This document provides an overview of materials management. It defines materials management and its objectives. It discusses the importance of materials management and its scope, which includes anticipating requirements, sourcing materials, introducing materials, and monitoring materials status. The document also covers topics like purchasing, production control, transportation, warehousing, information systems, inventory planning, quality management, and planning tools like MRP, ERP, and DRP.

1. MANAGING MATERIALS FLOW
Chapter 2

2. MATERIALS MANAGEMENT DEFINED
An integral part of logistics management, which
encompasses the administration of raw
materials, subassemblies, manufactured
parts, packing material and in-process
inventory.
It is concerned with activities that are related to
the “physical” supply of materials in an
organization

3. OBJECTIVES
1. To identify the activities of materials
management
2. To examine the concept of Total Quality
Management (TQM)
3. To identify and describe a variety of
materials management techniques including
just-in-time systems, MRP, ERP and DRP.

4. IMPORTANCE OF MATERIALS MANAGEMENT
 Has a significant impact on level of customer
service offered
 Directly affects the ability of the firm to compete
with other companies
 Has an effect on level of sales and profits achieved
in market place
Without an efficient and effective management
of inbound materials flow, the manufacturing
process cannot produce products at the
“desired price” and at the “time required” for
distribution to the form’s customers.

5. SCOPE OF MATERIALS MANAGEMENT ACTIVITIES
Materials management is typically comprised of four
basic activities:
1. Anticipating materials requirements
2. Sourcing and obtaining materials
3. Introducing materials into the organization
4. Monitoring the status of materials as a current
asset

6. Company Objectives
Objectives of Materials
Management
1. Low
Costs
To
optimize
materials
costs,
capital
costs and
overhead
expenses
2. High level
of service
To optimize
response
towards
production
and
markets
3. Quality
Assuranc
e
To
maintain
and improve
the quality of
materials
4. Low level
of tied up
capital
To
optimize
the level
of capital
tied up in
inventorie
s
5. Support
of other
function
s
To supports
sales,
design/
developmen
t

7.  Reasons for rising importance:
1. Shorter product life cycles, rapid technological
changes and more sophisticated customers
have made flexibility and agility increasingly
important
2. Emergence of global economy has forced
companies to broaden their horizons
3. Revolution in information technology and
telecommunication has provided low-cost,
high-spewed automated alternatives to manual
activities

8. PURCHASING & PROCUREMENT
 They are not same
 Purchasing is the actual buying of materials
and those activities associated with the
buying process
 Procurement is broader in scope and
includes purchasing, traffic, warehousing and
receiving inbound materials

9. PURCHASING vs. PROCUREMENT

10. PRODUCTION CONTROL
 An activity traditionally positioned under
manufacturing
 Two-fold role
1. Production activity determines how much and
what kinds of finished goods to produce
2. Directly determines the company’s needs for
raw materials, subassemblies and component
parts that are used in the manufacturing
process

11. INBOUND TRANSPORTATION
 Managers must know
 Various transport modes and modal
combinations available
 Any regulations that might affect the
transportations carrier that the firm uses
 Decision of private versus for-hire
 Leasing
 Evaluating mode and carrier performance
 Cost/service tradeoffs involved in inbound
movement of the product

12.  Difference b/w Inbound and Outbound
transportation
1. Market demand that generates the need for
outbound transportation is uncertain and fluctuating
2. Inbound is concerned with bulk movements of raw
materials or large shipments hat have different
handling and loss/or damage characteristics
3. Firms generally exercise less control over inbound
logistics as they look at “total delivered cost”. In-
depth analysis can result in significant cost savings

13. WAREHOUSING & STORAGE
 Raw materials are either stores on site or
delivered as needed (JIT)
 JIT reduces or rather eliminates the need for
inbound warehousing
 Open or outside storage is also possible
 Damage or loss due to weather, spoilage or
theft is minimal because of their low value
per pound

14. DATA AND INFORMATION SYSTEMS
 Material managers need direct access to firm’s
information system
 Type of information required:
 Demand forecasts by production
 Names of suppliers and supplier characteristics
 Pricing data
 Inventory levels
 Production schedules
 Transportation routing
 Various other financial and marketing facts
 Provides inputs on suppliers, delivery schedules,
pricing etc,

