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Production and operations management

MATERIALS MANAGEMENT

Definition
It is concerned with planning, organizing and controlling the flow of materials from their initial purchase through
internal operations to the service point through distribution.
OR
Material management is a scientific technique, concerned with Planning, Organizing &Control of flow of materials,
from their initial purchase to destination.
AIM OF MATERIAL MANAGEMENT

To get
1. The Right quality
2. Right quantity of supplies
3. At the Right time
4. At the Right place
5. For the Right cost
PURPOSE OF MATERIAL MANAGEMENT
• To gain economy in purchasing
• To satisfy the demand during period of replenishment
• To carry reserve stock to avoid stock out
• To stabilize fluctuations in consumption
• To provide reasonable level of client services
Objective of material management
Primary
• Right price
• High turnover
• Low procurement
• & storage cost
• Continuity of supply
• Consistency in quality
• Good supplier relations
• Development of personnel
• Good information system
Secondary
• Forecasting
• Inter-departmental harmony
• Product improvement
• Standardization
• Make or buy decision
• New materials & products
• Favorable reciprocal relationships
Four basic needs of Material management
1. To have adequate materials on hand when needed
2. To pay the lowest possible prices, consistent with quality and value requirement for purchases materials
3. To minimize the inventory investment
4. To operate efficiently
Basic principles of material management
1. Effective management & supervision
It depends on managerial functions of

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• Planning
• Organizing
• Staffing
• Directing
• Controlling
• Reporting
• Budgeting
2. Sound purchasing methods
3. Skillful & hard poised negotiations
4. Effective purchase system
5. Should be simple
6. Must not increase other costs
7. Simple inventory control programme
Elements of material management
1. Demand estimation
2. Identify the needed items
3. Calculate from the trends in Consumption during last 2 years.
4. Review with resource constraints

1 Material Requirements Planning (MRP)

Material requirements planning (MRP) is a production planning and inventory control system used to manage
manufacturing processes. Most MRP systems are software-based, while it is possible to conduct MRP by hand as
well.
.
Material Requirements Planning (MRP) is a computer-based production planning and inventory control
system. MRP is concerned with both production scheduling and inventory control. It is a material control system
that attempts to keep adequate inventory levels to assure that required materials are available when needed. MRP is
applicable in situations of multiple items with complex bills of materials. MRP is not useful for job shops or for
continuous processes that are tightly linked.

The major objectives of an MRP system are to simultaneously:

1. Ensure the availability of materials, components, and products for planned production and for customer delivery,
2. Maintain the lowest possible level of inventory,
3. Plan manufacturing activities, delivery schedules, and purchasing activities.
MRP is especially suited to manufacturing settings where the demand of many of the components and
subassemblies depend on the demands of items that face external demands. Demand for end items are independent.
In contrast, demand for components used to manufacture end items depend on the demands for the end items.
The distinctions between independent and dependent demands are important in classifying inventory items
and in developing systems to manage items within each demand classification. MRP systems were developed to
cope better with dependent demand items.
The three major inputs of an MRP system are
the master production schedule ,
the product structure records , and
the inventory status records . Without these basic inputs the MRP system cannot function. The demand for
end items is scheduled over a number of time periods and recorded on a master production schedule (MPS).
The master production schedule expresses how much of each item is wanted and when it is wanted. The
MPS is developed from forecasts and firm customer orders for end items, safety stock requirements, and internal
orders.
MRP takes the master schedule for end items and translates it into individual time-phased component
requirements. The product structure records , also known as bill of material records (BOM), contain information on
every item or assembly required to produce end items. Information on each item, such as part number, description,
quantity per assembly, next higher assembly, lead times, and quantity per end item, must be available.

