Material Management

UNIT I
 UNIT I INTRODUCTION

Operating environment-aggregate planning-role, need, strategies, costs

techniques, approaches-master scheduling-manufacturing planning and
control system-manufacturing resource planning-enterprise resource
planning-making the production plan
 Meaning
• Materials management is an essential business function. It is
concerned with planning, acquisition and flow of materials within the
supply chain.
• Material is one of the four basic resources.
• Example: Labor, Material, Equipment and Capital of any industrial or
business activity.
 Definition
‘Materials Management’ is a term used to connote “controlling
the kind, amount, location, movement and timing of various
commodities used in production by industrial enterprises”.

Materials Management is the planning, directing, controlling and

coordinating those activities which are concerned with materials and
inventory requirements, from the point of their inception to their
introduction into the manufacturing process.
functions of materials management
• i) Planning and programming for materials purchase.
• (ii) Stores and Stock control.
• (iii) Receiving and issue of the material.
• iv) Transportation and material handling of the material.
• (v) Value engineering and value analysis.
The fundamental objectives of materials management activities can be:

• Material Selection:
• Low operating costs:
• To minimise storage and stock control costs.
• By minimising cost of production to increase profits.
• To purchase items of best quality at the most competitive price.
Organization of Materials Management Department
The key material activities are:
• Purchasing Activities
It involves mainly identification of materials needs, market research,
maintaining materials records etc.
• Procurement Activities
It involves material specifications, materials studies, receiving materials etc.
• Inventory Management
It involves planning and controlling of materials handling, storing materials
and managing material supplies etc.
• Supply Management
It involves monitoring in-plant material handling, strategic planning of
materials etc.
Classify Manufacturing Materials

• Raw materials- materials that the company converts into processed parts.
This might include parts specifically produced for the company and parts
bought directly off the shelf (i.e. bolts, nuts).

• Purchased parts- parts that the company buys from outside sources (i.e.
rubber parts, plastic parts).

• Manufactured parts- parts built by the company (i.e. tower case for a
computer).
• Work in process- these are semi-finished products found at various
stages in the production process (i.e. assembled motherboard).

• MRO supplies- maintenance, repairing, and operating supplies used

in the manufacturing process but are not part of the final products (i.e.
soap, lubricating oil).
 Objectives of Materials Management Department

The primary objectives of Materials Management department are:

• Low Procurement price

• High inventory turnover
• Low cost of acquisition and possession
• Continuity of supply
• Consistent quality
• Low payroll costs
• Favorable supplier relations
• Maintenance of good records
The secondary objectives of Materials Management are:

• New materials, processes and products

• Economic make or buy decisions

• Standardization

• Product improvement
Relationship between Materials Management Department and
other Departments

• Materials Management Department and Production Department

• Materials Management and Engineering Design Department
• Materials Management and Quality Control Department
• Materials Management and Finance department
Risks to be Considered by Purchase
Material Manager
• Not receiving materials at the time of requirement, causing loss of
productivity;
• Incorrect materials take off from drawing and design document;
• Subsequent design changes;
• Damage/loss of items;
• Failure on installation;
• Management of surplus materials;
Operating Environment
Aggregate planning
• Aggregate planning is a marketing activity that does an aggregate
plan for the production process, in advance of 6 to 18 months, to give
an idea to management as to what quantity of materials and other 
resources are to be procured and when, so that the total 
cost of operations of the organization is kept to the minimum over that
period.
Importance of Aggregate Planning

• Achieving financial goals by reducing overall variable cost and

improving the bottom line
• Maximum utilization of the available production facility
• Provide customer delight by matching demand and reducing wait
time for customers
• Reduce investment in inventory stocking
• Able to meet scheduling goals there by creating a happy and satisfied
work force
Level Strategy:

• Keep a level workforce throughout the planning period, thereby

maintaining a constant production capacity.
• May produce backorders.
• Avoids firing, hiring, and training costs
Chase Strategy
• Could adjust production capacity to match demand by hiring and
firing workers.
• Varying workforce size is a risky strategy. It assumes trained workers
can be readily found or brought back instantly.
• Hybrid Strategy
• As the name suggests, hybrid strategy looks to balance between level
strategy and chase strategy.
Techniques for Aggregate Planning
• Step 1: Determine demand for each period
• Step 2: Determine capacities for each period
• Step 3: Identify company or departmental policies that are pertinent
• Step 4: Determine unit costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs, and other
relevant costs
• Step 5: Develop alternative plans and compute the cost for each
• Step 6: If satisfactory plan emerge, select the one that best satisfies the
objectives
APPROACHES
TO AGGREGATE PLANNING

