Introduction to Material and Inventory Management

1. Materials and
Inventory
Management
Nitin G Shekapure
By

2. MaterialWhat is Material ?
• Material is anything made of matter, constituted of one or more
substances.
• Sometimes the term "material" is used more narrowly to refer
to substances or components with certain physical properties
that are used as inputs to production or manufacturing.
• In this sense, materials are the parts required to make
something else.
• Material is also used to refer to a group of ideas, facts,
information or data that may provide the basis for or are part of
some piece of work.

3. Inventory
What is Inventory ?
• The word inventory is commonly used to describe the goods
and materials that a business holds for the ultimate purpose.
• The word stock is commonly used to describe the capital
invested in a business.
• The word stock is used by both American and British English in
the term Stock Exchange.
What is Stock ?

4. ManagementWhat is Management ?
• Management in all business and organizational activities is the
act of coordinating the efforts of people to accomplish desired
goals and objectives using available resources efficiently and
effectively.
• Management comprises planning, organizing, staffing, leading or
directing, and controlling an organization (a group of one or more
people or entities) or effort for the purpose of accomplishing a
goal.

5. • Since organizations can be viewed as systems, management can
also be defined as human action, including design, to facilitate the
production of useful outcomes from a system. This view opens the
opportunity to 'manage' oneself, a prerequisite to attempting to
manage others.
Management
Basic Resources
MEN
MATERIALS
M/Cs
METHODS
MONEY
MARKET
Cont…
Cont…

6. Planning
What is Planning ?
• Planning is the process of thinking about and organizing the
activities required to achieve a desired goal.
• Planning involves the creation and maintenance of a plan.
• As such, planning is a fundamental property of intelligent
behavior.
• This thought process is essential to the creation and refinement
of a plan, or integration of planning it with other plans; that is, it
combines forecasting of developments with the preparation of
scenarios of how to react to them.

7. Material Management
Definition
• 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.
• Material management is a scientific technique, concerned with
Planning, Organizing &Control of flow of materials, from their
initial purchase to destination.

8. Aim of Material Management
To get
1. The Right quality
2. Right quantity of supplies
3. At the Right time
4. At the Right place
5. For the Right cost

9. Purpose of Material Management
 To gain economy in purchasing
 To satisfy the demand during period of replenishment
 To carry reserve stock to avoid stock out
 To stabilize fluctuations in consumption
 To provide reasonable level of client services

10. Objective of Material Management
 Right price
 High turnover
 Low procurement & storage cost
 Continuity of supply
 Consistency in quality
 Good supplier relations
 Development of personnel
 Good information system
Primary

11. Objective of Material Management
 Forecasting
 Inter-departmental harmony
 Product improvement
 Standardization
 Make or buy decision
 New materials & products
 Favorable reciprocal relationships
Secondary

12. Four basic methods of Material Management
1. To have adequate materials on hand when needed
2. To pay the lowest possible prices, consistent with
quality and value requirement for purchases
materials
3. To minimize the inventory investment
4. To operate efficiently

13. Basic Principles Material Management
1. Effective management & supervision
It depends on managerial functions of
• Planning
• Organizing
• Staffing
• Directing
• Controlling
• Reporting
• Budgeting
2. Sound purchasing methods
3. Skillful & hard poised negotiations
4. Effective purchase system
5. Should be simple
6. Must not increase other costs
7. Simple inventory control programme

14. • Inventory is the stock of any item or resource used in an
organization.
• An inventory system is the set of policies and controls that monitor
levels of inventory and determine what level should be maintained,
when stock should be replenished, and how large order should be.
• By convention, manufacturing inventory generally refers to items that
contribute to or become part of firm’s output.
• Manufacturing inventory is typically classified into raw materials,
finished products , component parts , supplies, and work – in – process.
• In services, inventory generally refers to the tangible goods to be sold
and the supplies necessary to administer the service.
Inventory

15. Purpose of Inventory
All firms keep a supply of inventory for the following reasons :
1. To maintain independence of operations.
• A supply of materials at a work center allows that center flexibility
in operations.
• There are costs for making each new production set- up. This
inventory allows management to reduce the number of set-ups.
• Independence of workstations is desirable on assembly lines as
well. The time that it takes to do identical operations will naturally
vary from one unit to the next.
• Therefore it is desirable to have a cushion of several parts within
the workstation so that shorter performance times can
compensate for longer performance times.
• This way average output can be fairly stable.

