Contents -
1. Meaning and Definition of Material, Material Cost and Material Control.
2. Types of Material.
3. Objectives of Material Control.
4. Steps / Stages of Purchasing Procedure / Procurement Process.
- Meaning and Definition of Material -
The basic input from which a product is manufactured is termed as material. In the production of any finished goods materials play an extremely significant role. As they constitute a crucial component of any manufactured product, it is imperative to have an appropriate control mechanism with regard to their overall moments. It may be raw material or manufactured material. In a manufacturing firm, material can be categorised into direct material and indirect material. Material has been defined as Anything that can be stored, stocked or stockpiled. i.e. inflow, outflow and uses.
- Meaning of Material Cost -
The cost of material used at the basic input in a process of production of any good is known as the material cost. Material cost is bifurcated as direct material cost and indirect material cost. In the following paragraphs they have been discussed in detail.
1. Direct Material Cost -
Cost of the materials which are used directly during the manufacturing process of a product are known as direct material cost. As such expenses are easily related to a particular product or job and they can be charged accordingly. i.e. manufacturing process of that product or job. The scraps generated and losses incurred during the process are also included in the expenses.
Step wise process of computing the direct material cost is explained in the following points :
i) The weight of the component volume time is the material density.
ii) At the outset a list of all the components needed for the process of production is prepared from the engineering drawings.
iii) The volume of each component is calculated on the basis of the drawing, after taking into consideration the adjustment, with regard to the process like machining, casting, forming etc.
iv) Raw material cost in respect of each component is calculated by multiplying the gross weight by the material cost per unit weight.
v) The total of component raw material cost is the total direct material cost per component.
vi) The gross weight of the component is arrived at by making adjustments regarding the :
a) Projected scrap rates.b) Other material losses e.g. melt loss, certain items, which are not considered and losses are recalculated, e.g. the gates and risers/feeders of castings.c) Quantity for process yield.
2. Indirect Material Cost -
Indirect materials are the essential part of the overall production process, i.e. transformation of direct materials into finished goods. They are important as without them the process of production cannot be completed. However, they do not form part of finished goods and their cost cannot be identified with the production of a particular finished good. This is precisely the reason for terming them as indirect material.
- Meaning and Definition of Material Control -
For a smooth and hassle free process of production, the production department need to raw material processed material, machineries and consumption stores. It is the responsibility of the purchase department to ensure timely purchase of the above inputs of requisite quality and quantity from various suppliers. All such purchases are received and stocked by the stores department after they go through the usual process of inspection and approval by the quality control department. The above materials are released by the stores department to the production department as and when they are required.
In order to have an ideal system of material control, a higher level of co-ordination between purchase department, store department and production department is essential. Material control may be defined as, making available at the minimum cost the required quantity and quality material in a timely manner at the right place. It facilities improvement in input-output ratio of the business. A poor co-ordination between the above departments may result in stock out unsystematic purchase at higher price, production loss, wastage due to poor quality etc.
All the above situations are not conductive to the financial health of a business organisation. Large business structures have a dedicated production planning and control department, which acts as a co-ordinator for the various activities and the departments like, sales, purchase, production, quantity control, stores, account etc. The responsibilities of this department include monetary at every stage. i.e. right from the placing of purchase order to the disposal of scraps and obsolete materials.
According to Buyers and Holmes :
"Material control, is the system that ensure, the provision of the required quantity of material of the required quality at the required time with the minimum amount of capital tied up".
- Types of Material -
Materials may be classified into two categories direct and indirect materials.
1. Direct Material -
Those materials, which are easily and unambiguously acknowledged in relation to a specific product, process or job are called direct materials. Following examples in this regard would make the concept of direct material clearer.
i) Primary Packaging Materials
a) Bag for cement.
b) Plastic packing for milk, ghee and oil.
c) Can for tinned food and drink.
d) Bottles for water, wine and whisky.
e) Card board box for drinks like Frooti, real juice.
f) Tin packing for ghee and oil.
ii) Basic Raw Materials -
a) Bricks and cement in building construction.
b) Gold and silver in jewellery.
c) Paper in books.
d) Milk and cream in ice cream.
e) Cloth in garments.
f) Timber in furniture.
