Chapter 7

Materials Management
 Introduction
• Materials Management integrates all activities of planning, scheduling, and
controlling of materials from design stage through production, including
delivery to the customer.
• Therefore, it applies the function of planning, organizing, integrating and
measuring to the volume and flow of materials.
• Hence, it establishes a single responsibility over the materials flow system
with accountability of quality, delivery and cost.
Materials management is a core supply chain function and includes supply chain
planning and supply chain execution capabilities. Specifically, materials
management is the capability firms use to plan total material requirements

 Material management is the process of planning and controlling material flows

 It includes planning and procuring materials, supplier evaluation and section,

purchasing, expenditure, shipping, receipt processes for materials ( including
quality control), warehousing and inventory and material distribution

Example:

An organization that manufactures cars needs to purchase wheels, engines and

windows. The process by which these materials are being sourced, purchased,
stored and utilized is material management
Aim of material management

Material management aims to ensure that suitable materials are available at the right
time, in the right amount and at the right place. A comprehensive materials
management plan should be developed in collaboration with stakeholders such as
suppliers, production teams and logistics providers

Types of inventory

There are four different top-level inventory types:

1. Raw materials
2. Work-in-progress (WIP)
3. Merchandise and supplies
4. Finished goods
It helps businesses classify and track items that are in stock or that they might need
in future
Functions of material management
1. Purchasing
2. Production control
3. Shipping
4. Receiving and stores

 Stages of material management

1. Procurement- Procurement is the process where the materials are sourced and are
purchased from the suppliers
2. Inventory control – Inventory control is essential to monitor the inventory levels
and the flow of materials
3. Distribution - Distribution involves the task of shipping materials from the
organization to the customer

 5 R’s of material management

1. Refuse, 2. Reduce, 3. Reuse, 4. Repurpose, 5. Recycle
How organization can achieve an effective material management plan ?

1. Organization should develop a comprehensive materials management plan

2. Implement inventory management practices

3. Maintain strong supplier relationships

4. Continuously monitor and analyze data

5. Adopt digital technologies

6. Foster a culture of continuous improvement

What is inventory?
Inventory refers to the different types and volumes of goods a company holds at a
particular time. It includes:
1. Inventory for raw materials
2. Inventory for purchase goods
3. Inventory for finished parts and goods

What is supply chain management?

Supply chain management is a centralized process of managing the flow of goods
and services. It includes the complete process of transforming raw materials into
final products and delivering them. It coordinates all business activities that are
necessary to produce and deliver goods and services to customers. By managing the
supply chain effectively, companies reduce production costs, avoid shortages of raw
materials and deliver products to customers timely
 Definition
“A total concept involving an organizational structure unifying into a single
responsibility for the systematic flow and control material from identification of the
need through customer delivery”.

“Management function primarily concerned with the acquisition, control, use of

materials needed, the flow of goods and services connected with production
processes”.
 Objectives
Materials Management objectives may be broadly divided into three categories:
• Primary objectives – includes purchasing, stores and inventory management,
continuity of supply, quality of materials, good supplier relations, and department
efficiency

• Secondary objectives – help to achieve the primary objectives, but different

organizations put different emphasis on them. Make-or-buy decisions, value analysis
and value engineering, standardization, product development and new product,
demand and requirements forecasting

• Corporate objectives – include achievement of organization’s objectives and

targets, actual performance figures, data and statistics, and corrective action, if any,
required on the basis of feedback
 Steps involved in achieving objectives

• Classification of items required in terms of both quality and quantity

of each item.
• Purchasing the items from a reliable source at economic rate
• Ensuring timely supply from suppliers
• Ensuring good storage facilities
• Ensuring scientific record-keeping and developing an effective
control mechanism
• Controlling pilferages
• Ensuring proper distribution at the point of usage
• Employing trained and efficient personnel
• Ensuring good performance
 Materials Requirement Planning (MRP)
• MRP constitutes a set of techniques that use a bill of materials, inventory data,
and the master production schedule (MPS) to calculate requirements of
materials.
• It is a computer-based system that takes MPS to explode into the required amount
of raw materials, parts, sub-assemblies, and assemblies needed in each of the
planning horizons.
• Finally, it develops a schedule of order for purchased materials and produced parts
over the planning horizon.
• For manufacturing, planning and control system, MRP has its core relationship
with bill of materials and use of MRP records to calculate the time-phased released
of orders.
 Functions
• Material management functions include planning, organizing, staffing,
directing, and controlling. It involves the formulation of an intelligent scheme of
action designed to accomplish its objectives effectively and economically.

• Materials management is a function that every materials manager performs

irrespective of his level or location in the organization.
 Structure of MRP

There are three essential inputs to MRP:

1. Master Production Schedule (MPS) and other data
2. Bill of materials (BoM) file defining the product structure
3. Inventory status file
 MRP Inputs
Master Production Schedule (MPS)
Is a list of items, indicating end products to be produced. It consists of items name and
code, quality to be produced, and time for completing the production. It is based on
accurate estimation of product demand available from sales forecast.

Bill of materials (BoM) file

It contains the list of finished products, materials needed for each finished product (in
units), assembly structure, sub-assemblies, parts, and materials. It provides relationship
of each finished product with sub-assemblies and raw materials.

