1

PART II
MATERIALS
MANAGEMENT
 Definition and Concept of MM
2

 Materials are goods or items that can be acquired,

purchased, processed, stored and used for
production, consumption or conversion.
 Materials in manufacturing organizations may
include raw materials, tools, spare parts, semi-
finished goods, maintenance and operating
supplies.
 Materials management can, therefore, be defined as the
planning, organizing, directing, controlling and
3
coordinating those activities which are concerned with
various material requirements from the point of their
inception to the point of their utilization and disposal. It
includes all activities performed by purchasing, inventory
control, stores, transportation and physical distribution.

 Materials Management are the management functions

related to the complete cycle of material flows from them
purchase and internal control of materials to the planning
and control of working process to the warehousing,
shipping, and distribution of the finished product.
 Definition and Concept of MM
4

 Terms interchangeably used with

materials management:
 Logistics
 Procurement
 Supply management
 Purchasing
Purchasing: is the process of buying the necessary goods
and services and includes identifying need, identifying
sources, selecting suppliers, negotiating prices and delivery.
5

 Procurement: is a broader term and includes purchasing, stores,

transportation, receiving, inspection and disposal.

 Supply management a set of approaches utilized to efficiently

integrate supplier, manufacturer, warehouse and stores so that
merchandise is produced and distributed at the right quantities, to
the right location and at the right time, in order to minimize
system under costs while satisfying service level requirements
(Levi, 2000).

 Logistics: has a military connotation. It is the function of

obtaining and distributing material and product in the proper place
and proper quantities.
 The Importance and Scope of MM
6

 Importance:
 Ensuring the regular supply materials.
 Minimizes the procurement and transportation costs
associated with materials.
 Efficient stores and stock control minimizes wastage of
materials: It reduces the damage of materials obsolescence
problem, etc.
 Inspection of materials at the time of procurement minimizes
the possibility of finished goods being rejected by customers.
 It assures better utilization of labor, capital and equipment.
 Congestion at stores and at different stages of production can
be avoided by effective materials management system.
 Scope of MM
7

 Planning or anticipating the materials

requirement (materials forecast, budget)
 Identifying the source and acquiring it

to the firm (Purchasing)

 Introducing the materials to the

organization and control materials as a

current asset (Transporting, storage,
inventory control)
The Objectives of MM

Aim
Right Right
Cost Quality

Right Right
Place Quantity

Right
Time
 Cont………….Objectives
9

 To provide uninterrupted flow of materials, supplies and

services required to operate the organization;
 To keep inventory investment at an optimum and loss at a
minimum;
 To maintain adequate quality standard;
 To develop effective and reliable sources of supply;
 To achieve maximum integration with other departments;
 To improve the competitive position of the organization;
and
 To obtain the required items and services at the lost
possible price
 Nature of Decision Making in MM
10

 Make or buy decision

 Supplier selection

 Optimum level of inventory

determination
 Time of delivery

 Economic order quantity

 Mode of transportation

 Price determination
 Functions of MM: an overview
11

 Material Planning and Budgeting

 Materials Purchasing Research (Economic analysis, Market analysis,
Supplier analysis, Transportation analysis, Price analysis, & Purchase analysis)
 Purchasing
 Receiving (Receive incoming materials, Checking, Inspection, Preparation of
receiving report, & Delivery of the materials to the appropriate store)
 Managing Stores
 Transportation and Traffic Management
 Inventory Control
 Disposal of Scrap, Surplus and obsolete materials
 Value Analysis
 An Organization of MM: Importance
12

 It helps the organization to achieve its strategic

objectives.
 It cerates integration of all sections, units and
departments.
 It maximizes the efforts of each individual/employee.
 It facilitates the coordination of efforts towards the
common goals.
 It motivates people to carry out the desired activities.
 It creates formal relationships in terms of responsibility
and authority.
 An Organization of MM: Factors to be
considered
13

 The type of Materials used

 Volume of Materials

 Magnitude of Materials Cost

 Responsibility and Authority

 Conditions for decentralizing the structure:

14

 When distances between the plants are significant, the

materials management function is impaired when
controlled from the headquarters, both in terms of cost
and time.

 When each plant requires many unique materials and

materials management section located at the plant is in a
better coordination with the plants’ operational units.
 Conditions for centralizing the structure:

15

 When the materials requirement of each plant is similar

and bulk in size.

