MM All Chapters

Faculty
Materials
• Business and
economics
management
Department
• Management
infotesfish@gmail.com
Materials management
Chapter One: Introduction
Chapter Two: Forecasting
Chapter Three: purchasing
Chapter Four: Inventory management
Chapter Five: store management
Chapter six: material handling
Chapter seven: Logistics
Materials management
Chapter One:
Introduction
Chapter outline
• Definition and scope
• Materials management - Origin and transition
• Importance of materials management in
corporate policy
Materials management meaning
• Materials?
• Management?
• Are important determinants of the total cost of production
– It occupies 30-50% of the total cost
• It includes
– Raw materials, components, sub-assemblies, finished products
• Materials management is a
– specialized,
– systematic and
– scientific function
of a group of people for better procurements/storage
and distribution of materials.
Definitions
• MM is the planning, organizing and controlling of the
flow of materials from the initial purchase through
internal operations to distribution of finished goods.
(American production and Inventory Control Society)
• Materials management is a body of Knowledge which
helps the manger to improve the productivity of capital
by
– reducing materials costs,
– preventing large amount of capital being locked up for long
periods and
– improving the capital turnover ratio.
Haralod Koontz
Cont’d…
• It is concerned with planning, acquisition

and flow of materials within the supply chain.
• Material is one of the four basic resources.
• Its objectives are as follows:

• Maximize the use of the firm’s resources.
• Provide the required level of customer service
Concept of MM
Material Management
Purchasing
Planning
Organizing
Material
Controlling
Management
Concept of MM
Managerial
and
Inputs operational
process
Output
• Materials
• Finance
• People
• Information
feedback
MM revolves around
• 5Ms
MM process
Start
Purchasing Receiving
Customer
Quality
Distribution
control
Inventory Production
Store
control unit
Why do we study materials
management?
• Two basic reasons
• Economic
– Because it is concerned with minimizing cost of
materials
– Causes up to 50% of total expenditure
• Attitude
– People have and feel less concern for materials
Objective of materials management
– Ensuring a uniform flow of materials.
– Reducing materials costs
– Increasing the competitiveness of end products
– Establishing good buyer –seller-relation.
• The primary task of modern MM with an integrated
view in purchasing materials of;
Right
Importance of MM
• Optimum materials acquisition
• Greater promise as a cost reducing device
• Result in improved production capacity of plants
• Saving of labour time
• Reduction in inventories and storage space
• Reduction in damage to materials
• Smooth flow of production
• Easier production control
• Better utilization of resources
• Effective issue and distribution
• elimination of losses and pilferage…
Scope of materials management
• MM deals with all aspects of materials, costs, material supply
and utilization
• Involves in converting raw materials into finished products
• Concerned with the
– planning and programming of materials and equipment,
– market research for purchase,
– value analysis,
– Packaging, materials stores and inventory control,
– transportation of raw materials,
– material handling, disposal of scrap products etc.
Scope….
• MM is the function of responsible for the
coordination of
– planning,
– sourcing,
– purchasing,
– moving,
– storing, and
– controlling martials
in an optimum manner so as to provide a pre-
decided service to the customer at a minimum cost.
Scope …
• The functions of MM are categorized in the following
ways
Material planning
and control
Scope of MM
Purchasing
Store
management • 3 Ss:
• Standardization
Inventory • Simplification
management • Specification
• Value analysis
Other functions • Ergonomics
• JIT
Scope…
• Materials planning and control:
– Inputs: sales forecast and production plan
Involves:
• Estimating individual requirement of parts
• Preparing materials budget
• Forecasting inventories
• Scheduling the orders
• Monitoring the performance in relation to production
and sales
Scope…
• Purchasing:
– Includes
• Selection of sources
• Placement of purchase orders
• Maintenance of smooth relations with suppliers
• Approval of payments
• Evaluating and rating suppliers
Scope…
• Stores management:
Involves
• Physical control of materials
• Preservation of stores
• Minimization of obsolesces and damage through timely
disposal and efficiently handling
• Maintenance of store record
• Proper location and stocking
Scope…
• Inventory control or management
– Inventory aka idle resources of an enterprise or
materials in stock
– Facilitate smooth operations/minimize interruption
Scope…
• Other functions
– Standardization
• Producing maximum variety of production from the minimum
variety of materials/parts/tools/processes.
• Measured: quality, quantity, value, performance
– Simplification:
• The process of reducing the variety of products manufactured.
• Concerned with the reduction of product range, assemblies, parts,
design
– Specification:
• A precise statement that formulize the requirements of the
customer. i.e. product, process, service
Scope…
• Value analysis
– Concerned with the costs added due to
inefficient/unnecessary specifications and features.
• Ergonomics/human engineering:
– Concerned with man-machine system
– Is the design of human tasks, man-machine system, and
effective accomplishment of the job including;
• Displays for the presenting information to human sensors,
• Controls for human operations and
• Complex man-machine system …
Scope…
• JIT
– A Philosophy believes in eliminating all wastes and
seeking continuous improvement aims at creating
manufacturing system that is response to the market needs.
– Benefits of JIT
• Product cost - greatly reduced due to reduction of waste and
inventories
• Quality – improved due to continuous improvement
• Design – quick design will be developed due to fast response for
changes
• Productivity improvement
• High production flexibility
• Ease and simple for administration
Functions/activities of MM
• Depends on the size, type and complexities of
product/processes in an organization
• The main activities are
– forecasting and planning of material demand
– Inventory control
– Make/buy decision
– Production control
– Purchasing
– Receiving, inspecting and warehousing/stores
– Physical distribution/transportation
– MRP- a system used in planning, scheduling and inventory
management during manufacturing process.
Historical aspects of MM
• The evolution of MM has followed the following
patterns in phased manner
– First Phase: executives were carried on all MM functions
as side-lines
– Second phase: formal MM functions recognized
– Third phase: MM functions concerned with purchased
materials are grouped together under a senior executive
(MM recognized as one function)
– Fourth phase: MM functions become a genuine value
adding activity for purchased materials
Activity 1: Discussion points
• Discuss consequences of poor material
management
• Challenges of material management
Materials
management
Faculty
• Business and
economics Chapter Two:
Department
Forecasting
• Management
Forecasting
 A technique which help to see the future
• A statement about the future value of a variable of interest
such as demand.
• Forecasts affect decisions and activities throughout an
organization
– Accounting and finance
– Human resources
– Marketing
– MIS
– Operations
– Product / service design
Uses of forecast
Accounting Cost/profit estimates
Finance Cash flow and funding
Human Resources Hiring/recruiting/training
Marketing Pricing, promotion, strategy
MIS IT/IS systems, services
Operations Schedules, MRP, workloads
Product/service design New products and services

Elements of good forecast
Timely
Reliable Accurate
Written
Steps in forecasting process
“The forecast”
Step 6 Monitor the forecast

Step 5 Prepare the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast
Forecasting
Techniques
Qualitative Quantitative
Technique Technique
Expert/delphi Consumer
opinion interview/survey
Method method Time series Causal
weighted Moving Trend Simple Simultaneous

Moving average projection Regressio equation
average methods method n method method
Time series models
• Used time based data
• Has four components
– Secular trend: irregular movement (up/down
ward) of time series
– Seasonal variation: fluctuation occurs
periodically
– Cyclical movement: caused by business cycles
– Random movement: residual or erratic movement
caused by some unpredictable reasons
Quantitative techniques
1. Trend projection method
This technique assumes that whatever has been the pattern of demand
in the past, will continue to hold good in the future as well. Historical
data can thus be used to predict the demand for a commodity in the
future.
Future demand through the trend method can be found by either of the
two methods.
• Graphical method
• Algebraic method
Graphical method
• Past data projected
data
Trend
1
Dema
Trend
nd
2
Time
2019 2020 2021 2022 20213 2024 2025 2026
Trend 1 is curvilinear, trend 2 is linear

Algebraic method
Example
• The following data relate to the sale of iron ore of a company

the over the last five years
Year 2018 2019 2020 2021 2022

No of ores 120 130 150 140 160
• Estimate the demand for iron ores in the year 2025, if the
present trend is to continue.
Solution
• since the present trend is expected to continue, the LSM

(least square method) is employed.
• Let the base year be 2018
Year x Y xy
2001 1 120 1 14400 120
2002 2 130 4 16900 260
2003 3 150 9 22500 450
2004 4 140 16 19600 560
2005 5 160 25 25600 800
Total 15 700 55 99000 2190
Solution
Solution
• Solving the set simultaneous equation by
multiplying equation (4) by 3 and then
subtracting it from equation (5), we get
• 10b= 90
• b= 9 Thus, the trend equation is
• Substituting this value of b in equation Y= 113+9x
(4), we have
Since for the year 2025, X
• 700=5a+5x9
will be 10
• 5a= 565
Y2025= 113+9x7
• a= 113
176 ores.
Regression method
• The following is the price and quantity data of pens sold by a
company.
Year 201 201 201 201 201 201 201 201 202 202
2 3 4 5 6 7 8 9 0 1
Price 2 1 2 4 5 4 3 8 6 5
Quantity 9 10 8 7 5 6 8 3 4 7
(‘000 units)
• Fit a linear regression line to the data and estimate the demand
for pens when the price is 7 per unit
Solution X Y xy
• Taking the price 2 9 4 81 18

1 10 1 100 10
and quantity as
2 8 4 64 16
variable X and
4 7 16 49 28
Y respectively, 5 5 25 25 25
and tabulating 4 6 16 36 24
them for 3 8 9 64 24
8 3 64 9 24
calculation we
6 4 36 16 24
get
5 7 25 49 35
40 67 200 493 228
Solution
Solution …..cont’d
• Putting this value of b in equation (3) we get
10a-40=67
10a=107
a= 10.7
• Thus, Y= 10.7-x
• Hence, the regression line is
Q= 10.7-P
When P =7 the demand is
Q= 10.7-7= 3.7
That is demand Q= 3700 units
Classwork
1. Forecast demand in 2030, base year – 2019
(use trend projection)
2. Forecast demand when the price 10. (use
regression)
Year 2016 2017 2018 2019 2020

