Material Management
Chapter 3
Material Management
“It is concerned with planning, organizing
and controlling the flow of materials from their
initial purchase through internal operations to the
service point through distribution.”
or
“Material management is a scientific
technique, concerned with Planning, Organizing
&Control of flow of materials, from their initial
purchase to destination.”
2
Focus of Material Management
To procure right materials
In
Of
At
From
At
Right Quantity
Right Quality
Right Time
Right sources
Right prices
– 5 R’s, principles of purchasing
3
Primary Objectives
Lower costs and,
Simultaneously, increase product quality.
Accommodate demands for local
responsiveness.
Respond quickly to shifts in
customer
demand.
4
Phases in M M
Planning (Plans for capacity or production
levels and required inventory levels
Material utilization (efficiency of the flow of
materials through the plan)
Physical (storing, receiving and issuing of
materials and physical checking of inventory of
raw materials, work in process, finished goods,
record keeping)
Control or follow up (feedback and corrective
action involved)
5
Main departments. Of M M
Materials planning
Purchase
Stores
Inventory control
6
Traditional Organizational Structure
CEO
Purchasing
Manufacturing
Marketing
Production
Planning
and Control
Distribution
Finance
7
Organization Structure with Materials
Management as Separate Function
Strategic
manager/CEO
Materials
management
Purchasing
Manufacturing
Production
planning
and control
Marketing
Finance
Distribution
Figure 16.4B
8
purchasing
9
Purchasing
Purchasing is to procure the materials,
supplies, tools, equipment etc.
5 R’s – quality, Quantity, Source, Time,
Price
Procurement – purchase, material
supervision and management as inventory
control, receiving and salvage operations.
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Objectives of Purchasing
Procurement of required quantity and quality of
materials at the most economical price
Buying an optimum quantity, neither too much
nor too less, not affecting capital or holding up
production.
Improvement of the product with reference to
quality by means of selection of adequate
material
To develop fullest cooperation, coordination
and maintenance of internal relationship with
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departments in the company.
Functions
Obtaining prices
Selecting vendors
Awarding purchase orders
Following up on delivery promise
Adjusting and settling complaints
Selecting and training of purchase personnel
Vendor relations
12
Vendor rating
It is a method to evaluate a vendor against
certain parameters, related to his supplies.
Factors considered:
Vendors are assessed on the basis of a wide variety of
factors or criteria which might include but not limited
to:
Price
Discounts received
Maintenance of specifications
13
Inventory Management
 The term inventory includes
materials – raw, in process, finished
packaging, spares and others
stocked in order to meet an
unexpected demand or distribution
in the future.
 Inventory can be used to refer to the
stock on hand at a particular time,
of raw materials, goods-in –process
of manufacture, finished products,
merchandise...
14
Types
Finished goods inventories
Stock in trade –ready for shipment
Maintenance, Repair and Operating
inventories
- cutting tools , grinding wheels, jigs
Maintenance inventory
Electrical – switches, fuses, lamps, lubricants, safety goggles
Stationary inventories
Canteen provisions, medical supplies, uniforms
15
Objectives of Inventory
To facilitate smooth operation of the
manufacturing process.
To minimize investment in inventory
To reduce material handling costs
Reasonable utilization of people
Inventories are held to facilitate product display
and service to customers, batching in
production in order to take advantage of longer
production runs
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Just-In-Time (JIT)
 JIT is defined as an approach to minimize waste in
manufacturing in the force of time, energy and errors.
 JIT is an alternative to MRP system for certain type of
production and as a bridge between management and work
guide lines.
 JIT is applied systematically can have wide range of
implications on marketing and transportation besides
economizing production.
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Enterprise Resource Planning (ERP)
ERP is an integrated cross functional software that
re-engineers manufacturing, distribution, finance,
human resources and other basic business processes
of a company to improve its efficiency, agility and
profitability.
18
Production Planning and Materials
Management Modules
ERP extends information distribution
Supports materials requirement planning, inventory
management, capacity planning
Allows for merging of multiple databases
Eliminates paperwork and bottlenecks
Decreases design costs, lead time, personnel costs
Increases productivity
ERP systems provides integration
Sales forecasts employed to develop production plans
6-19
Materials Management Modules
MPS: Master Production Schedule
 created through demand management
Determines quantities and dates for finished products
MRP: Material Requirements Planning
creates efficient, detailed material plan
Determines what needs to be ordered and when
Creates work orders sent to production
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ERP System
Business Enterprise
Legacy
Systems
Data Warehouse
ERP
System
On-Line Analytical Processing
(OLAP)
Bolt-On Applications
(Industry Specific Functions)
Suppliers
Customers
Core Functions [On-Line Transaction Processing (OLTP)]
Sales
&
Distribution
Business
Planning
Shop Floor
Control
Operational Database
Customers, Production,
Vendor, Inventory, etc.
Logistics
Materials Management Modules
MES: Manufacturing Execution Systems
(MES) are computerized systems used in manufacturing.
MES can provide the right information at the right time and
show the manufacturing decision maker "how the current
conditions on the plant floor can be optimized to improve
production output
 Factory floor information and communication systems
 Provide feedback on real-time basis
 Can be front-end combined with back-end applications
6-22
Materials Management Modules
A production system (or production rule system)
is a computer program typically used to provide some form
of artificial intelligence, which consists primarily of a set of
rules about behavior. These rules, termed productions, are a
basic representation found useful in automated
planning, expert systems and action selection.