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The inventory status records contain the status of all items in inventory, including on hand inventory and
scheduled receipts. These records must be kept up to date, with each receipt, dis- bursement, or withdrawal
documented to maintain record integrity.
MRP will determine from the master production schedule and the product structure records the gross
component requirements; the gross component requirements will be reduced by the available inventory as indicated
in the inventory status records

The scope of MRP in manufacturing

The basic function of MRP system includes inventory control, bill of material processing and elementary
scheduling. MRP helps organizations to maintain low inventory levels. It is used to plan manufacturing, purchasing
and delivering activities.
"Manufacturing organizations, whatever their products, face the same daily practical problem - that customers want
products to be available in a shorter time than it takes to make them. This means that some level of planning is
required."
Companies need to control the types and quantities of materials they purchase, plan which products are to be
produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the
lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few
examples are given below:
 If a company purchases insufficient quantities of an item used in manufacturing (or the wrong item) it may
be unable to meet contract obligations to supply products on time.
 If a company purchases excessive quantities of an item, money is wasted - the excess quantity ties up cash
while it remains as stock and may never even be used at all.
 Beginning production of an order at the wrong time can cause customer deadlines to be missed.
MRP is a tool to deal with these problems. It provides answers for several questions:
 What items are required?
 How many are required?
 When are they required?
 The end item (or items) being created. This is sometimes called Independent Demand, or Level "0" on
BOM (Bill of materials).
 How much is required at a time.
 When the quantities are required to meet demand.
 Shelf life of stored materials.
 Inventory status records. Records of net materials available for use already in stock (on hand) and materials
on order from suppliers.
 Bills of materials. Details of the materials, components and sub-assemblies required to make each product.
 Planning Data. This includes all the restraints and directions to produce the end items. This includes such
items as: Routings, Labor and Machine Standards, Quality and Testing Standards, Pull/Work Cell and Push
commands, Lot sizing techniques (i.e. Fixed Lot Size, Lot-For-Lot, Economic Order Quantity), Scrap
Percentages, and other inputs.
MRP can be applied both to items that are purchased from outside suppliers and to sub-assemblies, produced
internally, that are components of more complex items.
Problems with MRP systems
1.the integrity of the data.
If there are any errors in the inventory data, the bill of materials (commonly referred to as 'BOM') data, or
the master production schedule, then the output data will also be incorrect ("GIGO": Garbage In, Garbage Out).
Data integrity is also affected by inaccurate cycle count adjustments, mistakes in receiving input and shipping
output, scrap not reported, waste, damage, box count errors, supplier container count errors,production reporting
errors, and system issues. Many of these type of errors can be minimized by implementing pull systems and using
bar code scanning. Most vendors in this type of system recommend at least 99% data integrity for the system to give
useful results.
2.systems is the requirement that the user specify how long it will take for a factory to make a product from
its component parts (assuming they are all available). Additionally, the system design also assumes that this "lead
time" in manufacturing will be the same each time the item is made, without regard to quantity being made, or other
items being made simultaneously in the factory.
Purchasing management is the management of purchasing process, and related aspects in an organization.

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purchasing management is one of the most critical areas in the entire organization and needs intensive
management. Purchasing management also covers the areas of outsourcing and insourcing.
There does not exist many definitions of Purchasing Management and the difference to the well known
concept strategic purchasing is not very clear. Strategic Purchasing is often described and defined as: when
purchasing activities are linked to the corporate strategic planning process. Here is one more explicit definition of
strategic purchasing written by Carr and Smeltzer (1997): “Strategic purchasing is the process of planning,
implementing, evaluating, and controlling strategic and operating purchasing decisions for directing all activities of
the purchasing function toward opportunities consistent with the firm's capabilities to achieve its long‐term goals”.
This book will be based on this definition and it will in other words work as a definition for the books concept
Purchasing Management as well.
The main focus of this model is that Purchasing Management is located at the boundary between a
corporate organization’s external and internal business network. The business network is defined as a network of
activities, resources and actors (Ford, et al., 2003). On the internal side of the business network the activities are
often represented of internal process within the own organization and resources are often owned by the focal firm.
The impact of Purchasing Management A large study based on 175 company surveys with a respond rate of
22% performed by Carr and Pearson (2002) shows that the factors strategic purchasing and Purchasing Management
have a positive impact on the firm’s financial performance in both small and large firms. Carr and Pearson (2002)
also write that Purchasing Management and supplier involvement does affect the success of a new product
introduction
Purchasing Process
Purchasing Process includes as usual 8 main stages as follows:
1. Market survey
Requisitioning
1. Approving
2. Studying Market
3. Making Purchase Decision
4. Placing Orders
5. Receipting Goods and Services Received
6. Accounting Goods and Services
7. Receiving Invoices and Making Payment
8. Debit note in case of material defect
Purchasing Management Process
Purchasing Management Process consists usually of 3 stages:
1. Purchasing Planning
2. Purchasing Tracking
3. Purchasing Reporting
Purchasing Planning
Purchasing Planning may include steps as follows:
 creating purchasing projects and tasks
 providing related information (files, links, notes etc.)
 assigning purchasing tasks to the concern person
 setting task priorities, start/finish dates etc.
 assigning supervisors
 setting reminders
 control and evaluation
Purchasing Reporting
Purchasing Reporting includes:
 comparing actual and estimated values
 calculating purchasing task and project statistics
 sorting, grouping or filtering tasks by attributes
 creating charts to visualize key statistics and KPIs

