Material Management

MATERIAL MANAGEMENT

VINODKUMAR M

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Material Management

CONTENTS

Introduction......................................................................................................................3
Technical Terms...............................................................................................................3
The Supply Chain Concept..............................................................................................3
Manufacturing Strategy...................................................................................................4
Production Planning System............................................................................................5
The Manufacturing Planning and Control System...........................................................5
Manufacturing Resource Planning (MRP 2)....................................................................7
Production Plan................................................................................................................7
Master Production Scheduling (MPS).............................................................................8
Material Requirements Planning (MRP).........................................................................9
Production Activity Control (PAC)...............................................................................12
Purchasing......................................................................................................................14
Forecasting.....................................................................................................................15
Conclusion.....................................................................................................................30

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Introduction
This document briefly describes the material management, which is a coordinating
function responsible for planning and controlling material flow. Its objectives are to
maximize the use of the firm’s resources and provide required level of customer service.
The planning and process is generally used as basis in Enterprise Resource Planning
(ERP) application.

Technical Terms

Lead Time
From the supplier’s perspective, this is the time from the receipt of an order to the
delivery of the product. From the customer’s perspective, it may include time for order
preparation and transmittal.

Bill of Materials (BOM)

Bill of materials (BOM) is a list of the raw materials, sub-assemblies, intermediate
assemblies, sub-components, components, parts and the quantities of each needed to
manufacture a final product.

Capacity
The amount of work can be done in a specified time period.

JIT
Just-in-time is an inventory strategy that strives to improve a business's return on
investment by reducing in-process inventory and associated carrying costs.

Kanban
Kanban is a signaling system to trigger action. It signals the need for an item and related
to JIT in production.

The Supply Chain Concept

There are three phases to the flow of materials. Raw materials flow into a manufacturing
company from a physical supply system, they are processed by manufacturing, and
finally finished goods are distributed to end consumers through physical distribution
system. The below graphic shows one supplier and one customer, usually the supply
chain consists of several companies linked in a supply / demand relationship. For
example, the customer of one supplier buys product, add value to it, and supplies yet

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another customer. Similarly, one customer may have several suppliers and may in turn
supply several customers. The basic elements are Supply, Production and distribution.

Supplier Customer
Manufacturer Distribution
System

Manufacturing Strategy

A highly market-oriented company will focus on meeting or exceeding customer

expectations and order winners. Thus, operations must have a strategy that allows it to
supply the needs of the marketplace and provide fast on-time delivery.

Engineer-To-Order (ETO):-
Customer’s specification requires unique engineering design or required customization.
Delivery lead time is long because it includes not only purchase lead time but also design
lead time.

Make-To-Order (MTO):-
Manufacture does not start an order until the customer’s order is received. Delivery lead
time is reduced because little design time needed and raw material is available in
inventory.

Assemble-To-Order (ATO):-
Product is made from standard components that manufacturer can inventory and
assemble according to customer order. Delivery lead time is further reduced because no
design time is required and components are available in inventory.

Make-To-Stock:-
The supplier manufactures the goods and sells from finished goods inventory. Delivery
lead time is shortest.

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Production Planning System

Manufacturing is a complex process. Some firms make few products while others make
many products. However, each uses a variety of processes, machinery, equipment, labor,
skills and materials. To be profitable, the firm must organize all these factors to make the
right goods at right time at top quantity and do so economically as possible. It is a
complex problem and essential to have a good planning and control system.

The Manufacturing Planning and Control System

There are five major levels in the manufacturing planning and control system.

a) Strategic Business Plan

b) Production Plan (Sales and Operation Plan)
c) Master Production Schedule
d) Materials Requirement Plan
e) Purchasing and Production activity control

STRATEGIC
BUSINESS PLAN

Master
PlanPRODUCTION
PLAN

Planning

MASTER
PRODUCTION
SCHEDULE

MATERIAL
REQUIRMENTS PLAN

PRODUCTION
ACTIVITY CONTROL
Implementation AND PURCHASING

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1. Strategic Business Plan

It is a statement of major goals and objectives that company expects to achieve over next
two to ten years or more. It is based on long forecasts and direction and coordination
among the marketing, production, financial, and engineering plans.

2. The Production Plan

Given the objectives set by strategic business plan, production management is concerned
with the following:
• The quantities of each product group that must be produced in over period of time
• The desired inventory levels.
• The resources of equipment, labor, and material needed in each period.
• The available of resources needed.

3. The Master Production Schedule (MPS)

It is a plan for production of individual end items. It breaks down the plan to show, for
each period, the quantity of each end item to be made.

