
• The fundamental situation can be shown on an inventory-time diagram, with Q on
the vertical axis and the time on the horizontal axis. The total time period (one
year) is divided into n parts.
• The most economic point in terms of total inventory cost exists where,

Inventory carrying cost = Annual ordering cost (set-up cost)

• Average inventory = 1/2 (maximum level + minimum level)

= (Q + 0)/2 = Q/2

• Inventory carrying cost per unit = Cost per unit x Inventory inventory carrying
cost expressed as a percentage of the value of the average inventory

Cc = C I

• Total inventory carrying cost = Average inventory × Inventory carrying cost per
unit

• i.e., Total inventory carrying cost = Q/2 × C I = QCI/2 ….…(1)

• Total annual ordering costs = Number of orders per year × Ordering cost per order

• i.e., Total annual ordering costs = (D/Q) × P = (D/Q) P …….…(2)

The total cost is minimum when the inventory carrying costs becomes equal to the
total annual ordering costs.

Therefore, QCI/2 = (D/Q) P

QCI = (2D/Q)P

Q2 = 2PD/CI

Economic order quantity (EOQ) ……….(3)

Total cost of production run = Total inventory carrying cost + Total annual
ordering costs
T = QCI/2 + (D/Q) P
• An oil engine manufacturer purchases lubricants at the rate of Rs. 42
per piece from a vendor. The requirements of these lubricants are 1800
per year. What should be the ordering quantity per order, if the cost per
placement of an order is Rs. 16 and inventory carrying charges per
rupee per year is 20 paise.
• A manufacturing company purchase 9000 parts of a machine for its
annual requirements ordering for month usage at a time, each part
costs Rs. 20. The ordering cost per order is Rs. 15 and carrying
charges are 15% of the average inventory per year. You have been
assigned to suggest a more economical purchase policy for the
company. What advice you offer and how much would it save the
company per year?
 Techniques of Inventory Control

• In any organization, depending on the type of business, inventory is maintained.

When the number of items in inventory is large and then large amount of money is
needed to create such inventory, it becomes the concern of the management to
have a proper control over its ordering, procurement, maintenance and
consumption. The control can be for order quality and order frequency.
• The different techniques of inventory control are:

(1) ABC analysis,

(2) HML analysis,

(3) VED analysis,

(4) FSN analysis,

(5) SDE analysis,

(6) GOLF analysis and

(7) SOS analysis.

The most widely used method of inventory control is known as ABC analysis.
 ABC Analysis
• ABC analysis: In this analysis, the classification of existing inventory is based on
annual consumption and the annual value of the items. Hence, we obtain the
quantity of inventory item consumed during the year and multiply it by unit cost to
obtain annual usage cost.

• The items are then arranged in the descending order of such annual usage cost.
The analysis is carried out by drawing a graph based on the cumulative number of
items and cumulative usage of consumption cost.
Classification is done as follows:
Once ABC classification has been achieved, the policy control can be formulated as
follows:

A-Item: Very tight control, the items being of high value. The control need
to be exercised at higher level of authority.

B-Item: Moderate control, the items being of moderate value. The control
need to be exercised at middle level of authority.

C-Item: The items being of low value, the control can be exercised at gross
root level of authority, i.e., by respective user department managers.
• 2. HML analysis: In this analysis, the classification of existing inventory is based
on unit price of the items. They are classified as High price, Medium price and
Low cost items.

• 3. VED analysis: In this analysis, the classification of existing inventory is based

on criticality of the items. They are classified as Vital, Essential and Desirable
items. It is mainly used in spare parts inventory.

• 4. FSN analysis: In this analysis, the classification of existing inventory is based

on the consumption of the items. They are classified as Fast moving, Slow moving
and Non-moving items.
• 5. SDE analysis: In this analysis, the classification of existing inventory is based on their
availability and procurement complexity. SDE analysis, an acronym for Scarce, Difficult,
and Easy, provides a simple yet powerful framework for classifying inventory items,
enabling businesses to make informed decisions regarding procurement, storage,
and replenishment strategies.