Price 6 8 11 11 12
Demand 500 100 300 300 200
Discussion points
• Types of forecasting
• Demand
Quiz 1
Synergy company is engaged in agro-processing. Currently the
company is exporting processed mango juice to middle east countries.
the company mainly used mango fruit as input. In the past five years
the following kg of mango were consumed.
Year 2017 2018 2019 2020 2021

Mango 200 100 300 400 600
(‘000 kg)
Based on the above information, Forecast the demand for mango in 2024, base
year is 2018.
Answer
b= 1.1
a= -0.1  at year 2014 (7years) = 760,000 kg mango fruit will be demanded
Material
management
Chapter Three:
Faculty
• Business and
economics
Department
Purchasing
• Management
Chapter Outline
• Purchasing
• Responsibilities
• Objectives
• Policies
• Types
• Make or buy decision
• Purchasing policies and practices in Ethiopia
Purchasing
• Fundamental function in an operations
• Concerned with having the
correct quantity and quality of materials on hand, and
when it is needed, at price that is consistent with the
existing economic conditions
• Purchasing is the acquisition of materials in exchange
for money.
– is a process of buying goods and/or services at the right
quality, at the right quantity at the right time, at the right
price from the right suppliers.
Responsibilities of purchasing
department
• Purchasing is responsible for acquiring raw
materials, components, parts, tools and items required
from outside suppliers for conversion, consumption
or resale.
• The responsibilities of a purchasing department
include:
– Learning the material needs of the organization
– Selecting suppliers and negotiating price
– Ensuring delivery, and
– Monitoring cost, quality, and delivery performance
Objective of purchasing
• Ensure uninterrupted flow of materials
• Meeting demand and supply via wise regulation
• Keeping adequate materials
• Maintaining good relationship with vendors
• Create effective integration with other departments
• Improve the organization’s competitive position
Purchasing policies
• Centralized purchasing
• A single person is responsible for the entire purchasing
function/activities
• It is essential for attainment for both optimum operating
efficiency and maximum profit.
• Advantages
• Highly one skilled official is sufficient
• Avoids duplication of purchasing
• Give more attention to purchasing
• Economy of large scale buying
Purchasing policies ….
• Decentralized purchasing
– Purchasing is decentralized to departments, plants
• Advantages
– Purchasing on time
– It is possible to keeping minimum level of stock
– It more suitable for multi-plant operation
– Utilization of local resources effectively
• Combination purchasing
– purchasing function is partially centralized at head office
and partially decentralized to the business unit
Types of purchasing
• Hand-to-mouth buying:
– the practice of buying material to satisfy current operating
requirement
• Market-purchasing:
– buying raw materials at a time when market prices are the
lowest
• Purchasing on long-range contract:
– pursued in the case of materials which are needed in
substantial quantities and on a continuous basis.
Types of purchasing …cont’d
• Hedging:
– It is buying now for delivery at a future date
– Hedging is a way not only to reduce the risk in the face of
price fluctuation but also, in some cases, to ensure supply.
• Speculative buying:
– It involves purchasing in excess of normal requirements
with the intention of profiting on price movement.
• Upstream buying:
– It involves research in raw materials components and
supplies for products which are still planning stage.
– This price investigation helps in estimating the cost of
production and forecasting of profit per unit.
Purchasing Principles
• Right quality
• Right quantity
• Right time
• Right source Right
• Right price
PURCHASING PROCEDURES
• Purchasing procedure refers to the way in which
purchase transaction is carried through from its
inception to its conclusion.
i. Origination of purchase requisition
ii. Verification of Authority and budget
iii. Request for quotation or bids
iv. Evaluation of bids and selection of suppliers
v. Issuing of purchase order
vi. Follow up and expediting the order
vii. Receiving, Inspecting, and Storing
viii. Payment
Make or buy decision
• A decision to produce a fabricated part internally
rather than to buy the part externally from a supplier
is often called make or buy decision.
• Aims at meeting own needs internally or to buy

externally.
Make or buy decision …cont’d
• Two factors stand out above all others when
considering the make or buy question at the tactical
level:
– cost and
– availability of production capacity.
• However, a good make or buy decision, also requires
the evaluation of many less tangible factors
• The following considerations influence firms to make
or to buy the items used in their finished products or
their operations.
Considerations which favor making
• Cost consideration (less expensive to make the part)
• Desire to integrate plant operations
• Productive use of excess plant capacity to help absorb fixed
overhead
• Need to exert direct control over production and/or quality
• Design secrecy required
• Unreliable suppliers
• Desire to maintain a stable work force (in periods of declining
sales)
Consideration which favor buying
• Suppliers research and specialized know how

• Cost consideration (less expensive to buy the part)
• Small volume requirement
• Limited production facilities
• Desire to maintain stable work force (in periods of rising sales)
• Desire to maintain a multiple-source policy
• Indirect managerial control consideration
• Procurement and inventory consideration
Shipping terms and letter of credit (L/C)
• For EXIM, we have to know who is going to cover the
oceangoing transportation cost
• Free on board (FOB):
– any risk or loss is transferred at the point of shipment from
exporter to the importer
• C&F:
– exporter pays cost and freight to the destination but any
risk is transferred from the exporter to the importer when
the good pass the ships rail at the port of shipment
• CIF:
– similar to the C & F, but adds insurance in the marine
Letter of credit (L/C)
• …is a kind of written guarantee by the issuing bank that
payment will be made in absolute accordance with the terms of
that particular letter of credit.
• L/C is attached to the shipping documents and acts as a kind of
security (collateral) with the bank guaranteeing payment.
• Two most commonly practiced documentary letters of credits
are:
– Irrevocable L/C: can’t be cancelled/changed unless everyone
involved agrees
– Confirmed L/C: in case of issuing bank fails to meet the obligation,
an other reputable bank will guarantee the transaction
Discount in purchasing
• The other important factor which can influence the
buyer in suppler selection or tender evaluation is
discount.
• A discount is a reduction allowed by a seller to a
buyer when the buyer meets certain stated
condition in buying.
Types of Discount in purchasing
• Cash discount
– are given to purchaser who pays their bill on time.
– Example, if the cash discount is 2/10, net 30.
• Quantity discount
– given to a buyer for purchasing increasingly larger
quantity of materials.
Types of Discount…
• Trade discount
– Given for distributors or other who perform certain
marketing functions
• Seasonal discounts
– granted for purchasing seasonal nature products
during the off-season period.
i.e. winter product vs summer products
Selecting the source of supply
• Steps List possible
suppliers
Evaluate each Qualitative/

supplier subjective
Select
supplier/s Quantitative/
objective
• Weighted point method
• Cost ratio method
Value analysis
• Value analysis is concerned with scrutiny of the
design function and cost of any product, material or
service with the object of reducing cost by
– modification of design material specification,
– more efficient process,
– change in source of supply
 without sacrificing reliability and quality.

Two conceptual tools in the operation of value
analysis
1. Design analysis of the required material
– design analysis entails a methodological step by step
study of all phases of the design of a given item in
relation to the function it performs.
– Decomposing on item to its parts so as to see and examine
each parts in relation to their function avoids or eliminate
redundant or idle ones
2. Cost analysis of the required material
– Cost analysis involves the investigation of the supplier’s
probable cost of producing a given materials.
Business orders
• In business there are two main order types

– Purchase order
– Sales order
Business orders
Purchase order Sales order
Meaning A document used for A document used for

ordering goods confirmation of sale
Detail Prepared by the buyer Issued by the supplier to

and is sent to the supplier its buyer before delivery
Effect of Creates a contact between It approves the sale

acceptance the buyer and supplier
Discussion points
• Purchasing principles
• Buy vs making decisions
Group assignment
Review Ethiopian purchasing and procurement
guideline and criticize it.
Material
management
Faculty
Chapter Four:
• Business and Inventory (control)
economics Management
Department
• Management
Chapter outline
– Meaning of Inventory
– Types of Inventory
– Motivation for Holding Inventories
– Objectives of Inventory Management
– Interest of the Functional Units in Inventories
– Nature of Demand in Inventories
– Inventory Analysis
– Inventory Control
– Inventory Costs
– The EOQ Model
– Economic Production Quantity (EPQ)
Introduction
• The fundamental problem of inventory management
can be succinctly described by the two questions:
– When should an order be placed?
– How much should be ordered?
• As part of supply chain it includes aspects such as
controlling and overseeing purchases from suppliers
and customers, maintaining the storage of stock,
controlling the amount of product for sale and order
fulfilment.
Inventory management
• A systematic approach to
sourcing,
storing, and
selling inventory both
raw materials (components) and finished goods (products).
• It means the right stock, at the right levels, in the right
place, at the right time and at the right cost as well as
price.
Inventory
• Inventory is an idle resource (physical stock of
goods) possessing economic value which is awaiting
(kept) for future use.
• Here, the responsibility of materials management is to

