CHAPTER ONE:

INTRODUCTION TO MATERIALS MANAGEMENT

The concept of having one department responsible for the flow of materials, from supplier through production to
consumer, thereby minimizing total costs and providing a better level of customer service, is known as
materials management.
The business function responsible for the flow of materials, from supplier through production to consumer is
somewhat new; this function is called material management.

Other names of material management include physical distribution, distribution planning and control, supply
chain management, and logistics management. But in recent years, companies to adopt the materials
management or logistics management title. The need to implement a material management organization is

 To maximize profits, and Improves customer service,

 Establish needed controls, and Reduce costs.

Definition of Materials Management

Material management is

 “Managing flow of materials into, though, and out of the system.”

 “The function responsible for the coordination of planning, sourcing, purchasing, moving, storing and
controlling materials in an optimum manner so as to provide a pre-decided service to the customer at a
minimum cost”.

 "Planning, coordinating, and controlling the acquisition, storage, handling, and movement of raw
materials, purchased parts, semi-finished goods, supplies, tools, and other materials that are needed in
the production process.

 “Concerned with design, specification, procurement, transportation, inspection, storage, retrieval, use,
disposal and accounting of materials to maximize return on investment in materials.”

 Pertaining to decision making with respect to materials to ensure right quantity of materials of right
quality at right time at right place in right price to get most out of every dollar invested in them.
 Materials defined
Materials are considered as the lifeblood and heart of any manufacturing or service system. Material is defined as
the physical materials that are purchased and used to produce the final product and does not suggest that materials
are the final product (materials are the parts used to produce the final product).
Materials as the items that are used to produce a product and which include raw materials, parts, supplies and
equipment items.
For our purpose, material is defined as any commodity used directly or indirectly in producing a product or
service.
CLASSIFICATION OF MATERIALS (MANUFACTURING MATERIALS)
Industrial materials can be classified into several categories based on how they enter the production process and
their relative costliness.
1. Raw materials
Raw materials are the inputs or resources that a company uses to manufacture its finished products. In other words,
raw material is the unprocessed material like metal stock, rubber blanks, or unrefined natural resources that
companies use in there manufacturing processes to produce finished goods to sell to consumers.
Raw material is goods or products which are used in manufacturing or unprocessed products which are used in the
creation of some final product.
These are the materials that have been delivered to an organization, but are not yet being used. Raw materials fall
into two major groups:
Farm products (e.g., wheat, cotton, livestock, fruits, and vegetables) and Natural products (e.g., fish, lumber,
crude petroleum, iron ore).
Farm products are supplied by many producers and their perishable and seasonal nature gives rise to special
marketing practices. On the other hand, natural products are limited in supply. They usually have great bulk and low
unit value and must be moved from producer to user. Fewer and larger producers often market them directly to
industrial users. Because the users depend on these materials, long-term supply contracts are common.

2. Manufactured components and parts/Component material and parts

Most manufactured materials and parts are sold directly to industrial users. Manufactured materials and parts fall
into two categories: Component materials and component parts.

Component materials are usually fabricated further (e.g. iron, yarn, cement, wires). The standardized nature of
component materials usually means that price and supplier reliability are key purchase factors.

Component parts enter the finished product with no further change in form, such as bolts & nuts, small
motors, engines, tires and castings.
 3. Capital items

Capital items are long-lasting goods that facilitate developing or managing the finished product. They include two
groups: Installations and equipment.

Installations consist of buildings (factories, offices) and heavy equipment (generators, drill presses, mainframe
computers, elevators). Installations are major purchases. They are usually bought directly from the producer, with
the typical sale preceded by a long negotiation period. The producer's sales force includes technical personnel.
Producers have to be willing to design to specification and to supply post sale services.

Equipment comprises portable factory equipment and tools (hand tools, lift trucks) and office equipment (personal
computers, desks). These types of equipment do not become part of a finished product. They have a shorter life than
installations but a longer life than operating supplies. Although some equipment manufacturers sell direct, more
often they use intermediaries, because the market is geographically dispersed, the buyers are numerous, and the
orders are small.

4. Supplies
Supplies are short-term goods that facilitate developing or managing the finished product. Supplies are usually
purchased with minimum effort on a straight re-buy basis. They are normally marketed through intermediaries
because of their low unit value and the great number and geographic dispersion of customers. Supplies are of two
kinds:
Maintenance and repair items (paint, nails, brooms), and operating supplies (lubricants, coal, writing paper, pencils).
Together, they go under the name of MRO goods. These are maintenance, repairing, and operating supplies used in the
manufacturing process but are not part of the final products (i.e. soap, lubricating oil).
5. Work-in process (WIP) - these materials are in the semi-finished stage. It refers semi- finished
products found at various stages in the production process (i.e. assembled motherboard).
6. Finished goods - these are the final products (consumable goods) that are ready for final delivery or
distribution to consumers.
Another classification of materials includes:
7. Purchased materials - these are the raw materials, components, spare parts, and items that are used in
the production process.
 1.1 The Functions (Scope) of Materials Management
1. Material Planning and Control
2. Purchasing
3. Stores Management
4. Inventory Control

