MATERIALS

MANAGEMENT

Professor: Eng. Virgilio Acevedo

vmacevedom@ujmd.edu.sv

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Materials Management - Definition
Definition:
“It is the function responsible for planning and
coordinating all activities related to he
provisioning, buys,
storage, control, motion,
“manipulation, standardization of a company's goods
or products”
“Its main objective is to reduce costs and streamline
the movement and handling of materials at all
stages.”

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Materials Management - Scope
Scope of Inventory
traditional Management or
Control
functions that it
comprises Warehouse
Management
Shoppin
g
Other
s

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Logistics Approach to Materials
Management

PLANNING PLANNING MANAGE

FORECAST PLANNING
• OF OF MENT
OF OF OF
THE THE PRODUCTION
DEMAND DISTRIBUTIO MATERIALS SUPPLY
N

It is also known as the functional approach to

logistics.

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Inventory Management or
Control
Definition:
It is the function responsible for answering the
following questions
What to Order?

When to Order?

How Much to Ask?

To what level should inventory be raised?

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Inventory Management or
Control
Processes covered by Management
of
Inventories

Inventory
Distribution
Planning

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Inventory Management or
Control
Materials Management uses different techniques of

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Inventory Management or
Control REDUCE INVENTORIES AS MUCH AS
POSSIBLE ACCORDING TO THE CIRCUMSTANCES

ENSURE HE SUPPLY
GOALS TIMELY DELIVERY OF RAW
MATERIALS AND FINISHED
PRODUCTS TO THE COMPANY'S
PRODUCTION AND SALES AREAS

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Inventory Management or
Control
MAJOR INVENTORY MANAGEMENT PROBLEMS

• OUTDATED INVENTORY INFORMATION

• VARIATIONS IN REPLENISHMENT TIME

• INSUFFICIENT STORAGE CAPACITY

• CHANGES IN DEMAND

• CHANGES IN THE MARKET

• LACK OF SALES COMMUNICATION

• LACK OF PRODUCTION COMMUNICATION

• QUALITY FAILURES OF SUPPLIERS AND PRODUCTION

• INTERRUPTIONS IN THE PRODUCTION PROCESS

• FAILURES IN PROMOTIONS OR MARKETING LAUNCHES

BOTTLE NECKS
Inventory Management or
Control
IT IS RECOMMENDED AS A KEY ASPECT FOR THE
PLANNING PROCESS TO HAVE ABSOLUTE CONTROL
OVER THE LOCATION AND STATUS OF THE
INVENTORIES

AGAIN, THE USE OF WMS (WAREHOUSE

MANAGEMENT SYSTEM) OR ENTERPRISE RESOURCES

PLANNING (ERP) SYSTEMS IS KEY

Inventory Management or
Controlof inventory management
Objectives
Inventory Management or
Control
Benefits
Increase customer satisfaction through timely delivery
of goods and services
Maintain an uninterrupted flow of goods and services
Facilitates purchasing negotiation processes
Improves the company's working capital

Inventory, definition
It is a list of different materials or
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Materials Management -
products,
Concepts whose quantities or
stock are available for sale or for
internal consumption.
Why keep inventories?
Inventories constitute a buffer
element between the different stages
of the process or commercial
operations in order to obtain a
operation
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Materials Management -
economic and efficient production
Concepts
system.

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INVENTORY VISION: “THE LAKE”
Typology of Inventories
Types of inventory according to their
nature

SUBJECTS MATERIALS
COUSINS IN PROGRESS

COMPONENTS PRODUCT

FINISHED
Typology of Inventories
THESE ARE THE MOST WELL-KNOWN CLASSES, BUT NOT THE
ONLY ONES
Typology of Inventories
Types of Inventory according to their
function

Cycle Stock
Stock
in Security
transit Stock

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9
Typology of Inventories
Anticipation Stock

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0
Typology of Inventories
Types of Inventory.- Definitions
Raw Materials
They are input goods that are converted into finished products
through a manufacturing process.
Finished Products
They are transformed goods ready for sale.
Semi-finished products
These are goods that are at an intermediate stage and require
some additional work to become finished products ready for
sale.

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1
Materials Management -
Concepts
Inventory Policy
Inventory policy typically refers to the
amount of inventory to be maintained.

It also defines the procedures and

controls related with
the
inventory management

2
Materials Management - Concepts
ASPECTS THAT THE INVENTORY POLICY SHOULD CONSIDER:
• DESIRED LEVEL OF SERVICE

• PERISHABLE NATURE OF INVENTORIES OR OTHER QUALITY

ASPECTS
• PRODUCTION CAPACITY VS DEMAND (IF NECESSARY)
• LOGISTICAL SUPPLY RESTRICTIONS, IF ANY (ESPECIALLY LINKED
TO OFFER AND LEAD TIME)

• FINANCIAL CAPACITY OF THE COMPANY (BUDGET)

• THE USED REPLENISHMENT SYSTEM AND INVENTORY REVIEW
FREQUENCY
• TREATMENT OF OBSOLETE OR REJECTED MATERIALS

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3
Materials Management -
Concepts
Characteristics of good inventory management:
Absence of out-of-stock finished products or shortages in
production.

Optimal inventory level to meet customer demand

High inventory turnover

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Materials Management -
Concepts
Inventory Management Indicators

• Inventory turnover.

• Inventory coverage.

• Inventory fill rate.

• Accuracy of inventory record (ERI)

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Inventory costs

Inventory Cost of Cost of buying

ownership
OC Big High Low
OC Small Low High
Materials Management -
Concepts
Cost of holding inventory
• Obsolescence, damage or evaporation
• Insurance
• Financial interests
• Taxes
• Storage
• Handling and Equipment

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Materials Management -
Concepts
• Capital or opportunity
Cost of stockout
• Lost sales
• Bad image of the company
Cost of placing orders
• Cost of preparing and placing orders
• Cost of receiving and inspecting the
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Materials Management -
Concepts
goods
• Cost of requisitioning goods
The Risk of Overstocking

Increases opportunity cost

Increases ownership costs and risk of
breakdowns
Decreases the liquidity or cash flow of companies

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 The Benefit of Working Capital

TOTAL STOCK

ACCOUNTS
RECEIVABLE

ACCOUNTS
PAYABLE
•O7>-Zm

WORKING CAPITAL

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0
MANAGEMENT
PERSPECTIVES REGARDING INVENTORY IN THE
OF ORGANIZATION
AREA LEVEL CONSEQUENCE

MANUFACTURE HIGH FIXED CAPITAL

SALES HIGH FIXED CAPITAL

I
N SHOPPING HIGH FIXED CAPITAL
V
E
N LOW INVESTMENT SERVICE
T
FINANCE LOW RISK
O
R
I MEETS THE NEEDS OF THE
SCM/ OPTIMUM COMPANY WITH MINIMUM
E PLANNING INVESTMENT •OR
S
Materials Management -
Concepts

BASIC INPUT OF THE

MANAGEMENT OF

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Materials Management -
Concepts

INVENTORIES

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 Materials Management -
Concepts
INFORMATION ON LOGISTICS PARAMETERS FOR
INVENTORY MANAGEMENT
• LEAD TIME

• MINIMUM PURCHASE LOT

SUPPLY
• ECONOMIC ORDER LOT

• PURCHASE LOGISTICS UNIT

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5
INFORMATION ON LOGISTICS PARAMETERS
FOR INVENTORY MANAGEMENT
• REORDER POINT

• STORAGE CAPACITY

• BOM

• MINIMUM PRODUCTION BATCH

MANUFACTURE
• PRODUCTION SPEED

• LOGISTICS UNIT OF THE COMPANY

• TRANSPORT CAPACITY OF FLEET LOGISTICS UNIT

PRIMARY AND SECONDARY SCHOOL 33
INFORMATION ON LOGISTICS PARAMETERS
FOR INVENTORY MANAGEMENT
• INVENTORY COVERAGE

INDICATOR

• SERVICE LEVEL
LOGISTICS PARAMETER

SERVICE LEVEL

• SAFETY STOCK —> DYNAMIC COVERAGE

FREQUENCY OF PRODUCTION

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 GOOD PRACTICES RELATED TO STOCK MANAGEMENT • TION

DEVELOP INVENTORY MANAGEMENT PROCEDURES

ESTABLISH INVENTORY MANAGEMENT INDICATORS

ESTABLISH A ROUTINE FOR ANALYSIS OF INVENTORY

TYPOLOGY

ESTABLISH TRACEABILITY OF OBSOLETE, EXPIRED AND

REJECTED ITEMS

ESTABLISH INVENTORY REDUCTION PRACTICE

OFINVENTORIES

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 Materials Management -
Concepts Demand Products
Independent
They are characterized by using the following tools to
plan their inventories
Inventory replenishment systems with reorder point

