Material Management

Material Management
Definition
Material management is a scientific technique which helps in
Planning, Organizing & Controlling of flow of materials from
their initial purchase through internal operations to the service
point through distribution. In other words, material management
is a process which concerns flow of supplies into, through and out
of an organization to achieve a level of service which ensures that
the right materials are available at the right place at the right time
in the right quantity and quality and at the right cost.
 Objectives of Material Management

 To gain economy in purchasing [At right cost]

 To satisfy the demand during the
replenishment period [At right time]
 To carry reserve stock to avoid the stock out
[ Right quantity]
 To stabilize functions in consumption [Right
place]
 To provide our customers reasonable level of
service [Right quality]
Importance of Material Management

 It keeps inventory accurate.

 Enables JIT [Just In Time]
inventory management.
 Freight costs are optimization.
 Quality control goes up.
 Inventory Management
• The stock of raw material, semi
finished goods or finished goods for
smooth flow of production or supply
or for giving better service is called
inventory .
 Importance of Inventory
 It helps in smooth and efficient running of
work/production/business.
 It helps in proper utilization of labor and machine.
 It helps in providing good service to customers.
 It helps in purchase of proper quantity of goods.
 It allows flexibility in production schedule.
 It helps in minimizing the loss from wastage or damage.
 It helps to take the advantage of price discount by bulk
purchasing.
 Inventory Costs
1. Ordering Cost/Set up Cost:
The cost incurred for placing an order of inventory
is called ordering cost. Examples:
Transportation cost, managerial cost, processing
cost.
2. Carrying/ Holding Cost:
The cost which incurred for keeping stock in stores
is called carrying cost. Examples: Security cost,
electricity cost, interest on capital, cost of
insurance, cost due to leakage, damage,
3. Material Cost:
The price or amount paid to suppliers for
buying materials of inventory is called
material cost.
4. Stock out cost/ shortage cost:
It is the opportunity cost of not having an
item in stock when it is demanded. This
cost is only incurred when demand
exceeds supply.
 Dependent Demand Vs Independent Demand
Dependent Demand: It is directly related to the demand of
another parts and components of products or product itself. It
is relatively straight forward calculation. It is the requirement
for finished goods. It is not based on forecasting but based on
direct calculation from finished goods. For example, if an
automobile is planning to produce 500 cars then it needs 2000
wheels and tires.
Independent Demand: It is the demand of final products. It is
created by outsides like customers, suppliers or other
companies. It is unknown demand so it is estimated by various
technique like trend analysis, market survey, furcating models
etc.
 Dependent Demand
1. Related with demand of
parts/components required to
produce final goods.
2. No direct touch to final
customers.
3. It is straight forward
computational.
4. Mathematical and statistical
models are not required to
predict.
5. Low cost is required.
Independent Demand
1. Related with demand of final
goods by customers, suppliers.
2. Direct touch with final
customers.
3. It is not straight forward
computational.
4. Mathematical and statistical
models are required to predict.
5. High cost is required.
 Types of Inventory System
1. Continuous Review inventory system:
The fixed order quantity (Q) and re-order stock level called reorder
point (R) should be determined. So this is called fixed order quantity
system or Q/R inventory system or economic order quantity (EOQ)
system or re-order point system or perpetual inventor system.
Diagram
The assumptions are:
Constant and certain demand over the period.
Constant and known lead time.
Constant purchase price of material.
Constant and independent carrying cost.
No stock out
2. Periodic inventory system: In this model, order is placed at certain
interval of time. In this model, demands are not constant and order
 Material Requirement Planning(MRP)
Introduction
• Material requirement planning (MRP) is determining the
number of parts, components and materials needed to
produce a product.
• MRP provides time scheduling information specifying when
each of the materials, parts and components should be
ordered or produced.
Definition
“ MRP constitutes a set of techniques that use bill of materials,
inventory data and the master production schedule to calculate
requirements for materials” – APICS Dictionary
 Inputs of MRP
Three inputs of MRP are

Master Production
Customer Order Sales Forecast
Schedule (MPS)

Bill of Material Inventory

Material Requirement Planning
(BOM) File Status File
(MRP)System

Engineering Service Parts

Changes Requirements
 Material Requirements Planning System

Based on a master production schedule, a

material requirement planning system:
• Identifies the specific parts and materials
required to produce final product.
• Determines exact number of units needed.
• Determines the date when orders for those
materials should be released, based on
lead time.
 Master Planning System (MPS)
It is a list of items, indicating end/final products to
be produced. This contains items name and code,
quantity to be produced and time of completing
production.
It is based on estimations of product demand, i.e.
sales forecast.
MPS for two products P1 and P2
February
Products
Week 1 Week 2 Week 3 Week 4
Product P1 50 40 30
Product P2 60 80
 Bill of Materials (BOM) File
• It provides a list of materials and
quantities required to produce the final
products.
• It contains the list of finished products,
material needed for each finished products
in units, assembly structure, sub-
assemblies, parts and materials.
• BOM file is revised every time there is a
change in product design or specification.
 Bill of Materials (BOM) File
• A company has to fulfill the order of 50 units
of product A in 10 days. The product structure
tree reveals that for the assembly of each unit
of A requires 4 units of B and 2 units of C for
assembly. Each units of B requires 2 units of
D and 1 unit of E where as each unit of C
needs 3 units of D and 2 units of F. Draw
product structure tree diagram and calculate
net requirements of B, C, D, E and F to
produce 50 units of product A.
 BOM without lead time
A company has to fulfill the order of 50 units of product A in 10 days.
The product structure tree reveals that for the assembly of each unit of A
requires 4 units of B and 2 units of C for assembly. Each units of B
requires 2 units of D and 1 unit of E where as each unit of C needs 3
units of D and 2 units of F. Draw product structure tree diagram and
calculate net requirements of B, C, D, E and F to produce 50 units of
product A.
A(50)
A = 50
B = 4A = 4x50 = 200
B(4) C(2) C = 2A = 2x50 =100
D = 2B + 3C = 2x200 + 3x100 = 700
E = B = 200
D(2) E(1) D(3) F(2)
F = 2C = 2x100 =200
 Homework: BOM without lead time
A company has to fulfill the order of 50 units of
product in 10 days. The product structure tree reveals
that for the assembly of each unit of A requires 8 units
of B, 2 units of C and 3 units of G for assembly. Each
units of B requires 2 units of D and 1 unit of E where
as each unit of C needs 3 units of D and 2 units of F.
A=50
each unitsA(50)
of G requires 3 units of D, 4 units of E and
B=8A = 8x50 = 400
2 units of F Draw product structure tree diagram and
C=2A = 2x50 = 100
calculate
B(8)
net requirements
C(2) G(3) of B, C, D, E,
G=3A = 3x50 = 150
F and G to
produce 50 units of product A. D=2B+3C+3G = 2x400+3x100+3x150 = 1550
E=1B+4G= 1x400+ 4x150 = 1000
D(2) E(1) D(3) F(2) D(3) E(4) F(2)
F =2C+2G= 2x100+2x150 = 500
 Homework: BOM without lead time
A company has to fulfill the order of 50 units of product in 10 days. The
product structure tree reveals that for the assembly of each unit of A
requires 8 units of B, 2 units of C and 3 units of G for assembly. Each
units of B requires 2 units of D and 1 unit of E where as each unit of C
needs 3 units of D and 2 units of F. each units of G requires 3 units of D,
4 units of E and 2 units of F Draw product structure tree diagram and
calculate net requirements of B, C, D, E, F and G to produce 50 units of
product A.
A=50
A(50)
B=8A = 8x50 = 400

C=2A = 2x50 = 100

B(8) C(2) G(3)
G=3A = 3x50 = 150
D=2B+3C+3G = 2x400+3x100+3x150 = 1550
E=1B+4G= 1x400+ 4x150 = 1000
D(2) E(1) D(3) F(2) D(3) E(4) F(2)
F =2C+2G= 2x100+2x150 = 500
 BOM with lead time
A company has to fulfill the order of 50 units of product in 10 days. The
product structure tree reveals that for the assembly of each unit of A
requires 4 units of B and 2 units of C for assembly. Each units of B
requires 2 units of D and 1 unit of E where as each unit of C needs 3 units
of D and 2 units of F. The lead time are one day for A, two days for B,
one day for C, three days for D, four days for E and one day for F. Draw
product structure tree diagram and calculate net requirements of B, C, D,
E and F to produce 50 units of product A.
A A = 50
B = 4A = 4*50 =200

B(4) C(2) C = 2A = 2*50 =100

D =2B+3C = 2*200+3*100 =700
E = B = 200
D(2) E(1) D(3) F(2) F = 2C = 2*100 =200
 Days 1 2 3 4 5 6 7 8 9 10

Require
A
(L=1) Order

Require
B
(L=2) Order

Require
C
(L=1) Order

Require
D
(L=3) Order

Require
E
(L=4) Order

Require
F
(L=1) Order
 Assignment
A company has to fulfill the order of 50 units of product in 10 days. The
product structure tree reveals that for the assembly of each unit of A
requires 8 units of B, 2 units of C and 3 units of G for assembly. Each
units of B requires 2 units of D and 1 unit of E where as each unit of C
needs 3 units of D and 2 units of F. each units of G requires 3 units of D,
4 units of E and 2 units of F. The lead time are two day for A, three days
for B, two day for C, three days for D, four days for E, one day for F and
2 days for G. Draw product structure tree diagram and calculate net
requirements of B, C, D, E, F and G to produce 50 units of product A.
 Economic Order Quantity(EOQ)

Cost
Total Cost

Carrying Cost

Min. Cost

Ordering Cost

Quantity
0
EOQ = 465 501 750
 Terminology
D = Annual demand,
C = Cost per unit (Annual average inventory
value)
O = Ordering cost/set-up cost per order,
H = Holding cost per unit
n = Number of order per year
N = Number of working days
d = Demand per day = D/N
T = Cycle time = N/n
EOQ = Economic Order Quantity
L = Lead time
 Formulas
1. EOQ
2. ROL = Daily Demand × Lead Time = d × L = × L
Incase of safety stock, ROL = × L+ Safety stock
3. No. of order in a year (n) =
4. Cycle time (T) =
5. Maximum stock = EOQ, Minimum stock = 0
Average inventory =
Incase of safety stock,
Maximum stock = EOQ + safety stock, Minimum stock = 0 + safety
stock
Average inventory = + safety stock
6. Carrying Cost = Average inventory × Carrying cost per unit
=
Total Ordering Cost = No. of order per year × Ordering cost per
order
=
Material Cost = Annual demand × Cost per unit = D × C
Total Inventory Cost (TC) = DC + [when we order any quantity]
When we order EOQ quantity,
Total Inventory Cost (TC) = DC +
= DC + +
= DC + +
= DC + .
[when we order EOQ quantity]
 Problem 1
What is the percentage change in EOQ when the annual demand is doubled?

Solution: Suppose,
 Problem 1
What is the percentage change in EOQ when the annual demand is doubled?

Solution: Suppose,
D = 10000 units
O = Rs. 2 per order
H = Rs. 1 per unit
EOQ = = 200 units
When annual demand is doubled, D1 = 2 × 10000 = 20000
EOQ1 = = 282.8427 units
Change in EOQ = EOQ1 – EOQ = 282.8427 – 200 = 82.8427
% change in EOQ = × 100% = 41.42%
 Problem 2
What will be the percentage change in EOQ if 50% decreases in the ordering cost
and the holding cost?
Solution: Suppose,
 Problem 2
What will be the percentage change in EOQ if 50% decreases in the ordering cost
and the holding cost?
Solution: Suppose,
D = 10000 units
O = Rs. 2 per order
H = Rs. 1 per unit
EOQ = = 200 units
When ordering cost and holding cost are decreased by 50%,
O = 50% of Rs. 2 = Rs. 0.50x2 per order
H = 50% of Rs. 1 = Rs. 0.50x1 per unit
EOQ1 = = = 200 units
Change in EOQ = EOQ1 – EOQ = 200 – 200 = 0
% change in EOQ = × 100% = 0 = no change
 Problem 3
Compute total annual cost of inventory if number of order is 5 @ Rs. 20
per order and optimum order quantity is 100 units with holding cost Rs.
2 per unit.
Solution: Given,
 Problem 3
Compute total annual cost of inventory if number of order is 5 @ Rs. 20
per order and optimum order quantity is 100 units with holding cost Rs.
2 per unit.
Solution: Given,
n=5
O = Rs. 20 per order
EOQ = 100 units
H = Rs. 2 per unit
D = n × EOQ = 5 × 100 = 500 units
Total Inventory Cost (TC) =
= =
Rs. 200
 Problem 4
A manufactures has to supply his customers with 2400 units of his product per year.
Shortages are not allowed and storage cost amounts to 1.20 Rs. per unit per year. The
setup cost per run is Rs. 160. Find the optimal order quantity, optimum number of
orders in a year, and cycle time in days.
Solution: Given,
 Problem 4
A manufactures has to supply his customers with 2400 units of
his product per year. Shortages are not allowed and storage
cost amounts to 1.20 Rs. per unit per year. The setup cost per
run is Rs. 160. Find the optimal order quantity, optimum
number of orders in a year, and cycle time in days.
Solution: Given,
 Problem 4
A manufactures has to supply his customers with 2400 units of his product per year.
Shortages are not allowed and storage cost amounts to 1.20 Rs. per unit per year. The
setup cost per run is Rs. 160. Find the optimal order quantity, optimum number of
orders in a year, and cycle time in days.
Solution: Given,
D = 2400 units
H = Rs. 1.20 per unit
O = Rs. 160 per order
N = 360 days (Assume)
a) EOQ = = 800 units
b) n = = = 3 times in a year
c) T = = = 120 days
 Problem 5
A manufacturing company with stable demand for its product is managing its inventory
system for EOQ 320 units. No of order per year are 12 and set up or order preparation
cost is Rs. 50 per order. Find what value of the holding cost adjusts this system. Also
find the Reorder Level, if lead time is 10 days.
Solution: Given,
 Problem 5
A manufacturing company with stable demand for its product is managing its inventory
system for EOQ 320 units. No of order per year are 12 and set up or order preparation
cost is Rs. 50 per order. Find what value of the holding cost adjusts this system. Also
find the Reorder Level, if lead time is 10 days.
Solution: Given,
EOQ = 320 units EOQ
320
n = 12 H = Rs. 3.75 per unit
O = Rs. 50 per order
D = n × EOQ = 12 × 320 = 3840
L = 10 days
N = 360 days (Assume) ROL ×L
= × 10
ROL = ? And H = ? = 106.67
 107 units
 Problem 6
A firm requires 18,000 units of raw materials in a period of 6 months. The
carrying cost is 20% of cost. The set up cost per set up is Rs. 10. The cost per
unit is Rs. 19. The average lead time is 2 days (Assuming 360 days in a year.)
Find
(a) Economic order quantity (b)
Total annual cost
(c) No of days between orders (i.e. cycle time) (d) Reorder level
Solution
 Problem 6
A firm requires 18,000 units of raw materials in a period of 6 months. The
carrying cost is 20% of cost. The set up cost per set up is Rs. 10. The cost per
unit is Rs. 19. The average lead time is 2 days (Assuming 360 days in a year.)
Find
(a) Economic order quantity (b)
Total annual cost
(c) No of days between orders (i.e. cycle time) (d) Reorder level
Solution
D = 2x18,000 = 36,000 units
O = Rs. 10 per order
C= Rs. 19 per unit
H = 20% of C = 20% x Rs. 19 = Rs. 3.8 per unit
L = 2 days
N = 360 days in a year
(a) EOQ =
(b) TC = = 36000x19 = Rs. 685654.09
(c) T =
(d) ROL = = 200 units
 Problem 7
A computer shop stocks and sells a mercantile brand of personal computer. It costs the
store Rs. 450 each time it Places an order with the manufacturer for the personal
computers. The annual cost of carrying the PCs in inventory is Rs. 170. The store
manager estimates that annual demand for the PCs will be 1200 units. Lead time is
given as 10 days and assuming working days per annum is 300. Determine:
(a) Economic order quantity (b) Re-order point (c) Cycle Time
Solution: Given,
 Problem 7
A computer shop stocks and sells a mercantile brand of personal computer. It costs the
store Rs. 450 each time it Places an order with the manufacturer for the personal
computers. The annual cost of carrying the PCs in inventory is Rs. 170. The store
manager estimates that annual demand for the PCs will be 1200 units. Lead time is
given as 10 days and assuming working days per annum is 300. Determine:
(a) Economic order quantity (b) Re-order point (c) Cycle Time
Solution: Given,
D = 1200 units O = Rs. 450 per
order
H = Rs. 170 per unit L = 10 days
N = 300 days
a) EOQ = = 80 units
b) ROL × L = × 10 = 40 units
c) T = = = 20 days
 Problem 8
A firm consumes 50,000 units of an item per annum, each costing Rs. 10. The order
costs are expected to be Rs.40 and inventory carrying costs 10% of the annual average
inventory value. Find EOQ. If the company operates 250 days per year, the
procurement time is 2 days and the buffer stock is 500 units, find the reorder level and
average inventory level.
Solution: Given,
 Problem 8
A firm consumes 50,000 units of an item per annum, each costing Rs. 10. The order
costs are expected to be Rs.40 and inventory carrying costs 10% of the annual average
inventory value. Find EOQ. If the company operates 250 days per year, the
procurement time is 2 days and the buffer stock is 500 units, find the reorder level and
average inventory level.
Solution: Given,
D = 50000 units C = Rs. 10 per unit
O = Rs. 40 per order L = 2 days
N = 250 days Safety stock(SS) = 500
units
H =10% of C = 10% × Rs. 10 = Rs. 1 per unit
a) EOQ = = 2000 units
b) ROL × L + SS = × 2 + 500 = 900 units
c) Average inventory + safety stock
= + 500
= 1500 units
 Problem 8