maintain sufficient inventories to meet demand for
goods and at the same time incurring the lowest
inventory handling costs.
Types of Inventory
• Raw materials
• Components
• Work-in-process: inventory either in the
system or being processing
• Finished goods
• Supplies: items facilitate production or
administrative functions
Motivations for holding Inventory
• Economic of scale
– To produce large number of items
• Uncertainties
• Speculation
• Transportation
• Smoothing: considering demand, seasonal
patterns
• Logistics
Objectives of Inventory
Management
• Minimize the investment in inventory.
• Minimize warehouse costs.
• Minimize losses from damage, obsolescence and perishability.
• Maintain enough inventories in order to facilitate efficient and
smooth production and sales operation.
• Maintain efficient transportation of inventories.
• Supply information on the volume of inventory to accounting.
• Make forecasts of inventory requirements.
• Establish an inventory system (policies and regulation that
monitors inventories
Problems Caused by Inventory
• Inventory ties up working capital
• Inventory takes up space
• Inventory is prone to:
– Damage, Pilferage and Obsolescence
• Inventory hides problems
The Material Flow Cycle
Cycle time
95% 5%
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
Interest of the functional units in
inventories
• Production department
• Purchasing department
• Marketing department
• Financial department
Nature of demand in Inventories
• Dependent demand items
– are those items where their demand is related to the demand
for another item. This demand is also known as Derived
Demand
– Example: fuel and car
• Independent demand items
– are those items that are not influenced by production
operation but by the market forces
– For stoking decisions of independent demand item
forecasting and EOQ model is required.
Inventory analysis (classification)
• All items in the inventory cant have an equal value or
relevance.
• Thus, some items requires high attention than others
• Inventories can be classified in to various groups on
the basis of the selective inventory management
approach as follows.
Cont’d…
• ABC Inventory Analysis (Always, Better, Control) Analysis.
• VED Inventory Analysis (Vital, Essential, Desirable) Analysis.
• SDE Inventory Analysis (Scarce, Difficulty, Easy) Analysis.
• HML Inventory Analysis (High, Medium, Low) Analysis.
• FNSD Inventory Analysis (Fast moving, Normal, Slow Dead)
Analysis.
• XYZ Inventory Analysis (High, Moderate & Low closing
inventory items) Analysis.
ABC Classification System
Classifying inventory according to some
measure of importance and allocating control
efforts accordingly.
A - very important High A
B - mod. important Annual
$ value B
of items
C - least important C
Low
Low High
Percentage of Items
12-89
Types
of inventory control system
Cyclical ordering system Fixed ordering system
• Is time-based system • Quantity based
• Involves periodic review of • Based on order quantity
stock factor not time factor
• Frequency of review varies • Benefits
from co. to co. – Economical
• Done manually or – Purchasing is done when
electronically it is required
• Suitable for materials
purchased on plan
Key inventory terms
• Lead time: time interval between ordering and receiving the
order
• Holding (carrying) cost: cost to carry an item in inventory for
a length of time, usually a year (heat, light, rent, security,
deterioration, breakage, depreciation, OC etc.)
• Ordering (set-up) cost: costs of ordering and receiving
inventory (shipping cost, preparing invoices, cost of inspecting
goods upon arrival for quality and quantity, moving goods to
temporary storage, process etc)
• Shortage costs: costs when demand exceeds supply, the
Opportunity Cost for not making a sale.
Inventory costs
• Costs of inventory are categorized into three
groups
– Holding (carrying) cost
– Order (set-up) cost
– Penalty (stock out) cost
Holding cost
• Also known as carrying cost or inventory cost
• is the sum of all costs that are proportional to the
amount of inventory physically on hand at any point
in time.
• Includes;
– Cost of providing the physical space to store the items
– Taxes and insurances
– Breakage, spoilage, deterioration, and obsolescence
– Opportunity cost of alternative investments
– The salaries and wages of storing, receiving…
Order cost
• Unlike of the holding cost, the order cost depends on
the amount of inventory that is ordered or produced.
• Placement of purchase order for a material is associated with
certain obvious cost due to advertising, consumption of
stationary and postage, telephone charges etc
• Includes;
– Salaries of the staffs in the purchasing department, and negotiators.
– Rent fee, postage, telegram, telephone bills.
– Traveling expense.
– Lawyers and court fees due to any legal matters arising out
of purchase.
– Inspecting shipment & moving goods to storage.
Penalty cost
• The penalty cost, also known as the shortage cost or
the stock-out cost, is the cost of not having sufficient
stock on hand to satisfy demand when it occurs.
• This cost has a different interpretation depending on
whether excess demand is back-ordered (orders that
cannot be filled immediately are held on the books
until the next shipment arrives) or lost (known as lost
sales).
• Example; delay cost, goodwill cost
Models in managing inventory
• Multi-Period Deterministic Inventory Models
I. Fixed- Order Quantity Models
 Economic Order Quantity (EOQ) Model.
 Production Order Quantity (POQ) Model.
 Quantity Discount Model.
II. Fixed-Time Period Models
The EOQ model
• The EOQ (Economic Order Quantity) model is one
method of determining the adequate (optimum)
inventory level for independent demand materials.
• This model is one of the mathematical model and it
results in an inventory level which is not too large or
too small. i.e. It is the economical level of inventory.
• Ensure right amount of quantity
Basic EOQ Model
Important assumptions
1. Demand is known, constant, and independent

2. Lead time is known and constant
3. Receipt of inventory is instantaneous and
complete
4. Quantity discounts are not possible
5. Only variable costs are ordering and holding
6. Stock outs can be completely avoided
Inventory Usage Over Time
Usage rate Average

Order quantity inventory on
= Q (maximum hand
Inventory level
inventory
Q
level)
2
Minimum
inventory
0
Time
The Inventory Cycle
Q Usage
Quantity rate
on hand
(maximum
İnventory)
Reorder
point
Receive Place Receive Place Receive

Time
order order order order order
Lead time
Minimizing Costs
Objective is to minimize total costs
Total cost of
holding and setup
(order)
Minimum
total cost
Annual cost
Holding cost
Setup (or order)

cost
Optimal order Order quantity
quantity (Q*)
EOQ
6000 Annual Carrying
Total Cost (Acc)
Lowest Cost
5000 Inventory
Cost
4000 Order Size
3000 Order Cost

ACC=AOC
Cost
2000 Carrying
Cost
1000
0 1 2 3 4 5 6 7 8
Order Annual Order Cost (AOC)
Size
EOQ
EOQ determination
The EOQ
determination
AOC= Annual Order (set-up) cost
Q= Order Quantity
D = Annual demand in units for the inventory item
OC = Setup or ordering cost for each order
Annual Order cost = (Number of orders placed per year)

x (Setup or order cost per order)
AOC= Setup or order cost

per order
The EOQ …
AOC = ordering (set-up cost)
Q= Order Quantity
ACC= holding (carrying) cost
D= Annual demand in units for the inventory item
CC = Holding or carrying cost per unit per year
Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)
(Holding cost per unit per year)

The EOQ …
Q = Order Quantity
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
CC = Holding or carrying cost per unit per year
Optimal order quantity is found when annual setup cost equals annual
holding cost or
we take the derivative of the total cost function and set the derivative
(slope) equal to zero and solve for Q
2DOC = Q2CC
Solving for Q* = Q2 = 2DOC/CC
Q* = 2DOC/CC
EOQ …
Q= EOQ
D= annual demand
OC= ordering cost/order
CC= carrying cost/year
EOQ ….
• The above analysis can be summarized as
follow.
– Minimum Inventory Cost = ACC + AOC
– Minimum total Annual Cost = ACC + AOC + Purchase
cost
EOQ determination
• Consider the following illustration which considers
the purchase of a product at the beginning of January
& usage is constant at 833 units per month so average
inventory will be 5000.
EOQ determination
Month Stock
Jan 1 10000 10000/2 5000
Feb 1 9167
Mar 1 8333
Apr 1 7500
May 1 6661
Jun 1 5833
Jul 1 5000
Aug 1 4167
Sep 1 3333
Oct 1 2500
Nov 1 1667
Dec 1 833
Dec 31 0 65000/13 5000 units
Example
• A local distributor for Addis tire company expects to

approximately 9,600 steel belted tires of certain size next year.
The annual carrying cost is 16.00 Birr per tier per year and the
ordering cost are 75.00 Birr per order. The distributor operates
288 days a year.
Required:
1. Determine EOQ.
2. What is the Ordering Cost per year and annual carrying cost
at EOQ?
3. What is the total incremental or total inventory cost at EOQ
4. If purchase price per tire is 80.00 Birr. What is the total cost
at EOQ?
5. How many times per year does the store reorders.
6. Determine the length of an order cycle.
7. Compute Ordering, Carrying, Total Inventory costs & overall
total costs. If order quantities are 100, 150, 200, 250, 300, 350
and 400 units. What do you infer from this exercise?
Solution
Cont’d…
Cont’d…
3. Minimum inventory cost = 2400+2400
= 4800 birr
4. Total cost = AOC+ACC+Pc
= 2400+2400+80(9600)
= 772,800 Pc= purchase cost

Cont’d…
Cont’d…
7. It means the optimum quantity will be used within working days
Order ACC = AOC = Annual Total Overall

Quantity (Q/2 x CC) (D/Q x Inventory Cost Total Cost
OC)
100 800 7200 8000 Birr 776,000
150 1200 4800 6000 774,000
200 1600 3600 5200 773,200
250 2000 2880 4880 772,880
300 2400 2400 4800 772,800
350 2800 2057 4857 772,857
400 3200 1800 5000 773,000
450 3600 1600 5200 773,200
D= 9600, TIC= 100*ACC, Over all cost= 800+7200+(9600*80)
Cont’d…
• From this we can infer that that at EOQ, total

inventory or overall total cost will be minimum.
When the order size is large, the ACC will be high &
for small order sizes the AOC will be high.
An EOQ Example 2
Determine optimal number of needles to order (Q)
D = 1,000 units per year
S = $10 per order
H = $.50 per unit per year
An EOQ Example 3
Determine expected number orders per year (N)
D = 1,000 units
Q*= 200 units
S = $10 per order
An EOQ Example 4
Determine expected time between orders (T)
D = 1,000 units Q* = 200 units
S = $10 per order N = 5 orders per year
An EOQ Example 5
Determine total annual cost:
D = 1,000 units Q* = 200 units
H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost

Robust Model
 The EOQ model is robust
 It works even if all parameters and assumptions

are not met
Because the total cost curve is relatively flat in the

area of the EOQ
Minimizing Costs
Objective is to minimize total costs
Total cost of
holding and setup
(order)
Minimum
total cost
Annual cost
Holding cost
Setup (or order)

cost
Optimal order Order quantity
quantity (Q*)
An EOQ Example
Suppose Management underestimates demand by 50%
D = 1,000 units 1,500 units
Q*= 200 units
D Q
TC = S + H
Q 2
1,500 200
TC = ($10) + ($.50) = $75 + $50 = $125
200 2
An EOQ Example
Actual EOQ for new demand is 244.9 units
D = 1,000 units 1,500 units
Q*= 244.9 units
D Q
TC = S + H
Q 2 Only 2% less
1,500 244.9 than the total cost
TC = ($10) + ($.50) of $125 when the
244.9 2
order quantity
TC = $61.24 + $61.24 = $122.48 was 200
Cont’d…
Therefore, Total material cost is 481,705.20 Birr with a

discount of 2% for an order size of 1,200 units.
 Reading assignment: price breaks and production
order quantity
EOQ with quantity discount and price breaks
• The optimum quantity when there is quantity discount is the

one that makes the savings from the purchase cost equal to the
total inventory cost.
• EOQ model is not the best method to determine the optimum
level when there is quantity discount
Example:
• A factory required 1,500 units of an item per month, each

costing 27.00 Birr. The cost per order is 150.00 Birr &
inventory carrying charge is 20% of price.
Required:
• Find the EOQ & the total material cost.
• Would you accept a 2% discount on a minimum supply of
quantity of 1,200 units?
Solution
Cont’d…
• The total cost without discount is

TOC = D/Q x OC
= 18000/1000 x 150 = 2700 Birr
TCC = Q/2 x CC
= 18000/2 x 5.4 = 2,700 Birr
• Total Purchasing Cost = 27 x 18000 = 486,000 Birr

• Total Material Cost = 2491,400
= 491,400 birr
Cont’d…
2. The minimum supply is 1,200 units.

