MATERIALS MANAGEMENT

Material is a resource. Management is the skill of judiciously

utilising this resource that will provide the user with adequate
surplus in other forms of resources for being utilised efficiently
and effectively.
Materials are available in numerous forms and shapes. Every
form and shape of a particular material creates a unique
identity. To elaborate this thought, stationery paper is a
material. Paper is available in numerous sizes, Foolscap, A4,
A3, A2 and so on. Each of these sizes is unique and is a
material.
It is necessary that one has a reasonable amount of each size
of paper for being utilised for various purposes. It may be
necessary to present applications to most Government Offices
in Foolscap paper. That is the standard they have been
maintaining for several decades. The preferred size of paper in
most companies and offices is A4. Reports with several
tabulations may exceed the size of A4 and A3 may be required.
A2 is a size that is preferred in Design departments. Based on
this one may for example need to have about 20 pages of
foolscap size paper, 100 sheets of A4, may be one or two A3
sheets and none of A2. This quantity needs to be available with
the user most of the time.
In the event the amount of paper that is available with the user
is, for example, 50 sheets of each size, a situation will arise
when the stock of A4 is consumed and other sizes are available
which are really of little or no use at that point in time. To
purchase fresh stock of A4, money is required. Money is
another resource. This is an inefficient means of utilising the
available resources.
Likewise, in the event the amount of paper that is available
with the user is, for example no stock of every size. Based on

the need, paper is bought. This appears judicious as money is

available to purchase the right size of paper as and when
needed. However, every time paper is needed, the user would
have to stop the activity that he is engaged in to procure the
paper. In this process, while conserving the money resource,
another useful resource time is used inefficiently. The
special characteristic of Time is that it can only be lost, seldom
can it be gained.
These two situations will guide if not drive the user to hold the
stock of papers that he has in hand to give him the best benefit
of two other resources - money and time. Managing the stock
of materials keeping other resources in mind and working out
the best benefit is Materials Management.
INVENTORY
The term inventory is associated in all forms of Management
but more strongly emphasised in Materials Management.
Inventory is another word for Stock. Stocks are maintained
everywhere and in every form of activity. An individual has a
stock of outfits in the form of trousers, shirts and so on. A
Provision Stores would have a stock of different grains and
edible items. A Pharmacist would carry a stock of different
tablets, capsules, tonics drugs and so on. A company would
have a stock of raw materials, semi finished goods or work in
progress, finished goods, indirect materials etc.
Wherever inventory or stock is available, the purpose is the
same. It is required to meet the need or demand of the
customers. The customers are the users of the stock. In a
company, it is imperative that the stocks held at various stores
or stock keeping points are at a reasonably correct level to
meet the demands of the customers without locking money for
a long period of time and arresting the freedom of the company
from utilising its resources efficiently and effectively.
Stock of raw materials, semi finished goods or work in progress,
finished goods, indirect materials etc. The stock of materials

that have to be held at every stocking point should be carefully

calculated in order that no customer or user is deprived of the
material when asked for and at the same time the amount of
money locked up in stocks should be reasonable without
affecting the purchase of materials or payments to stake
holders.
Inventories are held by every member or player in the
Distribution Channel. These players are RM suppliers, subcontractors, manufacturer, wholesaler, distributor, stockiest
and retailer.

MANUFACTURING COMPANY
The term Manufacturing Company has a large umbrella and
numerous varieties of companies exist below this umbrella.
The company could be either 1.
Engineering Industry
Large, Medium, Small, Heavy, Light, Precision...
2.

Process Industry Steel, Cement, Aluminium...

The kind of Industry is immaterial as the classification of

materials is quite similar though not identical. All the
manufacturing companies have primarily two types of materials
Direct and Indirect.
Direct materials are those used in producing the end product.
The direct material is visible in the end product after
processing. Indirect materials are those that support the
manufacture of the product. These items are not visible in the
end product after processing.
An inventory is the stock of idle resources in a firm for use at a
future date. Inventories can be of various types such as
1. Raw Materials
2. Components from vendors
3. Bought out items

4.
5.
6.
7.
8.
9.

