MATERIALS MANAGEMENT

Compiled by: Abdu Kamil (MBA)

Email: abkamilyahoo4569@gmail.com

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 Contents of the course Assessments

Chapter 1: Nature of Materials Management Evaluations Weights

Mid Exam 25%
Chapter 2: Materials Management Planning
Quiz 5%
Chapter 3: Purchasing Ind. & Group Assignments 20%

Chapter 4: Inventory Management Final Exam 50%

Total 100%
Chapter 5: Logistics

Chapter 6: Storage and Materials Handling

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 CHAPTER ONE

NATURE OF MATERIALS MANAGEMENT

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1.1. Definition of Materials Management

 Materials Management: is the planning,

organizing and controlling of the flow of

materials from the initial purchase through

internal operations to distribution of finished

goods.

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 Continued
 Materials Management: can be defined as an organizational concept of the foster

and total system approach to plan, acquire, store, move and control materials (raw

materials, supplies, work-in-process, and semi finished goods) in order to optimize all

company resources (includes materials, people, money and facilities).

 Materials Management is a process of coordinating all resources through the

process of planning, organizing, staffing, directing leading and controlling to achieve

desired objectives with the use of human beings.

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 Continued
 It is the planning and control of the activities related to the materials flow from the

suppliers up to the end of the conversion or production process.

 Lack of availability of adequate materials disturbs the normal operation or

production causing unnecessary delay of production or work stoppage.

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1.2. Scope of Material Managements
 Materials management covers all aspects of materials, costs, materials supply
and utilization.
 It covers the whole or range of functions involved in converting raw materials
and ancillary supplies in to finished products.
 It is concerned with the planning & programming of materials and equipment,
market research for purchase; pre-design and value analysis, procurements of
all materials, packaging and packing materials stores control and inventory
control; transportation of raw materials and materials handling, disposal of
scrap and operation research for materials.
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 1.3. Why Do We Study Materials Management

 The basic reason /objective of learning

materials management is economic.

 The other reason for studying materials

management is attitude.

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1.4. Objectives of Materials Management
 Maintaining continuity of productive operations by ensuring a uniform flow of

materials.
 Reducing materials costs by systematic use of scientific techniques.

 Increasing the competitiveness of end products by ensuring right quality at the right

price especially in foreign market.

 Saving foreign exchange through economic use of foreign purchases and import

substitution.
 Establishing good buyer-seller-relation.

 Ensuring low departmental cost and high efficiency.

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 1.5. Functions of Materials Management
A. Forecasting & Planning of material demand
B. Inventory Control

C. Purchasing

D. Make or Buy Decision

E. Receiving, Inspecting and Warehousing/Stores

F. Physical Distribution/ Transportation

G. Material Requirement Planning

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 1.6. Relationship Between Materials Management And Other Functional Units

 Materials Management and Finance

 Materials Management & Manufacturing

 Marketing and Materials Management

 In sum, materials management is essential for all functional units of the

organization. So it is a dynamic activity that ensures the small flow of supplies

through the entire organizational activities.

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 End of the first Chapter

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 CHAPTER TWO

MATERIALS MANAGEMENT PLANNING

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 Continued
An overview
 The material planning and budgeting function

is one of the roles of management at all levels.

 A material planning is the specific way of

determining the requirements of raw

materials, components, spare, supplies, etc in
an organization.

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 Continued
 Once the demand forecast is made it is possible to proceed with the materials

requirement planning using bill of materials explosion charts.

 Various forecasting techniques such as moving average method, exponential

smoothing and time series are applicable to demand forecasting.

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 Continued
Nature of Demand
 There are two types of demand: independent and dependent.

 Independent demand is not related to the demand for any other product. For

example, if a company makes wooden tables, the demand for the tables is
independent.
 However, dependent demand is directly related to the demand for higher-level

assemblies or products.
 The demand for the sides, ends, legs, and tops depends on the demand for the

tables, and these are dependent demand items

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 Continued

 The objectives of material requirements planning are determine requirements

and keep priorities current.

