Functions of Material Management

The functions of the materials management are also categorized as Primary functions and secondary functions.

Primary Functions

In order to meet the primary objectives, the primary functions performed by the materials management department are as specified below.

Materials Requirements Planning (MRP)

The profit earned depends on the utilization of the materials and reducing the inventory of the materials, thus planning of materials required in manufacturing is one of the most essential functions in any organization. Just in Time (JIT) is a technique where the company tries to place an order only after it has a definite order rather than storing inventory, which might be required in the future. Firms are trying to have a zero inventory approach to save on costs. Example – Online bookstores don’t store the books, as soon as they have an order they procure the book from the vendor.

An information system that determines what assemblies must be built and what materials must be procured in order to build a unit of equipment by a certain date is called MRP. It queries the bill of materials and inventory databases to derive the necessary elements.

The list of components that make up a system is called BOM. For example, a bill of materials for a house would include the cement block, lumber, shingles, doors, windows, plumbing, electric, heating and so on. Each subassembly also contains a bill of materials; the heating system is made up of the furnace, ducts, etc. A bill of materials “implosion” links component pieces to a major assembly, while a bill of materials “explosion” breaks apart each assembly or subassembly into its component parts. The first hierarchical databases were developed for automating bills of materials for manufacturing organizations in the early 1960s.

A BOM can be displayed in the following formats

  • A single-level BOM that displays the assembly or sub-assembly with only one level of children. Thus it displays the components directly needed to make the assembly or sub-assembly
  • An indented BOM that displays the highest-level item closest to the left margin and the components used in that item indented more to the right
  • In form of a Modular (planning) BOM

A Master Production Schedule or MPS is the plan that a company has developed for production, inventory, staffing, etc. It sets the quantity of each end item to be completed in each week of a short-range planning horizon. A Master Production Schedule is the master of all schedules. It is a plan for future production of end items. The Master Production Schedule gives production, planning, purchasing, and top management the information needed to plan and control the manufacturing operation. The application ties overall business planning and forecasting to detail operations through the Master Production Schedule.

Following are the type of Master Production Schedule (MPS)

MPS INPUTS: Forecast Demand, Production Costs, Inventory Costs, Customer Orders, Inventory Levels, Supply, Lot Size, Production Lead Time, Capacity

MPS OUTPUT: (production plan): Amounts to be Produced, Staffing Levels, Quantity Available to Promise, Projected Available Balance

Purchasing

Purchasing refers to a business or organization attempting for acquiring goods or services to accomplish the goals of the enterprise. Typically the word “purchasing” is not used interchangeably with the word “procurement”, since procurement typically includes Expediting, Supplier Quality, and Traffic and Logistics (T&L) in addition to Purchasing.

Steps involved in purchasing

  • Acquisition Process: The firm offers its demand in the market so that the suppliers can offer their price
  • Selection of Bidders: the various vendors and suppliers are then shortlisted
  • Bidding Process: there are different ways to pin down on one or many suppliers
  • Technical evaluation: Evaluation is carried out to check if the requirement of the firm is being met or not
  • Commercial evaluation: Viability of the raw materials or parts is evaluated to ensure low cost and high quality
  • Negotiating: A series of talks and meetings is held to make a deal with the finalized supplier with respect to the price, timings, quality, number of pieces, and also decides what happens if any party fails to perform
  • Post-Award Administration: A recheck is performed for complete satisfaction
  • Order Closeout: Finally the order is closed

Inventory Planning and Control

The concept of inventory planning is that the materials should be purchased and brought in the stores just before it enters the production or sold out so that inventory cost is negligible. The zero inventories are the ideal planning.

Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near a business’s location so that the firm may meet demand and fulfill its reason for existence. If the firm is a retail establishment, a customer may look elsewhere to have his or her needs satisfied if the firm does not have the required item in stock when the customer arrives. If the firm is a manufacturer, it must maintain some inventory of raw materials and work-in-process in order to keep the factory running. In addition, it must maintain some supply of finished goods in order to meet demand.

