ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
COURSE OUTLINE

Degree Program: B.A. in Management

Module Name: Materials and Operations Management
Course Number MGMT3151
Course Title: Materials Management
ECTS credit points 5
Course Information Academic Year: III Semester: I
Meeting day: Meeting time: Meeting location:
Instructor’s Contact Information Office: Phone: +251911416572 Email:
demeke1516@gmail.com Office Hours:
Course Objectives
After the end of this course students are expected to;
Know the integrated materials management functions in manufacturing
organizations.
Appreciate the interdependency of departments having relation with materials
department
Conduct inventory analysis
Calculate economic order quantity
Forecast demand
Develop material Requirement Planning
Be familiar with different inventory and ware house management practices.
Course Description
The course deals with introduction to materials theory; objectives of
materials management; Purchasing principles including such elements as
description of quality; determination and control of quantity; make or buy
decisions; selection of suppliers; organization of purchasing activities;
transportation of purchases; materials handling, inventory control models
(EOQ & EPQ); materials demand forecasting, Materials Requirement
Planning (MRP); Just in Time system (JIT): stores management and
warehousing.
• Pre-requisites: No
• Status of the Course: Core
Unit 1. INTRODUCTION
1.1. Definition and scope of materials management
1.2. Origin and transition
1.3. Importance of materials management in corporate policy
UNIT 2 – FORECASTING
2.1. Why Forecasting?
2.2. Features of Good Forecasting
2.3. Steps in Forecasting Process
2.4. Types of Forecasting
2.4.1. Qualitative Methods
2.4.2. Quantitative Methods
UNIT 3 - PURCHASING
UNIT 4 - INVENTORY MANAGEMENT
3.1. Meaning and Role
4.1. Introduction
3.2. Objective of good purchasing
4.2. Functions and types of inventory
3.3. Purchasing polices
4.3. Independent vs. dependent demand
3.4. Purchasing procedures
4.4. Inventory Costs
3.5. Computer based purchasing system
4.5. Economic Order Quantity (EOQ)
3.6. Selection and motivation of supplies
4.6. Economic Production Quantity (EPQ)
3.7. Make or buy decisions
4.7. Materials Requirements Planning (MRP)
3.8. Value analysis
4.8. Inventory systems
3.9. Global sourcing
4.9. Just in time (JIT)
3.10. Procurement Practices and procedures in Ethiopia
Cont..
UNIT 5. STORAGE
5.1. Storage functions and responsibilities
5.2. Location and layout
5.3. Stores system and procedures
5.4. Cost aspects and productivity
5.5. Stock receipt, issue and dispatch
5.6. Stores accounting and stock verification
5.7. Sores security
UNIT 6. MATERIALS HANDLING
6.1. Definition and scope
6.2. Benefits of proper materials handling
6.3. Influencing factors and control
6.4. Materials handling codes and specifications
6.5. Materials handling equipment and guidelines
6.6. Evaluation of materials handling
6.7. Materials disposal procedures and practice in Ethiopia
UNIT 7. LOGISTICS
7.1. Transportation and traffic management
7.2. In-bound logistics
7.3. Out-bound logistics
Course expectation

Preparedness: You must come to class prepared by bringing with you the appropriate materials. Complete the
individual and group assignments and other activities on time. You must plan your own learning through reading
various course related materials and chapters in books. You are expected to work much individually to meet the
requirement of the course. You have to use your time for group work and home study effectively

Participation: Make active participation during discussions (you must participate in class). You are not
participating if you are simply talking to a friend, doing homework, daydreaming, or not doing what the rest of the
class is doing. If you are working in a group or with a partner, you must talk to your group members or partner
and be a part of the group. Always be ready and willing to give constructive feedback to partners/group members
and to listen to their comments on your work
Policy
Attendance: It is compulsory to come to class on time and every time. If you are going to miss more than
three classes during the term, you should not take this course
Assignments: You must do your individual and group assignments and submit on time. No late assignment
will be accepted
Tests/Quizzes: You will have short quizzes and tests almost every unit. If you miss the class or, are late to
class, you will miss the quiz or test. No makeup test or quizzes will be given. You are expected to observe the
rules and the regulations of the University as well
Cheating: You must do your own work and not copy and get answers from someone else. When you are in
class: please do not chew gum, eat something, listen to recorders or CD players, or involve in acts that spoil
the normal teaching-learning process; switch off your cell phones before class and exam sessions. Any
attempt to use cell phones in exam sessions will be considered an act of cheating and hence, dealt
accordingly.
Reference:
Dobler, D.W. and Burt D,N „ Purchasing and Supply Management Text and Cases‟ 6th Edition,
Mc. Graw- Hill

Jessop, David and Morrison, Alex, „Storage and Supply of materials‟ 6th Edition Pitman.