2. Indirect Material -
Those materials, which are not easy to be acknowledged in relation to a specific product, process or job are called indirect materials. Following examples would make the concept of indirect material clearer :
a) Materials having in significant monetary value e.g. nails used in furniture, thread used in stitching garments etc.
b) Materials which are used by Service Department e.g. power house, boiler house etc.
c) Items which are useful in the maintenance of various types of Machines e.g. lubricant oil/grease, cotton waste and other consumables etc.
- Objectives of Material Control -
The system of material control serves the following objectives :
1. Fixation of Various Stock Levels -
This is necessary in order to have an efficient material management. Through the system of material control, the level of stock pertaining to various materials may be fixed at maximum, minimum and optimum levels.
2. Information about Materials -
It is also necessary to have a system in place to provide up-to-date information with regard to the availability of various material. Besides ensuring that the availability of various materials by the production department on tap. Lack of such a system may result in a situation where in steps need to be taken to make fresh purchases of the materials already in stock.
3. Proper Quality -
For every product, is specific on quality of materials is required. While purchasing such materials, only that specific quality need to be ensured, neither poor quality nor the best quality of materials should be purchased. Maintaining the quality of materials purchased by the purchase department is of paramount importance.
4. Minimum Wastage -
Storage arrangements for various materials should be made with a view of ensuring their wastage level, due to evaporation, obsolescence, pilferage etc. remains at bare minimum level. This is very important and demands for a cautious approach and close monitoring.
5. Less Costly in Purchasing -
Certain expertise is required for undertaking the process of purchasing materials. Through the system of material control, the materials may be purchased at the most competitive rates from their suppliers. Thus, due to the factor of cost effectiveness, a positive contribution is added to the profitability.
6. No Over-Stocking -
As discussed earlier under stocking of materials is likely to have an adverse impact on profitability. This stock of materials needs to be kept at an appropriate level, neither too low nor too high. Similarly, over stocking of materials also leads to impacting profitability adversely. This is due to the fact that the over stocking of materials at higher level involves higher level of capital cost and storage cost. Further, the incidence of obsolescence would be more in the case of over stocking which again affects the profitability.
7. No Under-Stocking -
Slowing down of the production cycle proves to be very costly for a business organisations, as it would ultimately impact profitability in a negative manner. The phenomenon of under-stocking of a material increases the possibilities of a situation like material out of stock, which in turn leads to the production process being adversely affected.
- Procurement Process / Purchasing Procedure -
According to Walters :
"Purchasing function means, the procurement mint by purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in the proper quality and quantity at the proper time at and at the lowest price, consistent with quality desired".
Purchasing Procedure / Procurement Process -
Following steps are involved in the Purchasing Procedure or Material Control :
1. Purchase Requisition -
The Purchase requirement for buying raw / processes material, components and other stores are received from production control department or any other user department of the organisation. The receipt of purchase requirement by the purchase department is the green signal empowering it to go ahead with the purchase cycle. The purchase requisition specifically mentions the quality and quantity of the material required to be purchased as well as the location where they are required to be delivered. Sometimes with a view to showing the urgency of the materials requisitioned the concerned department mentions the quantitative balance of such materials remaining with it.
2. Potential Sources of Supply -
Most of the purchase department have a panel of approval vendor for the supply of each item required from time to time by the business organisation. Once the purchase requisition is received by the purchase department, it start searching for a prospective vender capable of supplying the requisite material as per the specifications with regard to the quality and quantity. Such panel is prepared on the strength of information collected from sources like advertisement in newspaper, trade journals, buyers guides, purchase agents and salesman contacts etc. It is subjected to periodical review. During the review, name of certain vendors are removed from the panel, whereas names of certain other vendors are allowed to be continued in the panel depending upon their performance during the year names of new vendors are also considered for their inclusion in the panel.