4. The Material Requirements Plan (MRP)

It is a plan for production and purchase of components used in the making items in the
master production schedule. The level of detail is high.

5. Purchasing and Production Activity Control (PAC)

It represents the implementation and control phase of the production planning and control
system. Purchasing is responsible for establishing and controlling the flow materials to
factory. Production Activity control system controls the flow of work through factory.

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Manufacturing Resource Planning (MRP 2)

It is a master plan for all the departments in a company. It provides mechanism for
coordination between Marketing, production. Marketing, finance and production agree on
a total workable plan expressed in the production plan. Marketing and Production must
work together on a weekly basis and daily basis to adjust the plan as changes occur.
Marketing managers and production managers may change the Master Production
Schedules to meet changes in forecast demand. Senior managements may adjust the
production plan to reflect overall changes in demand or resources. All departments work
through the MRP 2 System. And it is a method for the effective planning of all resources
of a manufacturing company.

Production Plan

The production plan sets the general level of production and inventories over the
planning horizon. Its prime purpose is establishing the production rate that will
accomplishes the objectives of strategic business plan. These include inventory levels,
backlogs (unfilled customer orders), market demand, customer service, low cost plant
operation, labor relations and so on.

Basic Strategies
1) Chase Strategy
2) Production Leveling
3) Subcontracting

1) Chase (demand) Strategy

It means producing the amounts demanded at any given time. Inventory levels
remain stable while production varies to meet demand.

2) Production Leveling
It means continually producing an amount equal to average demand. Companies
calculate their demand over period of time and on the average, to produce to meet the
demand.

3) Subcontracting
It means always producing at the level of minimum demand and meeting any
additional demand through subcontracting.

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Master Production Scheduling (MPS)

The MPS is a vital link in production planning system. It forms a link between production
planning and what manufacturing will actually build. And it forms a basis for calculating
the capacity and resources needed. It drives the Material Requirement Planning (MRP).
As schedule of items to be built, the Master Production Schedule and Bill of Material
(BOM) will determine what components are needed from manufacturing and purchasing.
It is a priority plan for manufacturing.

It also forms a link between Sales and Production as per given below.

• It makes possible valid order promises. The MPS is a plan of what is to be

produced and when. As such, it tells Sales and Manufacturing when goods will be
available for delivery.
• It is a contract between marketing and manufacturing.

The following information needed to develop an MPS:

• The production plan

• Forecasts for individual end items
• Actual orders received from customers and for stock replenishment
• Inventory levels for individual end items
• Capacity Details

The objective in developing an MPS as follows:

• To maintain the desired level of customer service by maintaining finished goods

inventory levels or scheduling to meet customer delivery requirements.
• To make the best use of material, labor and equipment.
• To maintain the inventory requirement at optimum level.

Question and Answer:-

Question:-

The sales department has forecast an item for six weeks. The opening inventory is 50 and
the item to be made in 100 lots. As a master planner, prepare an MPS.

Week 1 2 3 4 5 5
Forecast 75 50 30 40 70 20
Sales
Projected ? ? ? ? ? ?

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Available

(Opening
Inventory
is 50)
MPS ? ? ? ? ? ?

Answer

Week 1 2 3 4 5 5
Forecast 75 50 30 40 70 20
Sales
Projected 75 25 95 55 85 65
Available

(Opening
Inventory
is 50)
MPS 100 100 100

Week 1:-
Opening Inventory -- 50
Forecast -- 75
Required Item Quantity = Forecast Sales – Opening Quantity = 75 – 50 = 25
The planner should schedule and complete one lot (ie) 100 to meet the demand.
Projected Quantity Available at the end of week1 = 100 – 25 = 75

Material Requirements Planning (MRP)

The material requirement planning is the system that establishes a schedule (priority plan)
showing the components required at each level of the assembly and based on lead times,
it calculate when these components will be needed.

Objectives of MRP

It has two requirements. One is determine requirement and other one is, keep priorities
current.

Determine Requirement:-

The main objective of any manufacturing planning and control system is to have the right
materials in the right quantities available at the right time to meet the demand for the
firm’s product. The material requirement objective is to determine what components are

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needed to meet the master production schedule (MPS) and based on lead time, to
calculate the periods when the components must be available. It must determine the
following:

• What to order
• How much to order
• When to order
• When to schedule delivery

Keep Priorities Current:-

The demand and supply of components change daily. Customer enters or change order.
Component gets used up, suppliers are late with delivery, scrap occurs and machines
break down. The material requirement plan must be able to reorganize priorities to keep
plans current. It must be able to add, delete, expedite and change orders.