15. INVENTORY PLANNING & CONTROL
 Concepts like ABC analysis, inventory carry
costs and economic order quantity (EOQ)
are directly applicable to materials
management

16. REVERSE LOGISTICS
Disposal or recycling of scrap, surplus or
obsolete materials; purchasing of
remanufactured or refurbished goods; and
the handling of product returns and
defects are all aspects of a total reverse
logistics

17. TOTAL QUALITY MANAGEMENT (TQM)
TQM is both a philosophy and a set of guiding
principles that represent the foundation of a
continuously improving organization

18.  Difficulties in TQM Implementation
1. Too much training required
2. Too little focus on human issues
3. Underestimating the time and effort required
losing sight of the customer
4. Trying to encompass too many elements
5. Lack of integration into form’s core values
and competencies

19.  KEYS TO TQM SUCCESS
1. Focus on continuous improvement that lead
to superior quality and better customer
support
2. Cultural change focusing more on process
improvement rather than activities
3. Employee involvement
4. Senior management commitment and
leadership

20. Relationship b/w TQM & LOGISTICS
TQM LOGISTICS
Provides a TQM management environment Uses systematic, integrated, consistent
organization-wide perspective to satisfy the
customer
Reduces chronic waste Emphasis on “doing it right the first time”
Nurtures supplier partnerships and
customer relationships
Knows the importance of supplies and
partnerships
Key to customer relations
Creates a continuous improvement system Uses logistics support analysis for
continuous improvement
Includes quality as an element of design Influences design by emphasizing reliability,
supportability and maintainability
Provides training constantly Provides constant technical training
Leads long term continuous improvement
efforts geared towards prevention
Focuses on reducing life cycle costs by
quality improvements geared to prevention

21. TQM LOGISTICS
Encourages teamwork Stresses the integrated efforts of everyone
Satisfies the customer (internal and
external)
Places the customer first

22. ADMINISTRATION & CONTROL OF MATERIAL FLOWS
 Firm must be able to “measure”, “report” and
“improve performance”
 Service levels can be measured by:
 Order cycle time for each supplier
 Variability in order cycle time for each supplier
 Order fill rate of each supplier
 Percentage of orders from each supplier that are overdue
 Number of stock-outs resulting from late deliveries from
suppliers
 Number of production delays caused by materials being
out of stock

23.  Inventory can be controlled by following
measures:
 Amount of dead stock
 Comparison of actual inventory levels with targeted
levels
 Comparison of inventory turnover rates with data
from previous time periods
 Percentage of stock-outs caused by improper
purchasing decisions
 Number of production delays caused by improper
purchasing decisions

24.  Materials price level measures include:
 Gains and losses resulting from forward buying
 A comparison of prices paid for major items over
several time periods
 Comparison of actual prices paid for materials with
targeted prices
 Measures for quality control include:
 Number of product failures caused by material
defects
 Percentage of materials rejected from each shipment
from each supplier
 Overall measurement of performance:
 Compare the “actual budget consumed” to “targeted
budget allocated”

25. MAJOR OPERATING REPORTS
1. Market & Economic conditions and price performance
 Price trends and changes for major materials and
commodities purchased
 Changes in demand-supply conditions for major items
purchased
 Lead-time expectations for major items
2. Inventory investment changes
 Dollar investment in inventories classified by major
commodity and materials group
 Days’ or months’ supply and on order for major commodity
and materials group
 Ratio of inventory dollar investment to sales dollar volume
 Rates of inventory turnover for major items

26. 3. Purchasing operations and effectiveness
 Cost reductions resulting from purchase research and value
analysis studies
 Quality rejection rates for major items
 Percentage of on-time deliveries
 Number of out-of-stock situations hat caused interruptions in
production schedules
4. Operation affecting administration and financial activities
 Comparison of actual departmental operating costs to budget
 Case discounts earned and cash discounts lost
 Changes in cash discounts allowed by suppliers

27.  Just in Time (JIT) is a method of inventory
control with a focus on waste elimination
 Introduced in 1970’s – is used interchangeably
 Efficient Consumer Response (ECR) for food
industry
 Quick Response (QR) for retail sector
 Primary goals are:
1. To minimize inventories
2. Improve product quality
3. Maximize production efficiency
4. Provide optimal customer service levels