Wlld, Ray (1995),‟ Production and Operation Management‟ 5th Edition, Cassell.

Chase. Richard B. Aquilano. Nicolas J and Jacobs. Robert F (1998) „ Production And Operation
Management- Manufacturing and Services‟ 8th Edition, Irwin McGraw- Hill

Bailey, P and Farmer, D, „Purchasing Principle and Management, West publishing

Techniques of evaluation Weight
Test 1 10%
Test 2 10%
Quiz 5%
Assignment(Individual and group) 25%

Final Exam 50%

Total 100%
 ADDIS ABABA UNIVERSITY
COLLEGE OF BUSINESS AND
ECONOMICS
DEPARTMENT OF MANAGEMENT
MATERIALS MANAGEMENT
Unit 1. INTRODUCTION
1.1. Definition and scope of materials management
The following figure shows general supply chain concept material flows:
6 Ms in operations management
Material
The materials are those products which are utilized for creating
the final product. Materials can be raw or even semi-finished
products that are used for making the end-product that the
company sells. In cotton mills, cotton is considered as raw
materials. Yarn or cloth sheets derived from these factories are
then sent to the clothing factories. These sheets of cotton are
viewed as raw materials in the clothing factory. The cotton is
sewed, tailored and altered to make a desirable outfit. A final
product for one factory can be the raw material for another.
.
What are materials:
Materials are the matter or substance that objects are
made from.
These might include:
•metal
•plastic
•wood
•glass
•ceramics
•synthetic fibers
•composites (made from two or more materials combined
together)
Different materials have different features, or properties,
which make them suitable for different uses.
Material resources are materials found in the natural world
that have practical use and value for humans. Material
resources include wood, glass (which comes from sand),
metals, edible plants, and plastics (which are made from
natural chemicals
Properties of Materials
Different materials have different properties, which is what makes
them unique. We group materials based on these properties, and its
their properties that make materials suited to different purposes.
•Strong / Weak: Whether a material will be able to withstand pressure
or if it will break easily.
•Heavy / Light: This is if a material will be able to hold something up
or if it will buckle under pressure.
•Rough / Smooth: Smooth materials are good for things like slides,
whereas rough materials are good for things like roads so that cars
aren't slipping everywhere.
•Hard / Soft: This is when a material can be squashed easily or if it
can't.
•Magnetic / Non-Magnetic: Whether a material will attract other
magnetic materials.
•Transparent / Opaque: This is when you can either see through a
material, like glass, or can't, like brick.
•Conductor / Insulator: Does this material let electricity run through it
or not. This is the same with heat, an insulator is excellent at keeping
heat in a building because it doesn't let it through itself
 Physical versus chemical
• Physical properties refer to properties that can be
observed or measured without changing the composition
of the material. Examples include color, hardness and
smell and freezing, melting and boiling points.
• Chemical properties are discovered by observing chemical
reactions. They include combustion point, reactivity with
acids and toxicity.
Types of Materials
The various types of materials to be managed are:
(i) Purchased materials: They are raw materials,
components, spare parts, oils, grease, cotton waste,
consumables and tools.
(ii) (ii) Work in process (WIP) materials: These are semi-
finished and finished parts and components lying on
the shop floor.
(iii) (iii) Finished goods: These are the final products either
waiting to be assembled in the assembly lines or in
stores which are stocked for final delivery waiting to
sell. The various costs involved in these materials are
basic price, purchasing costs, inventory carrying cost,
transportation cost, materials handling cost, office
cost, packing cost, marketing cost, obsolescence and
wastages.
 Materials management : 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.
´Materials management was a consolidation of functions
required to purchase, manage inbound transportation for,
receive, store, inventory, and schedule material flows. Physical
distribution then took the finished product to market either
directly or through warehouses