Sub-assemblies
Tools and spares
Semi-finished goods
Finished goods
WIP
Others

Inventory is held by companies in order to avoid stock out of an

item. A stock out is undesirable because it can
1. Stop the production process resulting in machines being
idle and more often than not machine idle time is more
expensive than the cost of the stock-out item.
2. Stoppage of production process will result in broken
promises of the commitment given to the customer.
3. Broken promises can result in loss of goodwill from the
customer
4. Broken promises will give competitors an issue to
capitalise upon.
While a low level of inventory can result in stock-out or
shortages, a high level of inventory will cause problems such as
1. Interest to be paid for the high level of capital locked up in
inventory 3%
2. Loss of opportunity cost of the capital 25% of TIC cost
3. Additional storage space is required 3%
4. Increases chances of theft and pilferage 2%
5. Obsolescence of material 1%
6. Design changes resulting in the material becoming useless
7. Insurance cost 1%
Arising out of these probabilities, the questions that a Manager
has to address are
1. What should be the size of the order to be placed on the
supplier?
2. When should the order be placed?
Inventories are used for several reasons and these have given
rise to different inventory models.

1. To satisfy the expected customer demand (anticipation

inventory)
2. To provide a buffer between successive operations (work
in process inventory)
3. To satisfy periods of seasonal high demand (seasonal
inventory)
4. To act as a buffer between various elements (members) of
the supply-chain (pipeline or transit stock)
5. To minimize the total cost by ordering the EOQ (cycle
stock)
6. To avoid stock outs (safety or buffer stock)
7. To protect against price increases and to take advantage
of quantity discount.
Anticipation Inventory
This is the primary or fundamental use of maintaining inventory
of an item. The purpose is to satisfy customer demand, to
ensure that no customer is disappointed by not getting the
desired item. Adequate stocks of items should exist to meet
the expected or anticipated demand of customers.
Work in Process or Decoupling Inventory
When machines are arranged in the process sequence, the
machines operate one after the other in sequence on the semifinished goods. Inventories of semi-finished goods accumulate
near every machine. These inventories are most useful when
one of the machines has a breakdown or change of tooling or
wheel. In such situations the remaining machines can
continue to function for sometime during which time either the
fault is rectified or the machine setting is completed. Such
inventories are called decoupling inventories as these decouple
or de-link the various processes of operations from each other.
Seasonal Inventory
Certain types of items are seasonal in nature. Inventories of
these items are stocked by firms before the start of the season.
These are called seasonal inventories.

Pipeline or transit stock

When stocks are moved between various elements (members)
of the supply chain, they are called pipeline or transit stock.
The members of the supply chain are suppliers, manufacturers,
distributors, wholesalers, retailers and end users or final
customers.
Cycle Stock
The Materials Manager determines the quantities of items to be
stocked by using models like EOQ. This model minimises Total
cost of inventory. The stock of items stored as Inventory to
meet the inventory cycle determined by an inventory model is
called cycle stock.
Safety or buffer stock
To protect against fluctuations of demand and abrupt increases
in the time taken by the suppliers to supply the items, some
stock is maintained in excess of the anticipatory inventory.
This is called safety or buffer stock.
There are basically two types of costs related to inventories.
These are
1. Ordering Cost

Co 2. Carrying or holding cost Cc

Ordering Cost per order Co is the cost of placing a single order.

The purchase department of the company that places orders on
the suppliers incurs the following types of costs every year.
1. Salary to its staff
2. Office items such as stationery, postage, telephone bills,
electricity bills, internet expenses, fax and photocopying
services etc..
3. Rent for the office space or opportunity cost if the office
space is owned (rental income lost)
4. Opportunity cost of furniture, computers, software,
hardware etc.

All the above mentioned expenses are totalled and divided by

the number of orders released in this period. This would give
the ordering cost. In this case the value of the order is
immaterial. Ordering cost is the same for all items for an
order.
Some companies total all the ordering cost. Likewise, they add
the value of all the orders. From these two data, they would
determine the %age of total cost accounted by all the ordering
elements. Ordering cost in this case is considered to be a
defined %age of the value of the order.
Companies normally check once a year to decide if the ordering
cost has to be revised for the coming year.
Carrying or Holding Cost Cc is the cost of storing the inventory
in the warehouse. It consists of
1. The rent of the warehouse opportunity cost if the
warehouse space is owned (rental income lost)
2. Cost of capital locked up in inventory
3. Maintenance cost such as electricity, telephone, airconditioners, security etc.
4. Cost of damages (if items are getting damaged by
mishandling)
5. Cost of obsolescence
The total cost per year is divided by the average value of
inventory carried in the warehouse to arrive at the carrying
cost. This can also be expressed as a %age of the value of the
product.