• 6. GOLF analysis: In this analysis, the classification of existing inventory is based

sources of the items. They are classified as Government supply, Ordinarily available
(Open market supply), Local availability and Foreign source of supply items.

• 7. SOS analysis: In this analysis, the classification of existing inventory is based nature
of supply of items. They are classified as Seasonal and Off-Seasonal items.

For effective inventory control, combination of the techniques of ABC with VED or ABC
with HML or VED with HML analysis is practically used.
 How to Calculate ABC Analysis?
A stock manager can perform ABC calculations on both individual product groups or a wide range of
inventory. An ABC Calculation is usually carried out within five steps, which are as follows-

1. First, multiply the annual number of products with each item's cost and find the utility of that
product.

2. Make a category of every product in the descending order based on its usage value.

3. Add the usage value of the products, including the total number of items.

4. Find out the cumulative percentages of items sold and annual consumption value.

5. Now, it's time to divide your data into three categories, finally, in an approximate ratio of
75:15:10.
ABC calculation has been further illustrated through an example of a
Furniture Store.
Cost per unit (in
Products Annual Number of items sold
Rupees)
Beds 5000 80
Chairs 10,000 20
Coffee Tables 700 50
Desks 1500 20
ottoman 600 40
Dining table 700 40
Book cases 600 40
Office chairs 700 30
Wardrobes 500 30
Computer cabinet 600 15
 Step 1: Multiply the total number of items by the cost of each unit to find the
annual usage value.

Cost per unit (in

Products Annual Number of items sold Annual usage value
Rupees)
Beds 5000 80 400000
Chairs 10,000 20 200000
Coffee Tables 700 50 35000
Desks 1500 20 30000
ottoman 600 40 24000
Dining table 700 40 28000
Book cases 600 40 24000
Office chairs 700 30 21000
Wardrobes 500 30 15000
Computer cabinet 600 15 9000
 Step 2: List them in the descending order based on annual consumption value.

Annual Number of items Cost per unit (in

Products Annual usage value
sold Rupees)
Beds 5000 80 400000
Chairs 10,000 20 200000
Coffee Tables 700 50 35000
Desks 1500 20 30000
Dining table 700 40 28000
ottoman 600 40 24000
Book cases 600 40 24000
Office chairs 700 30 21000
Wardrobes 500 30 15000
Computer cabinet 600 15 9000
• Step 3: Sum up and add the total number of units sold and the annual consumption
value.
Percentage of
Annual Number of Cost per unit (in Annual usage Percentage of annual
Products
items sold Rupees) value annual units sold consumption
value

Beds 5000 80 400000 23.92 50.89

Chairs 10,000 20 200000 47.85 25.45
Coffee Tables 700 50 35000 3.35 4.45
Desks 1500 20 30000 7.18 3.82
Dining table 700 40 28000 3.35 3.56
ottoman 600 40 24000 2.87 3.05
Book cases 600 40 24000 2.87 3.05
Office chairs 700 30 21000 3.35 2.67
Wardrobes 500 30 15000 2.39 1.91
Computer cabinet 600 15 9000 2.87 1.15

20900 786000
 • Step 4: In the last step, split the data and numbers into the three A, B, and C categories.
Remember, it’s essential to set the data in the ratio of approximately 75:15:10.

Percentage of Cumulative Percentage

Annual Number of Cost per unit (in Percentage and
Products Annual usage value annual consumption of annual consumption
items sold Rupees) category
value value

Beds 5000 80 400000 50.89 50.89 75.89

(A)
Chairs 10,000 20 200000 25 75.89

Coffee Tables 700 50 35000 4.45 80.34

11.83
Desks 1500 20 30000 3.82 84.16
(B)
Dining table 700 40 28000 3.56 87.72

ottoman 600 40 24000 3.05 90.77

Book cases 600 40 24000 3.05 93.82

11.83
Office chairs 700 30 21000 2.67 96.49
(C)
Wardrobes 500 30 15000 1.91 98.4

Computer cabinet 600 15 9000 1.15 100

Waste Management Principles
 Waste Management
• The waste management hierarchy is a conceptual framework designed to guide and rank

waste management decisions at both the individual and organisational level. It gives top

priority to waste prevention, followed by reduce, re-use, recycling, recovery and finally

disposal.

