Materials Management

Materials Management Definition

Materials Management can be said to Materials Management can be said to be that process of management which be that process of management which coordinatescoordinates, , supervisessupervises and and executesexecutes the tasks associated with the the tasks associated with the flow of flow of materialsmaterials to, to, throughthrough, and , and out of an out of an organisationorganisation in an in an integrated fashionintegrated fashion.. This approach follows the progressive This approach follows the progressive production-distributionproduction-distribution system from system from its its conception stageconception stage to to final final embodiment (embodiment (a tangible or visible form a tangible or visible form of an ideaof an idea)) into a product, when it is into a product, when it is finally delivered for end-usefinally delivered for end-use..

Materials Management Spectrum of Control

The underlying spectrum is to provide The underlying spectrum is to provide effectiveness to a function that must start effectiveness to a function that must start from planning stage and will end when the from planning stage and will end when the finished product is finally distributed.finished product is finally distributed.

1. 1. PlanningPlanning sets the Goal and indicates sets the Goal and indicates the available sources of finance.the available sources of finance.

2. 2. SchedulingScheduling specifies the requirements, specifies the requirements, the quantum and the delivery schedules.the quantum and the delivery schedules.

3. 3. PurchasingPurchasing and and ProcurementProcurement select select and retain vendors; and contracts with and retain vendors; and contracts with them.them.

Materials Management Spectrum of Control (contd.)(contd.)

4. 4. Inspection and Quality controlInspection and Quality control conduct test checks for conformance to conduct test checks for conformance to specifications.specifications.5. 5. Stores and Inventory controlStores and Inventory control determine inventory status, undertake determine inventory status, undertake maintenance and upkeep.maintenance and upkeep.6. 6. Material HandlingMaterial Handling controls physical controls physical movement at any stage the material is.movement at any stage the material is.7. 7. Distribution LogisticsDistribution Logistics controls flow controls flow and distribution, and finally, traffic, and distribution, and finally, traffic, shipment and despatch conclude with final shipment and despatch conclude with final delivery.delivery.

Materials Management Integration of Functions (Cost Mantra)

Materials Management needs an Materials Management needs an integratedintegrated approach of all concerned, viz., approach of all concerned, viz., R & DR & D, , EngineeringEngineering, , ProductionProduction, , FinanceFinance, , MarketingMarketing and and SalesSales. To derive . To derive maximum benefitsmaximum benefits each each has to assist the other. This is possible has to assist the other. This is possible through proper through proper appreciation of each others’ appreciation of each others’ rolerole and and top management supporttop management support, as , as materials management, materials management, in isolationin isolation, cannot , cannot achieve the desired achieve the desired resultresult. . ExampleExample: The production division would like : The production division would like to ensure the to ensure the availability of all items of availability of all items of materialsmaterials at all times. This means holding at all times. This means holding huge stocks of huge stocks of idle inventoryidle inventory leading to leading to losseslosses to a company in terms of to a company in terms of increasedincreased holding costholding cost, , insurance costinsurance cost, , interest costinterest cost etc. etc.

Materials Management Integration of Functions (Cost Mantra) contd.contd.

It leads to the concept of ‘It leads to the concept of ‘sub-optimisation sub-optimisation of sub-systemsof sub-systems’ for ‘’ for ‘optimisation of the optimisation of the whole systemwhole system’. ’. Therefore, two objectives, Therefore, two objectives, Inventory costInventory cost and and availabilityavailability ( no risk of stock-outs) are of ( no risk of stock-outs) are of primary importance for primary importance for integrationintegration. It calls . It calls for a delicate balance between for a delicate balance between professional professional skillsskills and and all-round cooperationall-round cooperation. This will in . This will in turn, depend on four aspects:turn, depend on four aspects:1. 1. QualityQuality: Quality is decided by the : Quality is decided by the R&DR&D,, EngineeringEngineering,, Marketing Marketing and and ProductionProduction divisions.divisions.


2.2.QuantityQuantity:Quantity is a function determined :Quantity is a function determined by by FinanceFinance, , SalesSales and and ProductionProduction..3. 3. UrgencyUrgency: Urgency is also a matter to be : Urgency is also a matter to be mutually discussed and decided between the mutually discussed and decided between the MarketingMarketing, , SalesSales and and ProductionProduction departments.departments.4. 4. EssentialityEssentiality: Essentiality by : Essentiality by usersusers and and technical expertstechnical experts. . Therefore, Decisions cannot be taken in Therefore, Decisions cannot be taken in isolation. Conflicts are bound to occur owing isolation. Conflicts are bound to occur owing to different perceptions, role and priority.to different perceptions, role and priority.The moderating force binding all the The moderating force binding all the groupsgroups and and divisions togetherdivisions together is the is the realisationrealisation of of the the ultimate cost of productionultimate cost of production..


Interesting to note that intra-departmental Interesting to note that intra-departmental

conflicts are far more in those organisations conflicts are far more in those organisations

where cost consciousness is ABSENT. where cost consciousness is ABSENT.

In an In an integratedintegrated approach, the approach, the DesignerDesigner, ,

SalesmanSalesman, , Production engineerProduction engineer, , Works Works

managermanager, the , the Purchase manPurchase man and the and the Finance Finance

officerofficer, will have to work as a , will have to work as a teamteam and each and each

has a has a SAYSAY in almost all of the in almost all of the ACTIVITIESACTIVITIES

bound by a bound by a single objectivesingle objective: : to bring down to bring down

the Cost of productionthe Cost of production. .

Functions of Materials Management

General Electric Company of USAGeneral Electric Company of USA, who are , who are pioneerpioneer in the field of Materials Management, in the field of Materials Management, listed the listed the functionsfunctions under the following heads: under the following heads:1. Planning and Programming for Materials 1. Planning and Programming for Materials Purchase.Purchase.2. Stores and Stock Control.2. Stores and Stock Control.3. Receiving and issue of Material.3. Receiving and issue of Material.4. Transportation and Handling of material.4. Transportation and Handling of material.5. Value Engineering and Value Analysis.5. Value Engineering and Value Analysis.6. Disposal of Scrap and Surplus Material. 6. Disposal of Scrap and Surplus Material. Materials Management deals with Materials Management deals with controllingcontrolling and and regulating the flow of materialsregulating the flow of materials in relation to in relation to changes in variables like changes in variables like DemandDemand, , PricesPrices, , AvailabilityAvailability, , QualityQuality, , Delivery schedulesDelivery schedules etc. etc. In all, Materials Management embraces all In all, Materials Management embraces all activities concerned with activities concerned with materials materials except those except those directly concerned with designing or directly concerned with designing or manufacturing the productmanufacturing the product..

Objectives of Materials Management

1. Regular uninterrupted supply of raw-1. Regular uninterrupted supply of raw-materials to ensure materials to ensure continuitycontinuity of production. of production.2. By providing 2. By providing economyeconomy in purchasing and in purchasing and minimisingminimising waste. It leads to higher waste. It leads to higher productivity.productivity.3. To 3. To minimiseminimise storage and stock control storage and stock control costs.costs.4. To purchase items of optimum/ useable 4. To purchase items of optimum/ useable Quality at the Quality at the competitivecompetitive price. price.5. To help 5. To help minimiseminimise cost of production to cost of production to achieve achieve breakevenbreakeven and and profitsprofits as a whole. as a whole.

Stages of Materials Management

• • Decision StageDecision Stage

• • Sourcing StageSourcing Stage

• • Production Planning StageProduction Planning Stage

• • Stage of OrderingStage of Ordering

• • Receiving StageReceiving Stage

• • Inventory ControlInventory ControlInventory Control system as a part of Inventory Control system as a part of Materials ManagementMaterials Management must have the must have the appropriate appropriate proceduresprocedures, , documentationdocumentation, , informationinformation and and organisational structureorganisational structure to to support it. support it.

