Materials Management: An Overview

• Materials Management is prepared by Ms. Mary Grace D. Ruz

The "m's" of the Industry

• Industry factors include manpower, materials, methods, and machines

Materials

• First group consists of purchased materials, including raw materials, components, and spare parts
• Second group consists of materials that are in-process or in semi-finished stages
• Third group consists of finished goods ready for customers

The impact of materials

• Excessive inventories lead to business failures
• Too much materials can lead to idle funds, storage and obsolescence issues, and marketing headaches.
• Inadequate materials can cause efficiency issues, skyrocketing costs, manufacturing delays, and broken delivery promises

Materials Management Defined

• Materials Management involves controlling the type, amount, location, movement, and timing of commodities used and produced by an industrial enterprise
• The function integrates purchasing, storage, inventory control, materials handling, and standardization to reduce costs
• Every organization aims to maximize profit by improving production and minimizing production costs
• The amount of money spent on materials is generally higher than the combined costs for machines, labor, and methodology
• Materials enhance product value because product quality relies on the materials used
• Materials Management is a system that ensures product availability to customers at the lowest cost
• Involves ensuring the right materials are available in the right quantity, at the right price, and at the right time

Main Objectives of Materials Management

• Maximizing resource utilization
• Providing the necessary level of customer service

Company Resource Optimization

• Companies use strategic Resource Allocation, which prioritizes and distributes limited resources like finances, workforce, technology, and raw materials
• Strategic Resource Allocation maximizes efficiency, profitability, and competitiveness
• Outsourcing delegates non-core functions to external partners, allowing companies to focus on primary competencies, reduce costs, and access specialized expertise, exemplified by BPO and IT outsourcing

Vertical Integration

• Vertical integration is a business strategy where a company controls multiple stages of its supply chain instead of relying on external suppliers or distributors
• Apple designs its own processors (M1 & M2 chips), software (iOS/macOS), and sells directly via Apple Stores

Functions of Materials Management

• Material forecasting and control defines material requirements at the base of successful material management
• Purchasing identifies supply sources, conducts market research, issues tenders, selects suppliers, and negotiates to make raw materials available to manufacturers
• Inventory control ensures that materials in a specific location and storage remain available at minimum cost and quickest availability
• Store keeping manages the receipt and issuance of materials, storing materials in a way that minimizes handling and wastage
• Material handling minimizes handling and provides equipment for handling materials, crucial for minimizing space requirements, effective distribution, and better workspace
• Warehousing handles storage facilities, materials handling equipment, product distribution facilities, and fire safety equipment
• Standardization and Simplification selects items of great demand and establishes standards for quality, raw material, sizes, and performance
• Organization and appraisal of materials facilitates efficiency and provides coordination to avoid delays and waste during material operations

Materials Manager

• Align demand with sourcing activities
• Inventory requirements must be aligned with sales and operations planning
• Define and execute policies pertaining to physical inventory and/or cycle counts
• Develop and maintain reports, analytics, and metrics
• Management of purchase orders involves expediting e-procurement.
• Measure operational performance against the production plan
• Plan capacity, material, and production schedules
• Receive and distribute product

Manufacturing Resource Planning (MRP II)

• This fully integrated planning and control system manages marketing, finance, and production
• Its main goal is to achieve the company's global objectives
• It provides coordination across marketing and production
• Manufacturing Resources Planning is a method for effectively planning all resources of a manufacturing company

Basic Production Line Strategies

• Chase (Demand Matching) Strategy: Produce amounts demanded at any given time
• Production leveling: Continually producing an amount equal to the average demand
• Subcontracting: Buy extra amounts or turn away extra amounts demanded

Elements of Material Flow System

• Manufacturing Planning and Control (MPC) System
• Physical Distribution System

Manufacturing Planning and Control (MPC) System

• Responsible for allocating resources to production activities
• Its goal is to satisfy customer demand over a specified time horizon
• It plays a pivotal role in planning and controlling the flow of materials in the manufacturing process

Primary Activities

• Production Planning which includes Forecasting, Master Planning, Materials Requirement Planning (MRP), and Capacity Planning
• Implementation and Control, i.e Purchasing
• Inventory Management involves the entire process of managing inventories from raw materials to finished products.

Inventory Management Methods

• Just-in-time management (JIT), or Toyota Production System (TPS), aligns raw-material orders from suppliers directly with production schedules
• Materials requirement planning (MRP) is a software-based integrated inventory and supply managment system
• Materials resources planning can estimate quantities of raw materials, maintain inventory levels, and schedule production and deliveries
• Economic order quantity (EOQ) determines the ideal quantity of units a company should purchase, minimizing inventory costs like holding, shortage, and order costs
  • EOQ, measures in units, includes: Demand in units (typically on an annual basis), Order cost (per purchase order), and Holding costs (per unit, per year)
  • Days sales of inventory (DSI), or "inventory days" or "days in inventory," measures the average number of days needed for a business to convert its inventory into sales

DSI Formula

• DSI = (Inventory / Cost of Sales) x (No. of Days in the Period)
• Business approximately takes 40 days to sell its inventory

Physical Distribution System

• Includes all activities where goods are moving from the supplier, through the beginning of the production process, and from production to the end consumer

Activities

• A sample of distribution activities includes: Transportation, Distribution, water, housing, Materials Handling, or Order Entry

Definition of Forecasting

• Forecasting is an act of predicting future events based on the available information.
• It leverages historical data to make credible estimates

Forecasting Principles

• Forecasts are usually wrong
• Every forecast includes an estimate of error
• Forecasts are more accurate for families or groups
• Forecasts are more accurate for near future time periods

Significance of Forecasting Principles

• Errors are unavoidable and must be taken into account
• Including an error estimate in forecasting helps in making informed decisions and facilitates realistic expectations
• Estimating error is often quantified as a percentage or shown as a range between maximum and minimum values
• Forecasting for groups has been shown to be more accurate with a better analysis compared to individual values
• The family group knows its members, enabling better prediction through preferences, increasing forecasting accuracy
• Near-term forecasts are more reliable due to reduced uncertainty compared to predicting too far into the future

Forecasting Techniques

• Qualitative forecasting, or Judgmental Method, is based on judgment, intuition, and informed opinions e.g Delphi Method
• Quantitative forecasting is a data-based mathematical process.
• Extrinsic techniques are influenced by external factors
• Intrinsic Techniques: Assumptions are made based on events that occurred in the past will happen in the future