Manufacturing Planning and Control System

INPUT PLAN OUTPUT

Business Plan Aggregate Plan

Production Plan
Finance Plan *) By Product Groups
Market Plan *) Inventory Levels
Capacity

Production Plan Master Production Detailed Plan

Forecasts Schedule *) By Week
Customer Orders *) By End Item
Inventory
Capacity

MPS Material Time – Phased MF and PO

BOM Requirements Plan *) For Raw material
Inventory *) For Components
Capacity

PURCHASING PRODUCTION
ACTIVITY
CONTROL
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Inputs to MRP:-

A) MPS
B) Inventory Records
C) Bills of Material ( BOM)

Material Requirements Planning Process

The purpose of material requirement planning is to determine the components needed,

quantities and due dates so items in the MPS are made on time. The basic MRP technique
discussed below.

a) Exploding and Offsetting

b) Gross and net requirements
c) Releasing Orders

a.1) Exploding

Exploding is the process of multiplying the requirements by the usage quantity and
recording the appropriate requirement throughout the product tree.

a.2) Offsetting
It is process of placing the exploded requirements in their proper periods based on lead
time. For example, if 50 units of A required in week 5, then in order to assemble A, it
must be released in week 4. And the 50 Bs and 50 Cs should be made available in week 4

A (LT: 1
Week)

B (LT: 2 C (LT: 1
Weeks) Week)

D (LT: 1 E (LT: 1
Week) Week)

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Figure:- Product Tree

LT – Lead Time

b) Gross and Net Requirements:-

Gross requirement = 50
Inventory Available = 20

Net requirement = Gross requirement – Inventory Available

= 50 – 20 = 30

c) Releasing Order
Authorization is given to purchasing to buy the necessary material or to manufacturing to
make the component. Before manufacturing order is released, the component available
must be checked.

Production Activity Control (PAC)

The PAC is responsible for executing the Master Production Schedule and Material
Requirement Plan. At same time, it must make good use of labor, machines, minimize
work in process inventory, and maintain customer service.

The MRP authorizes PAC:

• To release work orders to shop for manufacturing

• To take control of work order and make sure they are completed on time
• Responsible for immediate detailed planning of the flow of orders through
manufacturing, carrying out the plan and controlling the work as it progressing to
completion
• To manage day-to-day activity and provide the necessary support

Activities of PAC:

A) Planning
B) Implementation
C) Control function

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Planning

• Ensure that required materials, tooling, personnel, and information are

available to manufacture the components when needed.
• Ensure that schedule start and completion dates for each shop order at
each work center.

Implementation

Once the plans are made, the PAC put them into action by advising shop floor what
must be done.
• Gather the information needed by the shop floor to make the product.
• Release order to shop floor as authorized by the MRP. This is called
dispatching.

Control

Once the plans are made, shop orders are released, the process must be monitored to
learn what is happening.
• Rank the shop orders in desired priority sequence by work center.
• Track the actual performance of work orders and compare it planned
schedules. Where necessary, the PAC must take corrective actions by re-
planning, rescheduling or adjusting capacity to meet the customer
requirement.
• Monitor and control work in process, lead times and work center queues.
• Report work center efficiency, operation time, order quantities, and scrap.

Manufacturing Systems

1) Flow Manufacturing
2) Intermittent Manufacturing
3) Project Manufacturing

1) Flow Manufacturing
It is concerned with production of high volume standard products. If the units are
discrete then process is usually called repetitive manufacturing and if goods are
made in a continuous flow ( eg. Gasoline) then it is called continuous
manufacturing.

• Routings are fixed and work centers are arranged according to the routing.

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• Work center is dedicated to produce set of products.

• Materials flow from one work center to other in some form of mechanical
transfer.
• Capacity is fixed.

2) Intermittent manufacturing
• Flow of work through the shop is varied and depends on the design of a
particular product. As orders processed, one work station takes more time
than other.
• Machine and workers must be flexible enough to do variety of work.
• Capacity is depends on particular product and difficult to predict.

3) Project Manufacturing
It involves creation of one or small units. Design of the product is often carried out
and modified as project develops.

Scheduling Techniques

1) Forward Scheduling
It assumes that material procurement and operation scheduling for a component start
when the order is received, whatever the due date, and that operations are scheduled from
this date. It is used to calculate how the long it will take to complete the task.

2) Backward Scheduling
The last operation on the routing is schedule first and is scheduled for completion at the
due date. Previous operations are scheduled back from the last operations. It is used to
determine when an order must be started. It is commonly used in the industry because it
reduces inventory.