Documentation in Materials Management

A A stock control systemstock control system will require a will require a stock item stock item filefile which consists of the basic information of all which consists of the basic information of all items stocked with items stocked with one record for each itemone record for each item including basic information which falls into four including basic information which falls into four categories:categories:GeneralGeneral: Description, Code number, Unit of : Description, Code number, Unit of measure, Minimum level, Maximum level, Order measure, Minimum level, Maximum level, Order QuantityQuantityIssuesIssues: Date, Works order Number, Quantity (or : Date, Works order Number, Quantity (or number) issued, Balancenumber) issued, BalancePurchasesPurchases: Date of Order, Purchase order : Date of Order, Purchase order number, Quantity (or number) ordered, Delivery number, Quantity (or number) ordered, Delivery date, Quantity (or number) delivered, Pricedate, Quantity (or number) delivered, PriceAllocationAllocation: Date allocated, Job number, : Date allocated, Job number, Quantity, Date issued.Quantity, Date issued.

Documentation in Materials Management (contd.)(contd.)

Other Other documentationdocumentation, reflecting various types of , reflecting various types of transactiontransaction, includes the following:, includes the following: A material return noteA material return note, which permits unused , which permits unused material to be returned from the manufacturing material to be returned from the manufacturing department to the stores.department to the stores. A material transfer noteA material transfer note, which allows material , which allows material to be transferred from one location to another or to be transferred from one location to another or from one job to another.from one job to another. A scrap noteA scrap note, which records the scrap , which records the scrap generated and permits it to be handed in to the generated and permits it to be handed in to the stores in exchange for good material.stores in exchange for good material. A shortage noteA shortage note, which is issued from the , which is issued from the stores to a requisitioner informing him/her that stores to a requisitioner informing him/her that material required is not available and citing the material required is not available and citing the action being taken.action being taken.These documents are in addition to the These documents are in addition to the materials materials (or(or stores stores)) requisition requisition and and purchase purchase requisitionrequisition. .

The Material Flow ProcessInformation requirement and movement control Information requirement and movement control are not under any one functionare not under any one function, but spread , but spread across many functions’ activities. To improve across many functions’ activities. To improve upon the working of the unit’s upon the working of the unit’s operationsoperations, , jointly jointly and severallyand severally, an , an integrationintegration is necessary for the is necessary for the following control functions: following control functions: 1. 1. Material Quantity ControlMaterial Quantity Control at each of the stages at each of the stages of conversion and Distribution.of conversion and Distribution.2. 2. Material Movement ControlMaterial Movement Control for effective for effective Allocation, Location, and Flow control.Allocation, Location, and Flow control.3. 3. Material Quality ControlMaterial Quality Control for maintenance of for maintenance of quality standards and maximizing product-quality standards and maximizing product-service.service.4. 4. Control of overall costsControl of overall costs for enhancement of for enhancement of profit and improvement of materials productivity.profit and improvement of materials productivity.

PURCHASINGThe The Prime functionPrime function of Purchasing is that of of Purchasing is that of

being sensitive to the external supply market being sensitive to the external supply market

situation situation and also ofand also of feeding back this feeding back this

information to the other functions of the information to the other functions of the

organisation.organisation.

The The objectiveobjective of purchasing is to obtain of purchasing is to obtain

correct equipment, materials, supplies, and correct equipment, materials, supplies, and

services in the services in the rightright QuantityQuantity, of the , of the rightright

QualityQuality, from the , from the rightright OriginOrigin, at the , at the rightright

TimeTime and and CostCost. .

THE PURCHASE SYSTEMThe control of purchasing should be set out The control of purchasing should be set out in a written ‘in a written ‘Purchasing manualPurchasing manual’ which:’ which:a) a) Assign responsibilitiesAssign responsibilities for and within the for and within the purchasing function;purchasing function;b) Defines the manner in which b) Defines the manner in which suppliers are suppliers are selectedselected to ensure that they are to ensure that they are continuallycontinually capable of supplying the requirements in capable of supplying the requirements in terms of terms of materialsmaterials and and servicesservices;;c) Indicates the appropriatec) Indicates the appropriate purchasing purchasing documentationdocumentation – written orders, – written orders, specifications and certificates of conformity specifications and certificates of conformity – required in any modern purchasing – required in any modern purchasing activity.activity.

PURCHASE PROCESSDefine ObjectiveDefine Objective: Specify objectives, : Specify objectives, Constraints, and Criteria of Materials Constraints, and Criteria of Materials PurchasePurchaseCollect InformationCollect Information: Identification of : Identification of materials and specification, Look for materials and specification, Look for possible sources, Collect data on Price and possible sources, Collect data on Price and other terms of suppliers, Delivery schedule, other terms of suppliers, Delivery schedule, Rejection and replacement terms, Rejection and replacement terms, Compensation for shortages, Payment Compensation for shortages, Payment terms, Guarantee and warranty terms, terms, Guarantee and warranty terms, Transportation and package; Establish time Transportation and package; Establish time constraints. constraints.

PURCHASE PROCESS (contd.)(contd.)

Develop optionsDevelop options: Locate possible vendors, : Locate possible vendors, Quantity and price considerationsQuantity and price considerationsEvaluate & decideEvaluate & decide: Listing pros and cons : Listing pros and cons of options, Examine consequences of of options, Examine consequences of selecting various alternatives measuring selecting various alternatives measuring against criteria of evaluation; Testing against criteria of evaluation; Testing against overall objectives and selecting the against overall objectives and selecting the best option(s).best option(s).ImplementImplement: Initiate action to carry out the : Initiate action to carry out the decision taken, Monitoring the decision taken, Monitoring the implementation of decision, Review the implementation of decision, Review the decision if necessary.decision if necessary.

Standardisation: The Materials’ WayIt consists of reducing the varieties of materials It consists of reducing the varieties of materials stocked in the inventory to a workable minimum; stocked in the inventory to a workable minimum; by by fixing Sizes, Shapes, Dimensions, and other Quality fixing Sizes, Shapes, Dimensions, and other Quality characteristics of the materialscharacteristics of the materials. By combining . By combining materials into materials into StandardStandard groups it will no more be groups it will no more be necessary to keep as high a necessary to keep as high a level of inventorylevel of inventory of of items items as was necessaryas was necessary when there was a when there was a variety of variety of items in the stockitems in the stock..With With less varietyless variety and and more standardisationmore standardisation, the , the advantages are:advantages are:i) The i) The purchase costpurchase cost expected to be expected to be loweringlowering down. down.ii) ii) Reduced stocksReduced stocks to be maintained for current to be maintained for current consumption as well as for safety stocks.consumption as well as for safety stocks.iii) As a result, the iii) As a result, the amount of paper workamount of paper work is is reducedreduced in addition to streamlining Materials’ planning in addition to streamlining Materials’ planning process.process.

Standardisation & Simplification: A Holistic Approach

StandardisationStandardisation involves the definition of products involves the definition of products and services fixing specification, specifying and services fixing specification, specifying dimensions, allocation of identification code; dimensions, allocation of identification code; stipulating performance characteristics, quality stipulating performance characteristics, quality levels, safety measures; and reducing variety. levels, safety measures; and reducing variety. SimplificationSimplification means elimination of superfluous means elimination of superfluous varieties, sizes, dimensions, etc. varieties, sizes, dimensions, etc. Product simplificationProduct simplification means reducing the number means reducing the number of varieties. e.g. if the same component or of varieties. e.g. if the same component or subassembly can be used in a variety of products, subassembly can be used in a variety of products, or in a product family, production costs can be or in a product family, production costs can be reduced. reduced. Modular designModular design is one way to offer product variety is one way to offer product variety while holding the number of components and while holding the number of components and subassemblies to some reasonable level. subassemblies to some reasonable level. The conceptThe concept is advantageous to Manufacturers, is advantageous to Manufacturers, Suppliers and Buyers.Suppliers and Buyers.