Economic order quantity (EOQ)

Fixed review period

Demand forecasting systems

 Materials Management -
ConceptsDemand Products
Dependent
The main characteristic of these products is that their
demand comes from the manufacturing of products

Materials Requirement Planning

(MRP)

Safety stock
 Materials Management -
• Concepts
Safety stock provides a level of protection
against fluctuations in demand
• What determines safety stock???
1. The level of service

2. The replenishment lead time

3. The variability of demand

 Materials Management -
Concepts
The batch size
Definition

It is the quantity that is necessary to buy

or produce.

In practice it is strongly influenced by

technology and economies of scale.
Lot size, calculation techniques
Materials Management -
Concepts
Fixed Order Quantity (FOQ)

The amount is arbitrary

It can be the same CEP (Economic Order
Quantity) for purchase or for production
What is the optimal quantity to buy?
 Calculating CEP
•(EOQ)
The CEP formula: CEP = 2DCc
CinvCp
• D: Demand per year, Cc: Cost of
purchase, Cinv: Storage cost, Cp:
Product cost

D
• # orders per year =
EOQ
EOQ
• Time between orders = TeoEOQ
= D
 Calculating CEP
(EOQ)
Example.- EOQ

A small welding shop uses rods to weld at a uniform rate. Marvin, the owner of the place. He
estimates that annual demand is 1,000 pounds. To place an order, you will need to spend about $3.60
for the phone call and paperwork. Marvin pays $2 per pound of rod, and his storage costs are based
on an annual rate of 25% - analyze the system.

Solution. First, the parameters are identified.

D: 1000 lbs per year

Cc: $3.6 per order.
Cinv: 25% per year
Cp: $2 per pound

2(1000)(3.6)
CEP = = 120 lbs
(0.25)(2)
Calculating CEP
(EOQ) D 1000 = 8.33 orders
# orders per year=
EOQ 120 per year

• Time between orders = EOQ 120

0.12 year
D 1000
= 1.44
month

= 43.2
days
 Calculating CEP
(EOQ) Order Quantity (EOQ)
Economic

• CEP – Gives us an answer to the

question how much to ask for
• It actually gives us a guide to
evaluate whether it is possible to
buy more or less than what is
made.
Calculating CEP
(EOQ)
7/23/2020 45

Economic Order Quantity (EOQ)

Assumptions
• There are no fluctuations in demand
• There is no replenishment time
• Cost of placing an order is always the
same
• Annual cost of ownership is constant
 BYU MARRIOTT SCHOOL

AND
Material Treat Pass Environment System Help
[MRP Lot Size (2) 21 Entries Found 1-] □

Restrictions

$ E(G8 H| • • to
LP* TL IL Pei PLP ITL PeiL Description
DY 0D0 0 Dynamic planning calculation
EX SEO 0 Calculating the exact batch size
EZ SEO 0 Lot size x odds
FS SS 0 0 Fixed/Partition
FX SF 0 0 Fixed Lot Size Calculation
GR 0G0 0 Groff batch size calculation
HB SH 0 0 Replenishment up to maximum stock
MB PM 1 0 Monthly lot size
PB PP 1 0 Lot size analogous period cont period
PK PK 1 0 Batch size period according to calendar-planning.
SP BEAR 0 Compensation of parts by periods
TB PT 1 0 Daily batch size
I W2 PW 1 0 Week-2
N WB PW 1 0 Weekly lot size

V Wl
22
0W0
PM 2
0 Variable economic lot size
0 Lot size (2 MONTHS)
E 24 PW 4 0 Lot size 4 weeks
N ZK PK 1 0 Batch size period according to calendar-planning.
2M PM 1 0 Monthly batch date needed.
2T PM 3 0 Quarterly Lot Size
2W PW 2 0 Lot size 2 weeks

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