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Purchasing Management Features and Functions
Purchasing management encompasses a group of applications that controls purchasing of raw materials
needed to build products and that manages inventory stocks. It also involves creating purchase orders/contracts,
supplier tracking, goods receipt and payment, and regulatory compliance analysis and reporting.

Profile of Suppliers

Rating of Suppliers

Requisitions and Quotations

Purchase Orders (POs)

Pricing

Vendor Contracts and Agreements

Management of POs

Procurement Reporting and Online Reporting

Repeat Procurement
Procurement is the process of acquiring the goods and services required by an organization to fulfill its objectives
(manufacture products, maintain assets, etc). Depending on the type of resouces and their use, the frequency of
procurement can vary from very low (as for capital goods) to very high (as for raw materials). This criterion refers to
medium- or high-frequency procurement.

Receipts for Procurement

Receipts for procurement refers to the criteria related to the reception of ordered goods from the supplier. Between
the moment when goods arrive and the moment when they are physically stored in the warehouse, there are a few
factors that need to be taken into consideration, such as the quantity of the good received (Does it correspond to the
quantity ordered?); the quality of the goods (Were the goods damaged during transportation or handling? Did
perishable goods expire before getting shipped?); and pricing (Did the price of the goods delivered change due to
unexpected factors?).

Online Requirements for Purchasing Management

Online tools and portals are increasingly used by organizations for supplier interactions. In order to make
communication efficient for both parties, these tools should provide functionality such as information on all
available suppliers; the possibility of creating purchase orders with advanced options (e.g., define frequency, define
delivery method, define payment methods, etc); collaboration that will allow changes to be easily communicated to
suppliers, etc.).

Reporting and Interfacing Requirements for Purchasing Management

In order to track the efficiency of the purchasing department, organizations need to access statistics and reports on
what has been ordered compared to what has been received; the quality of the services provided by each supplier;
price comparisons between different suppliers, etc. These reports are useful not only for the purchasing department,
but also for other departments that depend on goods received, such as production, sales, and accounting.

Special Purchase Systems:

The following are some special purchase systems:

1.Forward Buying: In forward Buying, the purchasing decision for a period will be taken in advance and
the organization will commit accordingly in terms of order quantity, rate and delivery schedule, by taking into

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consideration the availability of the fund and the requirements. Generally, this is used for public buying to avoid
favouritism to a specific vendor.
2.Tender Buying: In tender buying the steps are preparing bidders list, advertising tenders, receiving bids,
evaluating bids and placing order with the bidder with the lowest cost.
3.Blanket order: In blanket ordering system, the organization will enter into an agreement with its
supplies to receive items for a required quantity at a particular rate over a period of time.
4. Zero Stock: Zero stock purchase system, is in-line with using the just-in-time manufacturing system.
The main idea of this system is to operate the plant with near zero inventory. If the suppliers are situated nearer to
the company, they are more reliable in terms of making supply in time. The company can place orders with such
suppliers. The company will generally provide even technical know-how, quality control support etc. to its suppliers.
5. Rate Contract: Rate Contract is very much used in public sectors and government departments. The
suppliers are on ‘rate contract’ with DGS&D for a specific period. The organizations can place orders straightaway
with such firms without going through the lengthy procedure of purchasing.