Purchasing

Purchasing is the process of buying. Obtaining the right materials, in the right quantity,
with right delivery (time and place), from the right source and at the right price are all
purchasing functions. Choosing the right material requires input from marketing,
engineering, manufacturing and purchasing departments. Market place determines the
quantities and deliveries of the product. The manufacturing planning and control must
decide when to order which raw materials so that market demand can be satisfied.
Purchasing is then responsible for placing the orders and ensuring that goods arrive on
time.

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Purchasing objective

• Obtaining goods and services of the required quantity and quality

• Obtaining goods and services at the lowest cost
• Ensuring best possible service and prompt delivery by the supplier
• Developing and maintaing good supplier relations and developing potential
supplier.

Purchasing Function

• Determining purchasing specification: Right quality, right quantity, and right

delivery.
• Selecting Supplier
• Negotiating terms and conditions
• Issuing and administration of purchasing order.

Purchasing Cycle

1) Receiving and analyzing purchase requisition

2) Selecting Suppliers
3) Determining the right price
4) Issuing purchasing order
5) Following up to assure delivery dates are met
6) Receiving and accepting goods
7) Approving supplier’s invoice for payment.

Forecasting

Forecasting is a prelude to planning. There are many circumstances and reasons but
forecasting is inevitable in developing plans to satisfy future demand. Most firms cannot
wait until orders are actually received before start to plan what to produce. Customers
usually demand for products in reasonable time, and manufactures must anticipate future
demand for products or services and plan to provide to provide capacity and resources to
meet the demand. Firms that make standard products need to have saleable goods
immediately available or at least to have materials and subassemblies available to shorten
the delivery time.

Demand Management

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Demand Management is the function of recognizing and managing all demands for
products. It occurs in the long, medium and short term. In the long term, demand
projections are needed for strategic business planning of such things as facilities. In the
medium term, it is needed for project aggregate planning for production planning. In the
shorter run, the demand management is needed for item and master production
scheduling.

Demand management has four activities

a) Forecasting
b) Order Processing
c) Making Delivery promises
d) Interfacing between manufacturing planning and control and the market plan.

Principles of Forecasting

a) Forecasts are usually wrong

b) Every forecast should include an estimate of error.
c) Forecasts are more accurate for families or groups.
d) Forecasts are more accurate for nearer time periods.

Inventory Fundamentals
Inventories are material and supplies that a business or institution carries either for sale or
to provide inputs or suppliers to the production process. All businesses and institutions
require inventories. Often they are substantial part of total asset. On the balance sheet,
they represent 20 to 60 % of total asset. Inventory management is responsible for
inventory planning from the raw material stage to customer. Inventory must be
considered at each level of planning and is thus part of production planning, master
production scheduling and material requirement planning.

Aggregate Inventory Management

It deals with managing inventories according to their clarification (raw materials, work in
process and finished goods) and the function they perform rather than at individual item
level.

Item Inventory Management

Inventory is not only managed at aggregate level but also at the item level.

Inventory and the flow of material

There are many ways to classify inventories.

1) Raw Materials

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These are purchased items received, which does not have entered the
production process. They include purchased materials, component parts and
subassemblies.
2) Work – In Process (WIP)
The raw materials entered the manufacturing process and are being worked on
or waiting to be worked.
3) Finished Goods
The finished products of the production process that are ready to be sold as
completed items.

SUPPLIER SUPPLIER SUPPLIER

RAW MATERIALS
PURCHASED PARTS AND
MATERIALS

Worked In
Process

Finished
Goods

WAREHOUSE WAREHOUSE WAREHOUSE

CUSTOMER CUSTOMER CUSTOMER

DEMAND DEMAND DEMAND

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SUPPLY AND DEMAND PATTERNS

If supply met demand exactly, there would be little need for inventory. Good made at the
same rate as demand and no inventory would build up. For this situation exist, the
demand must be predictable, stable and relatively constant over a long time period.