The unit cost will be decreased by 2% . i.e.
= 27 – (0.02(27)) = 26.46Birr
• The total material cost with quantity discount f 2% can be
obtained as follows
(N.B. – Q is 1,200 unit)
TOC = 18000/1200 x 150 = 2,250 Birr
TCC = 1,200/2 x (26.46 x 0.2) = 3,175.20 Birr
(CC is 20% of Price)
TPC = 18000 x 26.46 = 476,280 Birr
EOQ with gradual supply of orders from external
suppliers
• This one is the case where the supply of orders

is not instancious. i.e. there is no immediate
supply of items from the suppliers’.
• In order to grasp the idea of gradual supply
let’s look at the concepts of lead-time and
safety stock
a. Lead time
• Lead time is the lapse in time between when an order is placed
to replenish inventory and when the order is received.
Lead time…
• It involves the time for the completion of all or some of the
following activities:
– Raising purchase requisition.
– Inquires, quotations and approval, (import license procedure for imported items).
– Placement of an order on supplier(s).
– Suppliers time to make the goods ready.
– Transportation or clearing.
– Receipt of goods at the company.
– Inspection of received items.
– Taking the items in to the store
Cont’d…
• Obviously, in order to receive supplies before the

stock reaches zero level, it is necessary to order the
materials much in advance. i.e. when the stock
available sufficient to lost during the lead time. This
is shown graphically in figure (3.1) given below.
• Suppose an item has lead time of 15 days and the
monthly consumption (assuming 30 days per month)
of the item is 600 units, then the reorder must be
placed when the stock available is sufficient to last 15
days is 300 units.
Figure 3.1. Cont’d…
Order here to
500 receive supply @
C
400
Unit in Stock
R2
300 R1 ROL= 300
200
100
0
A M B N C
Lead Time = 15 days
• NC= MB= 15 days is lead time Re-order level (ROL).

• ROL = Stock sufficient to last during the lead time is 300 units.
• Here the Re-order point is lead- time multiplied by daily demand.
b. Safety stock (buffer or reserve)
• Neither the consumption rate of a material is constant through
the year nor the lead-time.
• Hence in the earlier example though reorder is place at a stock
level of 300 units.
• The consumption rate may rise subsequently and the stocks
may well be exhausted in 7 days instead of 15 days or it may
be that the supplier fails to supply after 15 days as expected.
• In either case a stock out would be experienced resulting into
hampering of production to guard mainly against these
uncertainties in consumption rate and lead time, an extra stock
is maintained all along this is called as buffer stock or safety
stock
Cont’d…
• This stock also come in use when:

– Any excess in process rejections.
– Rejections at the time of receipt or goods due to
damages or subsequent quality
• Since safety stock is part of inventory, it
should be maintained just sufficient to guard
against the uncertainties and not-too-excessive
(especially for ‘A’ items).
Determine safety stock
• One simple method of determining safety
stock in such cases is to approximately
estimate the maximum lead-time and the
normal lead time for an item in consultation
with the purchasing personnel and from the
past records.
• The safety stock then be sufficient to last the
periodic difference between maximum and
minimum lead-time period.
Cont’d…
• Suppose for an item monthly consumption is 100

units, the normal lead-time is 15 days and maximum
lead-time is estimated as one month. The safety stock
will be;
(Maximum lead-time in a month  Normal lead-
time in a month) x Monthly consumption
= (1-1/2) x 100
= 50 or say 50 to be on safe side.
ECONOMIC PRODUCTION QUANTITY
(EPQ)
• Determines the quantity a company or retailer

should order to minimize the total inventory
costs by balancing the inventory holding cost
and average fixed ordering cost.
• Was developed by E. Taft in 1918.
Cont’d…
• We have seen the application of the EOQ model in

determining the optimum order quantity of items
purchased/ordered from external suppliers.
• But when the company is the producer and user of its items,
the run size is the economic production quantity (EPQ).
• In other words the company is the supplier for itself.
• In the determination of the EPQ the carrying cost remains the
same but the ordering cost is replaced by set-up-cost which is
the cost of preparing production for operations.
Cont’d…
• Let us now derive the formula of EPQ;

Let d = Daily demand rate for the products.
P= Daily production rate for the product
T= Number of days for a production run (In
order to produce the Specified quantity).
When p>d;
– Daily rate of inventory build-up = p-d
– Level of inventory by the end of t-day = (p-d) x t  Max. inventory
Cont’d…
Cont’d…
Cont’d…
Where D = Annual demand

Sc = Set-up cost /run
CC = Annual carrying cost/unit
d/p = Part of production that is not inventoried
1 - d/p = Part of production that is carried in inventory
Example 1
• A merchandising business enterprise has a forecasted demand

of 10,000 units per year. Holding costs are Br. 0.4 per unit per
year. Acquisition cost is Br. 5.5/order. Daily demand is 40
units. The enterprise agreed with a supplier for a gradual
delivery of 120 units/day.
• Based on the above information;
A. Determine the optimum order quantity and annual
inventory costs.
B. What will be the effect of using this policy?
Solution
Cont’d…
Decision:
Since the total cost in non-instancous supply (under A) is less than
the instancous receipt (under B), the enterprise should use the
gradual delivery system.
Material requirement Planning (MRP)
Introduction
Nature of demand
• There are two types of demand: independent and
dependent.
• Independent demand is not related to the demand for
any other product.
• For example, if a company makes wooden tables, the
demand for the tables is independent.
• Master production schedule items are independent
demand items.
MRP
• Material Requirement Planning (MRP) happens to be
the best model of dependent demand pattern of
Inventory.
• MRP has two main characteristics
– The known requirement and
– The known period of requirement (time).
MRP
• MRP is a set of techniques that takes the Master
Production Schedule and other information from
inventory records and product structure records as
inputs to determine the requirements and
schedule of timing for each item.
• Based on a master production schedule, a Material
Requirements Planning system :
– Creates schedules identifying the specific parts and materials required
to produce end items
– Determines exact numbers needed
– Determines the dates when orders for those materials should be
released, based on lead times
Cont’d…
• MRP, by its nature, does not need carrying of any

inventory ahead of requirement.
 It starts with the finalization of the production plan in a
firm.
Objectives of MRP
• Material requirements planning has two major
objectives:
– determine requirements and
– keep priorities current.
Determine requirement
• The main objective of any manufacturing planning and control
system is to have the right materials in the right quantities
available at the right time to meet the demand for the firm’s
products.
• The material requirements plan’s objective is to determine
what components are needed to meet the master production
schedule and, based on lead time, to calculate the periods
when the components must be available.
• It must determine the following:
• What to order.
• How much to order.
• When to order.
• When to schedule delivery
Keep priorities current.
• The demand for, and supply of, components changes
daily. Customers enter or change orders.
– Components get used up, suppliers are late with delivery,
scrap occurs, orders are completed, and machines break
down.
• In this ever-changing world, a material requirements
plan must be able to reorganize priorities to keep
plans current.
• It must be able to add and delete, expedite, delay, and
change orders.
MRP inputs
• Basically, MRP is a computerized system for ordering
and scheduling dependent demand inventories. There
are three primary inputs to MRP:
– A master Schedule
– A Bill of materials
– Inventory records
Master schedule
• A master schedule indicates the desired quantity and timing of
an end item (e.g. a finished product, such as a refrigerator or a
micro wave over).
• The next table illustrates how a master schedule for End item P
might appear.
• It shows that 200 units of P will be needed at the start of the
Week 6 and that another 100 units of P will be needed at the
start of Week 8.
• A master schedule for End item P
Item: P 1 2 3 4 5 6 7 8 9
Quantity 200 100
The bill of material (BOM)
• BOM file contains a list of all the components (sub
assemblies, parts etc..) a needed to assemble one unit
of the end item.
– Thus, each end item will have a separate bill of materials
file.
– The bill materials in visual form is a product tree.
Table Parent
100
Legs (4) Ends (2) sides (2) Top (1) HW kit (1) Components
203 411 622 023 722
Inventory record file
• The inventory record file contains information
on the status of each component on a period by
period basis.
– shows all the parts required to make one of the
item
• This includes quantity on hand, quantity on
order, changes due to cancelled orders, the lead
time, and the lot size
MRP processing
• The purpose of material requirements planning is to
determine the components needed, quantities, and due
dates so items in the master production schedule are
made on time.
– This section presents the basic MRP techniques for doing
so. These techniques are discussed under the following
headings:
• Exploding and Offsetting
• Gross and Net Requirements
• Releasing Orders
• Capacity Requirements Planning
• Low-Level Coding and Netting
• Multiple Bills of Material
Fig. 4.1. Product tree with lead time
A LT: 1 Week
B LT: 2 Weeks C
LT: 1 Week
D LT: 1 Week E LT: 1 Week
•
Cont’d…
• Product tree. Figure 4.4 shows a product tree for the

bill of material shown in Figure 4.3.
• The product tree is a convenient way to think about
bills of material, but it is seldom used except for
teaching and testing. In this text, it is used for that
purpose.
Exploding and Offsetting
• Consider the product tree shown in Figure 4.1.
• It is similar to the ones used before but contains
another necessary piece of information: lead time
(LT).
• Lead time is the span of time needed to perform a process.
• In manufacturing it includes time for order preparation,
queuing, processing, moving, receiving and inspecting, and
any expected delays.
Cont’d…
• In Figure 4.1, if B and C are available, it will

