Procurement and Materials

Management Materials
Management
Arvind Tiwari
Guest Faculty IIFT

Overview

Materials Management
Production Planning
Materials Requirement Planning
Supplier Scheduling
Inventory
Inventory Costs
JIT

Materials Management
Business function for
Planning
Purchasing
Moving
Storing

Material in a manner to minimise the material

related costs in the organisation without
adversely affecting availability

Materials Management
Scope of Materials Management varies across
organisations. Includes
Production planning
Material planning
Purchasing
In plant material movement
Storage
Inventory control
Waste management

Production Planning
Plans
Sales
Despatch
Production
Materials

Inventory at each stage to ensure availability

to customer - internal or external

Production Planning
Objective is optimise utilisation of
Machines
Manpower
Material

Ideally No
Machine should be waiting / idle for material or
manpower
Man should be waiting / idle for material or
machine
Material should idle / waiting for machine or
manpower

Production Planning
Production planning
What to produce
How much to produce
When to produce

Involves
Process planning (Routing)
Loading
Scheduling

Production Planning
Has direct impact on
Capacity utilisation
Manpower cost
Utilities consumption and cost

PP inputs are used for

Materials Requirement Planning (MRP)
Manpower planning
Machinery requirement

Materials Requirement Planning

Based on Production Plan

Changes in PP entail changes in MRP
Now usually done through ERP systems
MRP run as many times as there is substantial
change in PP
Data accuracy specially BOM and Stock
information is essential to get the right output

Supplier Schedules
Supplier schedules generated from MRP
Share of Business information is also updated
in the ERP in case of multiple suppliers
Usually a manual override available for use if
necessary before a MRP output gets
converted to supplier schedule
SS informed to suppliers electronically

Understanding Inventory
Types of inventory
Raw material and semi finished item
Work-in-process (WIP)
Finished goods
Pipeline/In-transit
Maintenance, repair, and operating supplies
(MRO)

Raw Material and

Semi finished Item Inventory
Items purchased from suppliers or produced
internally to directly support production
requirements
Bulk quantities
Unfinished condition

Work-in-Process Inventory
Waiting to be moved to another process
Currently being worked on at work center
Lining up at processing center due to capacity
bottleneck or machine breakdown

Finished Goods Inventory

Completed items
Available for shipment or future customer
orders
Environments
Make-to-stock (MTS)
Make-to-order (MTO)
Just-in-time (JIT)

Pipeline/In-Transit Inventory
In transit moving to customer
Located at various places throughout
distribution channel

Maintenance, Repair, and

Operating Supplies Inventory
Used to support production and operations
Not physically part of finished product
Critical for continuous operation of plant,
equipment, and offices

Inventory-Related Costs
Unit costs
Ordering costs
Carrying costs

Unit Costs
Price that buyer pays for each unit
Actual costs of making or providing each unit
Direct materials
Direct labor
Allocated overhead

Ordering Costs
Associated with the release of material order
Generating and sending material release
Transportation costs
Any other cost of acquiring a good

With internal production, may include

machine set-up costs

Carrying Costs

Cost of capital
Cost of storage
Costs of obsolescence, deterioration, and loss
Opportunity cost

Costs of Storage
Costs related to storage space
Insurance costs
Costs of maintaining inventory, i.e., cycle
counting
Vary with level of inventory
Considered variable cost

Inventory Asset or Liability?

Historically considered current asset
Disregarded inventory carrying costs
Negative impact on cash flow, working capital
requirements, and profitability

Inventory Cash and Receivables

Need to translate real impact on
organizations financial measures
Determine key performance indicator

Right Reasons for Inventory

Avoid disruptions in operational performance

Support operational requirements
Support customer service requirements
Hedge against marketplace uncertainty
Take advantage of order quantity discounts

Wrong Reasons for Inventory

Poor quality and material yield

Unreliable supplier delivery
Extended order cycle times from global sourcing
Inaccurate or uncertain demand forecasts
Specifying custom items for standard applications
Extended material pipelines
Inefficient manufacturing processes

Just In Time Requirements

Commitment to zero defects by both buyer
and supplier
Frequent shipments of small lot sizes
Strict quality and delivery performance standards

Closer, even collaborative, buyer-supplier

relationships

JIT Requirements
Stable production schedules sent to suppliers
on regular basis
Extensive sharing of electronic information
between supply chain members
Electronic data interchange (EDI) capability
with suppliers

JIT Requirements
Requires effective and detailed supply
planning
Ongoing requirement to establish
Financial health of all players
Ability to grow with the company
Ability to continuously improve

Need to co-locate supplier engineers and

material managers with buyer

JIT Requirements
Begins and ends with thorough and welldeveloped commodity strategies
Plan for continuous cost improvement
establishes critical cost drivers

JIT Barriers

Dispersed supply base

Historic buyer-supplier relationships
Number of suppliers
Supplier quality performance

Downside of Poor Forecasting

Higher inventory volumes
Higher inventory carrying charges
Poor customer service
Inventory is misallocated across locations and
products

Excessive safety stock levels

JIT how much does it work

Objective of JIT is to reduce the inventory
related costs in the supply chain upto
manufacturing
Many companies in India also claim to follow
JIT
They have very low inventory and single /
multiple supplies daily
The additional cost of this operation is not
visible and can be substantial

JIT how much does it work

In situations with stable demand and
therefore stable production volumes there are
advantages to manufacturer, Tier 1 and Tier 2
suppliers
In other cases the suppliers are forced to carry
inventory with all the associated costs
These costs are eventually borne by the
customer
The costs may be higher than those incurred
by the customer had it held inventory