• The hierarchy helps us rethink our relationship with waste based on five priorities ranked

in terms of what’s best for the environment. This is often illustrated as a five-tier inverted

pyramid.
 Waste Hierarchy Steps

• Prevent – Top priority is placed on preventing waste. Can waste be avoided by

not using the material in the first place?

• Reduce – Can less materials be used in the design and manufacturing stage?

• Reuse – Can materials be re-used in other areas of your production process, or by

someone else?

• Recycle – Can the materials be recycled, either in whole or in part to turn the
waste into a new product
• Recover – Where further recycling is not practical or possible, energy
or materials could be recovered from waste through processes such as
anaerobic digestion or incineration

• Dispose – When all else fails, materials that cannot be reused, recycled
or recovered for energy will be landfilled and incinerated (without
energy recovery). This is an unsustainable method of waste
management because waste that sits in landfills can continue to have a
damaging environmental impact.
1. REDUCE

The waste management hierarchy places top priority on reducing or preventing as much waste
generation as possible. This stage encourages industries, communities and governments to reduce
their use of virgin raw materials to produce goods and services.

The idea is to maximise efficiency and prevent the unnecessary consumption of resources through
steps such as:

• Procuring raw materials that come with the least packaging or require the fewest resources to
refine.

• Avoiding disposable or single-use goods.

• Procuring materials that are recycled or can be recycled, repaired or reused.

• Optimising inventory to prevent perishable goods (e.g., food) from going to waste.

If your business can’t reduce or prevent waste, you can prepare them for reuse.
2. REUSE

Preparing materials for reuse in their original form is the second-best approach to waste
management. Aside from reducing your landfill impact, reusing business waste also allows your
business to avoid spending on new goods or virgin materials or paying a provider to dispose of
your waste for you.

For example, office-based businesses can use these measures to prepare common items for
reuse:

• Refilling toner and printer cartridges instead of buying new ones.

• Using durable glasses, mugs, cups, plates and cutlery instead of disposable alternatives.

• Reusing envelopes, boxes and other packaging materials.

• Donating or selling used furniture, computers and other office equipment.

You can even generate income from items and business waste that are valuable to other
organisations. For example, scrap stores will purchase scrap metals, fabrics, plastics, paper and
cardstock.
3. RECYCLING

• Recycling involves processing materials that would otherwise be sent to landfills and
turning them into new products. It’s the third step of the waste management hierarchy
because of the extra energy and resources that go into creating a new product.

• For instance, scrap paper can be recycled, but the process requires water and electricity to
transform it into pristine paper products.

• To maximise recycling opportunities, your business will need to have the proper recycling
infrastructure in place, which can be an on-site recycling facility (e.g., for grinding
concrete into material for backfilling) or a total waste management provider that can
handle segregation, collection and recycling for you.
4. RECOVERY

When further recycling is not practical or possible, businesses can recover energy or
materials from waste through processes such as:

• Incineration

• Anaerobic digestion

• Gasification

• Pyrolysis.

The recovered energy can be made available for the organisation’s use or fed back into the
electricity grid.
5. DISPOSAL

• When all else fails, materials that cannot be reused, recycled or recovered for
energy will be landfilled and incinerated (without energy recovery). This is an
unsustainable method of waste management because waste that sits in landfills can
continue to have a damaging environmental impact.

• For example, one tonne of landfilled food waste is estimated to produce 450kg of
carbon emissions. Landfills can also leak chemicals and toxic liquids that can
contaminate the soil and groundwater underneath.