Objective of Standardisation: ISO WayInternationalInternational organisation for organisation for StandardisationStandardisation has stated the Objective as has stated the Objective as ‘‘to facilitate international exchange of goods to facilitate international exchange of goods & services& services and and to develop mutual co-to develop mutual co-operation in the sphere of operation in the sphere of IntellectualIntellectual, , ScientificScientific, , TechnologicalTechnological and and EconomicEconomic activity’activity’. . The objective of Standardisation has The objective of Standardisation has following four dimensions:following four dimensions:1. 1. ManufacturerManufacturer2. 2. TraderTrader

3. 3. UserUser

4. 4. SocietySociety

Scope of Standardisation

1. 1. Technological factorsTechnological factors such as such as

Specification, Tolerance & Limits, Specification, Tolerance & Limits,

Testing.Testing.

2. 2. DisciplinesDisciplines such as Engineering, such as Engineering,

Agriculture, Education etc.Agriculture, Education etc.

3. 3. Legal aspectsLegal aspects such as Forms, such as Forms,

Contracts, Labeling etc.Contracts, Labeling etc.

4. 4. Sectoral areasSectoral areas such as Company such as Company

Industry, National, International etc.Industry, National, International etc.

Application of Standardisation1. 1. Units and MeasurementUnits and Measurement2. 2. Safety of Persons and GoodsSafety of Persons and Goods3. 3. Products and ProcessesProducts and Processes: Definition and : Definition and Selection of characteristics of product Selection of characteristics of product testing methods, Specification of testing methods, Specification of characteristics of production for defining characteristics of production for defining their quality, Regulation of variety, their quality, Regulation of variety, Interchangeability etc.Interchangeability etc. 4. 4. Variety ReductionVariety Reduction (simplification) and (simplification) and rationalisation.rationalisation.5. 5. Inspection and SamplingInspection and Sampling6. 6. Nomenclature and CodificationNomenclature and Codification

VALUE ANALYSIS: The Materials’ WayValue Analysis (or Value Engineering) is a Value Analysis (or Value Engineering) is a Design Design

MethodologyMethodology, developed by, developed by Lawrence Miles in the Lawrence Miles in the late 1940s, that focuses on the late 1940s, that focuses on the Function of the Function of the ProductProduct, rather than on its structure or form, and , rather than on its structure or form, and tries to tries to maximizemaximize the the Economic value of a product Economic value of a product oror componentcomponent relative to its relative to its costcost. . Three important aspects of Value Analysis areThree important aspects of Value Analysis are: : 1. The use of 1. The use of Multidisciplinary teamsMultidisciplinary teams,,2. A systematic procedure for evaluating 2. A systematic procedure for evaluating Product Product FunctionalityFunctionality and and ValueValue, and, and3. A focus on 3. A focus on Product simplificationProduct simplification..Value Analysis normally begins by analysing the Value Analysis normally begins by analysing the Product as a whole, then each sub-assembly, and Product as a whole, then each sub-assembly, and finally each component if necessaryfinally each component if necessary. . A series of questions are used to guide the process A series of questions are used to guide the process at each step:at each step:

VALUE ANALYSIS: STEPS First stepFirst step is to specify the is to specify the FunctionFunction of the of the ProductProduct and to identify those and to identify those Product CharacteristicsProduct Characteristics and and DimensionsDimensions that are of value to that are of value to Customers. Customers. Typical questions might be:Typical questions might be:aa. What is the Product or Component?. What is the Product or Component?bb. What is its Function? What does it do? Why do we . What is its Function? What does it do? Why do we need to do it?need to do it?cc. What characteristics are of value to the . What characteristics are of value to the customers? How will the customer use the Product?customers? How will the customer use the Product?It is helpful to define the It is helpful to define the functionfunction of a of a productproduct or or component using component using two-wordtwo-word statements. For example statements. For example to the question ‘to the question ‘What is the product or component What is the product or component supposed to dosupposed to do?’ The answer might be: Control ?’ The answer might be: Control current (Electrical device), Transfer funds (bank current (Electrical device), Transfer funds (bank cheque), Cure illness (Medical procedure), Heat fluid cheque), Cure illness (Medical procedure), Heat fluid (Heating element in machine). This type of answer (Heating element in machine). This type of answer reveals the reveals the core of the productcore of the product..

VALUE ANALYSIS: STEPS (contd.)(contd.)

The second stepThe second step is to determine how each is to determine how each product characteristicproduct characteristic or or componentcomponent contributes to contributes to its its valuevalue (functionality) and to determine what each (functionality) and to determine what each component component costscosts. Typical questions might be:. Typical questions might be:aa. How does this component contribute to . How does this component contribute to functionality? How does it increase the product’s functionality? How does it increase the product’s value?value?bb. What does it cost.. What does it cost. The final stepThe final step is the is the creative phasecreative phase in which we in which we redesign productredesign product or or componentcomponent to reduce its to reduce its costcost or or improve its improve its valuevalue. During this phase, team members . During this phase, team members focus especially on focus especially on simplifying the designsimplifying the design and and evaluating the appropriateness of the product evaluating the appropriateness of the product specificationsspecifications, using the following questions:, using the following questions:

VALUE ANALYSIS: STEPS (contd.)(contd.)

aa. Can this be done another way? Can it be done . Can this be done another way? Can it be done more cheaply?more cheaply?bb. Is the item over-engineered? Does it do more than . Is the item over-engineered? Does it do more than necessary?necessary?cc. Can the item’s function be combined with that of . Can the item’s function be combined with that of another component? How much does it cost to do another component? How much does it cost to do this?this?dd. Can a standard or existing component be used?. Can a standard or existing component be used?ee. Can a different material be used?. Can a different material be used?ff. Can this product be made easier to assemble?. Can this product be made easier to assemble?The answers to these questions represent design The answers to these questions represent design alternatives that can be compared and evaluated in alternatives that can be compared and evaluated in terms of their value and cost.terms of their value and cost.ExampleExample: VE played an important role in Honda’s : VE played an important role in Honda’s design of its 1994 design of its 1994 ACCORDACCORD. Each part has to pass . Each part has to pass careful examination by a VE team. careful examination by a VE team. Not until the part Not until the part passed this evaluationpassed this evaluation (answering questions such (answering questions such as: Why this shape? Why this material?) as: Why this shape? Why this material?) could a could a designer sketch a prototype partdesigner sketch a prototype part. .

CLASSIFICATION & CODIFICATIONThe system to be adopted for accurate The system to be adopted for accurate identificationidentification of of materials materials is throughis through allotment of a numeral to allotment of a numeral to each item. each item. In Materials Management terminology it is In Materials Management terminology it is known as ‘known as ‘CodificationCodification’. The ’. The objectiveobjective of of Codification is to provide a Codification is to provide a common languagecommon language for for identification of identification of every single input itemevery single input item in the in the inventoryinventory for all for all transactiontransaction within and outside the within and outside the organisation. organisation. Principles of Classification of MaterialsPrinciples of Classification of Materials11. The entire inventory needs to be classified under . The entire inventory needs to be classified under major groups known as ‘major groups known as ‘GenericGeneric’ groups. For ’ groups. For example ‘General Engineering’.example ‘General Engineering’.22. Items under each Generic group should then be . Items under each Generic group should then be further classified into distinct further classified into distinct sub-groupssub-groups according according to the type of material; known as ‘to the type of material; known as ‘Specific’Specific’ group. group. For example, under the Generic group ‘For example, under the Generic group ‘General General Engineering’Engineering’ one of the specific group may be one of the specific group may be ‘‘BearingBearing’. It covers present and also the anticipated ’. It covers present and also the anticipated future holdings of Ball bearings, Roller bearings, or future holdings of Ball bearings, Roller bearings, or other forms of Bearings. other forms of Bearings.

CLASSIFICATION & CODIFICATION (contd.)(contd.)