FUNCTIONS OF INVENTORIES
In batch manufacturing, the basic purpose of inventories is to decouple supply and
demand. Inventory serves as buffers between

• Supply and Demand

• Customer demand and finished goods
• Finished goods and component availability
• Requirements for an operation and output from the preceding operation
• Parts and Materials to begin production and the suppliers of materials

Based on this, inventories can be classified according to the function they perform.

a) Anticipation Inventory
Anticipation inventories are build up in anticipation of future demand. For example,
they are created ahead of peak selling season, a promotion program, vacation
shutdown or possible a threat or strike.

b) Fluctuation Inventory (Safety Stock)

Fluctuation inventory is held to cover random unpredictable fluctuations in supply
and demand or lead time.

c) Lot – Size Inventory / Cycle Stock

Items purchased or manufactured in quantities greater than needed immediately. This is
to take advantage of discounts, to reduce shipping, clerical, and setup costs and in cases
where it is impossible to make or purchase items at the same rate they will be used or
sold.

d) Transportation Inventory
Transportation inventory exist because of the time needed to move goods from one
location to another such as from a plant to a distribution center or a customer.

e) Hedge Inventory
Some products such as minerals and commodities for example, grains or animal products
are traded on worldwide market. The price of the product is fluctuates according to world
supply and demand. If buyer expects price to rise, they can purchase the hedge inventory
where the prices are low.

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Objectives of Inventory Management

• Maximum Customer Service

• Low cost plant operation
• Minimum Inventory investment

Inventory Costs
The following costs are used for inventory management decisions.
• Item Costs
• Carrying Costs
• Ordering Costs
• Stockout Costs
• Capacity – Associated costs

Item Cost
Item cost is price paid for a particular item, which consists of cost of the item and any
other direct costs associated in getting the item into the plant. These could include such
things as transportation, custom duties and insurance. The inclusive cost is often called
the landed price.

Carrying Costs
Carrying cost include all expenses incurred by the firm because of the volume of
inventory carried. As inventory increases, so do these costs. They can be broken down
into three categories.

a) Capital Cost
Money invested in inventory is not available for other users and as such represents a lost
opportunity cost.
b) Storage Cost
Storing requires space, workers and equipment. As inventory increase, do these costs.
c) Risk Cost
The risks in carrying inventories are
1) Obsolescence – Loss of product value resulting from a model or style change or
technological development.
2) Damage – Inventory damaged while being held or moved.
3) Pilferage – Goods lost, strayed or stolen.
4) Deterioration – Inventory that rots or dissipates in storage or whose shelf life is
limited.

Ordering Costs
Ordering costs are those associated with placing an order either with factory or a supplier.
The cost of placing an order does not depend upon the quantity ordered. Whether a lot of
10 or 100 is ordered, the cost associated with placing the order are essentially same.

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Stockout Costs
If demand during the lead time exceeds forecast, we can expect a stockout. A stockout
can potentially be expensive because of back – order costs, lost sales, and possibly lost
customer.

Capacity – Associated Costs

When output levels must be changed, there may be costs for overtime, hiring, training,
extra shifts, and layoffs.

ABC Inventory Control

Control of inventory is exercised by controlling individual items called stock keeping
units (SKUs). In controlling inventory, four questions must be answered.
1. What is the importance of the inventory item?
2. How are they to be controlled?
3. How much should be ordered at one time?
4. When should an order be placed?

Most companies carry a large number of items in stock. To have better control at a
reasonable cost, it is helpful to classify the items according to their importance. Usually
this is based on annual dollar usage, but other criteria may be used.

Order Quantities

Stock Keeping Unit (SKU)

Control is exercised through individual items in a particular inventory. These are called
stock keeping unit. Two white shirts in the same inventory but of different sizes or styles
would be two different SKUs. The same shirt in two different inventories would be two
different SKUs.

Economic – Order Quantity (EOQ)

Assumptions

The assumptions on which the EOQ is based are as follows.

1) Demand is relatively constant and is known.
2) The item is produced and purchased lot or batches and not continuously.
3) Order preparation costs and inventory – carry costs are constant and know.
4) Replacement occurs all at once.

Period – Order Quantity (POQ)

The EOQ attempts to minimize the total cost of ordering and carrying inventory and is
based on the assumption that demand is uniform. Often demand is not uniform,
particularly in material requirements planning, and using the EOQ does not produce a
minimum cost.

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The period order quantity lot size rule is based on the same theory as the EOQ. It uses the
EOQ formula to calculate an economic time between orders. This is calculated by
dividing the EOQ by the demand rate. This produces the time interval for which orders
are placed. Instead of placing same order quantity, orders are placed to satisfy the
requirements for the calculated time interval. The number of order placed is same as for
an economic order quantity, but the amount ordered each time varies. Thus, order cost is
same but order quantities are determined by actual demand, the carrying cost is reduced.

Independent Demand Ordering Systems

Order Point System

When the quantity of an item on hand in inventory falls to a predetermined level, called
an Order point, an order is placed. The quantity ordered is usually pre calculated and
based on economic – order – quantity concepts. Using this system, an order must be
placed when there is enough stock on hand to satisfy demand from the time the order is
placed unit the new stock arrives ( called lead time).