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 Continued
Inputs to the Material Requirements Planning System
There are three inputs to MRP systems:
1. Master production schedule is a statement of which end items are to be
produced, the quantity of each, and the dates they are to be completed.
2. Inventory records: when a calculation is made to find out how many are
needed, the quantities available must be considered.
3. Bills of material is a listing of all the subassemblies, intermediates, parts, and
raw materials that go into making the parent assembly showing the quantities of
each required to make an assembly.
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 Continued
 Using the following product tree, construct the appropriate single-level trees,

and how many Ks are needed to make 100 Xs and 50 Ys?

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 Continued
 Lead time is the span of time needed to perform a process.

 Planned order receipt is the quantity planned to receive at a future date as a

result of planned order release.

 Planned order release is derived from planned order receipt by taking planned

order quantity and offsetting by the appropriate lead-time.

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 Continued
Example

 Please determine the planned order receipts and releases assume there are 50

As required in week 5 and 100 in week 6.

 What about 50 Bs?

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 Continued
 Net requirements = gross requirements-available inventory

Example: complete the following table. Lead time for the part is two weeks.
The order quantity (lot size) is 100 units.

Weeks 1 2 3 4
Gross requirement 50 45 20
Project available (75)
Net requirement
Planned order receipts
Planned order release

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 Low-Level Coding and Netting

 A component may reside on more than one level in a bill of material.

 If this is the case, it is necessary to make sure that all gross requirements for

that component have been recorded before netting takes place.

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 Continued
 For example, there is a gross requirement for part A of 50 in week 5, all lead

times are one week, and the following amounts are in inventory: A, 20 units;
B, 10 units; and C, 10 units.

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 Forecasting

 Forecasting is a process of predicting or

estimating the future based on past and

present data.
 Forecasting is the art and science of predicting

future events.
 Forecasting provides information about the

potential future events and their consequences

for the organization.
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 Continued
 Forecasting is one of the techniques which helps to see the future.

 It is also a basic tool to help managerial decisions making.

 Forecasting can be made for any thing but the focus here is demand

forecasting.
 Forecasting is one of the inputs to all types of business planning and control.

 Good planning utilizes a forecast as input.

 Thus, quality of a decision depends in large part on the quality of the forecast.

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 Importance of Forecasting

Demand forecasting plays a vital role in decision making of a business.

It is a most important aspect for a business for achieving its objectives.

It reduces risk related to business activities and helps it to take efficient

decisions.
For firms having production at the mass level, the importance of forecasting

had increased more.

A good forecasting helps a firm in better planning related to business goals.

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 Continued

Good forecast helps in appropriate production planning, process selection,

capacity planning, facility layout planning, and inventory management etc.

Demand forecasting provides a reasonable data for the organization’s capital

investment and expansion decision.

Demand forecasting also provides a way for the formulation of suitable

pricing and advertisement strategies.

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 Features of Forecasting
 Forecasting is concerned with future events
 It shows the probability of happening of future events
 It analysis past and present data
 It uses statistical tools and techniques
 It uses personal observations

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 Characteristics of Good Forecasting
 Forecast should be timely

 Forecast should be accurately stated

 Forecast must be reliable

 Material forecast must be stated in meaningful units

 The information must be simple and easy to understand

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 Procedures of Forecasting

1. Analyzing and understanding the problem

2. Developing sound foundation

3. Collecting and analyzing data

4. Estimating future events

5. Comparing results

6. Follow up action

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Limitations of Forecasting
 The collection and analysis of data about the past, present and future involves

a lot of money and time.

 It cannot guarantee that these events will take place in the future.

 It based on a certain assumptions if these assumptions are wrong, the

forecasting will be wrong.

 Forecasting may go wrong due to bad judgment and skills on the part of

some managers.

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 Type of Forecasts

1) Qualitative Forecasting 2) Quantitative Forecasting

 Grass Roots  Time series models

 Market Research  Causal models

 Panel Consensus

 Historical Analogy

 Delphi method

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 Qualitative Forecasting Techniques
 The qualitative forecasting uses personal judgment and involves qualities like

intuition and experience as the bases of forecasts and are subjective by their
very nature.
1. Grass Roots - drive a forecast by compile input from those at the end of the
hierarchy of the organization who deal with what is being forecasted.
2. Market Research - When market research technique is adopted data is
collected in various ways (surveys, interviews, etc) to test hypothesis about the
market.