16. Purpose of Inventory
2 To meet variation in product demand.
• If the demand of the product is known precisely, it may be
possible ( though not necessarily economical ) to produce
the product to exactly meet the demand.
• However, demand usually is not completely known , and a
safety or buffer stock must be maintained to absorb
variations.
Cont…
Cont…

17. Purpose of Inventory
3 To allow flexibility in production scheduling.
• A stock of inventory relieves the pressure on the
production system to get the goods out.
• This causes longer lead time, which permit production
planning for smoother flow and lower cost operation
through larger lot size production.
• High setup costs, for example, favour producing a large
number of units once the setup has been made.
Cont…
Cont…

18. Purpose of Inventory
4 To provide a safeguard for variation in raw material delivery
time.
• When material is ordered from a vendor, delays can occur
for variety of reasons.
• A normal variation in shipping time, a shortage of material at
vendor’s plant causing backlogs, an unexpected strike at
vendor’s plant or at one of the shipping companies, a lost
order, or a shipment of incorrect or defective material.
Cont…

19. Purpose of Inventory
5 To take advantage of Economic purchase order size.
• There are costs to place an order; labour, phone calls, typing,
postage, and so on.
• Therefore, the larger each order is, the fewer the orders that
needs be written.
• Also, shipping costs favor large orders - the larger the
shipment, the lower the per unit cost.
Cont…

20. Inventory Cost
• Inventories are a cost and large amounts are generally
undesirable.
• Long cycle times are caused by large amounts of
inventory and are undesirable.
• In making any decision that affects inventory size, the
cost must be considered.
Cont…

21. Inventory Cost
1 Holding (or carrying) costs –
• This broad category includes the costs for storage facilities,
handling, insurance, pilferage , breakage , obsolescence,
depreciation, taxes, and the opportunity cost of capital.
• Obviously, high holding cost tend to favour low inventory
levels and frequent replenishment.
Cont…
Cont…

22. Inventory Cost
2 Setup (or production change ) costs –
• To make each different product involves obtaining the necessary
materials, arranging specific equipment setups, filling out the required
papers, appropriate changing time and materials, and moving out the
previous stock of material.
• If there were no costs or loss of time in changing from one product to
another, many small lots would be produced.
• This would reduce inventory levels, with resulting savings in cost.
• One challenge today is to try to reduce these setup costs to permit
smaller lot sizes.
Cont…

23. Inventory Cost
3 Ordering costs -
• These costs refer to the managerial and clerical costs to
prepare the purchase or production order.
• Ordering costs include all the details, such as counting
items and calculating order quantities.
• The costs associated with maintaining the system needed
to track orders are also included in ordering costs.
Cont…
Cont…

24. Inventory Cost
4 shortage costs -
• When the stock of an item is depleted, an order for that item must either
wait until the stock is replenished or be cancelled.
• There is a trade- off between carrying stock to satisfy demand and the costs
resulting from stock out.
• This balance is sometimes difficult to obtain, because it may not be possible
to estimate lost profits, the effect of lost customers, or penalties for late
supplies.
• Frequently, the assumed shortage cost is little more than a guess, although
it is usually possible to specify a range of such costs.
Cont…
Cont…

25. • Establishing the correct quantity to order from vendors or the
size of lots submitted to the firm’s productive facilities involves
a search for the minimum total cost resulting from the
combined effects of four individual costs ;
 Holding costs.
 Setup costs.
 Ordering costs.
 Shortage costs
• The timing of these orders is a critical factor that may impact
inventory cost.
Inventory Cost
Cont…

26. The Paradox of Inventory Management
• A remarkable truth about inventory management is -
“ if you can not match inputs to and output from an inventory,
you will never control it.”
• The better we can match inputs and outputs, the less need there is for
inventory.
• Inputs to inventory are –
- receipts of purchased materials from suppliers.
- Complete production of parts
- Sub- assemblies
- Assemblies.
• Output are -
- deliveries to customers external and internal
- Issues to manufacturing processes
- Scrap.
Cont…

27. The Paradox of Inventory Management
• People concerned with inventory and its management include –
- Top level managers
- Sales and marketing
- Purchasing
- Material planning and control
- Production activities
- Cost accountants
Cont…
Cont…

28. The Paradox of Inventory Management
Problems abound
• Customers changed their minds about.
• What they wanted.
• How many they wanted
• When they wanted them.
• Designs were faulty and changed frequently.
• Suppliers were late and often delivered defective materials.
• Machinery and tooling broke down.
• People were absent and made defective things when they worked.
• The consensus was that these problems were unsolvable.
• This has now been proven false.
• Most can be solved and eliminated : those that cannot be eliminated can
be minimized.
• There is now little excuse for the “surprises” blamed on manufacturing
problems in the past.
Cont…
Cont…

29. The Paradox of Inventory Management
• MRP can play an important role in achieving a better balance
between inventory inputs and outputs.
• The paradox stated above has made it clear how we should
answer the question, “ how much inventory is enough ?”
• The answer is , “how much is needed because inputs and
outputs don’t match ?”
• Even more important questions are, “ who is responsible for
the mismatch ?” and “ how long will it take to get them to
match ?”
Cont…

30. Inventory – Asset or Liability ?
• Management has always challenged amounts of manufacturing inventories - raw materials,
work – in – process , and stocks of component parts and subassemblies.
• Although they called them assets ( and they comprise a major portion of the asset total on
most company’s balance sheets), executives and top – level managers have viewed and
treated them as liabilities.
• Improving inventory turnover ( total sales at cost divided by total inventory at cost) has
been perennial goal of management.
• Only finished product inventories have been accepted, albeit grudgingly, as necessary to
serving customers.
• This abhorrence of inventory now is seen as being eminently correct for different reasons!
• In itself, some inventory is needed in manufacturing ; some is even beneficial, earning an
adequate return on the investment.
• Such inventory is an asset, but in most firms it is a very small fraction of the total.

31. Inventory – Asset or Liability ?
• The single most important performance measure of the overall health of a
manufacturing business is inventory turnover ratios.
• Inventory turnover is the ratio of total sale divided by total inventory being
held.
• In USA before 1980, these ranged from as below 1 to as high as 6.
• Management thought they were doing well to increase the figure by 50
percent in one year.
• Many found that lowering inventories harmed customer service and caused
higher costs, indicating lack of understanding of how manufacturing should
work and failure to use sound planning and control.
• The people responsible for acting on it must have the knowledge and tools
to react properly to avoid damaging customer service and profits by
instigating crisis actions.
• This must begin with sound planning and end with right control.
• MRP is the core of modern integrated planning and control systems.
• It is the key to effective inventory management.
Cont…

32. Material Requirements Planning
(MRP):
MRP calculates and maintains an optimum manufacturing plan based on master
production schedules, sales forecasts, inventory status, open orders and bills of
material. If properly implemented, it will reduce cash flow and increase
profitability. MRP will provide you with the ability to be pro-active rather than re-
active in the management of your inventory levels and material flow.
Definition:
Materials requirements planning (MRP) is the scientific techniques for planning the
ordering and usage of materials at various levels of production and for monitoring
the stocks (inventories) during these transitions.

33. Implementing or improving Material Requirements
Planning can provide the following benefits for your
company:
1. Reduced Inventory Levels
2. Reduced Component Shortages
3. Improved Shipping Performance
4. Improved Customer Service
5. Improved Productivity
6. Simplified and Accurate
Scheduling
7. Reduced Purchasing Cost
8. Improve Production Schedules
9. Reduced Manufacturing Cost
10. Reduced Lead Times
11. Less Scrap and Rework
12. Higher Production Quality
13. Improved Communication
14. Improved Plant Efficiency
15. Reduced Freight Cost
16. Reduction in Excess Inventory
17. Reduced Overtime
18. Improved Supply Schedules
19. Improved Calculation of
Material Requirements
20. Improved Competitive Position

34. MRP uses the following elements to plan optimal
inventory levels, purchases, production schedules and
more:
1. Master Production Schedule (MPS)
2. Bill of Materials (BOM)
3. Quantity on Hand (QOH)
4. Part Lead Times
5. Sales Order Quantities / Due Dates
6. Scrap Rate
7. Purchase Order Quantities / Due Dates
8. Lot Sizing policies for All Parts
9. Safety Stock Requirements

35. MRP II (Manufacturing Resources Planning)
MRP II is (essentially) MRP but with more added. Typically an MRP II
package will include features such as cost information, management
reports and easy "what-if" analysis. It may also include capacity
requirements planning (essentially try and automatically include
capacity restrictions in the planning process).
To confuse things MRP II stands for manufacturing resources
planning, signifying that we are concentrating upon the planning of
the manufacturing resources (e.g. people, machines, storage), rather
than limiting ourselves to the planning of the materials requirements.