take one week to assemble A. Thus, the lead
time for A is one week.
• Similarly, if D and E are available, the time
required to manufacture B is two weeks. The
purchase lead times for D, E, and C are all one
week
Cont’d…
• Exploding the requirements. Exploding is the process of
multiplying the requirements by the usage quantity and
recording the appropriate requirements throughout the product
tree.
• Offsetting. Offsetting is the process of placing the exploded
requirements in their proper periods based on lead time. For
example, if 50 units of A are required in week 5, the order to
assemble the As must be released in week 4, and 50 Bs and 50
Cs must be available in week 4.
• Planned orders. If it is planned to receive 50 of part A in
week 5 and the lead time to assemble an A is one week, the
order will have to be released and production started no later
than week 4.
Cont’d…
• Thus, there should be a planned order receipt for 50 in week
5 and a planned order release for that number in week 4. If
an order for 50 As is to be released in week 4, 50 Bs and 50 Cs
must be available in that week. Thus, there must be planned
order receipts for those components in week 4. Since the lead
time to assemble a B is two weeks, there must be a planned
order release for the Bs in week 2. Since the lead
time to make a C is one week, there must be a planned order
release for 50 in week 3.
• The planned order receipts and planned order releases for the
Ds and Es are determined in the same manner. Figure 4.12
shows when orders must be released and received so the
delivery date can be met.
Example
• Using the product tree and lead times shown in
Figure 4.1, complete the following table to
determine the planned order receipts and
releases.
• There are 50 As required in week 5 and 100 in
week 6.
Answer: Table 4.1
Part Week
No 1 2 3 4 5 6
A Planned order receipt 50 100
Planned order release 50 100
B Planned order receipt 50 100
C Planned order receipt 50 100
D Planned order receipt 50 100
E Planned order receipt 50 100
Table 4.1: exploding and offsetting
Part Week
No 1 2 3 4 5
A Planned order receipt 50
Planned order release 50
B Planned order receipt 50
C Planned order receipt 50
D Planned order receipt 50
E Planned order receipt 50
Gross and Net Requirements
• The previous section assumed that no inventory was available
for the As or any of the components. Often inventory is
available and must be included when calculating quantities to
be produced. If, for instance, there are 20 As in stock, only 30
need to be made. The requirements for component parts would
be reduced accordingly. The calculation is as follows:
– Gross requirement = 50
– Inventory available = 20
– Net requirement = gross requirement – available inventory
– Net requirement = 50-20= 30 units
Cont’d…
• Since only 30 As need to be made, the gross

requirement for Bs and Cs is only 30
NB: The planned order release of the parent becomes
the gross requirement of the component.
The time-phased inventory record shown in table 4.1
can now be modified to consider any inventory
available. For example, suppose there are 10 Bs
available as well as the 20 As. The requirements for the
components D and E would change. Table 4.2 shows the
change in the MRP record.
Answer: Table 4.2 gross and net requirement
Part Week
No 1 2 3 4 5
A Gross requirement 50
Projected available 20 20 20 20 20 0
Net requirement 30
Planned order receipt 30
B Gross requirement 30
Projected available 10 10 10 10 0
Net requirement 20
Cont’d
C Gross requirement 30
Projected available 0 0
Net requirement 30
D Gross requirement 20
Net requirement 20
E Gross requirement 20
Net requirement 20
Example
• Complete the following table. Lead time for the part
is two weeks. The order quantity (lot size) is 100
units. Week 1 2 3 4
Gross requirement 50 45 20
Projected available 75
Net requirement
Planned order receipt
Planned order release
Answer
Week 1 2 3 4
Gross requirement 50 45 20
Net requirement 20
Releasing Orders
• So far we have looked at the process of planning when orders
should be released so work is done in time to meet gross
requirements. In many cases, requirements change daily. A
computer-based material requirements planning system
automatically recalculates the requirements for subassemblies
and components and re-creates planned order releases to meet
the shifts in demand.
– Planned order releases are just planned; they have not been released. It
is the responsibility of the material planner to release planned orders,
not the computer. Since the objective of the MRP is to have material
available when it is needed
and not before, orders for material should not be released until the
planned order release date arrives. Thus, an order is not normally
released until the planned order is in the current week (week 1).
Cont’d…
• Releasing an order means that authorization is given to

purchasing to buy the necessary material or to manufacturing
to make the component. Before a manufacturing order is
released, component availability must be checked. The
computer program checks the component inventory records to
be sure that enough material is available and, if so, to allocate
the necessary quantity to that work order. If the material is not
available, the computer program will advise the planner of the
shortage.
Cont’d…
• When the authorization to purchase or manufacture is released, the

planned order receipt is canceled, and a scheduled receipt is created in
its place. For the example shown in Figure 4.13, parts D and E have
planned order releases of 20 scheduled for week 1. These orders will be
released by the planner, and then the MRP records for parts D and E
will appear as shown in table 4.3. Notice that scheduled receipts have
been created, replacing the planned order releases.
• Scheduled receipts. Scheduled receipts are orders placed on
manufacturing or on a vendor and represent a commitment to make or
buy. For an order in a factory, necessary materials are committed, and
work-center capacity is allocated to that order. For purchased parts,
similar commitments are made to the vendor. The scheduled receipts
row shows the quantities ordered and when they are expected to be
completed and available.
Cont’d…
• Open orders. Scheduled receipts on the MRP record

are open orders on the factory or a vendor and are
the responsibility of purchasing and of production
activity control. When the goods are received into
inventory and available for use, the order is closed
out, and the scheduled receipt disappears to become
part of the on-hand inventory.
Table 4.3. scheduled receipts
Part Week
No 1 2 3 4 5
D Gross requirement 20
Scheduled receipts 20
Net requirement 0
E Gross requirement 20
Net requirement 0
Cont’d…
• Net requirements. The calculation for net

requirements can now be modified to include
scheduled receipts.
• Net requirements =
(gross requirement – scheduled receipts – available inventory)
Example
• Complete the following table. Lead time for the item
is two weeks, and the order quantity is 200. What
action should be taken?
Week 1 2 3 4
Gross requirement 50 250 100 50

Net requirement
Answer
Week 1 2 3 4
Gross requirement 50 250 100 50

Net requirement 50
The order for 200 units should be released

Capacity requirements planning
• As occurred in the previous planning levels, the MRP priority
plan must be checked against available capacity. At the MRP
planning level, the process is called capacity requirements
planning (CRP). The next chapter examines this problem in
some detail. If the capacity is available, the plan can proceed.
If not, either capacity has to be made available or the priority
plans changed.
Low-Level Coding and Netting
• A component may reside on more than one level in a
bill of material. If this is the case, it is necessary to
make sure that all gross requirements for that
component have been recorded before netting takes
place. Consider the product shown in Figure 4.2.
Component C occurs twice in the product tree and at
different levels. It would be a mistake to net the
requirements for the Cs before calculating the gross
requirements for those required for parent B.
Fig. 4.2 multilevel product tree
Level
A 0
B C 1
C D 2
Cont’d…
• The process of collecting the gross requirements and
netting can be simplified by using low-level codes.
The low-level code is the lowest level on which a part
resides in all bills of material. Every part has only one
low-level code. The low-level codes for the parts in
the product tree shown in Figure 4.2 are:
part low level code
A 0
B 1
C 2
D 2
Cont’d…
• Low-level codes are determined by starting at the lowest level

of a bill of material and, working up, recording the level
against the part. If a part occurs on a higher level, its existence
on the lower level has already been recorded.
• Once the low-level codes are obtained, the net requirements

for each part can be calculated using the following procedure.
For the purpose of this exercise, there is a gross requirement
for part A of 50 in week 5, all lead times are one week, and the
following amounts are in inventory: A, 20 units; B, 10 units;
and C, 10 units
.
Procedure
• 1. Starting at level zero of the tree, determine if any of the
parts on that level have a low-level code of zero. If so, those
parts occur at no lower level, and all the gross requirements
have been recorded. These parts can, therefore, be netted
and exploded down to the next level, that is, into their
components. If the low-level code is greater than zero, there
are more gross requirements, and the part is not netted. In this
example, A has a low-level code of zero so there is no further
requirement for As; it can be netted and exploded into its
components. Table 4.4 shows the results.
• 2. The next step is to move down to level 1 on the product tree
and to repeat the routine followed in step 1. Since B has a low-
level code of 1, all requirements for B are recorded, and it can
be netted and exploded.
Table 4.4 netting and exploding Zero-level parts
Low- Part Week
level No.
1 2 3 4 5
code
0 A Gross requirement 50
Scheduled receipts
Net requirement 30
1 B Gross requirement 30
Scheduled receipts
Net requirement
2 C Gross requirement 30
Scheduled receipts
Net requirement
Cont’d…
• The bill of material for B shows that it is made from a C and a