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Production system advantages
Business analysis and support
Leverage data for decision support
Data collection
Real-time data gathered with mobile phone or
Internet-enabled devices
Automated data collection
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Inventory control
It means stocking adequate number and
kind of stores, so that the materials are
available whenever required and wherever
required. Scientific inventory control results
in optimal balance
Inventory Costs
Ordering cost
salaries and expenses of processing an order,
regardless of the order quantity
Holding cost: Carrying cost:
usually a percentage of the value of the item
assessed for keeping an item in inventory
(including finance costs, insurance, security costs,
taxes, warehouse overhead, and other related
variable expenses)
Backorder cost– (Shortage cost or Out of
stock )
costs associated with being out of stock when
an item is demanded (including lost goodwill)
Purchase cost -- the actual price of the items
Other costs
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Inventory Models
The study of inventory models is concerned with
two basic questions:
How much should be ordered each time
When should the reordering occur
The objective is to minimize total variable cost
over a specified time period (assumed to be
annual in the following review).
Deterministic Models
The simplest inventory models assume demand
and the other parameters of the problem to be
deterministic and constant.
The deterministic models are:
Economic order quantity (EOQ):
Economic production lot size
EOQ with planned shortages
EOQ with quantity discounts
Economic Order Quantity (EOQ)
‫كمية الطلب االقتصادي‬
The most basic of the deterministic
inventory models is the economic order
quantity (EOQ).
The variable costs in this model are annual
holding cost and annual ordering cost.
For the EOQ, annual holding and ordering
costs are equal.
‫كمية الطلب اإلقتصادي‬
EOQ
Annual
cost ($)
Total Cost
Slope = 0
Carrying Cost =
Minimum
total cost
CcQ
2
Ordering Cost =
CoD
Q
Optimal order
Qopt
Order Quantity, Q
‫كمية الطلب اإلقتصادي‬
EOQ
: EOQ ‫• تكاليف نموذج‬
Co - cost of placing order
Cc - annual per-unit carrying cost
D - annual demand
Q - order quantity
Annual ordering cost =
CoD
Q
Annual carrying cost =
CcQ
2
Total cost =
CoD
+
Q
CcQ
2
Economic Production Lot Size
The economic production lot size model is a
variation of the basic EOQ model.
A replenishment order is not received in
one lump sum as it is in the basic EOQ
model.
Inventory is replenished gradually as the
order is produced (which requires the
production rate to be greater than the
demand rate).
For the optimal lot size, annual holding and
set-up costs are equal.
EOQ with Planned Shortages
With the EOQ with planned shortages
model, a replenishment order does not
arrive at or before the inventory position
drops to zero.
Shortages occur until a predetermined
backorder quantity is reached, at which time
the replenishment order arrives.
For the optimal order and backorder
quantity combination, the sum of the annual
holding and backordering costs equals the
annual ordering cost.
EOQ with Quantity Discounts
The EOQ with quantity discounts model is
applicable where a supplier offers a lower
purchase cost when an item is ordered in
larger quantities.
This model's variable costs are annual
holding, ordering and purchase costs.
For the optimal order quantity, the annual
holding and ordering costs are not
necessarily equal.
Probabilistic Models
In many cases demand (or some other factor) is not
known with a high degree of certainty and a
probabilistic inventory model should actually be
used.
These models tend to be more complex than
deterministic models.
The probabilistic models covered in this chapter are:
single-period order quantity
reorder-point quantity periodic-review order quantity
Single-Period Order Quantity
A single-period order quantity model (sometimes
called the newsboy problem) deals with a
situation in which only one order is placed for the
item and the demand is probabilistic.
If the period's demand exceeds the order
quantity, the demand is not backordered and
revenue (profit) will be lost.
If demand is less than the order quantity, the
surplus stock is sold at the end of the period
(usually for less than the original purchase price).
Reorder Point Quantity
‫نقطة إعادة الطلب‬
A firm's inventory position consists of the on-hand
inventory plus on-order inventory (all amounts
previously ordered but not yet received).
An inventory item is reordered when the item's
inventory position reaches a predetermined value,
referred to as the reorder point.
The reorder point represents the quantity available to
meet demand during lead time.
Lead time is the time span starting when the
replenishment order is placed and ending when the
order arrives.
Order quantity, Q
Inventory Level
Demand
rate
Reorder point, R
0
Lead
time
Order Order
placed receipt
Lead
time
Order Order
placed receipt
Time
Reorder Point Quantity
Under deterministic conditions, when both
demand and lead time are constant, the
reorder point associated with EOQ-based
models is set equal to lead time demand.
Under probabilistic conditions, when
demand and/or lead time varies, the reorder
point often includes safety stock.
Safety stock is the amount by which the
reorder point exceeds the expected
(average) lead time demand.
Safety Stock and Service Level
The amount of safety stock in a reorder
point determines the chance of a stockout
during lead time.
The complement of this chance is called the
service level.
Service level, in this context, is defined as
the probability of not incurring a stockout
during any one lead time.
Service level, in this context, also is the
long-run proportion of lead times in which
no stock outs occur.
Periodic Review System
A periodic review system is one in which the
inventory level is checked and reordering is done
only at specified points in time (at fixed intervals
usually).
Assuming the demand rate varies, the order
quantity will vary from one review period to
another.
At the time the order quantity is being decided,
the concern is that the on-hand inventory and the
quantity being ordered is enough to satisfy
demand from the time the order is placed until
the next order is received (not placed).