Determining Safety Stock

Safety stock is intended to protect against uncertainty in supply and demand. Uncertainty
may occur in two ways. One is quantity uncertainty and time uncertainty. Quantity
uncertainty occurs when the amount of supply or demand varies; Timing uncertainty
occurs when the time of receipt of supply or demand differs than expected. A customer or
supplier may change the delivery date.

Determining When the Order Point is Reached

There must be some method to show when the quantity of an item on hand has reached
the order point. Two methods to determine the order point.

Two – Bin System

A quantity of an item equal to order point quantity is set aside (frequently in a separate or
second bin) and not touched until all the main stock is used up. When this order need to
be used, the production control or purchasing department is notified and a replenishment
order is placed. There are variations on this system, such as the red-tag system, where a
tag is placed in the stock at a point equal to the order point. Book stores frequently use
this system. A tag or card is placed in a book that is in a stack in a position equivalent to
the order point.
The two – bin system is simple way of keeping control of C items.

Perpetual Inventory Record System

A perpetual inventory record is a continual account of inventory transactions as they
occur. At any instant, it holds an up-to-date record of transactions.

Periodic Review System

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Using this periodic review system, the quantity of on hand of a particular item is
determined at specified, fixed-time intervals, and an order is placed.

Distribution Inventory

Distribution inventory includes all the finished goods held anywhere in the distribution
system. The purpose of holding inventory in distribution centers is to improve the
customer service by locating stock near the customer and to reduce transportation cost by
allowing the manufacturing to ship full loads rather than partial loads over long distance.
The objective of distribution inventory management are to provide the required level of
customer service, to minimize the cost of transportation and handling and to be able to
interact with factories to minimize the scheduling programs.

Distribution system varies considerably, but in general they have a central supply facility
that is supported by a factory, a number of distribution centers and finally customers.
Unless firm delivers directly from factory to consumer, demand on the factory is created
by central supply. In turn, demand on central supply is created by the distribution centers.
This can have severe repercussions on the pattern of demand on central supply and the
factory. Although demand from customer is uniform, the demand from central supply is
not uniform because it depends on when distribution center places replenishment orders.
In turn, the demand on the factory depends on when central supply system places order.

Decentralized System
In a decentralized system, each distribution center first determines what needs and when
the orders to be placed on central supply. Each center orders on it own without regard to
other centers, available inventory at central supply or the production schedule of the
factory. The advantage of decentralized system is, it operates on its own and reduces
communication and coordination expenses. The disadvantage is lack of coordination and
the effect this may have on inventories, customer service, and factory schedules.

Centralized System
In a centralized system, all forecasting and order decisions are made centrally. Stock is
pushed out from central supply. Distribution centers have no say about what they receive.
The advantage of these systems is the coordination between factory, central supply and
distribution center needs. The disadvantage is the inability to react to local demand, thus
lowering customer service level.

Physical Inventory and Warehouse Management

Because inventory is stored in warehouse, the physical management of inventory and
warehousing are intimately connected. In some cases, inventory may be stored for an
extended time. In other situations, inventory is turned over rapidly and warehouse
function as a distribution center.

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In a factory, store perform the same functions as warehouses and contain raw materisl,
work in process inventory, finished goods, supplies and possibly repair parts. Since both
warehouse and store perform same functions, they treated alike same.

Warehousing Management

1) Provide timely customer service

2) Keep track of items so they can be found readily and correctly.
3) Minimize the total physical effort and thus the cost of moving goods into and out
of storage.
4) Provide communication links with customer.

Warehouse Activities

1) Receive goods. The warehouse accepts goods from outside transportation.

a) Check the goods against an order and the bill of lading.
b) Check the quantities.
c) Check for damage and fill out damage reports if necessary.
d) Inspect goods if required.

2) Identify the goods

Items are identified with the appropriate stock keeping unit (SKU) number (part number)
and the quantity received recorded.

3) Dispatch goods to storage.

Goods sorted out and put away.

4) Hold goods.
Goods are kept in storage and under proper protection until needed.

5) Pick goods
Item required from stock must selected from storage and brought to marshalling area.

6) Marshal the shipment

Goods making up a single order are brought together and checked for omissions or errors.
Order records are updated.

7) Dispatch the shipment

Orders are packaged, shipping documents prepared and goods loaded on the right vehicle.

8) Operate on information system.

A record must be maintained for each item in stock showing quantity on hand, quantity
received, quantity issued and location in the warehouse.