Inventory status file

It is a computerized list of records of each materials physically available in the system.
 Benefits of MRP
Helps to know the effect of changes in future in production control department. It
triggers a process of self-study to improve BoM. Inventory tracking often leads to
marking of non-value added activities. Others benefits of MRP are:

1. Improvement of customer service

2. Reduction in lead time (time between the initiation and completion)
3. Reduction in work-in-process
4. Reduction in past-due orders
5. Elimination of annual inventory
6. Reduction in finished good inventory, raw material, and safety stock
7. Increase in productivity
8. Better understanding of capacity constraints
9. Increase of inventory turnover
 Integrated Approach To Material Management

For decision-making with respect to material.

1. Value analysis and Purchase price analysis
2. Material Handling
3. Inventory control
4. Stores management
5. Waste management
 VALUE ANALYSIS

Identify the function of a product or service, establish a monetary value for

that function and provide the necessary function at lowest possible cost.
 Objective is to provide a means of total cost control by reducing or
eliminating certain cost components. Every product or service possesses
two types of values:
1. Aesthetic value
2. Functional value
 Two approach:
 Design analysis: Study each phase of the design of a product in
relation to the function it performs
 Cost Analysis: Study total cost of production
 Design Analysis
The analysis entails a systematic study of each phase of the design of a given
product in relation to the function it performs.
It is concerned with the functional relationships of various parts to the
performance of the complete unit or assemblage.
The analysis of each part attempts to answer four specific questions:

1. Can any part be eliminated without impairing the operation of the complete
unit?
2. Can the design of the part be simplified to reduce its basic cost?

3. Can the design of the part be changed to permit the use of simplified and
cheaper production methods?

4. Can less expensive but equally satisfactory materials be used in the part?
 Cost Design
It involves a theoretical study of the total cost of producing a given product.
Total cost involves the cost of materials, labor, manufacturing overheads, and
general overheads.
The selling price of the product is then normally decided by adding a reasonable
profit margin to the theoretical total cost.

The cost analysis plays two major roles:

1. It is conducted for currently purchased items whose costs appear excessive.
The information is useful in the process of further price negotiations with the
suppliers.

2. It becomes the means of identifying high-cost parts which should be

subjected to design analysis. Design analysis leads to specification changes and
production modifications and ultimately to reduced costs. (high-cost parts)
 Material Handling

Objectives are:
 Reduce costs by decreasing inventories, minimizing the distance to be
handled, and increasing productivity
 Increase production capacity by smoothening the workflow
 Minimize waste during handling
 Improve distribution through improving routes and better location
 Increase equipment and space utilization
 Improve the working conditions
 Improve customer service
 Inventory Control
Aims at usable and idle resources having economic value.
Control models:
a. Inventory related cost control
• Purchase (Production) cost
• Ordering (Set-up) cost
• Carrying (Holding) cost
• Shortage (Stockout) cost
b. Demand
• Order cycle
• Time horizon
• Lead time
• Stock replenishment
• Reorder level
• Reorder quantity
 Stores Management
Concerned with carrying the right kind of material in the right quantity, neither excess nor less,
providing it quickly as and when required, keeping it safe from deterioration and pilferage, and
carrying out all these activities at the lowest possible cost.
Major functions:
 Receipt
 Storage
 Retrieval
 Issue
 Records
 Housekeeping
 Control
 Surplus management
 Verification
 Coordination and cooperation
 Stores Management
**Stores Accounting System
Refers to flow of material and estimating the cost of product for pricing
decisions.
Six most frequently used systems of estimating the cost:
1. FIFO system: First in First out system. Material issued from oldest stock.
Cost is added from previous record and thus fails to show the current value.
2. LIFO system: Last in First out. Most recent receipt are issued first. As current
price is charged thus projected a lower income during period of price hike.
3. Average cost system: Doesn’t recognize which item goes out of inventory first
or last. Considers average cost of procurement or price paid for each item over
a time period as they are held in stock. Calculated by total cost divided by no of
items.
 Stores Management
**Stores Accounting System
3. Market value system: Material issued is charged at the present market rates,
so requires continuous monitoring of market rates.
5. Standard cost system: Standard rate for items of inventory are set for a period
(six months or so) based on a detailed analysis of market price and trends. After
the period expires, the rate is reviewed again and updated.
6. Costing the closing stock system: Market price or stock at cost, whichever
is less, is used.
 Waste Management

A multidisciplinary activity involving engg principles, economics, urban and

regional planning, management techniques and social sciences.
Main objective: minimize waste through aiming at ideal system
i.e. optimal utilization of available resources for higher efficiency and growth.
Functional Classification of Waste Management
a. Generation
b. Reduction
c. Collection
d. Recycling
e. Disposal
 Waste Management
Waste management

Reduction
Basic Deterministic Inventory Model
Economic Order Quantity with Uniform Demand
PROBLEM 1: There is a contract to supply 1000 items in a month at a uniform
rate and each time a production run once started will cost Tk 200. The cost of
storing an item per month is Tk 20. The number of items to be produced per
run has to be ascertained. Find the total amount of set-up cost and average
inventory cost if the run size is 500, 600, 700 or 800. Also, comment on the
result. Using the ‘economic order quantity’ formula, also find the optimum
production run size.
SOLUTION:
From the given data,
Monthly demand (D)  1,000 items
Cost per set-up (C0)  Tk 200
Carrying cost (Ch)  Tk 20/item/month
Now, it is possible to calculate the total of set-up cost and average inventory
cost for different batch sizes (Table l).

Table 1 Total of Set-up Cost and Average Inventory Cost for

Different Batch Sizes
It can be observed from the Table 1 that as the batch size
increases, the total cost increases.
Now, using the EOQ formula, the optimum run size can be
calculated as follows: