Chapter 1

Material Management
Concepts and Forecasting

At the end of the chapter the students shall be able to:

 To discuss the concepts of Logistic Management;

 Enumerate the changing management process that gives value in Logistic
organization;
 Identify the important requirements in material planning;
 Give the objectives of materials requirement planning;
 Discuss the factors that must be avoided in materials forecasting;
 Enumerate the steps in forecasting material requirements for production;
 Give the requirements of properly prepared forecast; and
 Discuss the elements and processes in organizing the purchasing function

ORGANIZATIONAL CONCEPT OF MATERIAL MANAGEMENT

Material management concept emerged as a formal organization due to the greater need
for a separate system in the flow of materials to the production floor. The growing need of
customers for new and better products resulted in the management awareness to formally give
attention to the need to systematically develop the flow of materials.
The future outlook in the supply chain management is that majority of the purchases in
the peso value will continue to use the conventional way of buying and delivering the needed
inputs for their daily needs. On the other hand, bigger and more organized firms with greater
supply chain will tend to be centralized. They would aim for the greater control of the financial
requirements for the supply of raw materials and other production inputs.
The advent of more sophisticated computerized system available in the coming paperless
system of purchasing and canvassing of materials will result in lean logistics management
organization. As a result of this, development firms will focus on centralized purchasing. Firms
will negotiate for more long-term supply agreement in order to stabilize the price and continue
supply of more standardized parts and products.

THE CHANGING LOGISTICS MANAGEMENT PROCESS

Material management process exists in the organization with the view of exploring the
new business opportunities. Organization will implement supplies strategies that will give most
possible value for its products or services for its supplies and to its customers. Strategic supply
management in the organization will focus on intelligence gathering. The internet will develop
cost reduction program. More suppliers will be available to most firms.
The changing management process will give the materials management value in the
organization due to the following:

1. It will serve as intelligence network of material inputs.

The wide network available on the internet and the web will be the source of
information gathering. People assigned in the purchasing and canvassing of goods or
materials do not need to leave their offices to get the necessary data or product
specification. They may opt to order sample products for inspection.
 2. It will contribute to greater organizational profitability.
Since there will be less people to handle the purchasing function there will be
savings in manpower cost. While company maybe paying more wages for technically
skilled manpower, there could be more savings in transportation and other benefits.
On the other hand, they could avail of more suppliers that will bid for lower quality
products, hence savings could be generated.

3. It will contribute to increase efficiency in the delivery of needed materials.

Efficiency is one advantage in the use of more sophisticated computer system. It
is now available for use in material management. Communication linkages
worldwide are now within the tip of the finger, teleconferencing provides economy in
sourcing material inputs.

4. It will enhance greater productivity for the organization.

Greater productivity is the result of more efficient system of material delivery and
higher quality of inputs that go into the production line. Delayed supply in the
production line could be reduced by applying just in time delivery. Down time could
be avoided due to lack of supply in the production of goods or services.

5. It will develop continuous improvement in better products.

Organization with greater access to quality inputs in its product line will be able
to develop products that would satisfy the need of the consuming public. Customers
have limitless satisfaction and this needs better quality and standard products.

6. It will develop better competitive position in the industry.

Competition is the name of the game on the industrial world. Development of
quality products is what most industries are aiming for, as their existence in the world
market lies on quality.

7. It will give customers better satisfaction for quality products.

Customer satisfaction is the lifeblood of any organization. Customer patronage is
the one making the industry alive in the market place. They are the moving spirit
that keeps production line moving. Customers are the king that needs to be
served with utmost satisfaction.

8. It will develop better organizational image.

The company brand image is the result of high-quality products that rested
heavily on material quality inputs. Industries worldwide are known for their
quality products. Any defect in small parts of an automobile would ruin the
whole company image. Any alterations that did not work effectively may put the
company in total shambles.

MATERIALS REQUIREMENT PLANNING

Materials requirement planning is the first stage in the procurement of any materials for
processing into finished products or for sale to the direct consumer. A manufacturing operation
or any industry that processes goods into another finished product must have a good material
planning system. It must be implanted in order to deliver its goods on time and of the right
quality.
On the other hand, buyers of goods or services that go to the direct distribution of its
products to direct consumers must have the necessary supply chain put in place. Continuous
supply to its customer will maximize its profitability. Any good that is missed on its shelf would
mean loss of income opportunity.
Goods and services must be selected and produced in such a way that operating units
have adequate supply on hand for processing or for sale. Considering the wide variety of
materials requirement is a gigantic task for any organization. This requires careful planning
process to attain its goals and objectives.
Material planning is the determination of the course of action in the procurement and
delivery of the materials at the plant site. The company needs to achieve the desired result in its
operation. It involves the process of forecasting the general and specific framework with the
utmost efficiency and economy. The purchase and delivery of materials requirements of the
organization must be planned with utmost study and analysis.
Materials Requirement Planning (MRP) involves the development of systems and
procedure. The proximate activities are outlined and directed towards specific course of action.
The courses of action are studied in consultation with end users of those in the manufacturing
department. It is conceived with careful analysis of the production plans and the delivery of the
finished products.
In its modern sense, computerized programs are developed to help expedite the
procurement and delivery of materials. The use of electronic procurement system makes these
functions more efficient and greater economy. Speed is out in place with the use of computer
system in materials procurement.

Materials Requirement Planning has the following objectives:

1. Maintain adequate supply of materials.

Adequate supply of materials in the production line or for sale must be available at all
times. These require careful analysis of the historical supply and demand of the
organization’s clientele. The analysis must be able to show that the items are available in the
supply chain and that the vendor can deliver it when needed.

2. Maintenance of high-quality standards.

The items in the supply chain must meet the quality standard required for the processing
or for sale. It must ensure that the operation maintains consistent quality of products in order
to satisfy customer’s needs and wants. These quality items can come in the supply chain by
establishing linkages with suppliers and vendors.

3. Economy fund management.

Wise investment in materials supply is the reality that operational funds are limited.
Careful value analysis of the supply and demand is weighted against the operation’s cash
position. Operational fund is the amount appropriated for the purchase of the needed material
that will go into the production line. Buying too much products as well as buying too limited
items at any given time can be damaging to plant operation. There must be enough when it is
needed.

4. Maintain corporate competitive position.

Maintaining competitive position is another objective in requirement planning. It may
look easy in the first instance but a lot of company would not have the details of their
information. Choose the supplier that will provide the best combination of price and service.
Usually vendors sell more than the products in cases where volume orders are made. When
the context of quality products is the primary concern, the buyer should concentrate on
vendors that are strict on specifications.
5. Get the lowest possible price.
 The lowest possible price must be obtained. Nevertheless, it must be within the
specification requirements in terms of quality. Get as many suppliers that will be interested
to supply the corporate requirements. Competitive pricing will surface when the company is
a good client. Price negotiations will result to better price index that will be most
advantageous to the company.

Managers of Logistic Administration must bear in mind the importance of the planning
process in the procurement of the needed materials for production. Materials Logistic
Planning must be done with the following general objectives:

1. Logistic organization must clearly define its objectives and goals.

2. It must be able to identify firsts its strengths, weaknesses, opportunities and threats.
3. Review the present supply requirements and relate it with present environment in the
local and international market forces in the supply chain.
4. It must provide a systematic budgetary requirement for all its specific activities.
5. Sets measures and control mechanism to achieve its goals and objectives.

THE ELEMENTS OF EFFECTIVE LOGISTISTIC MANAGEMENT SYSTEM

Logistic operation activities vary in different companies and intensity of its operation, the
bigger the organization, the more materials requirement is involved. It also differs in the type of
industry and extent of its operation either locally or internationally. The method of logistics
planning depends also on the top management and the people who handle the operational
requirement. It is also related to the structural system implemented in the organization.

Planning is the integral part of the manager’s job. The manager will find it difficult to plan
effectively if uncertainties cloud the planning horizon. Forecasting is a tool of the manager to
reduce the uncertainties and help him develop more visible future activities. This scenario must
reveal a certain distant future. Forecasting material demand is like forecasting the weather
condition.

While there could be no clear and definite assurance of its accuracy, forecasting serves
greatly in the planning process. The goals and objectives are focused in getting the right quality
and quantity of material for production. In the business world, forecasting serves as the basis for
budgeting and planning for capacity, production, and inventory of goods.
Forecasting is a systematic approach to probe the future demand material of the industry. It
is based on available data and information that shall be the basis of projections and analysis. It
pertains to more than predicting the demand for material inputs that shall go into the production
line.
The successful forecast often requires a skillful blending of art from experience and the
science of predicting demand. A good manager to be able to make a sensible forecast must
possess the following:
1. experience
2. good judgment based on data analysis
3. technical expertise

Features Common to all Material Forecasting

Forecasting techniques as used by managers assume that the same underlying causal system
that existed in the past will continue to exist in the future. It is axiomatic to assume that what
prevails today shall still be the same tomorrow as industry and business changes too rapidly.
 The manager cannot delegate forecasting models to computer generated data or delegate to
subordinate and forget all about it as there are occurrences that change the business landscape.
The changes in prices, the peso-dollar exchange rates, changes in product features, can have
great impact on the company product and services, thus, the manager must be alert to the
changing environment and make adjustments in the forecast.
Managers must be alert to changes in the business condition and make amendments as it will
be necessary. No single technique should be relied upon. Wisdom and experience dictate the
best system.