Cube utilization and Accessibility

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Goods are stored not on the floor but in the cubic space of the warehouse. Although the
size of a warehouse can be described as so many square feet, warehouse capacity depends
on how high goods can be stored.

Space is also required for aisles, receiving and shipping docks, offices and order picking
and assembly. Suppose that maximum of 9000 cartons are to be inventoried and 30
cartons fit on a pallet. Space is needed for 3000 pallets.

Physical Distribution
Physical distribution is movement of materials from producer to consumer. It is the
responsibility of the distribution department, which is part of integrated materials
management or logistics system. The movement of material is divided into two. A)
Physical Supply B) Physical distribution.

Physical supply is movement and storage of goods from suppliers to manufacturing.

Depending on the conditions, cost may be paid by supplier or customer, but it is
ultimately passed on to the customer. Physical distribution is the movement and storage
of finished goods from end of production to the customer. The particular path in which
the goods move – through distribution centers, wholesalers, and retailers – is called the
channel of distribution.

Supplier Customer
Manufacturer Distribution
System

Physical Supply MF Planning Physical Distribution

And Control

Channels of Distribution:

A channel of distribution is one or more companies or individuals who participate in the

flow of goods and or services from the producer to the final user or consumer. Sometimes
a company delivers directly to its customer, but often it uses other companies or
individuals to distribute some or all of its products to the final consumer. These
companies or individuals are called intermediaries. Examples of intermediaries are
wholesalers, agents, transportation companies, and warehouses.

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There are two related channels involved. 1) Transaction Channel is concerned with the
transfer of ownership. Its function is to negotiate, sell and contract. 2) The distribution
channel is concerned with transfers or delivery of goods or services.

Distribution Channel Transaction Channel

Factory Warehouse General Sales Office

Company
C
Truck

Regional Warehouse District Sales Office

Common
Carrier
Public Warehouse Distributor

Local Delivery Retailer

CONSUMER

The specific way in which materials move depends upon many factors. For example:

a) The channels of distribution that the firm is using. For example, producer
to wholesaler to retailer to consumer
b) The types of markets served. Market characteristics such as geographic
dispersion of the market, the number of customers and the size of orders.

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Material Management

c) The characteristics of the product. For example, weight, density, fragility,

and perishablity.

Physical Distribution System

Physical distribution is responsible for delivering to the customer what is wanted on time
and at minimum cost. The objective of distribution management is to design and operate
a distribution system that attains the required level of customer service and does so at
least cost.

Activities in the Physical Distribution System

1) Transportation: It is single highest cost in distribution, usually accounting for 30

to 60 % of distribution costs.
2) Distribution Inventory: Distribution inventory includes all finished goods
inventory at any point in the distribution system. It is 25 to 30% of the cost of the
distribution.
3) Warehouses (distribution centers). Warehouses are used to store inventory. The
management of warehouse makes decision on site selection, number of
distribution centers in the system and methods of receiving, storing and retrieving
goods.
4) Materials Handling: Materials handling is the movement and storage of goods
inside the distribution center. The type of material handling equipment used
affects the efficiency and cost of operating the distribution center.
5) Protective packaging: Goods moving in a distribution system must be contained,
protected and identified. In addition, goods are moved and stored in packages and
must fit into the distribution of the storage spaces and transportation vehicles.
6) Order Processing and Communication: Order processing includes all activities
needed to fill customer orders. Order processing represents a time element in
delivery and is an important part of customer service. Many intermediaries
involved in the distribution system, and good communication is essential to a
successful distribution system.

Transportation
Transportation is an essential ingredient in the economic development of any area.

1) Rail
2) Road, including trucks, buses, and automobiles
3) Air
4) Water, including ocean-going, inland and costal ships.
5) Pipeline

Transportation Cost Elements

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Material Management

1) Line haul
2) Pickup and delivery
3) Terminal handling
4) Billing and collecting

Warehousing

Warehouse includes plant warehouse, regional warehouses and local warehouses. They
may be owned and operated by supplier or intermediaries such as wholesalers or may be
public warehouses. Warehouses are classified into two types.

1) The General Warehouse where goods are stored for long periods and where the
prime purpose is to protect goods until they are needed. There is minimal
handling, movement, and relationship to transportation. Furniture storage or a
depository for documents is examples of this type of storage.
2) The distribution warehouse has a dynamic purpose of movement and mixing.
Goods are received in large volume uniform lots, stored briefly and then broken
down into small individual orders of different items required by the customer in
the market place. The emphasis is on movement and handling rather than on
storage. It is widely used in the distribution system.