Aspects of Purchase Management:

The different aspects of purchasing management are as follows:
1. Price forecasting
1. Charting Method
2. Moving Average Method
3. Regression method
4. Exponential smoothing method
2. Purchasing of capital equipments\
1. Payback period method
2. Rate of return method
3. Present worth method
4. Annul Equivalent Method
5. Future Worth method
The Various options to satisfy the demand for capital equipment are listed below:
 Purchase of new equipment
 Purchase of used equipment
 Leasing
3. International purchasing
4. Public buying
 Defence organizations
 Railway department
 Post and telegraph departments
 State governments

Stores Management;

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Just in Time Systems

Just in time (JIT) is a production strategy that strives to improve a business return on investment by
reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals or
Kanban between different points in the process, which tell production when to make the next part. Kanban are
usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. Implemented
correctly, JIT focuses on continuous improvement and can improve a manufacturing organization's return on
investment, quality, and efficiency. To achieve continuous improvement key areas of focus could be flow, employee
involvement and quality.

JIT relies on other elements in the inventory chain as well. For instance, its effective application cannot be
independent of other key components of a lean manufacturing system or it can "end up with the opposite of the
desired result." In recent years manufacturers have continued to try to hone forecasting methods such as applying a
trailing 13-week average as a better predictor for JIT planning; however, some research demonstrates that basing JIT
on the presumption of stability is inherently flawed.

The philosophy of JIT is simple: the storage of unused inventory is a waste of resources. JIT inventory systems
expose hidden cost of keeping inventory, and are therefore not a simple solution for a company to adopt. The
company must follow an array of new methods to manage the consequences of the change. The ideas in this way of
working come from many different disciplines including statistics, industrial engineering, production management,
and behavioral science. The JIT inventory philosophy defines how inventory is viewed and how it relates to
management.

Transaction cost approach

JIT helps in keeping inventory to minimum in a firm. However, a firm may simply be outsourcing their input
inventory to suppliers, even if those suppliers don't use Just-in-Time (Naj 1993). Newman (1994) investigated this
effect and found that suppliers in Japan charged JIT customers, on average, a 5% price premium.

Price volatility

JIT implicitly assumes a level of input price stability that obviates the need to buy parts in advance of price rises.
Where input prices are expected to rise, storing inventory may be desirable. However, decision of storing higher
inventory, which will mean higher inventory cost need to be weighed with increased cost due to volatility in prices.

Quality volatility

JIT implicitly assumes that input parts quality remains constant over time. If not, firms may hoard high-quality
inputs. As with price volatility, a solution is to work with selected suppliers to help them improve their processes to
reduce variation and costs. Longer term price agreements can then be negotiated and agreed-on quality standards
made the responsibility of the supplier. Fixing up of standards for volatility of quality according to the quality circle

Benefits

Main benefits of JIT include:

 Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory for
"changeover" time. The tool used here is SMED (single-minute exchange of dies).
 The flow of goods from warehouse to shelves improves. Small or individual piece lot sizes reduce lot delay
inventories, which simplifies inventory flow and its management.
 Employees with multiple skills are used more efficiently. Having employees trained to work on different
parts of the process allows companies to move workers where they are needed.

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 Production scheduling and work hour consistency synchronized with demand. If there is no demand for a
product at the time, it is not made. This saves the company money, either by not having to pay workers
overtime or by having them focus on other work or participate in training.
 Increased emphasis on supplier relationships. A company without inventory does not want a supply system
problem that creates a part shortage. This makes supplier relationships extremely important.
 Supplies come in at regular intervals throughout the production day. Supply is synchronized with
production demand and the optimal amount of inventory is on hand at any time. When parts move directly
from the truck to the point of assembly, the need for storage facilities is reduced.
 Minimizes storage space needed.
 Smaller chance of inventory breaking/expiring

Problems

Within a JIT system

Just-in-time operation leaves suppliers and downstream consumers open to supply shocks and large supply or
demand changes. For internal reasons, Ohno saw this as a feature rather than a bug

Very low stock levels means shipments of the same part can come in several times per day.

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