36. ABC Analysis (Inventory Control tool)
Understanding ABC classification starts by understanding the 80/20
rule, also known as Pareto‟s rule.
Basically the rule outlines a phenomenon known throughout the world of
business:
“80% of a company’s cost value is used by 20 % of the raw materials”
Meaning that time, money and resources spend on the remaining 80 % of
the raw materials represent very little value.

37. ABC Classification
Raw Material Cost

38. The method separates “The critical few, and the trivial (Unimportant)
many”:
•A’s being the most important: Few raw materials representing your
core business with a high impact on your button line, generating 80 %
of your cost value
•B’s being less important: Raw materials generating 15 % of your cost
value
•C’s being least important: The majority of your raw materials are low
value/slow movers generating close to nothing of your cost value.

39. Other Control tools…..
Classification Criterion employed
ABC Analysis Usage value (i.e. consumption per period x price per unit)
HML analysis Unit price (i.e. it dose not take consumption into account)
VED analysis Criticality of the item (i.e. loss of production)
SED analysis Procurement difficulties
GOLF analysis Source of Procurement
S-OS analysis Seasonality
FSN analysis Issues from stores
XYZ analysis Inventory investment

40. Dependent and Independent Demand
• The nature of demand of an item is a determining factor in the selection of
an appropriate inventory control technique.
• An item exhibits ‘Dependent demand’ when it is required to go into one or
become a part of another item.
• Component items go into parent items.
• The reason for this classification is that the procurement or delivery schedule
of a dependent demand item follows the demand of its parent
• Production of the parent and the component can be tightly co-ordinated
with little or no difficulty. The schedule of the component item is dead
accurate relative to the schedule of the parent item.

41. 41
STOCK LEVEL WITH - MRP DEPENDENT
DEMAND SYSTEM
STOCKLEVEL
NORMAL
STOCK
LEVEL
SCHEDULED
DELIVERY PRODUCTION STOP
PRODUCTION START
TIME
STOCK LEVEL
DECLINES TO MEET
PRODUCTION NEEDS

42. Dependent and Independent Demand
• Independent demand item scheduling is not so simple due to
the element of guess work in the forecast figures.
• The costs of carrying inventory are prominent, as the buffer
stock of inventory is carried to safeguard customer’s service
level.
• The items whose demand is independent of other items in the
inventory system are called independent demand item.

43. 43
STOCK LEVEL WITH INDEPENDENT
DEMAND SYSTEM
NORMAL
STOCK
LEVEL
STOCKLEVEL
PRODUCTION STARTS
PRODUCTION STOPS
SCHEDULED DELIVERY
TIME

44. Shortcomings of Independent Demand System
• The assumption of a uniform, continuous demand rate is
unrealistic in most circumstances. Typically, component demand
is lumpy because of production lot size decision made for
parent items.
• Forecasting lumpy demand using statistical method results in
large forecasting errors.
• Compensating for such errors by increasing the safety stock is
costly and even then there is no guarantee that stockouts can
be surely avoided.
Cont…

45. Shortcomings of Independent Demand System
• Assuming that demand for the inventory items is independent, is fallacious.
• In fact, the parent and component are linked through bill of materials.
• The re-order point system failed to recognize that requirement schedules
(for components , assemblies and raw materials needed to make parent
items) needed to make parent items are based on the production schedule
of parents.
• In re-order point systems, analysts do not use information from parent item
schedules to manage the inventory of components or sub-assemblies. This is
a grave error.
Cont…
Cont…

46. • The re-ordering point system provides no futuristic visibility for
planning purposes.
• Instead, an operation assumes that it can follow the past
demand pattern to establish reasonable re-order points and
safety stocks.
• To correct these problems, a better way is needed to integrate
and use the information already available to estimate future
requirements for dependent demand items accurately.
Cont…
Shortcomings of Independent Demand System

47. Dependent and Independent Demand
• For many years, companies tried to manage production and
delivery of dependent demand components by independent
demand system, but the outcome was seldom satisfactory.
• As a result MRP - “material requirement planning” , a
computerized information system was developed specifically to
aid in managing dependent demand inventory and scheduling
replenishment orders.

48. Thankyou