A firm consumes 50,000 units of an item per annum,

each costing Rs. 10. The order costs are expected to be
Rs.40 and inventory carrying costs 10% of the
purchase price. Find EOQ. If the company operates
250 days per year, the procurement time is 2 days and
the buffer stock is 500 units, find the reorder level and
average inventory level.
Problem 9: A company demands 50,000 units per quarter. The ordering cost is Rs.40
per order and carrying cost is 10% of the cost price of inventory is Rs. 10 per unit. The
lead time for placing order is 5 days. Find assuming 300 working days.
(a) Economic order quantity (EOQ) (b) No of
orders
(c) Cycle time (d) Total cost of inventory. (e) Reorder
level
Solution: Given,
Problem 9: A company demands 50,000 units per quarter. The ordering cost is Rs.40
per order and carrying cost is 10% of the cost price of inventory is Rs. 10 per unit. The
lead time for placing order is 5 days. Find assuming 300 working days.
(a) Economic order quantity (EOQ) (b) No of
orders
(c) Cycle time (d) Total cost of inventory. (e) Reorder
level
Solution: Given,
Problem 9: A company demands 50,000 units per quarter. The ordering cost is Rs.40
per order and carrying cost is 10% of the cost price of inventory is Rs. 10 per unit. The
lead time for placing order is 5 days. Find assuming 300 working days.
(a) Economic order quantity (EOQ) (b) No of
orders
(c) Cycle time (d) Total cost of inventory. (e) Reorder
level
Solution: Given,
D = 50000 × 4 = 200000 units C = Rs. 10 per unit
O = Rs. 40 per order L = 5 days
N = 300 days H =10% of C =
10% × Rs. 10 = Rs. 1 per unit
a) EOQ = = 4000 units
b) n = = = 50 times in a year
c) T = = = 6 days
d) TC = DC + = 200000 × 10 + = Rs. 2004000
e) ROL × L = × 5 = 3333.33 units
 Problem 10
Annual demand for an item is 2400 units. Ordering cost is Rs
100, inventory carrying charges 24% of the purchase price per
year and the price breaks are as follows:
Determine
Order Sizeoptimum
in units purchasePrice
quantity.
per unit (C) in Rs
Above 750 C1 = 8.75
501 - 750 C2 = 9.25
Less or equal to 500 C3 = 10
Solution: Given, Order Size in units Price per unit (C) in Rs
D = 2400 units Above 750 C1 = 8.75

O = Rs. 100 per order 501 - 750 C2 = 9.25

Less or equal to 500 C3 = 10
H =24 % of C = 0.24 × C per units
Calculation of EOQ1: Order size is ( Less or equal to 500) units
H =24 % of C = 0.24 × 10 = Rs. 2.40 per units
EOQ = = 447.21 units  448 units
EOQ = 448 lies in order size (Less or equal to 500). So EOQ = 447
units.
TC = DC + = 2400 × 10 + = Rs. 25073.31
Calculation of EOQ2: Order size is (501 – 750) units
H =24 % of C = 0.24 × 9.25 = Rs. 2.22 per units
EOQ = = 465 units
EOQ = 465 is less than order size (501 – 750). To qualify for getting
purchased at Rs. 9.25 per unit, the quantity to be ordered should be at
least 501 units . So ordered quantity(Q) = 501 units.
Total Inventory Cost (TC) = DC +
= 2400 × 9.25 + = Rs. 23235.15
Calculation of EOQ3: Order size is above 750 units
H =24 % of C = 0.24 × 8.75 = Rs. 2.1 per units
EOQ = = 479 units
EOQ = 479 is less than order size above 750. To qualify for getting
purchased at Rs. 8.75 per unit, the quantity to be ordered should be at
least 751 units . So ordered quantity (Q) = 751 units.
Total Inventory Cost (TC) = DC +
= 2400 × 8.75 +
= Rs. 22108.12

From these three TC, it is found that optimum quantity = 751 units with
minimum the total annual cost (TC) = Rs. 22108.12