33. To classify and to list out, firstly in . To classify and to list out, firstly in AlphabeticalAlphabetical order and then in order and then in size chronologysize chronology, all the items , all the items under each specific group. For example, all ball under each specific group. For example, all ball bearings should be listed size-wise to be followed bearings should be listed size-wise to be followed by roller bearing and other forms of bearings etc. by roller bearing and other forms of bearings etc. Each item should then be allotted consecutive Each item should then be allotted consecutive numerals. numerals. 44. As a precaution, care should be taken to . As a precaution, care should be taken to leave few leave few serial numbers vacantserial numbers vacant for the induction of new items for the induction of new items or new sizes in the period ahead as a result of R&D or new sizes in the period ahead as a result of R&D activities, Expansion of capabilities etc. activities, Expansion of capabilities etc. Sometimes Sometimes classificationclassification may be based on either may be based on either prime compositionprime composition of materials e.g. Oil & Lubricants, of materials e.g. Oil & Lubricants, Rubbers, Plastic, Ferrous or Non-ferrous metal etc.; Rubbers, Plastic, Ferrous or Non-ferrous metal etc.; OR may be based on OR may be based on usage-wiseusage-wise e.g. Electrical, e.g. Electrical, Mechanical, Electronic, Chemical, Miscellaneous Mechanical, Electronic, Chemical, Miscellaneous etc. etc.


In case of In case of overlappingoverlapping, the decision may be to , the decision may be to place such items in the category in which a place such items in the category in which a particular material is particular material is predominatedpredominated or in some or in some cases a cases a mixturemixture of both ‘ of both ‘CompositionComposition’ and ‘’ and ‘UsageUsage’ ’ principles.principles.READING THE CODEREADING THE CODE11. The code number of each item would consist of . The code number of each item would consist of the the Generic group numberGeneric group number, the , the Specific group Specific group numbernumber and its and its own code serial numberown code serial number in that in that order. In most cases, the order. In most cases, the GenericGeneric group and the group and the SpecificSpecific group are expressed in group are expressed in TWOTWO digit digit numbers each, and the numbers each, and the individual item code individual item code numbernumber is expressed in Seven digits. A one digit is expressed in Seven digits. A one digit space should be left blank to express the Code space should be left blank to express the Code number. e.g. AB CD EFG number. e.g. AB CD EFG


22. If the number of items under any . If the number of items under any specificspecific group group is estimated to is estimated to exceedexceed 999, the three digit system 999, the three digit system is is inadequateinadequate and we adopt and we adopt four digitfour digit system for system for all items in the all items in the inventoryinventory. . 33. For . For convenienceconvenience in handling, a separate code in handling, a separate code book is to be prepared for each book is to be prepared for each GenericGeneric group. group. The The GenericGeneric group and the group and the SpecificSpecific group code group code number should be number should be displayeddisplayed boldly on the cover boldly on the cover of each booklet.of each booklet.

INVENTORYTypically Inventory implies a list of Typically Inventory implies a list of ITEMSITEMS held in held in stockstock. Stock implies the . Stock implies the Quantity Quantity of of a particular item a particular item on handon hand.. Inventory is a Inventory is a STOCKSTOCK ofof Materials Materials used used to facilitate to facilitate ProductionProduction or to satisfy or to satisfy Customer demandsCustomer demands. It include . It include Raw-Raw-materialsmaterials, , Work-in-progressWork-in-progress and and Finished Finished goodsgoods. . Inventory acts as a Inventory acts as a BUFFERBUFFER between the between the demanddemand and and supplysupply rates of different rates of different nature.nature. Inventories are Inventories are VITALVITAL to the successful to the successful functioning of functioning of ManufacturingManufacturing & & RetailingRetailing organisations. organisations.

INVENTORY MANAGEMENT

The The maintenancemaintenance, , upkeepupkeep and and assuranceassurance of of adequate supplyadequate supply of something in order to of something in order to meet an meet an expected patternexpected pattern of distribution of of distribution of DemandDemand for a given financial investment. for a given financial investment. Inventory Management is a key Inventory Management is a key OperationsOperations responsibility because it greatly responsibility because it greatly affectsaffects Capital requirementsCapital requirements, , CostsCosts, and , and Customer serviceCustomer service.. Inventories need Inventories need efficientefficient Management, Management, as generally, a as generally, a SubstantialSubstantial share of its share of its fundsfunds is is investedinvested in them. in them.

TYPES OF INVENTORY Raw Material and Production InventoriesRaw Material and Production Inventories: These : These are raw materials and other supplies, parts and are raw materials and other supplies, parts and components components which enter into the productwhich enter into the product during during the production process and generally the production process and generally form part of form part of the productthe product. . In-process InventoriesIn-process Inventories: These are semi-finished : These are semi-finished WIP, and partly finished products formed at WIP, and partly finished products formed at various stages of production. Also named as various stages of production. Also named as Decoupling InventoriesDecoupling Inventories to decouple or disengage to decouple or disengage different parts of the production system. different parts of the production system. MRO InventoriesMRO Inventories: Maintenance, repairs and : Maintenance, repairs and operating supplies which are consumed during the operating supplies which are consumed during the production process and generally production process and generally do not form part do not form part of the product itselfof the product itself are referred to as MRO are referred to as MRO Inventories. e.g. oils and lubricants, machinery and Inventories. e.g. oils and lubricants, machinery and plant spares, tools and fixtures etc. plant spares, tools and fixtures etc.

TYPES OF INVENTORY (contd.)(contd.)

Movement InventoriesMovement Inventories: It is also named as : It is also named as Transit or Pipeline inventories. It arises because of Transit or Pipeline inventories. It arises because of the time necessary to move stocks from one place the time necessary to move stocks from one place to another. The average amount can be determined to another. The average amount can be determined mathematically as mathematically as I = S x TI = S x T whereas whereas II – the Movement inventory needed – the Movement inventory neededSS – the average rate of sales say weekly average – the average rate of sales say weekly average TT – the transit time required to move from one – the transit time required to move from one stage to another in a weekstage to another in a weekExampleExample: say T is 3 weeks i.e. : say T is 3 weeks i.e. it takes 3 weeks to it takes 3 weeks to move materials to a warehouse from the plantmove materials to a warehouse from the plant; S is ; S is 110 per week; then 110 per week; then average inventoryaverage inventory is 110x3=330 is 110x3=330ExplanationExplanation: When a unit of finished goods is : When a unit of finished goods is manufactured and ready for sale, manufactured and ready for sale, it must remain it must remain idle for three weeks for movement to the idle for three weeks for movement to the warehousewarehouse. Therefore, the plant stock on an . Therefore, the plant stock on an average must be equal to average must be equal to three weeks’ salethree weeks’ sale in in movement. movement.


Lot-size InventoriesLot-size Inventories: It is a common practice to : It is a common practice to

buy some raw materials in buy some raw materials in Large quantitiesLarge quantities than are than are necessary for necessary for immediate needimmediate need in order to avail in order to avail quantity discountsquantity discounts and and lowering down costslowering down costs of of buying, receiving, inspection, transport and buying, receiving, inspection, transport and handling. It is also termed as Cycle inventories.handling. It is also termed as Cycle inventories.

FluctuationFluctuation InventoriesInventories: In order to : In order to cushioncushion

against against unpredictable fluctuationunpredictable fluctuation in demand these in demand these are maintained. are maintained. The general practice of serving the The general practice of serving the customer well is the reason for holding such customer well is the reason for holding such InventoriesInventories. But they are not absolutely essential in . But they are not absolutely essential in the sense that such stocks are always the sense that such stocks are always uneconomical. uneconomical.


AnticipationAnticipation InventoriesInventories: In case of seasonal : In case of seasonal variations in the availability of some raw materials, it variations in the availability of some raw materials, it is convenient and also economical to build up is convenient and also economical to build up stocks where consumption patterns may be stocks where consumption patterns may be reasonably uniform and predictable. Such reasonably uniform and predictable. Such inventories are carried to meet predictable changes inventories are carried to meet predictable changes in demand.in demand.