Let
Co be the Order Cost in INR per Order
A be the Annual requirement
Cc be the Carrying Cost in INR per unit per day
The Ordering Cost will amount to Co*A/Q
The Carrying Cost will amount to Cc*Q/2

When these two costs are balanced, the Optimal Quantity to be

ordered will be obtained.
Cc*Q/2 = Co*A/Q
Q^2
= 2*A*Co/Cc
Q = 2*A*Co/Cc
Carrying Cost = Cc*Q/2
By substituting different values for Q, the movement of
carrying cost can be plotted in a graph.
Likewise Ordering Cost = Co*A/Q
By substituting different values for Q, the movement of
carrying cost can be plotted in the same graph.
The sum of Ordering Cost and Carrying Cost is called Total
Incremental / Inventory Cost. When the Total
Incremental / Inventory Cost is plotted on the same graph,
it will be noticed that TIC will drop initially and thereafter
again rise.

Holding Ordering
Tota
Cost Cc
Cost Co
l
Order
15% per Order
Cc +
Qty.
month
Qty
5000 Co
51.2
100
15
1.25
100
50
5
200
30
2.5
200
25
27.5
300
45
3.75
300
16.6 20.4

400

60

400

7
12.5

500

75

6.25

500

10

600

90

7.5

600

8.33

700

105

8.75

700

7.14

800

120

10

800

6.25

900
1000
2000

135
150
300

11.25
12.5
25

900
1000
2000

5.56
5
2.5

4000

600

50

4000

1.25

2
17.5
16.2
5
15.8
3
15.8
9
16.2
5
16.8
1
17.5
27.5
51.2
5

The minimum point on the Total Incremental / Inventory

Cost curve denotes the optimal value of Q and is termed
EOQ.
The Incremental / Inventory Cost of the optimal solution is
derived by substituting the value of EOQ in the TIC
equation.
Salient Points in this model
1. Assumed that the average demand is constant. Any
significant trend or any event causing an upsurge in
demand or any change in seasonality requirements
resulting from a change in the duration of the season
may cause a change in the average annual
requirements. This model is inappropriate to take
cognizance of such changes in average annual
requirements.
2. Co and Cc are constant.
3. The Order Quantity EOQ may be equal to the lot size at
which the item is sold or available. Variations in the
available lot size would change the average inventories
in the EOQ model.

4. There is an instantaneous replenishment of items.

5. The items are sourced from an outside supplier.
6. There are no restrictions in the quantity that we can
order.
7. There are no preferred order quantities for the items
8. No price discount is offered when the order quantity is
large.
LOT SIZING METHODS
Different lost sizing techniques have been developed
based on experiences and the suitability for the company.
These may be classified as
(i)
Variability of demand
(ii) Length of the planning horizon
(iii) Size of the Planning Period
(iv) Ratio of set-up to unit cost
Certain quantitative techniques have been developed over
time. An emphasis on cost is almost prevalent in all these
techniques.
(i)
Fixed Order Quantity (FOQ)
(ii) Economic Order Quantity (EOQ)
(iii) Period Order Quantity (POQ)
(iv) Lot for Lot Ordering (L4L)
(v) Fixed Period Replenishment (FPR)
(vi) Least Unit Cost (LUC)
(vii) Least Total Cost (LTC)
(viii) Economic Part-Period (EPP)
(ix) Wagner-Whitin Algorithm (W-W Method)

Fixed Order Quantity (FOQ)

This policy recommends a fixed quantity is bought every time
the item there is a need. When items with limited shelf life or
items that perish over time have to be purchased, it would be
insensible to buy a large quantity. Based on the packed

quantity, the consumers would like to purchase one or multiple

packs that they would consume in a short time, eg. Loaf of
bread, Bottle of Jam, Butter and such other edible items.
Period Order Quantity (POQ)
This method is an extension of EOQ. Let us suppose the annual
requirement is 5000 and the EOQ is 600.
600

90

7.5

600

8.33

15.83

This would indicate that 8.33 orders have to be placed. With a

year having 12 months or 52 weeks or 365 days, orders will
have to be placed every 12/8.33 = 1.44 month or 52/8.33 =
6.24 week or 365/8.33 = 43.8 days.
In this method, orders are generated at a particular interval as
the carrying and ordering costs have been considered and
carrying inventory will not arise as it is being consumed
regularly and there will be nothing remaining at the end of the
period. This method is unsuitable when the demand is neither
continuous nor uniform.
Lot for Lot Ordering (L4L)
This method recommends that you order only the quantity that
is required. It covers period by period coverage of net
requirements. The inventory is carried only between receipt
and use. Eg. You go to a restaurant and order a cup of coffee
and consume it. No one orders 5 or ten cups of coffee to be
consumed over 5 or 10 different periods of time.
Fixed Period Replenishment (FPR)
This method is extensively followed when purchases have to be
made for a rural consumer from an urban supply location. The
buyer may travel once every week or fortnight or month and
buy his needs for the coming period. It would be inconvenient
to invest his funds for a longer duration, transport larger
quantities, store larger quantities and above all consume large

quantities. This is typical of all household inventory

management techniques.
Least Unit Cost (LUC)
This method keeps the cost of an item in focus. For instance,
your requirement is one shirt. You find a shop that provides you
shirts on the Buy One Take Two scheme. More often than not,
you will consider buying in that scheme as the unit cost is
lower.
Least Total Cost (LTC)
This method takes the summation of the cost of the item and
the other allied costs in buying the item at that location. A
shop may provide you shirts on the Buy One Take Two scheme.
This shop is located 10 Kms away from your residence. You will
consider the money that you have to spend on the shirt(s), the
money that you have to spend for bus/auto/bike/car to reach
the place and return, the money you have to spend for parking
your vehicle and the sum of these costs will help you assess the
cost of the shirt. It is but natural that you would prefer the shirt
that has the Least Total Cost.
Economic Part-Period (EPP)

FOQ Loaf of Bread, Bottle of Jam, Butter

POQ -

Different types of inventory are as follows.

1. Raw Material Inventory
This comprises of raw materials received from suppliers,
components received from suppliers, semi-finished items
received from sub-contractors, fasteners and standard
items from mill stores and vendors.
2. Work in process/work in progress/semi-finished items.
This consists of partly finished parts, components, subassemblies on which the production process has
commenced but not finished.
3. Spare Parts Inventory
Every manufacturing enterprise has equipment to enable
processing raw materials into finished product. In order to
maintain the equipments in a functioning state, spare
parts are needed. The time when these spare parts would
be required in quite unpredictable unless a periodic
maintenance schedule is in operation. All spare parts are
a part of Spare Parts Inventory.
4. Office and Estate Supplies Inventory
Every enterprise functions only with the support of
departments like Accounts, Estate and facility, Personnel
etc.. An item that all these departments need is
stationery. Similarly items to maintain the premises,
washrooms, lawns, canteen etc. Should be available at all
times and no compromise can be accepted as this can
affect a large number of personnel.
5. Finished Goods Inventory
These are the products that have to be delivered to
customers, wholesalers, dealers and stockists for final use
by the end user.
6. Transportation (Pipeline) Inventory
All items that are in freight
(i)
from the manufacturer to his customers
(ii) from the supplier to the manufacturer
(iii) from the raw material manufacturer to the subcontactor

TRADING
All manufacturing companies deal directly only with their
customers that are corporate or original equipment
manufacturers. The open market is far too large for them to
access all the customers. Accessing all the customers would
involve a very large selling team that would make the entire
exercise unviable. It is practical and prudent to use the
services of wholesalers, stockists, dealers and retailers to
distribute the products in the market.
More often than not, the wholesalers and retailers are
dependable sources to provide a feedback on the customers
reaction and opinions on the product. Similarly, the
wholesalers and retailers are the best agents to clear nonmoving stock before the launch of a new product.
INDEX FOR EFFECTIVE MATERIALS
MANAGEMENT
Every time material is purchased, there is a flow of cash from
one player/member/partner to another player/member/partner
in the material flow/distribution channel. A large transaction
involves the supplier receiving a large sum of money from his
customer. This results in the supplier having funds to invest in
new material from his supplier. The contra at the customer is
that the customer would have to sell his stocks quickly to
recover his investment. A large amount of funds being locked
up in a material prevents the flexibility for that material flow
partner. All the players/members/partners in the channel would
endeavour to hold an optimal stock and purchase fresh stock
many times during the year.
If the sale of a particular product in a year is Rs.X and the
average stock of that item that the supplier carries with him at
any time is Rs.Y, the inventory turns is (X/Y). The higher the
number of turns, the better is the financial strength of the
player/member/partner. It should be borne in mind, that it is
essential and important that the player/member/partner

prevents a situation of stock out by carrying very little stock to

improve his inventory turns. A stock out would create a
situation where in the customer would seek an alternative
supplier to overcome the risk of facing stock out at his
suppliers end.
1. Raw Material Inventory
An approach followed by most companies is as follows.
(i)
Translate the projected sales for the following year
product wise.
(ii) For the volume of the product that needs to be
produced, a
safety
factor of a certain
percentage is added. This safety factor will take care of
some process rejections and certain spurts in demand that
may arise. This gives an assessment of the requirement
of material for the year.
(iii) With this annual requirement available, the company
can negotiate a fair price for a unit of the material.
(iv) The company may take a decision to carry one
months stock and order once every month. By this
the company gets 12 turns a year.
2. Work in process/progress/semi-finished items
These are items that are being processed and will soon be
delivered to the customer as finished product. A product
family normally has similar or same ingredients and the
processing is identical to a large extent. The variations
occur in the later stages. One can find that about 50% to
70% of the processing for items in the same product
family is identical. In the latter half and in the finishing
stages the processing is different. The cost of the product
is about 50% till the 50% stage. The last 30% would cost
another 50%.
When this is the situation, the semi finished products or
WIP is accumulated to a certain level so that more than
one product can be produced as per the current demand.
In a hotel or food catering company, stock of vegetables
and meat would be raw materials. Once they are sliced or

cut, they become WIP. The WIP may be used in more than
one preparation or end product. However, this cannot be
retained in such a condition for a long time or even a day
as they are perishable items. The chef would decide on
the quantity that needs to be in WIP in order that he is
able to service the customers quickly and at the same
time have the flexibility of having vegetables with him and
preventing a no stock situation.
3. Spare Parts Inventory
A stock of spare parts is very essential as breakdowns are
seldom predictable. Breakdowns more often than not
occur due to negligence in periodical maintenance or due
to the component in question having served its life.
Accidents can result in damage to some parts and call for
replacement of the parts. Availability of the relevant spare
part would be the only means of returning quickly to
operation. A stock of spare parts is always helpful to
mitigate the effect of the breakdown. A spare part would
lessen the time to return to operation and with time being
money the loss would be much higher in the absence of a
spare part being available.
We use a vehicle for transportation and movement. If we
end up with a flat tyre, it is primarily due to failure in
checking the air pressure periodically and maintaining it at
the correct level. A Stepney in the boot will help in the
event we encounter a situation of a flat wheel. The other
occasion when despite periodically checking the wheel
pressure, and maintaining it correctly, we may have a flat
wheel is when the tyre has been used adequately and the
tyre is bald. The tyre has served its life. Once again, a
Stepney would help you save time and return to normalcy.
4. Office and Estate Supplies Inventory
Paper, Stationery, envelopes, stapler pins, dot pen refills,
pencils, labels, brooms, buckets, brushes and many other
such items are inexpensive in price but could be prove
very expensive to the business when it is unavailable at a

time when needed. It is wise to have a stock of them and

get them replenished when the stock is depleting and
before a no stock situation is arrived at.
Business or operational situations may demand that the
office has to function beyond normal functioning time to
meet a dead line or target. Non availability of office items
could be disastrous as there would be no means of
purchasing them from the market.
Likewise, preparations may be made for an event or for
normal operations after a weekly day of rest or a national
or festival holiday. All efforts for cleaning the premises
would lead to a dead end or result in failure to accomplish
the desired results if cleaning implements or tools like
brushes, brooms, buckets, cleaning powder are
unavailable. It may be difficult to fetch these items on a
holiday. Having an inventory of these items is inexpensive
but not having it would be very expensive.
5. Finished Goods Inventory
This inventory helps the company to earn money. All
other forms of inventory would have cash out flow. This
inventory would enable cash inflow. It is necessary that
the stock that is available on hand would meet the sales
forecast and the orders on hand. In this context, it would
be sensible to keep in mind that meeting sales target has
four dimensions product, volume, delivery date and
place of delivery. The inventory that is held should meet
all the stated dimensions. Failure on any of the
dimensions is costly and can result in damage to future
business.
While the need to fulfil four dimensions has been stated,
an important operational dimension in Finished Goods
Inventory is the age of the stock. No customer would like
to buy an item that has been lying in stock for a long time.
The operating staff in the Finished Goods Store must
ensure that the stocks are cleared on a First-in-First-out
basis.

Objectives of Stores/Inventory Department/Function

On the first and foremost place, Stores/Inventory
Department/Function supports Production and
Maintenance functions. Nevertheless, it is unfair to deem
it as a staff function as they perform in tandem to a line
function.
1. Unpredictable demands from customers and uncertain
supplies from sources.
Sales and Marketing functions work smartly to capture a
business when the competitor fails to deliver and
promise to meet the customers requirement oblivious
of the RM stock to produce the product. Production is
eager to manufacture the goods but have no clue of the
RM availability. The easiest recourse is to convert the
WIP and find the WIP is inadequate to meet the
customers demand. The Inventory function that forms
the interface between the company and the material
market will be compelled to use its rapport with the
suppliers to procure the material in order that this
sudden requirement is met.
Likewise, the supplier may express difficulty in
delivering material on account of his negotiations with
the source or the likely increased demands that may
create paucity in supplies, or the likelihood of prices
increasing in the market. The Inventory function may
take the decision to stock more of the material to
overcome the probable disturbances in supplies.
2. Price Discounts
It is a common practice that larger the volumes, the
price per unit can
be brought down. It is only the
Inventory function that relates with
the market that
can assess this benefit to the company and properly
implement it as a balance between price and volumes.
3. Long Production Runs
A product may have a long production run arising out of
a large volume. The Inventory function can speak to

the supplier to deliver on a monthly/fortnightly/weekly

basis so that the company does not carry inventory at
its works but held by the supplier. This is typically a
win-win situation in that the company does not have
carry abnormal inventories and have its funds locked up
and the supplier in turn does not supply large quantities
and waits for his payments.
4. Short Production Runs
New products are seldom launched without a trial
production run to assess the areas where problems can
arise, plan and implement solutions to overcome those
problems and to provide prototypes for testing
endurance and other performance characteristics
before launching the product. Such exercises require
only a comparatively small quantity of material and the
run is also short and intermittent. The Inventory
function can relate with the suppliers to procure such
quantities that are not the conventional volumes.
Production and Sales functions have other core duties to
perform that such procurement breaks the rhythm in
their operations.
5. Flexibility in Production
During the manufacturing process, it happens
occasionally that the quality of the product suffers and
rejections are high. The manufacturing may decide to
abort the production, take up another product as a
substitute, investigate on the reasons behind a collapse
in quality, rectify the cause and return to producing the
product. When a production disturbance of this kind
occurs, the Inventory function ought to be prepared to
provide the appropriate material for the substitute
product so that the company does not suffer.
Inventory Control Systems
1. Continuous Review (Q) System

A popular method is to have every item stored in two bins.

Materials are issued from one bin and the other retained in
as is condition till the first bin is empty. When the last
item is removed from the first bin, the store keeper gets a
signal to reorder. The item is ordered and materials are
issued from the second bin. Before the last item is issued
from the second bin, materials are received and the first
bin is filled up. This cycle of replenishment, issuing and
reordering is repeated.
2. Periodic Review (P) System
In a periodic review system, the inventory level is
reviewed at fixed intervals of time. This is therefore
called fixed order interval systems. At the time of review,
an order is placed to replenish the inventory to the
predetermined level.
3. ABC Classification
The ABC classification of inventories is based on the cost
(or value) of items consumed. High value items are A
class items and may require tighter control. Medium
value items are classified B class and the low value items
as C class.
To arrive at the classification, all the items are arranged in
the descending order of consumption value (product of
unit value and annual consumption). The cumulative
values and the cumulative percentages are derived from
the consumption value table. It is commonly found that
5% to 10% of the items constitute 70% to 80% of the total
consumption value and these items constitute A Class
items Close monitoring and greater control are required
for this class of items. The lower or bottom 60% to 70%
items constitute 5% to 10% of the total consumption
value. These are the C class items. The items require
simple control mechanisms such as level based ordering.
The middle portion of about 10% to 25% by value and