Physical distribution take the finished product to market either
directly or through warehouses
Logistics= materials management +physical distribution
Other factors such as information and process flows were as
important as (if not more so than) the physical flow of goods.
Hence“supply chain management” to indicate this complex
web of relationships, processes, and information flows from
the supplier to the final customer
Scope of materials management
Materials planning and control
This involves estimating the individual requirements of parts, preparing
materials budget, forecasting the levels of inventories, scheduling the
orders and monitoring the performance in relation to production and sales.
2. Purchasing
includes the selection of sources of supply finalization in terms of
purchase, placement of purchase orders, follow-up, maintenance of
smooth relations with suppliers, approval of payments to suppliers,
evaluating and rating suppliers.
3. Stores management or management
involves physical control of materials, preservation of stores, minimization
of obsolescence and damage through timely disposal and efficient
handling, maintenance of store records, proper location and stocking. A
store is also responsible for the physical verification of stocks and
reconciling them with book figures. A store plays a vital role in the
operations of a company.
Inventory control or management
Inventory/the materials in stock/the idle resource of an
enterprise.
Inventories either stocked for sale, in the process of
manufacturing or they are in the form of materials, which
are yet to be utilized.
It is necessary to hold inventories of various kinds to act
as a buffer between supply and demand for the efficient
operation of the system. Thus, effective control on
inventory is a must for the smooth and efficient running of
the production cycle with the least interruptions.
3S Meaning
i.Standardization: Standardization means producing a
maximum variety of products from the minimum variety of
materials, parts, tools, and processes. It is the process of
establishing standards or units of measure by which extent,
quality, quantity, value, performance, etc. may be compared
and measured.
ii.Simplification: Simplification is the process of reducing the
variety of products manufactured. Simplification is concerned
with the reduction of product range, assemblies, parts,
materials, and design.
iii.Specifications: It refers to a precise statement that
formalizes the requirements of the customer. It may relate to a
product, process or service.
a.Value analysis: concerned with the costs added due to
inefficient or unnecessary specifications and features. It makes
its contribution to the last stage of the product cycle, namely,
the maturity stage
b.Ergonomics (Human Engineering): The human factors or
human engineering is concerned with the man-machine
system. Ergonomics is “the design of human tasks, man-
machine system, and effective accomplishment of the job,
including displays for presenting information to human sensors,
controls for human operations and complex man-machine
systems.”
 Objectives of materials management
The fundamental objectives of the Materials Management
function ,often called the famous 5 Rs of Materials
Management, are acquisition of materials and services
•of the right quality
• in the right quantity
• at the right time
• from the right source
• at the right price
 Further more Objective of material
Management classified as follows
Primary
•Right price Secondary
•High turnover •Forecasting
•Low procurement •Inter-departmental
•& storage cost harmony
•Continuity of supply •Product improvement
•Consistency in quality •Standardization
•Good supplier •Make or buy decision
relations •New materials & products
•Development of •Favorable reciprocal
personnel relationships
•Good information
system
 UNIT 2 – FORECASTING
Introduction
• Forecasting is the technique of estimating
the relevant future events and problems
on the basis of past and present behavior
or happenings
• Forecasting depends upon an analysis of
past events and current conditions
Meaning and Definition
– Meaning:
Forecasting: the systematic guessing of
future course of events with the help of
analysis of present and past events
• Definition of Forecasting
– According to Webster’s new Collegiate
Dictionary, ‘A forecast is a prediction and its
purpose is to calculate some future events
or conditions
 2.1. Why Forecasting?