D. table 4.5 shows the result of netting and exploding the Bs.
Part C has a low-level code of 2, which tells us there are
further requirements for Cs and at this stage they are not
netted.
• 3. Moving down to level 2 on the product tree, we find that
part C has a low-level code of 2. This tells us that all gross
requirements for Cs are accounted for and that we can proceed
and determine its net requirements. Notice there is a
requirement for 30 Cs in week 4 to be used on the As and a
requirement of 20 Cs in week 3 to be used on the Bs. Looking
at its bill of material, we see that it is a purchased part and no
explosion is needed.
Cont’d…
• Table 4.6 shows the completed material requirements

plan. The process of level-by-level netting is now
completed using the low-level codes of each part. The
low-level codes are used to determine when a part is
eligible for netting and exploding.
• In this way, each part is netted and exploded only
once. There is no time-consuming re-netting and re-
exploding each time a new requirement is met.
Table 4.5: netting and exploding first-level parts
Low level Part Week
code No
1 2 3 4 5
Scheduled receipts
Net requirement 20
2 C Gross requirement 20 30
Scheduled receipts
Net requirement
2 D Gross requirement 20
Scheduled receipts
Projected available
Net requirement
Table 4.6: completed material requirements plan
Low level Part Week
code No
1 2 3 4 5
0 A Gross requirement 50
Scheduled receipts
Net requirement 30
Scheduled receipts
Net requirement 20
Scheduled receipts
Projected available 10 10 0 0
Net requirement 10 30
Planned order receipt 10 30
Table 4.6: CONT’D
Low level Part Week

code No
1 2 3 4 5
2 D Gross requirement 20
Scheduled receipts
Projected available 0 0 0
Net requirement 20
Multiple Bills of Material
• Most companies make more than one product and often use
the same components in many of their products. The material
requirements planning system gathers the planned order
releases from all the parents and creates a schedule of gross
requirements for the components. Figure 4.4 illustrates what
happens. Part F is a component of both C and B.
• The same procedure used for a single bill of material can be
used when multiple products are being manufactured. All bills
must be netted and exploded level by level as was done for a
single bill. Figure 4.5 shows the product trees for two
products. Both are made from several components, but, for
simplicity, only those components containing an F are shown
in the product tree.
Cont’d…
• Note that both have F as a component but at different levels in

their product tree. All lead times are one week. The quantities
required are shown in parentheses; that is, two Cs are required
to make an A, one F is required to make a C, and two Fs are
needed to make a B. table 4.7 shows the completed
material requirements plan that would result if 50 As were
required in week 5 and 30 Bs in week 3.
• Scrap is usually stated as a scrap allowance. For example, a
process may generate 15% scrap. The net requirement might
be for 300 units. With a scrap allowance of 15% the process
would be required to make 330/(1.0-0.15) = 353 units.
Fig. 4.3 multilevel product tree
B C
F (1) (1) G E (2) (2) F
Part B Part C
Week 1 2 3 Week 1 2 3
Planned order 20 20 Planned order 30 30
release release
Part F
Week 1 2 3
Planned order 20 20 Figure 4.4 multiproduct
release MRP explosion
Figure 4.6 multiproduct tree
A B
C(2) F(1)
F21)
USING THE MATERIAL REQUIREMENTS PLAN
• The people who manage the material requirements planning
system are planners. They are responsible for making detailed
decisions that keep the flow of material moving into, through,
and out of the factory. In many companies where there are
thousands of parts to manage, planners are usually organized
into logical groupings based on the similarity of parts or
supply.
• The basic responsibilities of a planner are to:
1. Launch (release) orders to purchasing or manufacturing.
2. Reschedule due dates of open (existing) orders as required.
3. Reconcile errors and try to find their cause.
4. Solve critical material shortages by expediting or replanning
5. Coordinate with other planners, master production schedulers,
production activity control, and purchasing to resolve problems.
Table 4.7: partial MRP
Low level Part Week
code No
1 2 3 4 5
0 A Gross requirement 5 0
Scheduled receipts
Net requirement 30
Scheduled receipts
Projected available 10 10 10 0
Net requirement 20
Scheduled receipts
Net requirement 50
Table 4.7: CONT’D
Low level Part Week

code No
1 2 3 4 5
2 F Gross requirement 40 50
Scheduled receipts
Net requirement 40 50
The material planner works with three types of orders:

planned, released, and firm.
Planned orders.
• Planned orders are automatically scheduled and
controlled by the computer. As gross requirements,
projected available inventory, and scheduled receipts
change, the computer recalculates the timing and
quantities of planned order releases. The MRP
program recommends to the planner the release of an
order when the order enters the action bucket but
does not release the order.
Cont’d…
• Released orders. Releasing, or launching, a planned order is
the responsibility of the planner. When released, the order
becomes an open order to the factory or to purchasing and
appears on the MRP record as a scheduled receipt. It is then
under the control of the planner, who may expedite, delay, or
even cancel the order.
• Firm planned orders. The computer-based MRP system
automatically recalculates planned orders as the gross
requirements change. At times, the planner may
prefer to hold a planned order firm against changes in quantity
and time despite what the computer calculates. This might be
necessary because of future availability of material or capacity
or special demands on the system.
Cont’d…
• The planner can tell the computer that the order is not to be
changed unless the planner advises the computer to do so. The
order is “firmed” or frozen against the logic of the computer.
• The MRP software nets, offsets, and explodes requirements

and creates planned order releases. It keeps priorities current
for all planned orders according to changes in gross
requirements for the part. But it does not issue purchase or
manufacturing orders or reschedule open orders. However, it
does print action or exception messages, suggesting that the
planner should act and what kind of action might be
appropriate.
Cont’d…
Exception messages. If the manufacturing process is under control and
the material requirements planning system is working properly, the system
will work according to plan. However, sometimes there are problems that
need the attention of the planner. A good MRP system generates exception
messages to advise the planner when some event needs attention.
Following are some examples of situations that will
generate exception messages.
– Components for which planned orders are in the action bucket and
which should be considered for release.
– Open orders for which the timing or quantity of scheduled receipts does
not satisfy the plan. Perhaps a scheduled receipt is timed to arrive too
early or late, and its due date should be revised.
– Situations in which the standard lead times will result in late delivery of
a zero-level part. This situation might call for expediting to reduce the
standard lead times.
Cont’d…
• Transaction messages. Transaction messages mean that the
planner must tell the MRP software of all actions taken that
will influence the MRP records. For example, when the
planner releases an order, or a scheduled receipt is received, or
when any change to the data occurs, the MRP program must be
told. Otherwise, the records will be inaccurate, and the plan
will become unworkable.
Cont’d…
• Material requirements planners must manage the

parts for which they are responsible. This means not
only releasing orders to purchasing and the factory,
rescheduling due dates of open orders, and
reconciling differences and inconsistencies but also
finding ways to improve the system and removing the
causes of potential error. If the right components are
to be in the right place at the right time, the planner
must manage the process.
Managing the Material Requirements Plan
• The planner receives feedback from many sources such as:

– Suppliers’ actions through purchasing.
– Changes to open orders in the factory such as early or late
completions or differing quantities.
– Management action such as changing the master production
schedule.
• The planner must evaluate this feedback and take corrective
action if necessary.
The planner must consider three important factors in managing
the material requirements plan.
Priority.
• Priority refers to maintaining the correct due dates by
constantly evaluating the true due-date need for released
orders and, if necessary, expediting or deexpediting.
Consider the following MRP record. The order quantity is 300
units and the lead time is three weeks.
Week 1 2 3 4 5
Gross requirement 100 50 100 150 200
Net requirement 150
Cont’d…
• What will happen if the gross requirements in week 2 are

changed from 50 units to 150? The MRP record will look like
the following.
Week 1 2 3 4 5
Gross requirement 100 150 100 150 200
Projected available 150 50 -100 100 250 50
Net requirement
Cont’d…
• Note that there is a shortage of 100 units in week 2 and that the
planned order release originally in week 2 is now in week 1.
What can the planner do? One solution is to expedite the
scheduled receipt of 300 units from week 3 to week 2. If this is
not possible, the extra 100 units wanted in week 2 must be
rescheduled into week 3. Also, there is now a planned order
release in week 1, and this order should be released
Cont’d…
• Bottom-up replanning. Action to correct for changed

conditions should occur as low in the product structure as
possible. Suppose the part in the previous example is
a component of another part. The first alternative is to expedite
the scheduled receipt of 300 into week 2. If this can be done,
there is no need to make any changes to the
parent. If the 300 units cannot be expedited, the planned order
release and net requirement of the parent must be changed.
Cont’d…
• Reducing system nervousness. Sometimes

requirements change rapidly and by small amounts,
causing the material requirements plan to change
back and forth. The planner must judge whether the
changes are important enough to react to and whether
an order should be released. One method of reducing
system nervousness is firm planned orders
Example
• As the MRP planner, you arrive at work Monday
morning and look at the MRP record for part 2876 as
shown below.
– Order quantity = 30 units; Lead time = 2 weeks
Week 1 2 3 4 5 6
Gross requirement 35 10 15 30 15 20
Projected available 20 15 5 20 20 5 15
Net requirement 10 10 15
Planned order receipt 30 30 30
Planned order release 300 30 30
Cont’d…
• The computer draws attention to the need to release the
planned order for 30 in week 1. Either you release this order,
or there will be a shortage in week 3. During the first week,
the following transactions take place:
A. Only 25 units of the scheduled receipt are received into inventory. The
balance is scrapped.
B. The gross requirement for week 3 is changed to 10.
C. The gross requirement for week 4 is increased to 50.
D. The requirement for week 7 is 15.
E. An inventory count reveals there are 10 more in inventory than the
record shows.
F. The 35 gross requirement for week 1 is issued from inventory.
G. The planned order release for 30 in week 1 is released and becomes a
scheduled receipt in week 3.
Cont’d…
• As these transactions occur during the first week, you must
enter these changes in the computer record. At the beginning
of the next week, the MRP record appears as follows:
– Order quantity = 30 units
– Lead time = 2 weeks
Week 2 3 4 5 6 7
Gross requirement 10 10 50 15 20 15
Projected available 20 10 30 10 25 5 20
Net requirement 20 5 10
Planned order receipt 30 30 30
Planned order release 30 30 30
Cont’d…
• The opening on-hand balance for week 2 is 20 (20