5. Materials handling
6. Transportation/shipping
7. Disposal of scrap, surplus and obsolete materials
8. Other functions or activities
 Standardization
 Simplification
 Value Analysis
 Ergonomics’
 Just-in-Time(JIT)
Materials planning and control: Based on the sales forecast and production plans, the materials planning
and control is done. This involves
 Estimating the individual requirements of parts,
 preparing materials budget,
 forecasting the levels of inventories,
 Scheduling the orders and monitoring the performance in relation to production and sales.
Purchasing: This includes
 Selection of sources of supply finalization in terms of purchase,
 placement of purchase orders,
 follow-up, maintenance of smooth relations with suppliers, and approval of payments to suppliers,
 Evaluating and rating suppliers.
Stores management: This involves
 Physical control of materials,
 preservation of stores,
 minimization of obsolescence and damage through timely disposal and efficient handling,
 maintenance of stores records,
 Proper location and stocking.
A store is also responsible for the physical verification of stocks and reconciling them with book figures. A store
plays a vital role in the operations of a company.
Inventory control: Inventory generally refers to the materials in stock. It is also called the idle resource of
an enterprise. Inventories represents those items, which are either stocked for sale or they are in the process of
manufacturing or they are in the form of materials, which are yet to be utilized. The interval between receiving the
purchased parts and transforming them into final products varies from industries to industries depending upon the
cycle time of manufacture. It is, therefore, necessary to hold inventories of various kinds to act as a buffer between
supply and demand for efficient operation of the system
Materials handling: Materials handling involves both design and physical movement. It is the function of
developing and implementing appropriate manual, mechanized, and automated systems to provide movement of
materials throughout the company.
Major activities include:
Analyzing company operations to determine the need for improved materials handling,
designing and justifying new materials handling systems that will provide increased production
capacity,
improved materials flow,
reduced costs,
Improved working conditions, and reduced waste, providing user-oriented materials handling
systems and transporting materials to and from storage areas and the point where they will be used.
Transportation/shipping: Transportation of materials encompasses all the operations involved in the
movement and flow of products (materials and finished goods) from the time they are received to the time
they are shipped to the customer.

Major activities include:

 receiving finished goods from manufacturing departments or outside suppliers,

 verifying quantity, and identifying and moving materials to the warehouse,

 Determining and arranging for the most economical method to transport incoming and outgoing
materials and products and loading trucks, freight cars, and so on for shipment to customers.
Other related functions include the 3S‟s (standardization, simplification & specifications), value analysis,
ergonomics and Just-in-Time (JIT).

Standardization means producing maximum variety of products from the minimum variety of materials, parts,
tools and processes. It is the process of establishing standards or units of measure by which extent, quality, quantity,
value; performance etc. may be compared and measured.

The concept of simplification is closely related to standardization. Simplification is the process of reducing the
variety of products manufactured. Simplification is concerned with the reduction of product range, assemblies,
parts, materials and design.

Specifications refer to a precise statement that formulizes the requirements of the customer. It may relate to a
product, process or a service.
Value analysis is concerned with the costs added due to inefficient or unnecessary specifications and features. It
makes its contribution in the last stage of product cycle, namely, the maturity stage. At this stage research and
development no longer make positive contributions in terms of improving the efficiency of the functions of the
product or adding new functions to it. Ergonomics (human engineering) is concerned with man-machine system.
Ergonomics is “the design of human tasks, man-machine system, and effective accomplishment of the job, including
displays for presenting information to human sensors, controls for human operations and complex man-machine
systems.
” Just-in-time (JIT) is viewed as a production technique which aims to improve overall productivity through
elimination of waste and which leads to improved quality. JIT provides an efficient production in an organization
and delivery of only the necessary materials and parts in the right quantity, at the right time and place while using
the minimum facilities”.

1.3 Objectives of Materials Management

The main objectives of material management are to:

 Minimize materials cost.

 Procure and provide materials of desired quality when required, at the lowest possible overall cost

 Reduce investment tied in inventories for use in other productive purposes &to dev’p high inventory
turnover ratios.

 Purchase, receive, transport (i.e., handle) and store materials efficiently and to reduce the related costs.

 Trace new sources of supply and to develop cordial relations with them in order to ensure continuous
 material supply at reasonable rates.

 Cut down costs through simplification, standardization, value analysis,

import substitution, etc.

 Report changes in market conditions and other factors affecting the concern, to the concern.

 Modify paper work procedure in order to minimize delays in procuring material.

 Conduct studies in areas such as quality, consumption and cost of materials so as to minimize cost of
production.

 Train personnel in the field of materials management in order to increase operational efficiency.

1.4 Importance of Materials Management

(a) Materials account for a very substantive proportion of the total cost of goods and services, they account
for more than half the cost of doing business. Therefore, the effective and efficient management of materials
become a very powerful potential area for cost reduction and value enhancement.

(b) Materials constitute a very important resource input to production or service system, and hence
availability of the right quality in right quantity at the right place and right time becomes a prerequisite for effective
completion of production and/or service targets or timely completion of projects. Shortages cannot only be irksome.