INVENTORY CONTROL SYSTEMInventory control system is either Inventory control system is either ManualManual or or ComputerizedComputerized or a combination of or a combination of twotwo. It performs . It performs following functions:following functions:1. 1. Transaction AccountingTransaction Accounting: Every Inventory system : Every Inventory system requires a requires a methodmethod of record keeping, which must of record keeping, which must supportsupport the accounting needs of the organisation the accounting needs of the organisation and the inventory management function. and the inventory management function. It requires the Perpetual (It requires the Perpetual (never ending or changingnever ending or changing) ) records be kept by records be kept by recordingrecording every every disbursementdisbursement and and receiptreceipt. In some other cases, . In some other cases, periodic countsperiodic counts e.g. annual of the inventory may be required. e.g. annual of the inventory may be required. Whatever the exact Whatever the exact methodmethod used, every Inventory used, every Inventory control system requires a suitable transaction control system requires a suitable transaction accounting to follow with. accounting to follow with.

INVENTORY CONTROL SYSTEM (contd.)(contd.)

2. 2. Inventory Decision RulesInventory Decision Rules: A decision system is : A decision system is to be developed regarding to be developed regarding whenwhen and and how muchhow much to to order.order.3. 3. Exception ReportingException Reporting: A reporting system so as : A reporting system so as to alert Management to changing to alert Management to changing assumptionsassumptions e.g. e.g. StockoutsStockouts, , Excessive InventoryExcessive Inventory, , ForecastingForecasting not not meeting demand schedulesmeeting demand schedules..4. 4. ForecastingForecasting: : JudgmentJudgment plays a Vital role in plays a Vital role in forecasting, however, to forecasting, however, to modifymodify Quantitative Quantitative forecasts for forecasts for unusual eventsunusual events. . 5. 5. Top Management ReportingTop Management Reporting: The reports should : The reports should include (a) include (a) costs of operating the Inventorycosts of operating the Inventory, (b) , (b) Investment levels at a time compared with other Investment levels at a time compared with other periodsperiods, (c) the , (c) the Service levels provided to Service levels provided to customerscustomers etc. etc.

SELECTIVE INVENTORY CONTROL (SIC) ABC Inventory ClassificationABC Inventory Classification: The rationale of : The rationale of ABC classification is the ABC classification is the impracticalityimpracticality of giving an of giving an equally high degree of attention to the record of equally high degree of attention to the record of every inventory itemevery inventory item, due to limited information- , due to limited information- processing capacity. processing capacity. ButBut, , in a modern computerized well-implemented in a modern computerized well-implemented planning system, every item, irrespective of its planning system, every item, irrespective of its cost cost and and volumevolume, can , can receive the same degree of care receive the same degree of care and attentionand attention. . Possible Possible exceptionsexceptions are certainly extremely are certainly extremely low-costlow-cost items, that may have items, that may have large safety stockslarge safety stocks and be and be ordered in ordered in large quantitieslarge quantities. These . These exceptionsexceptions are are made, however, not due to some inability of the made, however, not due to some inability of the computer system to plan and maintain the status of computer system to plan and maintain the status of such items, but because of the such items, but because of the impracticality of impracticality of accurate physical controlaccurate physical control. . It simply does not pay to It simply does not pay to do exact amount of screws, bolts and nuts of small do exact amount of screws, bolts and nuts of small sizes, washers and cotter pinssizes, washers and cotter pins. .

SELECTIVE INVENTORY CONTROL (SIC)Materials Management involves thousand of Materials Management involves thousand of individual transactions each year. To do their job individual transactions each year. To do their job effectively, materials managers must avoid effectively, materials managers must avoid distraction of unimportant detailsdistraction of unimportant details and concentrate on and concentrate on significant matters. significant matters. Inventory control procedures should isolate those Inventory control procedures should isolate those items that require precise control from those that do items that require precise control from those that do not. not. SIC can indicate where the Manager should SIC can indicate where the Manager should concentrate his effortsconcentrate his efforts. . Physical Inventory control still remains a problem in Physical Inventory control still remains a problem in inventory management and the inventory management and the ABC control conceptABC control concept, , when applied in this area (to inspection, storage, when applied in this area (to inspection, storage, frequency of cycle checks, etc.) still remain valid.frequency of cycle checks, etc.) still remain valid.ABC analysis leads to classification of Inventory ABC analysis leads to classification of Inventory items on the basis of their items on the basis of their USAGEUSAGE in monetary in monetary terms. terms. AA – High consumption value items . – High consumption value items . BB – Moderate consumption value items. – Moderate consumption value items.CC – Low consumption value items. – Low consumption value items.

SELECTIVE INVENTORY CONTROL (SIC)

AA BB CC% age of items% age of items 10-20 20-30 60-70 10-20 20-30 60-70% age of value% age of value 70-85 10-25 5-15 70-85 10-25 5-15The division of items is obtained by plotting The division of items is obtained by plotting percentage of value against percentage of items and percentage of value against percentage of items and termed as termed as ABC distribution curveABC distribution curve/ / Pareto curvePareto curve/ / Curve of MaldistributionCurve of Maldistribution. .

FSN AnalysisFSN Analysis: FSN Study may be made to : FSN Study may be made to weed weed outout (discard/remove) (discard/remove) unwanted materialsunwanted materials and and partsparts. . It is based on the It is based on the Consumption patternConsumption pattern of items. of items.FF stands for Fast stands for Fast SS stands for Slow moving stands for Slow movingNN stands for non-moving materials and parts stands for non-moving materials and partsThis This speedspeed classification helps in the arrangement classification helps in the arrangement of stocks in the stores and in determining the of stocks in the stores and in determining the distributiondistribution and and handlinghandling patterns. patterns.


Further, it will automatically reduce inventory costsFurther, it will automatically reduce inventory costs. . Say a part or material has not been issued within a Say a part or material has not been issued within a period of three years can be completely weeded outperiod of three years can be completely weeded out. . A part moves sparingly within this period, its stock A part moves sparingly within this period, its stock can be substantially reducedcan be substantially reduced. Fast moving material, . Fast moving material, however, pose no such problem. however, pose no such problem.

VED AnalysisVED Analysis: VED Analysis is also the same in : VED Analysis is also the same in principle. principle. The only difference is that it finds out The only difference is that it finds out which materials and parts are valuable, which are which materials and parts are valuable, which are essential, and which are desirableessential, and which are desirable. . Inventory items are classified on the basis of their Inventory items are classified on the basis of their criticalitycriticality to the production process or other to the production process or other services. services. V V – Vital items without which the production – Vital items without which the production process would come to a standstill.process would come to a standstill.


EE – Essential items whose stock-out might cause – Essential items whose stock-out might cause temporary losses in production.temporary losses in production.DD – Desirable items which are required but do not – Desirable items which are required but do not immediately cause a loss of production.immediately cause a loss of production.This is also essentially meant for a sizeable This is also essentially meant for a sizeable reduction in inventoryreduction in inventory.. HML AnalysisHML Analysis: : Similar to the ABC analysisSimilar to the ABC analysis except except that the items are classified on the basis of that the items are classified on the basis of Unit Unit CostCost rather than their rather than their Usage valueUsage value. . HH stands for High cost per unit. stands for High cost per unit.MM stands for Medium cost per unit. stands for Medium cost per unit.LL stands for low cost per unit. stands for low cost per unit. SDE AnalysisSDE Analysis: SDE Analysis works on the criteria : SDE Analysis works on the criteria of of availabilityavailability of items. of items. SS stands for Scarce items stands for Scarce items DD stands for Difficult to obtain stands for Difficult to obtainEE stands for Easily available stands for Easily available


S-OS AnalysisS-OS Analysis: This analysis is based on the : This analysis is based on the

naturenature of Supplies. of Supplies.SS stands for Seasonal items stands for Seasonal itemsOSOS stands for Off-seasonal items stands for Off-seasonal items

GOLF AnalysisGOLF Analysis: This analysis is based on the : This analysis is based on the

SourceSource of Supplies of SuppliesGG stands for Government Sources stands for Government SourcesOO stands for Ordinary Sources stands for Ordinary SourcesLL stands for Local Sources stands for Local SourcesFF stands for Foreign Sources stands for Foreign SourcesThis is meant for deciding Procurement of materials This is meant for deciding Procurement of materials from different sources.from different sources.