Sometimes, a firm may keep larger inventory than is necessary to meet demand and keep the factory running under current conditions of demand. If the firm exists in a volatile environment where demand is dynamic (i.e., rises and falls quickly), an on-hand inventory could be maintained as a buffer against unexpected changes in demand. This buffer inventory also can serve to protect the firm if a supplier fails to deliver at the required time, or if the supplier’s quality is found to be substandard upon inspection, either of which would otherwise leave the firm without the necessary raw materials. Other reasons for maintaining an unnecessarily large inventory include buying to take advantage of quantity discounts (i.e., the firm saves by buying in bulk), or ordering more in advance of an impending price increase.

Classification of Inventory

Raw Material: Raw materials are inventory items that are used in the manufacturer’s conversion process to produce components, subassemblies, or finished products. These inventory items may be commodities or extracted materials that the firm or its subsidiary has produced or extracted. Typically, raw materials are commodities such as ore, grain, minerals, petroleum, chemicals, paper, wood, paint, steel, and food items. However, items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may be regarded as raw materials if they are purchased from outside the firm.

Work-in-process: Work-in-process (WIP) is made up of all the materials, parts (components), assemblies, and subassemblies that are being processed or are waiting to be processed within the system. This generally includes all material—from raw material that has been released for initial processing up to material that has been completely processed and is awaiting final inspection and acceptance before inclusion in finished goods.

Finished goods: A finished good is a completed part that is ready for a customer order. Therefore, finished goods inventory is the stock of completed products. These goods have been inspected and have passed final inspection requirements so that they can be transferred out of work-in-process and into finished goods inventory. From this point, finished goods can be sold directly to their final user, sold to retailers, sold to wholesalers, sent to distribution centers, or held in anticipation of a customer order.

Transit inventory: Transit inventories result from the need to transport items or material from one location to another, and from the fact that there is some transportation time involved in getting from one location to another. Sometimes this is referred to as pipeline inventory. Merchandise shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail facility. Some large firms, such as automobile manufacturers, employ freight consolidators to pool their transit inventories coming from various locations into one shipping source in order to take advantage of economies of scale.

Buffer Inventory: Inventory is sometimes used to protect against the uncertainties of supply and demand, as well as unpredictable events such as poor delivery reliability or poor quality of a supplier’s products. These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory is any amount held on hand that is over and above that currently needed to meet demand. Generally, the higher the level of buffer inventory, the better the firm’s customer service. This occurs because the firm suffers fewer “stock-outs” (when a customer’s order cannot be immediately filled from existing inventory) and has less need to backorder the item, make the customer wait until the next order cycle, or even worse, cause the customer to leave empty-handed to find another supplier.

Anticipation Inventory: Oftentimes, firms will purchase and hold inventory that is in excess of their current need in anticipation of a possible future event. Such events may include a price increase, a seasonal increase in demand, or even an impending labor strike. This tactic is commonly used by retailers, who routinely build up inventory months before the demand for their products will be unusually high (i.e., at Halloween, Christmas, or the back-to-school season). For manufacturers, anticipation inventory allows them to build up inventory when demand is low (also keeping workers busy during slack times) so that when demand picks up the increased inventory will be slowly depleted and the firm does not have to react by increasing production time (along with the subsequent increase in hiring, training, and other associated labor costs). Therefore, the firm has avoided both excessive overtime due to increased demand and hiring costs due to increased demand. It also has avoided layoff costs associated with production cut-backs, or worse, the idling or shutting down of facilities. This process is sometimes called “smoothing” because it smoothes the peaks and valleys in demand, allowing the firm to maintain a constant level of output and a stable workforce.

Decoupling Inventory: Very rarely, if ever, will one see a production facility where every machine in the process produces at exactly the same rate. In fact, one machine may process parts several times faster than the machines in front of or behind it. Yet, if one walks through the plant it may seem that all machines are running smoothly at the same time. It also could be possible that while passing through the plant, one notices several machines are under repair or are undergoing some form of preventive maintenance. Even so, this does not seem to interrupt the flow of work-in-process through the system. The reason for this is the existence of an inventory of parts between machines, a decoupling inventory that serves as a shock absorber, cushioning the system against production irregularities. As such it “decouples” or disengages the plant’s dependence upon the sequential requirements of the system (i.e., one machine feeds parts to the next machine).

Cycle Inventory: EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering or setting up machinery. When large quantities are ordered or produced, inventory holding costs are increased, but ordering/setup costs decrease. Conversely, when lot sizes decrease, inventory holding/carrying costs decrease, but the cost of ordering/setup increases since more orders/setups are required to meet demand. When the two costs are equal (holding/carrying costs and ordering/setup costs) the total cost (the sum of the two costs) is minimized. Cycle inventories, sometimes called lot-size inventories, result from this process. Usually, excess material is ordered and, consequently, held in inventory in an effort to reach this minimization point. Hence, cycle inventory results from ordering in batches or lot sizes rather than ordering material strictly as needed.

MRO Goods Inventory: Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support and maintain the production process and its infrastructure. These goods are usually consumed as a result of the production process but are not directly a part of the finished product. Examples of MRO goods include oils, lubricants, coolants, janitorial supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, and key stock. Even office supplies such as staples, pens and pencils, copier paper, and toner are considered part of MRO goods inventory.

Theoretical Inventory: Theoretical inventory is the average inventory for a given throughput assuming that no WIP item had to wait in a buffer. This would obviously be an ideal situation where inflow, processing, and outflow rates were all equal at any point in time. Unless one has a single process system, there always will be some inventory within the system. Theoretical inventory is a measure of this inventory (i.e., it represents the minimum inventory needed for goods to flow through the system without waiting). The authors formally define it as the minimum amount of inventory necessary to maintain a process throughput of R, expressed as under.

 
 Theoretical Inventory = Throughput x Theoretical Flow Time   Ith = R x Tth

In this equation, theoretical flow time equals the sum of all activity times (not wait time) required to process one unit. Therefore, WIP will equal theoretical inventory whenever actual process flow time equals theoretical flow time.

Ascertaining and Maintaining the Flow and Supply of Materials

The distribution of materials requested by the various production centers and other departments must be ascertained and its flow and continuity of supply must be maintained by the materials management department. Insufficient or zero inventories many times create the situations of stock-outs and leads to stoppage of production. Failure of materials handling devices is also responsible for disruption of material supplies. Alternatives or emergency supply systems can be used for assuring production lines to continue.

Uncertainty in demand and production quantity is one of the main factors of such disruptions. The management has to maintain continuity in production to meet this uncertainty in demand and control the situation by proper flow of materials supply and distribution at various production facilities and other departments as per changing production quantity.

Quality Control of Materials

The quality of the product manufactured by the organization depends upon the quality of the materials used to manufacture that product. The inspection, quality control, simplification, specification, and standardization are the activities which are to be followed for the measurement of quality of the materials.

  • Total Quality Management: TQM is a set of management practices throughout the organization, geared to ensure the organization consistently meets or exceeds customer requirements. TQM places strong focus on process measurement and controls as means of continuous improvement.
  • Kaizen: means continuous improvement (Japanese concept) involves setting standards and then continually improving those standards. To support the higher standards Kaizen also involves providing the training, materials and supervision that is needed for employees to achieve the higher standards and maintain their ability to meet those standards on an on-going basis.
  • Quality standards: The ISO 9000 family of standards represents an international consensus on good quality management practices. It consists of standards and guidelines relating to quality management systems and related supporting standards.
  • ISO 9001:2008 is the standard that provides a set of standardized requirements for a quality management system, regardless of what the user organization does, its size, or whether it is in the private, or public sector. It is the only standard in the family against which organizations can be certified – although certification is not a compulsory requirement of the standard.
  • Six Sigma: Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes.

Departmental Efficiency

The objective of this function is to ensure the efficiency of the system adopted. Management Information System (MIS) and feedback control at every stage of working must be adopted to control and make the management and employee work as efficiently as possible to achieve the best results.

Secondary Functions

There secondary functions of material management are specified as under.

Simplification and Standardization

The standards and specifications of various types of materials are fixed by design and technical department of the organization and they are followed by production department. Standards define the quality, reduction in sizes and variety, interchangeability of parts and products. It ensures efficient utilization of materials and reduces wastages. Standard materials are always available at reasonable cost. It also helps the purchase department in selection of materials and vendors. If less variety of items purchased and put in the stores the types of inventories will be reduced and in this way the cost of carrying the inventories in the stores will be reduced. Therefore the sole objective of this function is to produce standard product reducing the overall cost of the product.

Design and Development of the Product

The variety in product and functionality are the important factors to promote the sales of a product. The new techniques of designing a product using Computer Aided Design (CAD) has made possible to develop variety of products at faster rate. The new technological development in manufacturing using Computer Aided Manufacturing (CAM) can produce variety of products at much faster rate with all types of flexibility in the manufacturing as compared to conventional methods.

Make and Buy Decisions

The make and buy decisions are largely based on cost economics and cost benefit analysis made by the organization using the existing production capacity of labor, skill and machines available with the factory and how best they can be utilized. A company is often faced with the decision as to whether it should manufacture a component or buy it outside.

Suppose for example, a company Modern electronics makes four components, W, X, Y and Z, with expected costs for the coming year are as under.

 WXYZ
Production (units)1, 0002, 0003, 0004, 000
Unit of Marginal Cost$$$$
Direct Material4524
Direct Labour8946
Variable Production Overheads2312
 1417712

Direct fixed costs/annum and committed fixed costs are as under.

Incurred as a direct consequence of making W1,000
Incurred as a direct consequence of making X5,000
Incurred as a direct consequence of making Y6,000
Incurred as a direct consequence of making Z8,000
Other committed fixed costs30,000
 50,000

A subcontractor has offered to supply units W, X, Y and Z for $12, $21, $10 and $14 respectively. Decide whether this company should make or buy the components.

Solution:

(a)The relevant costs are the differential costs between making and buying. They consist of differences in unit variable costs plus differences in directly attributable fixed costs. Subcontracting will result in some savings on fixed cost.

(b) The company would save $3,000/annum by sub-contracting component W and $2,000/annum by sub-contracting component Z.

(c) In this example, relevant costs are the variable costs of in-house manufacture, the variable costs of sub-contracted units, and the saving in fixed costs. .

 WXYZ
$$$$
Unit variable cost of making1417712
Unit variable cost of buying12211014
 (2)-422
Annual requirements in units1,0002,0004,0003,000
Extra variable cost of buying per annum(2,000)8,00012,0006,000
Fixed cost saved by buying1,0005,0006,0008,000
Extra total cost of buying(3,000)3,0006,000(2,000)

(d) Other important considerations are as under.

  • If components W and Z are sub-contracted, the company will have spare capacity. How should that spare capacity be profitably used? Are there hidden benefits to be obtained from sub-contracting? Will there be resentment from the workforce?
  • Would the sub-contractor be reliable with delivery times, and is the quality the same as those manufactured internally?
  • Does the company wish to be flexible and maintain better control over operations by making everything itself?
  • Are the estimates of fixed costs savings reliable? In the case of product W, buying is clearly cheaper than making in-house. However, for product Z, the decision to buy rather than make would only be financially attractive if the fixed cost savings of $8,000 could be delivered by management. In practice, this may not materialize.

Coding and Classification of Materials

Coding and classification of materials is one of the most important functions of the materials management to help the production and purchasing department of every organization. It uses its own methods of classification of materials used to manufacture the product or a company selling various goods. ABC analysis is one of the simple and standard methods used by most of the firms for classification and storing their variety of materials. The materials are recognized to purchase and store as an inventory by its codes and nomenclatures.

Forecasting and Planning

Materials requirement planning is based on correct forecasting of sales and demand of the products in the market. The market fluctuations are to be observed to control production of the organization. Analytical methods are used for systematic forecasting and planning to procure the various materials required for production.

Methods of the forecasting

  • Time Series: Moving averages, extrapolation, exponential smoothing, trend estimation
  • Judgmental methods: Surveys, observation, Delphi method, forecast by analogy etc.

Costs involved with materials

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.

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