Forecast accuracy decreases as time horizon increases

Short term forecast tends to be more accurate. Long period forecasting tends to have
uncertainties as there occur changes in the business environment. Managers must respond
quickly and study the demand needed in order to cope with the changes in the business
condition.
The steps that managers must understand and avoid.

1. Forecasts are never perfect

No one can predict the actual need at a given particular period. It can vary from time
to time as changes occur so rapidly. Actual results differ from predicted needs. The
manager must always make allowances.

2. Forecast for group of items tends to be more accurate than forecast for individual
items.
Opportunities for grouping may arise if parts or raw materials for production are
used for multiple products, these could also happen if the product is required or needed
by other sources.

3. Some forecasting techniques assume the same underlying demand for a certain
period.
In the forecasting process, the responsibility for making material forecast in the
business organization lies with the production and distribution departments. It should be
coordinated with the logistics management team in order that supplies of materials are
delivered on time and at the right quality and quantity. There are five basic steps to
consider:

a. Determine the purpose of the forecast

The operation department who needed the materials and supplies must work
in hand with purchasing and finance department. They need information to
determine the objectives and purpose of the forecast it needs and the budgetary
requirement. This requires consultation and coordination among those involved
parties in the supply chain.

b. Established time frame on the needed materials

The forecast must indicate the time frame. Materials forecaster must keep in
mind that the accuracy of the demand decreases as the time horizon increases. The
demand analysis must be revised from time to time and be updated based on
needs of the producing unit.

c. Select the most appropriate forecasting technique

 Forecasting technique varies according to the needs and demand of the
organization. It must be based on what technique is most appropriate and based
on the experiences of those involved in the activity. One technique may not be
applicable to a particular need.

d. Gather the data and analyze according to the technique chosen

Forecasting is no guessing game. It requires relevant data and information to
be able to make a valid and reliable forecast. Any information that is not relevant
will ruin the validity of the forecast needs. All assumptions must be carefully
studied as it involves financial and budgetary requirements for the proper supply
of the needed materials.

e. Forecast preparation
The operating units, the logistics department and finance must be work hand
in hand in preparing the forecast needs as it based on production and distribution.
Chart must be prepared based in the time frame of delivery and on the financial
requirements needed. Forecast must be revised from time to time in order that
more accurate delivery could be made on time.

f. Forecast monitoring
Forecast has to be monitored as to its functional validity. It must be able to
monitor successfully the materials needed and time frame by which delivery is
made including the financial requirements to sustain the program. Reports and
schedules must be checked, and revisions are made when variances occur in the
implementation stage.

ELEMENTS OF GOOD FORECAST

There are many forecasting techniques in materials handling and management of

organization resources. There is no single technique that works best in every supply chain. The
manager must be able to take a number of factors which specifically address cost and accuracy.

Requirements for Properly Prepaid Forecast

1. Forecast should be timely.

A certain amount of time must be allowed to respond to forecast demand in materials
supply to the production line. The information must be relayed to the purchasing section or
department on a timely basis as there are a lot of considerations in the timely delivery of
materials requirements.

2. Forecast should be accurately stated.

It must state the accuracy of possible errors so that those involved will be able to make
adjustments on positive or negative variances. This will provide users to plan for possible
errors and basis for comparing alternative forecasting technique.

3. Material requirement forecast must be reliable

The forecast must work consistently so that materials managers will be guided in the
proper supply to the using department. When forecasting technique did not work effectively,
those in the supply chain will burn out every time a new forecast is made.
4. Materials forecasting must be stated in meaningful units.
It must be stated in quantifiable units or peso value. Financial managers need to know
the amount to be allocated as needed by production and other charges that go with
procurement of the needed materials. Adjustment must be made when materials will be
imported or procured outside the regular channels.

5. Forecast must be submitted in hard copies.

While management may use computerized information, it is still appropriate that written
forecast must be made as basis for evaluating the forecast once the actual results will be
available.