+25+10 -35 = 20). The planned order release
originally set in week 4 has shifted to week 3.
Another planned order has been created for release in
week 5. More importantly, the scheduled receipt
in week 3 will not be needed until week 4. You
should reschedule this to week 4. The planned order
in week 2 should be released and become a scheduled
receipt in week 4.
• Page 77-107 (source: introduction to MM, Arnold et
al, 2008)
Discussion questions
• What is an order quantity?
• What is lead time?
• MRP
Inventory system
Introduction
• inventories are materials and supplies that a business or
institution carries either for sale or to provide inputs or
supplies to the production process.
• All businesses and institutions require inventories. Often they
are a substantial part of total assets
• Inventory management is responsible for planning and
controlling inventory from the raw material stage to the
customer. Since inventory either results from production or
supports it, the two cannot be managed separately and,
therefore, must be coordinated.
Cont’d…
• Inventory management is the process of ordering, storing, and

using a company’s inventory.
• These includes the management of raw materials, components,
and finished products as well as warehousing and processing
such items.
• For companies with complex supply chains and manufacturing
processes, balancing the risks of inventory gluts and shortages
is especially difficult.
• To achieve these balances, firms have developed two major
methods of inventory management: Just-In-time and MRP.
Just-In-Time (JIT)
• Japanese manufacturers are more successful than even
companies in the western companies.
• How have the Japanese been able to do this?
• It is not because of their culture, geography, government
assistance, new equipment, or cheap labor, but because they
practice just-in-time manufacturing.
• Just-in-time (JIT) manufacturing is a philosophy that relates to
the way a manufacturing company organizes and operates its
business.
• It is not a magic formula or a set of new techniques that
suddenly makes a manufacturer more productive.
Cont’d…
• Rather, it is the very skillful application of existing

industrial and manufacturing engineering principles.
• The Japanese have not taught us new tricks but have

forced us to examine some of our basic assumptions
and approach manufacturing with a different
philosophy.
JIT philosophy
• Just-in-time manufacturing is defined in many ways, but the
most popular is the elimination of all waste and continuous
improvement of productivity.
• Waste means anything other than the minimum amount of
equipment, parts, space, material, and workers’ time absolutely
necessary to add value to the product. This means there should
be no surplus, there should be no safety stocks, and lead times
should be minimal: “If you can’t use it now, don’t make it
now.”
• Its adds value
Cont’d…
• Adding value to a product does not mean adding

cost. Users are not concerned with the manufacturer’s
cost but only with the price they must pay and the
value they receive. Many activities increase cost
without adding value and, as much as possible, these
activities should be eliminated.
Product development cycle
Market place Market
Product deign
(Customer ) Research
Manufacturing M/facturing
Engineering
• Anything in the product development cycle that does

not add value to the product is waste.
JIT environment
• Many elements are characteristic of a JIT
environment. They may not all exist in a particular
manufacturing situation, but in general they provide
some principles to help in the development of a JIT
system. These can be grouped under the following
headings:
• Flow manufacturing. • Uninterrupted flow.
• Process flexibility. • Continuous process
• Total quality management. improvement.
• Total productive maintenance. • Supplier partnerships.
• Total employee involvement.
MANUFACTURING PLANNING AND CONTROL
IN A JIT ENVIRONMENT
• Manufacturing planning and control are responsible

for managing the flow of material and work through
the manufacturing process, not designing the process.
However, manufacturing planning and control are
governed by, and must work with, the manufacturing
environment, whatever it is.
• The next slide shows the relationship.
Cont’d…
• No matter what planning and control system

is used, these four basic questions have to be
answered:
1. What are we going to make?

2. What do we need to make it?
3. What do we have?
4. What must we get?
JIT manufacturing
JIT manufacturing
Manufacturing
Process design
planning and control
Forecasting Flow m/facturing

Master planning Process flexibility
MRP TQM
Capacity management Uninterrupted flow
Production Activity control Total emp. Invol’t
Purchasing Supplier p/ship
Chapter five
Storage/ Store
Faculty
Management
• Business and
economics
Department
Store: place where excess materials are kept which
will be used as and when required.
• Management
Introduction
• Storage functions and responsibilities
• Location and layout
• Stores system and procedures
• Cost aspects and productivity
• Stock receipt, issue and dispatch
• Stores accounting and stock verification
• Stores security
Introduction
• The success of the business, besides other factors, depends to a
large extent on the efficient storage and material control.
• Material pilferage, deterioration and careless handling may
lead to reduced profits.
• Stores management is concerned with
– carrying the right kind of materials in right quantity,
– providing it quickly as and when required,
– keeping it safe against any kind of deterioration, pilferage
or theft, and
– to carry out the efficient performance of all these functions
at lowest possible cost.
Purpose of store management
• A significant role is played by stores in the operations
of a company.
• Store department remains in direct touch with other

departments of a company in its day-to-day activities.
• The key objective of the stores is to provide non-stop

service to the manufacturing divisions.
Cont’d…
• Additionally, a store is time and again equated directly with

money, as money is locked up on the stores.
• The objectives/functions of the stores can be classified as
follows:
• Receipt: receiving and accounting for raw materials, bought
out parts, spares tools, equipment and other items
• Storage: provision of right and adequate storage and
preservation to ensure that the stocks do not suffer from
damage, pilferage or deterioration
• Retrieval: facilitating easy location and retrieval of materials
keeping optimum space utilization.
Cont’d…
• Issue: fulfilling the demand of consumer departments by

proper issue of items on the receipt of authorized purchase
requisitions
• Records: to maintain proper records and update receipt and
issue materials
• Housekeeping: keeping the stores clean and in good order so
the handling, preservation, stocking, receipts and issue can be
done satisfactorily.
• Control: keeping a vigil on the discrepancies, abnormal
consumptions, accumulation of stocks, etc…and enforcing
control measures
Cont’d…
• Surplus management: minimization of scrap, surplus and

obsolesces through proper inventory control, and effective
disposal of surplus and obsolete items
• Coordination and cooperation: to coordinate and cooperate
with the interfacing department such as purchasing,
manufacturing, production planning and control, inspection
etc.
Types of stores
• Functionally, there are the following types of stores;
1. Receiving store: stores the quality and quantity of purchased
materials
Types of receiving stores
a. Inward store: to keep incoming materials until they are
accepted and taken into stock
b. Quarantine store: to temporarily stock materials which are
under dispute (for example, quantity discrepancy in the
consignment, transit damage to the goods, etc.)
c. Rejection store: to stock defective (non-conforming) goods,
until they are sent back to their suppliers.
Types of stores…
2. Main Store: storage and issuance of accepted materials
Main store may be divided as under:
a. Crib store to stock tools used by workmen in the
beginning of the shift and to be received at the end of the
shift (or job).
b. Finish part store to stock components and parts produced
in lot sizes in the company's own plant.
c. Plant (or maintenance) store to stock spares of plant and
machinery.
d. Sub-stores (Raw materials stores) to stock bar stocks,
castings and forgings etc. which require a lot of space and
can be stocked in areas open to the sky.
Types of stores…
3. Warehouses (Finish Product Store) to perform activities concerning
receipt, packaging and packing, dispatch of finished goods.
4. Special Stores to perform activities of receipt, storage and issues of
special materials. Typical examples of special stores are:
a. Bonded Store to stock materials "hypothecated with banks" and to stock
"excisable goods”
b. Statutory Store: to stock materials, namely kerosene, diesel and other
petroleum products requiring a strict conformance
c. Temperature Controlled Store: to stock perishable items such as
meat, fish, milk, vegetables and fruits or goods
5. Scrap Yard: used to store keep all types of scrap
Store location and layout
• Store Location
The location of stores is a strategic decision which if once taken
cannot be easily undone.
• It would be extremely costly to change the storage location at a
later stage.
• It should be carefully decided and planned so as to ensure
maximum efficiency.
• The optimal location of stores minimizes
– the total transportation, handling and other costs
– provide the needed protection for stores items.
Decision of store location
• In general, stores are located close to the point of use.
• Raw-materials stores is usually located
– near to the first operation - in case of line layout,
– near to subsequent operation, in process layouts
– finished goods stores near the shipping area.
– The tools and supplies stores are located centrally to the

personnel and equipment served.
Principles of good store location
• Economy in cost of transportation
• Approachability by rail/road transport
• Efficient service
• Reduced fire risk
• Security
• Minimization of risk spoilage and deterioration
• Flexibility/for future expansion
• Overall integration of factors
Layout and design of stores
• The efficient layout and design of stores is very important
from the point of view of its functioning which is linked to the
overall functioning of the plant.
• The planning and design of stores should be carried out with
the following objectives in mind:
– To achieve maximum ease of operation with ready accessibility of
major materials.
– To achieve minimum waste of space and flexibility of arrangement.
– Minimization of material handling requirements.
– Minimization of material deterioration and pilferage.
Cont’d…
• To assist the planning & to meet the objectives, following

information should be generated from the records:
a) Classification of store items by size, number, weight, frequency of
handling (FNS), handling arrangements, perishability.
b) Space requirement to store the item.
c) Units withdrawn at a time.
d) Maximum number of units to be stored at one time.
e) Storage facility best suiting the item.
f) List of available storage space for different kinds of storage facilities.
g) Size and shape of the space available for laying out the stores.
h) Prepare a flow diagram of the flow of materials through the stores.
i) REL Chart for the storage of different classes of materials can be
prepared.
REL chart
Cont’d…
• While planning the layout and design of the stores, following

factors should be considered:
– The space for receipt and inspection should be adjacent to the main
stores
– Use of third dimension (3D) must be made effectively.
– Different storage facilities should be situated in clearly defined lanes.
– Main lanes or aisles should usually be 1.5 to 3 metres wide, depending
upon the type of material and the amount of traffic involved.
– Clear markings should be made at storage space to facilitate location
and identification.
– The fast moving items should be stored near the dispensing window;
the slow moving should be away from the window.
3D of layout
Cont’d…
– The layout should permit the use of modern material handling

equipment.
– Stores layout should encourage the FIFO, i.e. the old stock should be
used earlier
– Due space should be left for expansion purposes in each portion.
– A pleasing and hygienic environment must be provided within the store
room.
– Adequate and clear lighting arrangements should be provided.
– Adequate safety provisions including fire-fighting equipment, alarms,
and accident control and prevention methods should be in-built in the
store room design.
– Special facilities, such as cold room, heating equipment, air-
conditioning etc., if required, should be carefully planned in advance
Cost aspects and productivity
• Should each cubic meter of space be employed by stocks?
• This type of stocking may considerably decrease the speed of
movement of material frequently and create blockages apart
from influencing the overall safety.
• Costs involved in stores can be analyzed under two heads, vis.,
• Fixed costs are to be incurred irrespective of the utilization of
space of the stores.
• E.g: rent, interest, repairs, maintenance, insurance, etc.
• Variable costs vary with the volume of throughput.
• E.g. handling costs, damages, deterioration, obsolescence, etc.
Stores Responsibilities
• Interestingly, Stores is a function that is visible in
probably any physical house.
• Be it a hotel, a hospital, a shop or industrial set up
Stores is found everywhere.
• Its presence every where adequately underlines the
responsibility of Stores.
• Depending upon where it is located a Stores has to
burden from minor to major responsibilities.
Cont’d…
1. Receipt of incoming goods
2. Inspection of all receipts
3. Storage and preservation
4. Identification of all materials stored
5. Materials handling
6. Packaging
7. Issue and dispatch
8. Maintenance of stock records
9. Stores accounting
10.Inventory control
11.Stock-taking
Cont’d…
• Receipt is the process of checking and accepting, from all