XYZ AnalysisXYZ Analysis: XYZ analysis is based on the : XYZ analysis is based on the criteria of criteria of Closing Inventory valueClosing Inventory value of different items. of different items.XX – Items whose Inventory value is high. – Items whose Inventory value is high.YY – Items whose Inventory value is neither too high – Items whose Inventory value is neither too high nor too low.nor too low.ZZ – Items with Low investments in them. – Items with Low investments in them.SummarySummary: The various types of analysis are not : The various types of analysis are not mutually exclusivemutually exclusive. They can be, and often are, used . They can be, and often are, used jointly to ensure better control over jointly to ensure better control over MATERIALSMATERIALS..


TITLE BASIS MAIN USES

ABC ABC AnalysisAnalysis

Usage valueUsage value To control on the To control on the Significant few & the Significant few & the Insignificant manyInsignificant many

FSN FSN AnalysisAnalysis

Consumption Consumption pattern of the pattern of the ComponentComponent

To control ObsolescenceTo control Obsolescence

VED VED AnalysisAnalysis

Criticality of Criticality of the Componentthe Component

To determine the Stocking To determine the Stocking Levels of Spare partsLevels of Spare parts

HML HML AnalysisAnalysis

Unit Price of Unit Price of the Materialthe Material

To control purchasesTo control purchases

SDE SDE AnalysisAnalysis

Problems faced Problems faced in Procurementin Procurement

Lead-time analysis and Lead-time analysis and Purchasing StrategiesPurchasing Strategies


TITLE BASIS MAIN USES

SOS SOS AnalysisAnalysis

Nature of Nature of SuppliesSupplies

Procurement/ Holding Procurement/ Holding Strategies for Seasonal Strategies for Seasonal items like Agricultural items like Agricultural productsproducts

GOLF GOLF AnalysisAnalysis

Source of Source of materialmaterial

Procurement StrategiesProcurement Strategies

XYZ XYZ AnalysisAnalysis

Value of items Value of items in Storagein Storage

To review the Inventories To review the Inventories and their Uses at and their Uses at Scheduled intervalsScheduled intervals

INVENTORY CONTROL–REVIEW SYSTEM

Continuous Review SystemContinuous Review System: A Continuous Review : A Continuous Review System provides one way to handle random demand. System provides one way to handle random demand. When the stock position drops to the reorder point When the stock position drops to the reorder point RR, , a fixed Quantity a fixed Quantity QQ is ordered is ordered. The time between . The time between orders will vary depending on actual demand. The orders will vary depending on actual demand. The value of value of QQ is set equal to is set equal to EOQEOQ. The value of . The value of RR is is based on the Service level desired.based on the Service level desired.Periodic Review SystemPeriodic Review System: A Periodic Review System : A Periodic Review System provides another way to handle random demand. provides another way to handle random demand. The The stock position is reviewed at fixed intervalsstock position is reviewed at fixed intervals PP, , and an and an amount is ordered equal to the Target Inventoryamount is ordered equal to the Target Inventory TT minus stock positionminus stock position. The amount ordered at each . The amount ordered at each review period will vary depending on actual demand. review period will vary depending on actual demand. The value of The value of PP is set by use of the is set by use of the EOQEOQ and the value and the value of of TT is based on the service Level desired. is based on the service Level desired.

INVENTORY CONTROL–REVIEW SYSTEM

The choice between The choice between PP and and QQ systems should be systems should be based on the timing of replenishment, type of record based on the timing of replenishment, type of record keeping and cost of the item. keeping and cost of the item. A periodic review A periodic review system should be used when inventory orders must system should be used when inventory orders must be regularly scheduledbe regularly scheduled. .

MATERIALSMATERIALS REQUIREMENT PLANNINGREQUIREMENT PLANNING DEFINITIONDEFINITION: A method that uses the approach to : A method that uses the approach to SCHEDULESCHEDULE ProductionProduction and and PurchasingPurchasing of of Dependent Dependent demanddemand items is items is Materials Requirement PlanningMaterials Requirement Planning.. WHAT IT DOESWHAT IT DOES: : MRPMRP takes the takes the OutputOutput from the from the Master scheduleMaster schedule, combines that with , combines that with informationinformation from from Inventory recordsInventory records and and Product structure Product structure recordsrecords, and determines a , and determines a SCHEDULESCHEDULE of of TimingTiming and and QuantitiesQuantities for each item. The basic idea is to get the for each item. The basic idea is to get the right Materialsright Materials to the to the right Placeright Place at the at the right Timeright Time..

DEPENDENT DEMANDDEPENDENT DEMAND: Dependent demand : Dependent demand systems focus primarily on systems focus primarily on coordinatingcoordinating the Timing the Timing of of ProductionProduction and and PurchasesPurchases for Related items/ for Related items/ products and managing their products and managing their InventoriesInventories as a as a GROUPGROUP. . Demand for many items, especially Demand for many items, especially Components and Raw-materialsComponents and Raw-materials, can be , can be irregularirregular and directly determined by the and directly determined by the Production plansProduction plans for for other products.other products.

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING THE DEPENDENT DEMAND SITUATIONTHE DEPENDENT DEMAND SITUATION: When : When demand for the finished product is demand for the finished product is lumpylumpy or or erraticerratic, , it is desirable to use some form of it is desirable to use some form of CONTROLCONTROL on on PurchasingPurchasing and and ManufacturingManufacturing which is derived which is derived from an examination of the from an examination of the OrdersOrders received for the received for the Finished goodsFinished goods. One such . One such form of controlform of control is known is known as as MRPMRP, and since the , and since the controlcontrol depends upon the depends upon the orderorder for the for the finished productsfinished products, this procedure is , this procedure is said to be one of said to be one of Dependent demandDependent demand..In In Dependent demand situationsDependent demand situations, the Problem facing , the Problem facing the Production Manager is to the Production Manager is to ScheduleSchedule the the PurchasePurchase of Externally obtained components and raw-of Externally obtained components and raw-materials, and the materials, and the ProductionProduction of Internally of Internally manufactured components or Sub-assemblies; and manufactured components or Sub-assemblies; and Final assembly in a timely and Cost-effective Final assembly in a timely and Cost-effective manner. manner.

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING STRUCTURE OF MRPSTRUCTURE OF MRP: : MRPMRP is a is a Computer based Computer based information systeminformation system for for schedulingscheduling ProductionProduction and and PurchasesPurchases of of Dependent demandDependent demand items. It uses items. It uses information about information about End-productEnd-product demands, demands, Product Product structurestructure and and componentcomponent requirements, requirements, ProductionProduction and and PurchasePurchase Lead timesLead times, and Current , and Current Inventory Inventory levelslevels to develop to develop COST-EFFECTIVECOST-EFFECTIVE ProductionProduction and and PurchasingPurchasing schedulesschedules. .

MECHANICS OF MRPMECHANICS OF MRP: The : The basic philosophybasic philosophy and and MechanicsMechanics of of MRPMRP are simple and straight forward. are simple and straight forward. The system assumes that the The system assumes that the End-productEnd-product is made is made up of a up of a hierarchyhierarchy of of AssembliesAssemblies, , Sub-assembliesSub-assemblies, , ComponentsComponents, and , and Raw materialsRaw materials. A . A scheduleschedule of end- of end-product requirements, based on product requirements, based on demand forecastsdemand forecasts or or actual customer ordersactual customer orders, is developed outside the , is developed outside the MRPMRP system. system.

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING Using these Using these End-productEnd-product requirements, requirements, Product Product structurestructure data, and Historical data, and Historical Lead timeLead time information, information, the the MRPMRP system system traces backtraces back when when AssembliesAssemblies, , Sub-Sub-assembliesassemblies, and , and ComponentsComponents must be must be producedproduced or or orderedordered in order to have the in order to have the MaterialsMaterials when needed when needed for subsequent for subsequent ProductionProduction steps, steps, but no earlier than but no earlier than necessarynecessary to to avoid excessive inventory costsavoid excessive inventory costs. .