• Pivotal role in an Organization

– Planning is the backbone of effective
functioning of an organization
– Planning is based on forecasting
• Primacy to planning
– Planning can not be done without the
forecasting
 Cont…
• Development of a business
– Business is established in order to achieve
specified objective
• Implementation of project
– Forecasting is an important factor which
enable the entrepreneur to get success
 Cont…
• Co-ordination
– Forecasting helps management
• executives in effective coordination
Indirectly
• Effective control
– Forecasting can provide adequate
information for exercising effective control
2.2. Features of Good Forecasting
• Forecasting is concerned with the future
events
• Impact of future events has to be
considered in the planning process
• Forecasting considers all the factors
which affect the organizational functions
2.3. Steps in Forecasting Process
1. Thorough preparation of foundation
– Detailed investigation and complete
analysis of the company are necessary for
forecasting
– Forecasting is based on the foundation
 Cont…
2. Estimation of future
– The prosperity of the future can be estimated with the
help of past experience and performance
3. Estimation of future
– The prosperity of the future can be estimated with the
help of past experience and performance
4. Collection of results
– All the information can be collected
– Nothing can be omitted and irrelevant information can be
avoided while collecting results
 Cont…
5. Comparison of results
– The actual results are compared with
estimated results to know derivations
6. Refining the forecast
– The forecast can be refined in the light of
derivations which seem to be more realistic
 2.4. Types of Forecasting
2.4.1. Qualitative Methods
•projections based on judgment, intuition, and
informed opinions; are subjective
1.Expert opinion method:
pooling of views of group of expected future sales and
combining them into a sales estimate.
The major advantage of this method is the pooling of
expertise knowledge in the forecasting process.
2.Delphi method:
involves converting the views of a group of
experts, who do not interact face –to – face, into a
forecast through an iterative process.
 Cont….
 The processes of Delphi method may include the
following steps :
1. A group of experts is sent a questionnaire by mail and
asked to express their view.
2. The response received from the experts are
summarized without disclosing the identity of the
experts,
send back to the experts, along with a questionnaire
meant to probe further the reasons for extreme views
expressed in the first round .
• 3. The process may be continued for one or more
rounds till a reasonable agreement emerges in the view
of the experts.
2.4.2. Quantitative Methods
Time series/Intrinsic
Techniques
• Use historical data to forecast. These data
are usually recorded in the company and
are readily available.
• are based on the assumption that what
happened in the past will happen in the
future
 DECOMPOSITION OF A TIME SERIES
Patterns that may be present in a time
series
1.Trend: Data exhibit a steady growth or decline over time.
2.Seasonality: Data exhibit upward and downward swings in a
short to intermediate time frame (most notably during a year).
3.Cycles: Data exhibit upward and downward swings in over a
very long time frame.
4.Random variations: Erratic and unpredictable variation in
the data over time with no discernable pattern.
Take the following pattern of
historical demand
Trend component od historical
demand
Seasonal component of
historical demand
Cycle component of historical
demand
Random component in historical
demand
Time series techniques: Cont---
Cont…
Assume that the monthly demand for a particular
item over the past year is as shown. Forecast
demand for January of coming year.
1. Naïve:
a. Demand this month will be the same as
last month. 84
b. Demand this month will be the same as
demand the same month last year. 92
Note:
• Rules based on a single month or past
period, are of limited use when there is
much random fluctuation in demand.
 2. Simple average

Demand for January: Total demand

number of periods
952/12 = 79.333
3. Simple moving average
Moving averages are best used for
forecasting products with stable demand
where there is little trend or seasonality

Required: Forecast demand for January

using a moving average of three months.
Demand for JNUARY= 63+91+84 =79.33
3
 4. Weighted moving average
Use weights as follows:
The most recent month , 5; moth before that
is 3; month before that is 2.
5*84+3*91+2*63 = 420+273+126
5+3+2 10

= 81.9
 5. EXPONENTIAL SMOOTHING METHOD
Exponential smoothing method: The new
forecast for next period (period t) will be
calculated as follows:
New forecast = Last period’s forecast +
σ(Last period’s actual demand – Last
period’s forecast)
New forecast = σ (Last period’s actual
demand) + (1- σ) (Last period’s forecast)
 Example
The old forecast for May was 220, and the
actual demand for May was 190. If alpha (α)
is 0.15, calculate the forecast for June. If
June demand turns out to be 218, calculate
the forecast for July.
 Answer
June forecast = (0.15)(190) + (1- 0.15)(220)
= 215.5
July forecast = (0.15) (218) + (0.8) (215.5) =
215.9
 6. Seasonal Index
• A useful indication of the degree of seasonal variation for
a product
• This index is an estimate of how much the demand
during the season will be above or below the average
demand for the product
• Seasonal index =period average demand
average demand for all periods
• The period can be daily, weekly, monthly, or quarterly
depending on the basis for the seasonality of demand.
 Example
For example, swimsuit demand might average 100 per
month, but in July the average is 175, and in September
it’s 35.
Required Calculate seasonal indexes for the months of
July and September.
Answer: 1.75 for July; 0.35 for September
• The average demand for all periods is a
value that averages out seasonality.
• This is called the deseasonalized
demand. The previous equation can be
rewritten as:
• Season index = period average demand
deseasonalized demand
 Example
• A product that is seasonally based on quarterly
demand and the demand for the past three
years is shown in Figure below. There is no
trend, but there is definite seasonality. Average
quarterly demand is 100 units (128+102+75+95)
/4=100 Figure below also shows a graph of
actual seasonal demand and average quarterly
demand. The average demand shown is the
historical average demand for all periods.
Remember we forecast average demand, not
seasonal demand
Sales seasonal history
Seasonal index
Note that the total of all seasonal indices
equals the number of seasons
 Seasonal forecast