6. The information must be simple and easy to understand and use.

Those involved must be able to generate clear understanding of what the forecast means
to them. It is useless information if it can only be understood by the one making the material
forecast as those in the lower level of management will also be using the data.

FORECASTING AND DEMAND ANALYSIS

The customer demand is the most important component in forecasting. Management of

organization should always look into the changing consumer preference in the manufacture
of goods or the delivery of the essential service. Forecasting for materials requirements is
greatly dependent on the development of new technology that changes the production system
and the coming of new inventions as obsolescence become too fast in the world of business.

There are two approaches to forecasting:

1. Qualitative Method
The qualitative method consists mainly of subjective information given by those
in direct contact with the end user of the product. It needed to be validated in order to
get deeper information. Information and data analysis on opinions and material
quality has to be subjected to further study. The true picture of the total material
requirements has to be determined.

2. Quantitative Method
This approach uses historical data as to material improvements and the
development of new that goes into a new product. This new development in the
technology attempts to utilize causal variables in new products or material component
that goes into the production line. We need to analyze the historical development in
new materials in order to be competitive in terms of price and product quantity.

ORGANIZING THE SUPPLY CHAIN

Organization in the new millennium will continue to change in answer to the growing
demand for more economy in labor cost. The trend points to more advanced technology that
needed less manpower in its purchasing operation. This is the result of lean organizational
structure as new design emerged. Bigger organizations designed their structure in the most
appropriate operational system that would be more efficient and economical in the delivery of
needed materials.
Sound logistics management design develops people operating effectively in the delivery
of goods in the production line. The structural design must develop people’s talent and initiative
as we build our trust and confidence in our people. Not a few organizations in the Philippine
setting suffered some mismanagement of the purchasing function due to some malpractices like
overpricing and corruption.
The selection process for people in the supply management must focus on honesty that
will build strong confidence and focus attention to the organization’s economic objective.
Employees should be trained for effective performance as supply function is becoming more
intricate with the use of modern technology. Computer knowledge will be an advantage as well
as strong knowledge in human relations and customer negotiations.
Effective implementation in the organizing process of the purchasing functions
should be toward the following:

1. Management must establish clear objectives for all concerned.

It must establish clear mission and vision and develop corporate objectives that
will sustain the economic and growth objective of the organization. Such objectives
must be known and understood by all concerned in the supply chain.

2. Identification and classification of the activities with clear and definite

assignment of functions.
These involved the preparation of clearly defined function by establishing clear
duties and responsibilities. Job description must clearly define the assignments of
those involved in the purchasing, canvassing, and delivery of the needed materials.

3. Group related activities in the light of human and material resources.

The company must look its manpower base in the light of its budgetary
requirements. It must be able to pay qualified manpower to handle the purchasing
and canvassing functions. Purchasing needs people who are highly trusted by
management as it is subject to great temptation for personal gain.

4. Proper delegation and accountability to line executives.

The purchasing executives must be delegated with authority with corresponding
accountability to the organization. It must determine the amount of which he can
approve for purchase and terms and condition of payments. This will avoid delay in
the purchase of the needed materials.

5. Define the vertical and horizontal relationship to improve condition.

The vertical relationship pertains to his relations with the higher executives and
horizontal relationship pertains to the other executives in the same line in the
organizational structure. The logistics executive must be able to cooperate effectively
with other line executives to avoid conflicts and other organizational problem.

6. Develop effective control system.

These involve internal and external audit in terms of finances and performance
level of those in the purchasing function. The organization must be able to establish
control procedures in the delivery of the needed items in the light of the total
company requirements in the supply chain and its capacity to pay on time.

In the organizing process, there are two major factors to be considered.

1. The organizational place of the purchasing functions.

 In smaller organizations, some purchasing functions are under the finance or
administrative department. In bigger manufacturing organizations, this function is under
the production department.
While in other organizations with bigger supply requirements, it becomes a
separate department or unit under a Vice President or Senior Manager. The top
management still has the final say where purchasing functions could operate effectively
in the organization.

2. The level of authority and responsibility.

This nagging question rests with the one who will head the organizational unit as
it is involves great trust and confidence. The most trusted person is given full authority
especially so if he is a director or a member of the board or a close relative of the top
management.

Authority carries with it a heavy responsibility for result and wise expenditure of
the organization’s financial resources. Management is very keen on who will head the
unit. The accountability for the proper selection of suppliers may result to possible inside
connections that may result to corruptions. Some organizations suffered losses on the
above issue.