28.  Benefits:
1. Improved inventory turns
2. Improved customer service
3. Decreased warehouse space
4. Improved response time
5. Reduced logistics costs
6. Reduced transportation costs
7. Improved quality of vendor products
8. Reduced number of vendors
9. Reduced number of transportation carriers

29.  Organizations that implement JIT have the following
characteristics
1. Formalization of performance measurements
2. Greater reliance on logistics personnel with specialized
skills
3. Delegation of decisions concerning logistics issues
down the organizational charts
4. Greater involvement by senior managers in the creation
of logistics strategy
5. An increased span of control of senior logistics
executives as the company grows
6. Improved perception of the organization’s performance
relative to the rest of the industry

30.  Problems associated with JIT:
1. Production scheduling (plant)
2. Supplier production scheduling
3. Supplier locations
4. Organizational resistance
5. Lack of systems support
6. Lack of planning and inventory being shifted

31.  Implications:
 Requires the firm to fully integrate all the logistics
activities which may require few trade offs
 Transportation becomes vital component of logistics
under JIT – requires better transportation decision
making
 Warehousing assumes an expanded role – becomes
a consolidation facility rather than a storage facility
**Table below summarizes the areas of difficulty when attempting to
implement JIT in a global arena

32. Required Elements JIT Global Purchasing
Frequent deliveries Essential Difficult
Small lots Essential Difficult
Supplier location Close Far
Single sourcing Common High risk
Long term relationship Essential Difficult
Early supplier
involvement
Possible and
probable
Unlikely
Coordination &
Monitoring of schedules
and markets
High Difficult
Price High Difficult
Transit loss/damage Low High
Information sharing High Low
Supplier flexibility and
reaction time
High Low
Quality High low
Potential pipeline
instability
Low high

33. MATERIAL PLANNING TOOLS
 Materials Requirement Planning = MRP I
 MRP I + financial + marketing + purchasing =
MRP II
 Basic logic is that any system begins with a
customer and how well the organization can
supply their demands

34. “Pens have been sold”
Now we need to know HOW MANY PENS ?and
WHEN ARE THEY REQUIRED?
Do we have
stock in hand?
YES NO
Enter a
shipping
order
Do we have the
components to
manufacture?

35.  Got 3 main inputs to MRP
1. What do we need to fulfill customers’
demands?
In this case, we need 20 pens by next week –
Master Schedule
2. Do we have the inventory?
Check the inventory in stock - if we do not have the
required stock in hand check the material required
to produce it – Gross requirement is the sum of
needs for each particular component
3. Once the requirement is established, subtract the
inventory from it,

36.  MRP offers following advantages:
1. Improved business results
2. Improved manufacturing performances
3. Better manufacturing control
4. More accurate and timely information
5. Inventory reductions
6. Time phased ordering of materials
7. Increased reliability
8. More responsiveness to market demand
9. Reduced production costs

37. ENTERPRISE RESOURCE PLANNING (ERP)
 This system includes the core accounting
functions of accounts payable, accounts
receivable and general ledger coupled with
logistics functions.
 Manage the distribution and manufacturing
component of an organization
 Facilitator of an organization, moving data
from one function to another& managing data
centrally

38. DRP SYSTEMS
 DRP Systems (DRP I and DRP II) are time-
phased models that include demand
forecasts, purchase orders and customer
orders
 DRP I (Distribution Requirement Planning) is
a system of determining demands for
inventory at distribution centers,
consolidating demand information
backwards and acting as an input to the
production and materials system

39.  DRP II (Distribution Resource Planning) is an
extension of DRP I and includes planning of
key resources in a distribution system-
warehouse space, manpower levels,
transport capacity and financial flows

40.  Marketing benefits of DRP
1. Improved service levels resulting in on-time customer
deliveries and fewer complaints
2. Ability to plan promotions and new introductions
effectively
3. The ability to see in advance when a product will not be
available so that it is not being marketed aggressively
4. Better working relationships with other functions of the
company
5. The ability to offer the customers not only the product
but also the service in helping them manage their own
inventory.

41.  Logistics benefits of DRP
1. Reduced freight costs to the distribution centers
due to fewer rush or premium freight shipments
2. Better planning for loading trucks and rail cars
3. Lower inventories
4. Reduced warehouse space
5. Reduced distribution costs to customers