about 20% to 30% by number of items constitute B class

items. These items require a moderate level of control.
4. XYZ Classification
The classification is based on unit cost. A very high
valued item often turns out to be specially made to order
or customized, complex and may call for lengthy supply
identification procedures. If such an item is received it is
but natural every dimension, every material
characteristics and every assembly characteristic are
ensured before accepting the item and recommending
payment for the same to the supplier or vendor. Such
items are generally classified as X items. A low unit cost
item when consumed in small quantities does not need
Managerial time and effort to decide its acceptance and is
classified as a Z item. The rest of the items may have a
price that floats in between X and Z items. These items
need inspection but a properly framed sample inspection
could be adequate. If an item in this class is received from
multiple suppliers, a need to have a relatively stringent
inspection is required to identify defects to the appropriate
source. These items are classified Y items.

5. FSN Classification.
In any situation, the consumption of materials is not
uniform in comparison. Some may be FAST MOVING (F),
some SLOW MOVING (S) and others NON-MOVING (N). A
Manager has to necessarily know the items in each of the
groups for the speed of consumption helps one decide the
extent of stocks or inventory to be held. This is an
important matter as it involves resources like money in
the form of carrying cost and investment on materials,
storage space and threat of obsolescence, theft, misuse
and abuse of inventory. Likewise, a collection of non-

moving items gives the message of improper application

of funds and it would be wise and prudent to dispose
those items and recover a part of the investment.
6. VED Classification
This classification is relevant and useful for maintenance
and plant engineering departments. Some spares may be
vital and non-availability of the item could be very
expensive in terms of restoring the plant to operation.
The stock of imported spares is relevant in this subject. It
would be worthwhile carrying one or a few of imported
spares though the need for using them may arise only
once in a year. Such items are termed VITAL. There are
items that may be used in several equipments. Having a
reasonable number of these items in stock would save the
trouble of having to procure them in a hurry. Such
purchases in haste would involve using expensive human
resource inefficiently. An additional quantity seldom
damages the inventory pattern and costs. Such items are
termed ESSENTIAL. It is generally a practise when
repairing an equipment to replace the broken or worn out
part, neighbouring parts are also checked. If the life of
the neighbouring part is estimated to be low or small, it is
also replaced so that a situation does not arise in the near
future to replace the defect. The time that is saved in
replacing the neighbouring part is useful to keep the plant
efficiency high. Having a reasonable stock of such parts
saves maintenance cost and helps the Manager to keep
his plant function without disturbances. Such parts are
termed DESIRABLE.
7. Supply Source Classification
Materials in a company come from several sources. They
could either be locally available in the station where the
unit is located or from a place with in the country or from
some overseas source. Each of these situations imposes
Managerial influence or control of different kinds. In the

first case, inventory within the works could be low and

constant interaction with the source is required. In the
second, inventory within the works needs to be relatively
larger than that in the first case. Interaction with the
source is required but this could be at a higher level in the
departmental hierarchy. An important factor in this case is
the transportation mode and cost. In the third case,
besides the cost of the product and the transportation
cost, the foreign exchange rate has to be considered. This
warrants the presence of a more senior person in the
hierarchy to be involved in deciding the stock levels and
the lot sizes.
MATERIALS REQUIREMENT PLANNING (MRP)
Materials Requirement Planning or MRP was developed
primarily to help manufacturers successfully produce
products without any shortages in the availability of
materials. What was attempted manually initially had to
be thereafter computerised to handle assemblies involving
several sub-assemblies and each of the sub-assemblies
needing several components.
The Sales Department does a detailed and extensive
exercise to project the volumes that can be sold in the
coming year. This projection relates to the different
products that the company sells. In an automobile
industry, the sales department will project a probable
sales of X units of a particular car, Y units of another car
and Z units for a third type of car. This projection relates
to three independent items. However, each of these three
cars has numerous items that are assembled to make the
car. The requirements of these items have to be
calculated. These items are termed Dependent Demand.
Consider a situation where the sub assembly A has two
components B and C. For every sub- assembly of A, 1 No.
of B and 2 Nos. of C are required. For a demand of 100

nos. of A which is the independent demand, 100 Nos. of B

and 200 Nos. of C would be required which are the
dependent demands.

