Materials and Inventory Management

Nitin G Shekapure

By

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.

InventoryWhat 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 ?

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.

• 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 ResourcesMEN

MATERIALSM/Cs

METHODSMONEYMARKET

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PlanningWhat 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.

Material ManagementDefinition

• 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.

Aim of Material ManagementTo get

1. The Right quality2. Right quantity of supplies 3. At the Right time4. At the Right place5. For the Right cost

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

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

Objective of Material Management

Forecasting Inter-departmental harmony Product improvement Standardization Make or buy decision New materials & products Favorable reciprocal relationships

Secondary

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 investment4.To operate efficiently

Basic Principles Material Management1. Effective management & supervision It depends on managerial functions of • Planning• Organizing• Staffing• Directing• Controlling • Reporting• Budgeting2. Sound purchasing methods3. Skillful & hard poised negotiations4. Effective purchase system5. Should be simple6. Must not increase other costs7. Simple inventory control programme

• 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

Purpose of InventoryAll 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.

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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• 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

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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

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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

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The Paradox of Inventory ManagementProblems 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.

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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 ?”

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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.

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.

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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.

Implementing or improving Material Requirements Planning can provide the

following benefits for your company:1. Reduced Inventory Levels 2. Reduced Component

Shortages3. Improved Shipping

Performance4. Improved Customer

Service 5. Improved Productivity 6. Simplified and Accurate

Scheduling 7. Reduced Purchasing Cost 8. Improve Production

Schedules9. Reduced Manufacturing

Cost10. Reduced Lead Times

11. Less Scrap and Rework12. Higher Production Quality13. Improved Communication14. Improved Plant Efficiency15. Reduced Freight Cost 16. Reduction in Excess

Inventory 17. Reduced Overtime 18. Improved Supply

Schedules19. Improved Calculation of

Material Requirements20. Improved Competitive

Position

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 Times5. Sales Order Quantities / Due Dates6. Scrap Rate7. Purchase Order Quantities / Due Dates8. Lot Sizing policies for All Parts9. Safety Stock Requirements

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.

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.

ABC ClassificationRaw Material Cost

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.

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

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.

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STOCK LEVEL WITH - MRP DEPENDENT DEMAND SYSTEM

STO

CK L

EVEL

NORMALSTOCKLEVEL

SCHEDULEDDELIVERY PRODUCTION STOP

PRODUCTION START

TIME

STOCK LEVELDECLINES TO MEETPRODUCTION NEEDS

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.

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STOCK LEVEL WITH INDEPENDENT DEMAND SYSTEM

NORMALSTOCKLEVEL

STO

CK L

EVEL

PRODUCTION STARTS

PRODUCTION STOPS

SCHEDULED DELIVERY

TIME

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.

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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.

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• 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

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.

Thankyou