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 Continued
3. Panel Consensus - are developed through open meetings with free exchange
of ideas from all levels of management and individuals with the belief that people
from different positions can develop a more reliable forecast than a small group.
4. Historical Analogy - This method ties the forecast of one item to the forecast
of a similar item.
5. Delphi method conceals the identity of the individuals participating in the
study.

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 Quantitative Forecasting Techniques
Quantitative methods utilize an underlying mathematical and statistical model to
predict and estimate the future requirement or demand based on past data.
 The time series models are used to make detailed analyses of past demand

patterns over time and to project these patterns forward into the future.
 Causal models are used when one variable is related to and therefore, depend

on the values of some other variable(s).

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 A time series Models for Forecasting

A) Last Period Demand (LPD): method simply forecasts for the next period

the actual demand that occurred in the previous period.

The equation for last period demand is:
Ft = At –1

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 Continued
Example

Year Actual demand Forecast

Predict the next year(s) demand based on
2010 2000
 Last Period Demand (LPD)
2011 2500
2012 2300
2013 2700
2014 2400
2015 2600
2016 - ?

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 Continued

B) Arithmetic Mean (Average): calculates the average of all past actual

demand of materials to arrive at a forecast.
The equation for the arithmetic mean is:

Ft = A1+ A2+A3 + …An

n

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 Continued
Example

Year Actual demand Future demand

Predict the next year(s) demand based on
2010 2000
 Arithmetic Mean (Average)
2011 2500
2012 2300
2013 2700
2014 2400
2015 2600
2016 - ?

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 Continued
C) Moving Averages: it attempts to forecast values on the basis of the average of
the values of past few periods.
The formula for the simple moving average is:

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 Continued
Example

Year Actual demand Forecast

Predict the next year(s) demand based on
2010 2000
 Moving Averages (use base three years)
2011 2500
2012 2300
2013 2700
2014 2400
2015 2600
2016 - ?

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 Continued
D) Weighted moving average reveals the moving average with a base of n
periods is in fact an equal weighted average of 1/n to each of the preceding n
values and a zero weighted to all the previous values.

Ft = w1At - 1 + w2At-2 + …+ wnAt - n

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 Continued
Example

Year Actual demand Future demand

Predict the next year(s) demand based on
2010 2000
 Weighted moving average using four
2011 2500
years with weights 0.4, 0.3, 0.2, and 0.1.
2012 2300
2013 2700
2014 2400
2015 2600
2016 - ?

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 Continued
E) Exponential smoothing: unlike the previous methods of forecasting (simple
and weighted moving average), in the exponential smoothing a new average can
be computed from an old average and the most recent observed demand.
 Exponential smoothing is the most used of all forecasting techniques.

 It is widely used in ordering inventory in retail firm’s wholesale companies,

and service agencies.

The equitation for an exponential smoothing forecast is:

Ft =  (At – 1) + 1-  (Ft - 1)
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 Continued
Example

Year Actual demand Forecast Predict the next year(s) demand based on
2010 2000
 Exponential smoothing (a=0.6)
2011 2500
2012 2300
2013 2700
2014 2400
2015 2600
2016 - ?

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 Causal Models of Forecasting
 The causal model considers two types of variables the dependent and

independent variables. E.g., the sales of a company is depend on & is related to

the price changed.
 By using regression analysis it is possible to develop a statistical relationship

b/n the dependent and independent variables.

 The regression method is a forecasting model that establishes a relationship

between a dependent variable and one or more independent variables.

 Simple regression uses only one independent variable.

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 Continued
 The equation (formula) for the simple linear regression is

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 Continued
Example

Year Time period (x) Actual demand (y) Predict the next year(s) demand for 2016
2009 1 100
based on:
2010 2 110
 Simple regression method
2011 3 122
2012 4 130
2013 5 139
2014 6 152
2015 7 164

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 End of the second chapter

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