sources (vendors, production units, repair units etc.)
– These include supplies for manufacturing or operating
processes, plant maintenance, offices and capital
installations.
• Identification is the process of systematically defining and
describing all items of materials in stock
• Inspection involves the examination of incoming
consignments for quality.
Cont’d…
• Storage and preservation involves items to be binged and
kept in storage bins and impounds
• Materials handling involves movement and handling.
• Packaging : Materials dispatched to customers from the
finished goods store or from one store to another at different
location require to be packed.
• Issue and Dispatch is the process of receiving demands,
selecting the items required and handling them over to users,
or dispatching them to customers.
• Stores accounting is the process of recording details of stock
movements and balances in terms of financial value
Cont’d…
• Inventory control is the operation of continuously arranging

receipts and issues in such a way so as to ensure that stock
balances in quantity and/or value are adequate to support the
current rate of consumption at all times with due regard to
economy
• Stock-taking is the process of physical verification of the

quantity and condition of goods in store.
Cont’d…
• A Stores manager, therefore, is responsible for

carrying out the following functions:
1. Receive incoming goods
2. Supervise unloading of material Count, tally
3. Check for damage/shortage and prepare report
4. Fill Goods Inward / Day Book/ Daily Collection Register
5. Complete Vendors Consignment Note
6. Arrange for inspection and complete the inspection
7. Prepare Goods Receipt Note (GRN)
8. Prepare Goods Rejection Memo (in case of goods rejected)
9. Send goods to stores
Cont’d…
10.Send other documents to respective departments

11.Ensure all storage facilities are in proper working order e.g.
check for loose racks, damaged pallets etc.
12.Ensure goods housekeeping (i.e. check for spillage of oils,
dirty walls, obstructions).
13.Ensure all materials handling equipment are in goods
condition
14.Check and count goods before issue
15.Make entries Bin/Kardex (stock) cards promptly
16.Ensure Receipts and Issues are correctly documented
17.Ensure that rules and regulations relating to physical custody
and preservation of stores are followed
18.Ensure correct accounting of stores
Stock Accounting and Verification
• A Stores is a virtual money that can be encashed. However,
this money needs to be properly counted or accounted for.
• Stock accounting is thus a systematic way of assessing the
money value of the items lying in stores as also the items
under transaction through stores.
• Transactions, in terms of receipts and issues are a regular
feature in any stores and therefore Stock accounting process ,
in most of the cases, concentrates only on the stock in hand,
lying in Stores.
• The most popular methods of accounting are, FIFO, LIFO,
WAM
•
Cont’d…
• FIFO and LIFO Methods as accounting techniques are used in

managing inventory
• FIFO: the old stock is depleted first
• LIFO: most recent receipts are issued first
• WAM: the issues to the production department are divided into
equal batches from each shipment at stock.
Security & safety aspects of Storage :
• While Storing the items care needs to be taken to ensure the
security of the items so that the items are available when
required.
• Proper security needs to be maintained to ensure avoidance of
theft/pilferage of items.
• Costly & pilferable items may have to be stored in strong
rooms, Safes with lock and key.
• The movement of items in a store needs to be with proper
documentation to ensure accountability as well as precaution
against pilferage/damages.
Materials
Management
Faculty
• Business and
economics
Department
Material Handling
• Management
Outline
• Definition and scope
• Benefits of proper materials handling
• Influencing factors and control
• Materials handling codes and specifications
• Materials handling equipment and guidelines
• Evaluation of materials handling
• Materials disposal procedures and practice in
Ethiopia
Material handling
• Material handling is movement of materials in the
plant from receiving centre to distribution places and
production centres.
• It is loading and unloading of different types of

materials to and from the transporting vehicles or
materials handling devices.
Definition
• Material handling is the function dealing with the
preparation, placing and positioning of materials to
facilitate their movement or storage.
• Material handling is the art and science involving the
– movement,
– handling and
– storage of materials during different stages of
manufacturing
Objectives of Material handling
• To reduce the number of handlings
• Reducing the distances through which the materials are
handled.
• Lower unit materials handling costs.
• Reduction in manufacturing cycle time through faster
movement of materials
• Contribution towards a better control of the flow of materials
• Improved working conditions and greater safety
• Contribute to better quality by avoiding damage
• Increased storage capacity through better utilization of storage
Higher productivity at lower manufacturing cost.
Scope/ functions of material handling
• Material planning and control

• Purchasing
• Store management
• Inventory control
• Standardization
• Simplification
• Specification
• Value analysis
• Ergonomics
• JIT
Material handling cost
• Source of material handling cost arise from
1. the cost of owning and maintaining equipment and
2. the cost of operating the system.
• Cost of the 1st sources are available in the books of
account but
• Cost of the 2nd source are elusive/indefinable
NB: cost of material handling do not add value to a
product
Methods of reducing material handling cost
1. Eliminating the handling itself whenever and

wherever possible.
2. Mechanizing, largely by conveyors and power-
driven trucks, whatever handling still remains.
3. Making the necessary handling more efficient.
Selection of Material Handling Equipment
• Selection of Material Handling Equipment is decisive

because it affects both
– Cost and
– Efficiency of handling system
• Factors to be considered during selection
• Properties of the material: solid, liquid, gas; size,
shape, weight; fragile, toxic, corrosive
• Production flow: fixed vs flexible flow
• Cost consideration:
Material handling equipment
Material handling
equipment
Fixed path Variable path
• Move in a fixed path • Have no restrictions in the

Example direction of movement
• Conveyors, monorail Example
devices, chutes and • Forklifts, mobile cranes,
pulley drive industrial tractors
Classification of material handling
equipment
• Five categories
• Conveyors: useful for moving material between two
fixed workstations, either continuously or
intermittently.
– More suitable for continuous/mass production
– Different types i.e. with rollers, wheels and belts
– Costly to install
– Less flexible
Classification…
• Industrial trucks: more flexible in use than
conveyors since they can move between various
points and are not permanently fixed in one place.
– Convenience for intermittent production
– Handle various size and shape products
– Types, truck-petrol driven. Electric, hand powered…
Classification …
• Cranes and hoists: can move heavy materials
through overhead space.
– usually serve only a limited area
– Types, depends on loading capacity
– used both for intermittent and for continuous production
Classification…
• Containers:
– are either
• ‘dead’ containers (e.g. Cartons, barrels, skids, pallets)
which hold the material to be transported but do not
move themselves, or
• ‘live’ containers (e.g. wagons, wheelbarrows or
computer self-driven containers).
• Operated manually
Classification…
• Robots: Many types of robot exist. They vary in size,
and in function and operation/manoeuvrability.
– Can be used in hostile environment
Evaluation of material handling system
– Investment cost,
– labour cost,
– anticipated hours per year,
– utilization, and
– unit load carrying ability,
– loading and unloading characteristics,
– operating cost, and size requirements are
• the factors for evaluation of material handling
equipment.
– Others; source of power, technical support etc
Cont’d…
• The effectiveness of the material handling system can

be measured in terms of the ratio of the time spent
in the handling to the total time spent in
production.
– Material handling system= time spent in handling
the total time spent in production
• Equipment utilisation ratio is an important indicator

for judging the materials handling system.
Cont’d…
• In order to know the total effort needed for moving materials,

it may be necessary to compute Materials Handling Labour
(MHL) ratio. This ratio is calculated as under:
• In order to ascertain whether is the handling system delivers

materials work centres with maximum efficiency, it is
desirable to compute direct labour handling loss ratio. The
ratio is:
Cont’d…
• Generally, the efficiency of materials handling mainly

depends on the following factors:
(i) efficiency of handling methods employed for handling a
unit weight through a unit distance,
(ii) efficiency of the layout which determines the distance
through which the materials have to be handled,
(iii) utilisation of the handling facilities, and
(iv) efficiency of the speed of handling.

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Faculty

Chapter Two: Forecasting

Chapter Three: purchasing

Chapter Four: Inventory management

Chapter Five: store management

Chapter six: material handling

Chapter seven: Logistics

• It is concerned with planning, acquisition

• Material is one of the four basic resources.

• Its objectives are as follows:

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

Step 6 Monitor the forecast

weighted Moving Trend Simple Simultaneous

Trend 1 is curvilinear, trend 2 is linear

• The following data relate to the sale of iron ore of a company

Year 2018 2019 2020 2021 2022

• since the present trend is expected to continue, the LSM

• Let the base year be 2018

• Taking the price 2 9 4 81 18

Year 2016 2017 2018 2019 2020

Year 2017 2018 2019 2020 2021

• Aims at meeting own needs internally or to buy

• Suppliers research and specialized know how

– Example, if the cash discount is 2/10, net 30.

Evaluate each Qualitative/

– more efficient process,

– change in source of supply

 without sacrificing reliability and quality.

• In business there are two main order types

Meaning A document used for A document used for

Detail Prepared by the buyer Issued by the supplier to

Effect of Creates a contact between It approves the sale

• Here, the responsibility of materials management is to

1. Demand is known, constant, and independent

Usage rate Average

Receive Place Receive Place Receive

Setup (or order)

3000 Order Cost

Annual Order cost = (Number of orders placed per year)

AOC= Setup or order cost

Annual holding cost = (Average inventory level)

(Holding cost per unit per year)

• A local distributor for Addis tire company expects to

3. Minimum inventory cost = 2400+2400

4. Total cost = AOC+ACC+Pc

= 772,800 Pc= purchase cost

Order ACC = AOC = Annual Total Overall

• From this we can infer that that at EOQ, total

Total annual cost = Setup cost + Holding cost

 The EOQ model is robust

 It works even if all parameters and assumptions

Because the total cost curve is relatively flat in the

Setup (or order)

Therefore, Total material cost is 481,705.20 Birr with a

• The optimum quantity when there is quantity discount is the

• A factory required 1,500 units of an item per month, each

• The total cost without discount is

• Total Purchasing Cost = 27 x 18000 = 486,000 Birr

2. The minimum supply is 1,200 units.