LINEAR PROGRAMMING
Linear programming is an optimization technique that allows the user
to find a maximum profit or revenue or a minimum cost based on the
availability of limited resources and certain limitations known as
constraints.
MIXED-INTEGER PROGRAMMING.
ixed-integer programming can provide a method for determining the
number of units to be produced in each product family.
LINEAR DECISION RULE.
Linear decision rule is another optimizing technique. It seeks to
minimize total production costs (labor, overtime, hiring/lay off,
inventory carrying cost) using a set of cost-approximating functions
(three of which are quadratic) to obtain a single quadratic equation.
SIMULATION.
A number of simulation models can be used for aggregate planning. By
developing an aggregate plan within the environment of a simulation
model, it can be tested under a variety of conditions to find acceptable
plans for consideration.
Costs in Aggregate Planning
1. Smoothing Costs
2. Holding Costs
3. Shortage Costs
4. Regular Costs
5. Overtime & Subcontracting Costs
6. Idle Time Costs
Cost in Aggregate Planning
1. Smoothing Cost
• Hiring costs (advertising, interviewing & training)
• Firing costs ( lack of labor force in future)
• Assumed to be a linear function of the number of workers
Cost in Aggregate Planning
Cost of Changing the Size of the Workforce

Firing costs Hiring costs

Cost in Aggregate Planning
2. Holding Costs
• Occurs as a result of having capital tied up in inventory.
• Assumed to be linear in the level of inventory
• For aggregate planning, it is expressed in terms of dollars per unit held per
planning period; (e.g. 100 $/month for one item)
(e.g. 100 $/month for one item)
Cost in Aggregate Planning
3. Shortage Costs
• Shortage occurs when demands are higher than anticipated
• For aggregate planning, it is assumed that excess demand is backlogged and
filled in a future period.
• In a highly competitive situation, the excess demand may be lost---lost sales.
Cost in Aggregate Planning
4. Regular Time Costs
Involve the cost of producing one unit of output during regular working hours
5. Overtime or Subcontracting Costs
Costs of production units not produced on regular time.
Overtime-production by regular-time employees beyond work day;
Subtracting-the production of items by an outside supplier;
Cost in Aggregate Planning
6. Idle Time Costs
• Under utilization of workforce
Issues in Aggregate Planning
• Smoothing – refer to the cost of changing production and workforce
level between periods. (Firing & Hiring Costs)
• Bottleneck Problem – Inability to respond to sudden changes in
demand as a result of capacity restrictions (High demand in one
period & breakdown of a vital piece of equipment)
Issues in Aggregate Planning
• Planning Horizon- Number of periods for which the demand forecast
and aggregate planning are done.
• If it is too small ( current aggregate plan may lead into not meeting the
demand beyond planning horizon)
• If it is too large ( forecasts into far future will be less accurate)
• End-of-horizon effect
Master Production Schedule (MPS)
A master production schedule (MPS) is a plan for individual
commodities to be produced in each time period such as production,
staffing, inventory, etc. It is usually linked to manufacturing where the
plan indicates when and how much of each product will be
demanded. This plan quantifies significant processes, parts, and other
resources in order to optimize production, to identify bottlenecks, and to
anticipate needs and completed goods. 
 functions of Master Production Schedule

• Achieve desired customer service levels

• Make the most efficient use of resources
• Maintain a desirable level of inventory
Manufacturing Planning And Control System
A manufacturing Planning and Control (MPC) system plans and
controls the manufacturing process (including materials, machines,
people and suppliers). Basically the MPC system provides information
to efficiently manage the flow of materials, effectively utilize people
and equipment, coordinate internal activities with those of suppliers,
and communicate with customers about market requirements.
Front end

engine

Back end
5 Stages Of A Successful Manufacturing
Planning And Control System
Material Requirements Planning

Material Requirements Planning (MRP) is a computer-based

production planning and inventory control system. MRP is concerned
with both production scheduling and inventory control
Major objectives of an MRP system are to simultaneously:

1. ensure the availability of materials, components and products for

planned production and for customer delivery,

2. Maintain the lowest possible level of inventory,

3. Plan manufacturing activities, delivery schedules and purchasing

activities.
MRP system
Master production Schedule
Inventory status records

The following inventory status records goes as input to the MRP system
1. Item
2. Supplier
3. Lot size
4. Safety stock
5. Lead time
6. On hand inventory
7. Allotted
8. Level
MANUFACTURING RESOURCE
PLANNING (MRP II)
Manufacturing resources planning (MRP II) is an extended form of
closed loop MRP that also incorporates strategic planning processes,
business planning, and a number of other business functions such as
human resources planning, profit calculation and cash flow analysis
Enterprises Resource Planning

It is a system which integrates all the processes and data of an

organization. It uses the hardware and software to integrate the activities
of manufacturing, supply chain, Financials, Customer Relationship
Management (CRM), Human Resources and Warehouse Management.
 Need for ERP

• Manufacturing
• Supply Chain Management
• Finance
• Projects
• Human Resources
• Customer Relationship Management:
• Data Warehouse
Advantages of ERP system

1. ERP effectively interfaces all the activities of the organization.

2. Computer security is included within an ERP to protect against both outsider

crime, such as industrial espionage and insider crime, such as embezzlement.

Disadvantages of ERP system

1. High investment required in buying and implementing the ERP system.

2. Problem due to a lack of corporate policy protecting the integrity of the data
in the ERP system and how it is used.
 ERP modules
Functional Areas

An ERP system covers the following common functional areas. In many

ERP systems, these are called and grouped together as ERP modules:
Financial accounting: general ledger, fixed assets, payables including
vouchering, matching and payment, receivables and collections, cash
management, financial consolidation
Management accounting: budgeting, costing, cost
management, activity based costing
Humanresources: recruiting, training, rostering, payroll, benefits, retire
ment and pension plans, diversity management, retirement, separatio
Manufacturing: 
engineering, bill of materials, work orders, scheduling, capacity, workflow
management, quality control, manufacturing process, manufacturing projects,
manufacturing flow, product life cycle management
Order processing: 
order to cash, order entry, credit checking, pricing, available to
promise, inventory, shipping, sales analysis and reporting, sales
commissioning
Supply chain management:
supply chain planning, supplier scheduling, product configurator, order to
cash, purchasing, inventory, claim processing, warehousing (receiving, put
away, picking and packing)
Project management:
project planning, resource planning, project costing, work
breakdown structure, billing, time and expense, performance units,
activity management
Customer relationship management (CRM):
sales and marketing, commissions, service, customer contact, call
center support – CRM systems are not always considered part of ERP
systems but rather business support systems (BSS)
Data services:
various "self–service" interfaces for customers, suppliers and/or
employees
ERP systems typically include the following characteristics:

• An integrated system
• Operates in (or near) real time
• A common database that supports all the applications
• A consistent look and feel across module
• Installation of the system with elaborate application/data integration
by the Information Technology (IT) department, provided the
implementation is not done in small steps
• Deployment options include: on-premises, cloud hosted
The Business Value of ERP

• Improved business insight from real-time information generated by reports

• Lower operational costs through streamlined business processes and best practices
• Enhanced collaboration from users sharing data in contracts, requisitions, and
purchase orders
• Improved efficiency through a common user experience across many business
functions and well-defined business processes
• Consistent infrastructure from the back office to the front office, with all
business activities having the same look and feel
• Higher user-adoption rates from a common user experience and design
• Reduced risk through improved data integrity and financial controls
• Lower management and operational costs through uniform and integrated
systems
Types of ERP

Cloud ERP
In cloud ERP the software runs on a provider’s cloud computing
platform. The maintenance of the system is handled by the provider.
There is also a choice of utilizing a public or private cloud, which is
gaining acceptance because of the low upfront costs.
On-premise ERP
This is the traditional model for deploying software where you
control everything. The ERP software is installed in your data center at
the locations of your choice. The installation and maintenance of the
hardware and software is your staff’s responsibility.
Hybrid ERP
For companies that want a mixture of both to meet their business
requirements, there is the hybrid model. This is where some of your
ERP applications and data will be in the cloud and some on premise.
Sometimes this is referred to as two-tier ERP.
Production Planning
The planning of production and manufacturing modules in a
company or industry. It utilizes the resource allocation of activities of
employees, materials and production capacity, in order to serve different
customers
Role of Production
Planning in the
Production Cycle.
It can comprise the following activities:

• Determination of the required product mix and factory load to satisfy

customers needs.
• Matching the required level of production to the existing resources.
• Scheduling and choosing the actual work to be started in the
manufacturing facility“
• Setting up and delivering production orders to production facilities.