Role of Warehouses
Warehouse serve three important roles: transportation consolidation, product mixing and
service.

Transportation Consolidation: Transportation cost can be reduced by using

warehouses. This is accomplished by consolidating small Less Than Truckload (LTL)
shipments into large Truck Load (TL) shipments. Consolidation can occur in both supply
and distribution systems. In physical supply, LTL shipments from several suppliers can
be consolidated at warehouse before being shipped TL to the factory. In physical
distribution, the TL can be made to a distant warehouse and LTL shipments made to local
users.

Product mixing: While transportation consolidation concerns with reduction of

transportation costs, product mixing deals with the grouping of different items into an
order and the economies that warehouse can providing in doing this. When customer
places an order they often want a mix of products that produced in different locations.

Service: Distribution centers improve customer service by providing place utility. Goods
are positioned close to markets so the market can be served more quickly.

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Material Management

PHYSICAL SUPPLY SYSTEM

LTL Shipments TL Shipments

SUPPLIER A

SUPPLIER B WAREHOUSE FACTORY

SUPPLIER C

PHYSICAL DISTRIBUTION SYSTEM

TL Shipments LTL Shipments

FACTORY A

FACTORY B WAREHOUSE MARKET

FACTORY C

PRODUCT MIXING

CUSTOMER Y
MF A Product A

Product B
MF B DISTRIBUTION
Product C CENTER Product A, B, C

MF C

CUSTOMER Z

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Material Management

Just In Time (JIT)

JIT is defined many ways, but most popular is the elimination of all waste and continuous
improvements of productivity. Waste means anything other than the minimum amount of
equipment, parts, space, material, and worker’s time absolutely necessary to add value to
the product. This means there should be no surplus, no safety stock, and lead times
should be minimal.

Adding Value
What constitutes value to the user? It is having the right parts and quantities at the right
time and place. It is having a product or service that does what the customer wants, does
it well and consistently, and is available when the customer wants it. Another word for it
is quality. Quality is meeting and exceeding customer’s expectations.

Waste
Anything in the product cycle that does not add value to the product is waste.

1) Waste caused by poor product specification and design

2) Component standardization
3) Waste caused in Manufacturing

There are seven important source of waste in manufacturing.

3.1) The process
3.2) Methods
3.3) Movement
3.4) Product defects
3.5) Waiting Time
3.6) Overproduction
3.7) Inventory

Just In Time Environment

Many elements are characteristics of a JIT environment.
a) Flow manufacturing
b) Process flexibility
c) Total Quality management
d) Total productive maintenance
e) Uninterrupted flow
f) Continuous process improvement
g) Supplier partnership
h) Total employee involvement

The Kanban System

With shortened lead times a constant goal in JIT, a system is needed to generate the
reorder point signal without having to rely on a formal, structured system that could take

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Material Management

time to react. The developers of JIT concepts utilize a simple card system called Kanban
(often produced con-bon), which roughly translated from Japanese means Card or ticket.
The system works very simply. The Kanban signal (often a piece of cardboard) identifies
the material to which it is attached. The information on the Kanban will often include:
• Component part number and identification
• Storage location
• Container size
• Work center (or supplier ) of origin

How it works: The following figures illustrate the use of what is often called a two card
Kanban system. The two types of cards are a production card (authorizing production of
whatever the part number is identified on the card in the quantity specified) and a
withdrawal card (authorizing the movement of the identified material)

Kanban Rules:- Though there are no formal schedules in a Kanban system, there is a
fairly important set of rules.
• Every container with parts shall have one, but only one, Kanban.
• There will be no partial containers stored. Every container will be filled, empty, or
in the process of being filled or emptied. This rule makes inventory accounting
easy. You do not need to count parts – only containers and then multiply by the
container quantity.
• There will be no production or movement without an authorization in the form of
an unattached Kanban card.

Using Kanban system for process improvement

Because the Kanban system allows for a controlled inventory of relatively small
containers, there is a great opportunity for using the system to promote continual process
improvement. Specifically, whenever the process is working smoothly for an extended
period of time, there is a possibility that there actually is too much inventory in the
system. The analogy is often used is a river. If the water level is high enough, it will
cover all the rocks in the river and appear to be running smoothly without any
obstructions. The water in the analogy is inventory, and the rocks are process problems
including quality problems, worker skills, equipment breakdown and so forth.

Conclusion
These are the five major planning and processes generally used in any manufacturing
company. In order to know the detail information of each planning and process, refer the
Introduction to Material Management book, authors – J.R. Tony Arnold, Stephen N.
Chapman.

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