The company in the previous problem forecasts an annual

demand next year of 420 units. Calculate the forecast for
quarterly sales.
 Deseasonalized Demand
• Forecasts do not consider random
variation.
• Forecasts are made for average demand,
and seasonal demand is calculated from
the average using seasonal indices.
• The forecast average demand is also the
deseasonalized demand
Seasonal Demand
Deseasonalized Demand
 Example
• A company selling tennis rackets has a January demand
of 5200 units and a July demand of 24,000 units. If the
seasonal indices for January were 0.5 and for June were
2.5, calculate the deseasonalized January and July
demand. How do the two months compare?
Answer:
• Deseasonalized January demand = 5200/ 0.5 = 10,400
units
• Deseasonalized June demand = 24,000/ 2.5 = 9600
units
• June and January demand can now be compared.
On a deseasonalized basis, January demand is
greater than June demand.
Deseasonalized data must be used for forecasting.
Forecasts are made for average demand, and the forecast
for seasonal demand is calculated from the average
demand using the appropriate season index.
The rules for forecasting with seasonality follow:

■ Use only deseasonalized data to forecast.

■ Forecast deseasonalized demand (base forecast), not
seasonal demand.
■ Calculate the seasonal forecast by applying the
seasonal index to the base forecast.
Example
A company uses exponential smoothing to
forecast demand for its products. For April, the
deseasonalized forecast was 1000, and the actual
seasonal demand was 1250 units. The seasonal
index for April is 1.2 and for May is 0.7.
If α is 0.1, calculate the following:
a. The deseasonalized actual demand for April.
b. The deseasonalized May forecast.
c. The seasonal forecast for May.
 Answer
a.
b. Deseasonalized May forecast = α (latest
actual) + ( 1 – α ) (previous forecast) = 0 .1 ( 1 0
4 2 ) + 0 .9 (1 0 0 0 ) = 1004
C. Seasonalized May forecast = (seasonal
index)(deseasonalized forecast) = 0 .7 ( 1 0 0 4 )
= 703
ASSOCIATIVE FORECASTING
METHOD
Associative forecasting models (causal
models) assume that the variable being
forecasted (the dependent variable) is
related to other variables (independent
variables) in the environment.
In its simplest form, linear regression is used
to fit a line to the data. That line is then used
to forecast the dependent variable for some
selected value of the independent variable.
The Regression Method.

In regression models, the quantity to be forecast in the demand function is the

dependent variable, and the determinants of demand are the independent or
explanatory variables

Suppose we want to forecast the demand for Y, for example, for particular
periods on the basis of some past data, we would estimate the regression
equation of the form:

Y = a + bX… Where Y represents the quantity of to be demanded; and, X

represents the single variable, population, and a and b are constants.
The parameters a and b can be estimated, using the past data,
Consider the following hypothetical past data on the demand for
sugar for the years 2000 to 2006. Using the hypothetical data
develop the regression demand model for sugar.
Year Population (millions) Quantity of sugar
demanded (000’s)

2000 10 40

2001 12 50

2002 15 60

2003 20 70

2004 25 80

2005 30 90

2006 40 100
TRACKING THE FORECAST/
MEASURING FORECAST ACCURACY
• Tracking the forecast is the process of
comparing actual demand with the
forecast.
Fo r e c a s t E r r o r
• Forecast error is the difference between
actual demand and forecast demand.
Error can occur in two ways: bias and
random variation.
 Cont..
Bias exists when the cumulative actual
demand varies from the cumulative forecast.
This means the forecast average demand
has been wrong.
• In the example in Figure below, the
forecast average demand was 100, but the
actual average demand was 720 ÷ 6 = 120
units.
Figure: Forecast and actual
demand with bias
Figure: Forecast and average
demand with bias
Bias is a systematic error in which the actual
demand is consistently above or below the
forecast demand.
When bias exists, the forecast should be
evaluated and possibly changed to improve its
accuracy.
The purpose of tracking the forecast is to be
able to react to forecast error by planning
around it or by reducing it. When an
unacceptably large error or bias is observed, it
should be investigated to determine its cause.
Random variation Forecast and actual data
with out bias
Graphic presentation of forecast and
actual data without bias
 Measuring error
1. Mean Absolute Deviation (MAD)
Is one method of measuring forecast error.
Calculate MAD from the following table
Uses of mean absolute deviations

1. Tracking signal: for tracking quality of

forecast
Cont…
 Cont..
2. Contingency planning: MAD can be used
to cope with the possible extra demand
3. Safety stock: MAD can be used to set
safety stock
END