If a company makes dozens or Hundred of If a company makes dozens or Hundred of productsproducts, the number of , the number of ComponentsComponents that must be that must be producedproduced and and scheduledscheduled can be in the can be in the thousandsthousands, , many of which may be many of which may be commoncommon to several products. to several products. This is where the Computer is able to maintain This is where the Computer is able to maintain current information about Inventory on all current information about Inventory on all componentscomponents, , INTEGRATEINTEGRATE component needs over component needs over time, and Schedule & time, and Schedule & CoordinateCoordinate ProductionProduction and and PurchasingPurchasing activities quickly, so that they can be activities quickly, so that they can be UPDATEDUPDATED on a regular basis. on a regular basis.

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING: : Major InputsMajor Inputs

The overall The overall StructureStructure of an of an MRPMRP System has System has THREETHREE Major Major INPUTSINPUTS::11. The . The Bill of MaterialsBill of Materials ( (BOMBOM) for all ) for all Finished Finished ProductsProducts; this must be kept ; this must be kept up-to-dateup-to-date with any with any Product specificationProduct specification changeschanges. . BOMBOM specifies specifies Product structure relationshipsProduct structure relationships between between ProductsProducts and and Raw-materialsRaw-materials. . 22. . Stock status informationStock status information for all items including for all items including Lead timesLead times; this should be ; this should be UpdatedUpdated with all with all RelevantRelevant stock transactionsstock transactions as they as they occuroccur. . 33. . Master Production ScheduleMaster Production Schedule ( (MPSMPS) requirements ) requirements for all for all Finished product itemsFinished product items, , period-by-periodperiod-by-period over over the the Planning horizonPlanning horizon. This . This MPSMPS will be made up of will be made up of both both Firm ordersFirm orders and and ForecastsForecasts, for, for each time each time periodperiod, and , and ItemItem [e.g. [e.g. week-by-weekweek-by-week for the next for the next 3 3 monthsmonths]. Since all ]. Since all ProcurementProcurement, , ManufacturingManufacturing and and Assembly plansAssembly plans are based on this, it is are based on this, it is imperativeimperative to to represent the represent the best possible estimatebest possible estimate of of requirementsrequirements..

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING: : FormulationFormulation

The Basic Formula for The Basic Formula for MRPMRP is is NR = GR – OH – OD + SS [ NR = GR – OH – OD + SS [ PO is NR offset by Lead PO is NR offset by Lead TimeTime]]NR NR stands forstands for Net Requirements Net RequirementsGR GR stands forstands for Gross Requirements Gross RequirementsOH OH stands forstands for On-hand Stock On-hand StockOD OD stands forstands for Orders Due Orders DueSS SS stands forstands for Safety Stock Safety StockPO PO stands forstands for Planned orders Planned ordersSteps to follow in a Typical Steps to follow in a Typical MRPMRP Programme ProgrammeSTEP 1: STEP 1: Assign Level number to each Part NumberAssign Level number to each Part NumberSTEP 2: STEP 2: Take-up Finished Goods at Level ZeroTake-up Finished Goods at Level ZeroSTEP 3: STEP 3: Calculate Calculate Net RequirementNet Requirement from the Basic from the Basic FormulaFormulaSTEP 4: STEP 4: Go for Planned Order ReleaseGo for Planned Order Release

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING: : Inputs SummaryInputs Summary

An An MRPMRP system requires system requires FOURFOUR specific types of specific types of information:information:^̂ A schedule of A schedule of requirementsrequirements for each end for each end productproduct^̂ A list of all A list of all componentscomponents of the of the ProductProduct according to the according to the Product’s Hierarchical structureProduct’s Hierarchical structure^̂ Expected Expected Lead timesLead times for for ProducingProducing or or PurchasingPurchasing all all componentscomponents and and materialsmaterials^̂ Information about current Information about current InventoryInventory Levels LevelsTo maintain this input, Three standard data files To maintain this input, Three standard data files are used:are used:## The Master Schedule File The Master Schedule File## The Bill-of-Materials File The Bill-of-Materials File## The Inventory Record File The Inventory Record File

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING: : REPORTSREPORTS

An An MRPMRP system, generally, generates system, generally, generates FOURFOUR specific types of Reports:specific types of Reports:^̂ OrderOrder andand ProductionProduction release schedules release schedules which specify thewhich specify the Amount Amount andand Timing of Timing of futurefuture OrdersOrders and and Production runsProduction runs for each itemfor each item..^̂ Order releases Order releases whichwhich authorize authorize thethe PurchasePurchase oror ProductionProduction of itemsof items^̂ Change reportsChange reports which highlightwhich highlight changes changes to to the previousthe previous ProductionProduction andand PurchasePurchase plans, if plans, if any.any.^̂ Load reportsLoad reports which indicate thewhich indicate the Amount Amount ofof eacheach Production resourceProduction resource oror Department Department capacitycapacity that is to bethat is to be utilised utilised with thewith the Plan. Plan.

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING: : CLASSES BASED ON PERFORMANCECLASSES BASED ON PERFORMANCE

CLASS CHARACTERISTICS

DD

•• MRP working in Data-processing MRP working in Data-processing department onlydepartment only

•• Poor Inventory RecordsPoor Inventory Records

•• Master Schedule mismanagedMaster Schedule mismanaged

•• Reliance on Shortage lists for progressingReliance on Shortage lists for progressing

CC•• Used for Inventory ordering, not Used for Inventory ordering, not SchedulingScheduling

•• Scheduling by shortage ListsScheduling by shortage Lists

•• Overloaded Master ScheduleOverloaded Master Schedule

MATERIALS REQUIREMENT PLANNINGMATERIALS REQUIREMENT PLANNING: : CLASSES BASED ON PERFORMANCECLASSES BASED ON PERFORMANCE

CLASS CHARACTERISTICS

BB

•• System includes Capacity Planning, Shop-System includes Capacity Planning, Shop-floor controlfloor control•• Used to Plan Production, not manage the Used to Plan Production, not manage the BusinessBusiness•• Help still needed from Shortage listsHelp still needed from Shortage lists•• Inventory higher than necessaryInventory higher than necessary

AA

•• Uses closed-loop MRPUses closed-loop MRP•• Integrates Capacity Planning, Shop floor Integrates Capacity Planning, Shop floor control, Vendor schedulingcontrol, Vendor scheduling •• Used to Plan Sales, PurchasingUsed to Plan Sales, Purchasing•• No shortage lists to Over-ride schedulesNo shortage lists to Over-ride schedules

MRP II:MRP II: MANUFACTURING RESOURCES MANUFACTURING RESOURCES PLANNINGPLANNING

The scope ofThe scope of MRPMRP has been has been expandedexpanded in in recent years to recent years to INTEGRATEINTEGRATE with with^̂ Order ProcessingOrder Processing^̂ BillingBilling^̂ Shop Floor SchedulingShop Floor Scheduling & &^̂ PersonalPersonal and and Machine utilizationMachine utilization activities of activities of the company. the company. These newer systems, called These newer systems, called MRP IIMRP II contains contains the Classical the Classical MRPMRP schedulingscheduling function as their function as their centre-piececentre-piece. However, . However, MRP IIMRP II systems may systems may include a include a MODULEMODULE that collects that collects SalesSales and and Customer orderCustomer order data and generates a data and generates a Master Master Production ScheduleProduction Schedule ( (MPSMPS) for ) for FutureFuture End-End-product requirementsproduct requirements e.g. using a forecasting e.g. using a forecasting Model.Model.


In addition, an In addition, an MRP IIMRP II system may system may convert convert

information from the information from the Material requirement plansMaterial requirement plans

into into specificspecific::

^̂ Work schedules for Work schedules for departmentsdepartments and and machinesmachines

^̂ Evaluate Evaluate department workloadsdepartment workloads & & Capacity Capacity

conditionsconditions

^̂ Generate Generate Shipping documentsShipping documents and and Customer Customer

invoicesinvoices and and

^̂ Produce Produce Management reportsManagement reports on on ProductionProduction

and and Financial performanceFinancial performance..


Typically, these systems have a Typically, these systems have a feedbackfeedback

mechanism so that if mechanism so that if DepartmentDepartment, , MachineMachine, or , or

PersonnelPersonnel capacitycapacity limits are limits are exceededexceeded; the ; the

Material requirement plansMaterial requirement plans and corresponding and corresponding

Production schedulesProduction schedules are are REVISEDREVISED to stay to stay

within Capacity limits. within Capacity limits.

MRP IIMRP II systems are an systems are an expansionexpansion of of MRPMRP to to

inter-connect withinter-connect with and and supportsupport other activities other activities

better, better, but the basic method used to generate but the basic method used to generate

Material Requirement Plans is the sameMaterial Requirement Plans is the same. .

CLASSIFICATION & CODIFICATION:CLASSIFICATION & CODIFICATION: The SystemsThe Systems

Alphabetical SystemAlphabetical System

Under this system, ‘Under this system, ‘alphabetsalphabets’ become the ’ become the

basis and codes are allotted to each item in basis and codes are allotted to each item in

alphabetical order. alphabetical order. Each item is grouped Each item is grouped

according to its natureaccording to its nature, , useuse, etc. and the first , etc. and the first

alphabet of the name of the material is the alphabet of the name of the material is the

starting point of codification. starting point of codification.

Subsequent Subsequent sub-alphabetssub-alphabets are used are used

depending upon other depending upon other characteristicscharacteristics of the of the

materialmaterial in question. The illustration is shown in question. The illustration is shown

how the system workshow the system works: :

Alphabetical SystemAlphabetical System

Class

Group Code

Raw Raw Materials: Materials:

IronIron

Bars, MSBars, MS

Bright SteelBright Steel

MeltedMelted

Mould Mould

ORE ORE

Pig Pig

Sheets, MS Sheets, MS

Sheets, Bright SteelSheets, Bright Steel

IR-BA-MSIR-BA-MS

IR-BA-BSIR-BA-BS

IR-MELIR-MEL

IR-MLDIR-MLD

IR-ORIR-OR

IR-PGIR-PG

IR-SH-MSIR-SH-MS

IR-SH-BSIR-SH-BS

Alphabetical System & Numerical SystemAlphabetical System & Numerical System

LimitationLimitation: However, it is not always easy to : However, it is not always easy to remember the codes and there are chances of remember the codes and there are chances of duplicationduplication. Coding . Coding mistakesmistakes are frequent due are frequent due to to repetitionrepetition of alphabets in the same code. of alphabets in the same code. SuitabilitySuitability: : It is only suitable where the number It is only suitable where the number of items is not large as availability of the of items is not large as availability of the number of items at desired level is limitednumber of items at desired level is limited. .

Numerical SystemNumerical System Against the alphabetical system, the numerical Against the alphabetical system, the numerical system is based on system is based on numbersnumbers, either , either simplesimple numbers, numbers, blockblock numbers or numbers or dash/ strokedash/ stroke numbers. For example:numbers. For example:

Numerical SystemNumerical System

Materials SimpleSimple

NumberNumber

BlockBlock

NumberNumber

DashDash or or Stroke Stroke

NumberNumber

Raw Materials

Iron Ore

Pig Iron

Melted Iron

Bright Iron

Steel Iron

Iron Sheets

Iron Bars

Iron Mould

0101

0505

0606

0707

0808

0909

1010

1111

1212

1 – 1000 1 – 1000

1 – 10 1 – 10

11 – 20 11 – 20

21 – 30 21 – 30

31 – 40 31 – 40

41 – 50 41 – 50

51 – 60 51 – 60

61 – 70 61 – 70

71 – 8071 – 80

1515

15-1 or 15/115-1 or 15/1

15-2 or 15/2 15-2 or 15/2

15-3 or 15/3 15-3 or 15/3

15-4 or 15/4 15-4 or 15/4

15-5 or 15/5 15-5 or 15/5

15-6 or 15/6 15-6 or 15/6

15-7 or 15/7 15-7 or 15/7

15-8 or 15/8 15-8 or 15/8

Numerical SystemNumerical SystemSimple numberSimple number: : One number is allotted against One number is allotted against each materialeach material, with some other number being , with some other number being kept as provision for other item. kept as provision for other item. Block numberBlock number: The number are so designed that : The number are so designed that materials of similar nature of group come under materials of similar nature of group come under one blockone block. As for example, . As for example, raw materialraw material block block comes under comes under 1-10001-1000, , consumable oil and consumable oil and lubricant materials blocklubricant materials block comes under comes under 1001 – 1001 – 20002000, , packaging materials blockpackaging materials block come under come under 2001 – 30002001 – 3000, , jigs, tools and fixtures materials jigs, tools and fixtures materials blockblock come under come under 3001 – 40003001 – 4000 and so on. and so on. Again, Again, raw material blockraw material block may be may be sub-dividedsub-divided into into small blockssmall blocks according to the according to the categorycategory or or materialsmaterials, as for example, iron, steel and allied , as for example, iron, steel and allied group, copper, nickel, alloy, etc.group, copper, nickel, alloy, etc.1-100, 101 – 200, 201 – 300, 301 – 400, 401 – 500, respectively.1-100, 101 – 200, 201 – 300, 301 – 400, 401 – 500, respectively.

Numerical System & Decimal SystemNumerical System & Decimal System

Dash/Stroke numberDash/Stroke number. . A further A further improvementimprovement over the block numbering is ‘over the block numbering is ‘dash/strokedash/stroke’’ numbering system. numbering system. A dash or stroke is put A dash or stroke is put against the against the main elementmain element of the material in order of the material in order to code the material in the to code the material in the same groupsame group. . Decimal SystemDecimal SystemUnder this system of codification, within the Under this system of codification, within the range of ten numerals 0-9, range of ten numerals 0-9, some significance is some significance is attached to every digit in the codeattached to every digit in the code. . Thus the Thus the whole range of items in stores can be codified whole range of items in stores can be codified without difficultywithout difficulty. Generally 7 to 8 digits will be . Generally 7 to 8 digits will be found sufficient for all practical purposes, but it found sufficient for all practical purposes, but it may also be extended up to 10 digits in order to may also be extended up to 10 digits in order to accommodate any other characteristic of the accommodate any other characteristic of the material desired to be described.material desired to be described.

Decimal SystemDecimal SystemUnder this system of codification:Under this system of codification:[[Digital code structure under one-digit decimal Digital code structure under one-digit decimal system for each class characteristicsystem for each class characteristic] ] XX XX XX XX X XClassClass Group Sub-group Type Size Group Sub-group Type Size

XX XX XXGrade Shape ConditionGrade Shape Condition[[Digital code structure under two-digit decimal Digital code structure under two-digit decimal system for each class characteristicsystem for each class characteristic] ] XX XX XX XX XX XX XXClassClass Group Sub-group Type Size Group Sub-group Type Size

XXXX XXXX XXGrade Shape ConditionGrade Shape Condition

Decimal SystemDecimal SystemWhere to use TWO-DIGIT Decimal SystemWhere to use TWO-DIGIT Decimal System::If, however, for any particular class If, however, for any particular class characteristic, more than characteristic, more than 10 sub-divisions10 sub-divisions are are necessary, the necessary, the one-digit decimal systemone-digit decimal system can be can be substitutedsubstituted for for two-digit decimal systemtwo-digit decimal system. . For example, if for type, size, and grade, For example, if for type, size, and grade, it is it is thought that provisions have to be made for thought that provisions have to be made for more than tenmore than ten, this may be done by a decimal , this may be done by a decimal after after two-digit numeralstwo-digit numerals. This will make a . This will make a provision for provision for 100 items in each group100 items in each group starting starting from from 00 -9900 -99. . Limitation:Limitation: However, this system may be made However, this system may be made complicated by insertion of a decimal point, complicated by insertion of a decimal point, which if wrongly inserted, may put the whole which if wrongly inserted, may put the whole system in disorder. system in disorder.

Materials Management

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