3. Issue of Letters Inviting Quotations -
The next step in the purchase procedure is calling for quotation from the panelled vendors. For this, letters indicating the details of the materials required, their quantity, quality, delivery schedule, place of delivery etc. are issued to all the suppliers included in the panel. They are also advised to furnish details regarding additional charges, if any, with regard to the packaging, handling, freight, taxes etc. With such details in hand the purchaser is in a better position to take decision and also to obviate any complexity in future. If the purchase material happens to be machines, plant and equipment, the vendors are asked whether they would be in a position to extend services like technical assistant, training programs and after sales services.
4. Receipt and Analysis of Quotations -
After a preliminary scrutiny, a chart is prepared where in the price terms and conditions of supply, payment, discount extended etc. by each vendor are mentioned. Receipt of quotations is closed on the prescribed date and on another prescribed date they are opened in the presence of responsible officers. This chart is subjected to further analysis in detail and the name of the vendor, who has quoted the lowest price and terms and condition most suited to the business organisation, is finalized.
5. Selection of Vendors / Suppliers -
Selection of a supplier only on the basis of lowest price quoted by him with suitable terms and conditions is not necessarily a correct decision. Certain other factor mentioned below are equally important and need to be taken into account with a view to reducing the total cost of purchase rather than just reduction only in the unit cost of materials.
i) The supplier's ability to adjust in a situation where in the purchaser is forced to cancel the order due to certain unforeseen factors.
ii) Trustworthiness on the vender on the basis of earlier experience, if any in dealing with the vendor.
iii) His readiness to take back the material without any trouble in case they are not found in conformity with the specifications or due to other reasons.
iv) The supplier's competence and ability to produce and supply the required materials.
6. Purchase Order -
Once the purchase order is accepted by the supplier it acts as a contract for the supply of materials on the terms and conditions mentioned there in. After having identified and finalized the name of the vendor or supplier for purchasing the request material order is issued by the purchase department, where in specifications with regard to the material required like quality, quantity, rates, delivery schedule, other terms and condition etc. are indicated. Sometimes a separate agreement is entered into by the purchaser and the supplier. When a business organisation requirement for certain materials are in bulk and on an ongoing basis the purchase department issues a blanket purchase order which includes all the details cited above having the quality, quantity and delivery schedules. At the time of actual requirement, the purchase department issues the release order and the supplies are made by the supplier.
7. Follow up and Delivery -
The issue of purchase order is followed by monitoring the process of timely delivery of the materials as per the schedules. Sometimes with a view to ensuring the timely delivery, a penalty clause is inserted in the purchase agreement. However, despite the penalty clause the follow up and monitoring continuous to be vital, as the penalties imposed are not good enough to make the losses incurred due to disruption in the production cycle.
8. Purchase Order Amendments -
Whenever required the necessary modification may be carried out in the original purchase order. However while doing so it is necessary to ensure that the delivery schedule is not affected because of such modification. in case of any doubt the addition of certain items in the original purchase order may adversely impact the delivery schedule, it is better to place a fresh purchase order for the new.
9. Analysis of Receiving Reports -
On receipt of materials, they are subjected to an inspection by the quality control department and verification by the department to ensure that the materials delivered are as per the specification mentioned in the purchase order. Necessary step are initiated promptly, if the consignment is to be rejected due to non fulfillment of terms and conditions of the purchase agreement. In such cases, the vendor is also requested to supply a fresh consignment in compliance with the terms and condition. Any deviation from the specification indicated in the purchase order i.e. shortage or damages etc. are immediately brought to the notice of the vendor.
10. Security and Approval of Invoices -
If the findings of the inspection carried out by the quality control department and verification by store department reveal that the materials have been delivered as per the specifications of the purchase agreement, the invoices are approved and forwarded to the accounts department for payment. In case of any deviation from the terms and conditions of the agreement, the matter is suitably taken up with the supplier.
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