(c) In the era of global competition, coordinating material flow across global locations economically calls
for managing material flow into, though, and out of the system efficiently and effectively.
(d) It also benefits enterprises by maximizing profits, improving customer service, providing required
credibility, and improving employee morale, enhancement of communication.

1.5 Some Indicators of Low Materials Management Effectiveness

The following checklists could be used to measure the level of materials management efficiency and effectiveness
in an organization.

 Excess inventories or low inventory turnover ratio

 Large amount of material wastage or high activity

 Long and uncertain procurement lead times

 Poor storage methods leading to excessive wastage, handling losses and longer retrieval times to meet the
demand
  Too much variety of parts and components due to lack of standardization and codification

 Tight tolerances on the parts and components due to lack of value analysis.

 Prescribing much thicker, costlier, better material than functionally required.

 Prescribing materials which have to be imported whereas a locally available substitute could do adds to the
costs

 Buying from a wrong source, at a higher price

 Large proportion of expenses on materials handling and poor choice of materials handling equipment

 Unreliable vendors due to lack of proper vendor selection, monitoring, and rating

 Large proportion of dead stock or nonmoving items in the system

 Poor storage layout, resulting in storage space being wasted or the operating efficiency being adversely
affected

 Nonscientific approaches to inventory management, not matching with the degree of uncertainty in the
supply environment

 Frequent shortage of materials when required leading to delays in production or projects or service system

 Lack of database to support decision making and non-computerization of inventory system

 Inappropriate organization structure not conducive to holistic thinking in dealing with materials or giving it a
low importance in organizational hierarchy.

SUPPLY CHAIN METRICS

A metric is a verifiable measure stated in either quantitative or qualitative terms defined with respect to a reference
point. Without metrics, no firm can expect to function effectively or efficiently on a daily basis. Metrics give us
1. Control by superiors.
2. Reporting of data to superiors and external groups.
3. Communication.
4. Learning.
5. Improvement.
Building the right metrics is vital to a company, as metrics communicate expectations, identify problems, direct a
course of action, and motivate people. Problems must be anticipated and corrective action taken before they become
severe and costly. Therefore production control works in a demanding environment shaped by six major challenges:
1. Customers that are rarely satisfied.
2. A supply chain that is large and must be managed.
3. A product life cycle that is getting shorter and shorter.
4. A vast amount of data.
5. An emphasis on profit margins that are more squeezed.
6. An increasing number of alternatives.
Physical Supply/Distribution/material management
Physical supply/distribution includes all the activities involved in moving goods, from the supplier to the
beginning of the production process, and from the end of the production process to the consumer.
The activities involved are as follows:
■ Transportation.
■ Distribution inventory.
■ Warehousing.
■ Packaging.
■ Material handling.
■ Order entry.
Materials management is a balancing act. The objective is to be able to deliver what customers want, when
and where they want it, and to do so at minimum cost. To achieve this objective, materials management must
make tradeoffs between the level of customer service and the cost of providing that service.
A good manufacturing planning system must answer the following four questions (all questions emphasize on
priority and capacity):
1. What are we going to make or provide to customers?
2. What does it take to make it?
3. What do we have?
4. What do we need?
Principles of Forecasting
Forecasts have four major characteristics or principles.
1. Forecasts are usually wrong. Forecasts attempt to look into the unknown future and, except by sheer luck,
will be wrong to some degree. Errors are inevitable and must be expected.
2. Every forecast should include an estimate of error. Since forecasts are expected to be wrong, the real
question is “by how much?” Every forecast should include an estimate of error often expressed as a
percentage (plus and minus) of the forecast or as a range between maximum and minimum values. Estimates
of this error can be made statistically by studying the variability of demand about the average demand.
3. Forecasts are more accurate for families or groups. The behavior of individual items in a group is
random even when the group has very stable characteristics. For example, the marks for individual students in
a class are more difficult to forecast accurately than the class average. High marks average out with low
marks. This means that forecasts are more accurate for large groups of items than for individual items in a
group.
4. Forecasts are more accurate for nearer time periods. The near future holds less uncertainty than the far
future. Most people are more confident in forecasting what they will be doing over the next week than a year
from now. As someone once said, tomorrow is expected to be pretty much like today.
Naïve method
Ft+1 = At where Ft+1 is forecasted/expected value for next period, At actual value
Simple mean average method
Ft+1 =∑ where n is number of moving period

Simple moving average method

Ft+1 =∑

Weight moving average method

Ft+1 =∑ c is weighted for each actual period
Exponential smoothing
Ft+1 = αAt + (1-α) Ft where c is coefficients, which is b/n 0 and 1 and Ft is previous forecasted value
Linear trend line
Y = a + bx
̅̅
b =∑ ̅

a = ̅ +b ̅
Forecasting seasonality
Seasonal index (SI) = where PAD period average demand, and PADAP period average demand for

all period, and AFDAP is average forecasted demand for all periods in the next time
Forecasting demand for each quarter (FD) SI*AFDAP