If a motor car is
considered,
there are
number of subSub Assembly
A
assemblies that
are assembled
to create the
final product.
Each of the sub
B-1
C-2
assemblies
Components
No.
Nos.
involves subassemblies at the first, second and more levels. Similar
components (bolts, nuts, washers) may be required at different
levels. The summation of identical components needed at all
levels will indicate the total number required for the sub
assembly. A chart is made listing the different components and
the quantity required for the sub-assembly to be completed is
made.
This kind of explosion is done for each sub-assembly and a
list is made of all the components needed and the quantity
of each component is indicated. The table/chart of the
explosion of each of the sub-assemblies is compared and a
final chart indicating all the components and the number
required is made. Identical components in all the subassemblies are collated to arrive at the final figure. This
table is called the Bill Of Materials BOM.
Inputs in MRP
The Key and Primary Inputs for a MRP system are
1. Bill of Materials BOM
2. Master Production Schedule MPS

3. Inventory or Stock status

Bill of Materials BOM
This is a record of all items (components) in a product
(item). It is based on parent-component relationships and
the accuracy of the information is of utmost importance.
The quantity of each of the components used is based on
the information from Engineering or Process Design or
Product Development.
Master Production Schedule
The MPS details how many end items will be produced
within specified periods of time. It breaks the Sales Plan
into Operational Plan and specific product schedules. The
product schedules are made into item schedules.
1. The sums of quantities in the MPS must equal those in
the Sales Plan and Operational Plan. The consistency
between the plans is necessary and mandatory to arrive
at the analysis done earlier to provide economic
viability and returns.
2. The production quantities must be allocated efficiently
over time. The specific mix is based on historic demand
and on Marketing and Promotional considerations. The
plan must select lot sizes taking into consideration
factors such as production set-up costs and inventory
carrying costs.
3. Capacity availability on machines and labour and
limitations in storage area and working capital are other
factors that should be considered to determine the
timing and size of the MPS.
Inventory or Stock Status
This indicates the status of the inventory of at item at the
time of review or in a given future period of time. This
includes current status, releasing new orders, receiving
scheduled receipts, adjusting/correcting due dates for
scheduled receipts, withdrawing inventory, cancelling
orders, correcting inventory errors, rejecting shipments,

verifying scrap losses and stock returns. Recording the

transactions accurately is essential if the firms on hand
inventory balances are to be correct. This is a vital
requirement for the MRP system to operate effectively.
Outputs in MRP
Three types of outputs are generated by the MRP Process.
They are
1. Planned Orders report
2. Order Release report
3. Order Changes report
Planned Orders Report
This report relates to the timing for release of orders on
some future date or during a particular week or month or
period of time. This report is crucial for assessing the
amount of funds required for payments when these orders
are received or supplied.
Order Release Report
This report indicates when a planned order should be
released. It helps the Purchase department to release
purchase orders to the suppliers on the correct date. The
MRP logic makes use of the lead time of items in
determining the release date of orders. A calendar or
diary is generated indicating the orders to be released
date wise, supplier wise and item wise so that the goods
are delivered on time by the suppliers and manufacturing
of the product is carried out without delay. This is the
most popular report and widely used by all companies, the
size and scale of operation is immaterial.
Order Change report
Based on the Order Release Report, Orders are released
on time. During the course of the lead time, certain
incidents and developments in the market can cause
changes in the requirements. These incidents lead to

revision in MPS. The changes in MPS can result in

(i) cancellation of orders placed earlier by the company
or
(ii) postponement of delivery
schedule or
(iii)
reduction in order size to suit the revised requirement
The Order Change Report provides the Purchase
Department with the necessary information about all the
changes that need to be done.