 When specialized and standardized materials are

required.

 When plants are highly geographically disbursed.

 16

THE
PLANNING/FORECASTIN
G FUNCTION OF MM
 Forecasting: Meaning and Significance
17

 Forecasts are estimates of the occurrence, timing, or

magnitude of future events.
 Materials demand forecasting is the process of estimating
the materials requirement (demand) to meet the operation
of the organization.

 Significance of Forecasting

 It reduces uncertainty
 It helps to make better estimates of what will happen in the future
 It helps managers to have appropriate level of materials available
when needed
 Forecasting Techniques
18

 Two major categories of forecasting methods:

Qualitative Techniques Quantitative Techiniques

They do not utilize historical data Data serve as the basis for
but they use expert judgment as raw developing a projection
materials
o They do not utilize mathematical o The Quantitative methods rely
formulas. exclusively (entirely) on
o They are especially useful when statistical and mathematical
accurate quantitative data is expressions in their
difficult to obtain. procedures.
 Qualitative Forecasting Techniques
19

 The Delphi Method

 Executive committee consultants

 Sales force estimation

 Expectation survey/ Anticipatory

survey
 Qualitative
20
Methods

Executive Market Sales Force

Delphi
Opinion Survey Composite
Method
Approach in
which a group Approach in
Approach that uses Approach in
of managers which consensus
which each
interviews and
meet and agreement is salesperson
surveys to judge
collectively preferences of reached among estimates sales
customer and to a group of in his or her
develop a experts
forecast assess demand region
 Quantitative Forecasting Techniques
21

Two subcategories of quantitative technique:

 The time series (Naïve)

 Simple Average method

 Last value method
 Simple moving Average
 Weighted Moving average (WMA)
 Exponential Smoothing (ES)
 Measuring Accuracy of naive methods
 Long-term forecasting/Causal Methods
 TIME SERIES MODELS
22

Model Description
Naïve Uses last period’s actual value as a forecast

Simple Mean Uses an average of all past data as a forecast

(Average)
Simple Moving Uses an average of a specified number of the
Average most recent observations, with each observation
receiving the same emphasis (weight)
Weighted Moving Uses an average of a specified number of the
Average most recent observations, with each observation
receiving a different emphasis (weight)
Exponential A weighted average procedure with weights
Smoothing declining exponentially as data become older
 ILLUSTRATION
1. NAÏVE METHOD
23

 In this illustration we assume that each year (beginning with year 2) we made a forecast,
then waited to see what demand unfolded during the year. We then made a forecast for the
subsequent year, and so on right through to the forecast for year 5.
Year Actual Forecast Note
Demand (Ft)
(At)
1 310 - There was no prior demand data on which to
base a forecast for period 1

2 365 310 From this point forward, these forecasts were

made on a year-by-year basis.

3 395 365
4 415 395
5 415
 2. Simple Mean (Average)
In this illustration we assume that a simple average method is being used. We will also assume
24
that, in the absence of data at start-up, we made a guess for the year 1 forecast (300). At the end
of year 1 we could start using this forecasting method. In this illustration we assume that each
year (beginning with year 2) we made a forecast, then waited to see what demand unfolded
during the year. We then made a forecast for the subsequent year, and so on right through to the
forecast for year 4.
Year Actual Forecast Note
Demand (Ft)
(At)
1 310 300 This forecast was a guess at the beginning.

2 365 310 From this point forward, these forecasts were

made on a year-by-year basis using a simple
average approach.

3 395 337.500
4 415 356.667
5 371.250
 3. SIMPLE MOVING AVERAGE METHOD
25
In this illustration we assume that a 2-year simple moving average is being used. We will also
assume that, in the absence of data at start up, we made a guess for the year 1 forecast (300).
Then, after year 1 elapsed, we made a forecast for year 2 using a naïve method (310). Beyond
that point we had sufficient data to let our 2-year simple moving average forecasts unfold
throughout the years.
Year Actual Forecast Note
Demand (Ft)
(At)
1 310 300 This forecast was a guess at the beginning.

2 365 310 This forecast was made using a naïve approach.

3 395 337.500 From this point forward, these forecasts were

made on a year-by-year basis using a 2-yr moving
average approach.
4 415 380
5 405
 4. WEIGHTED MOVING AVERAGE
METHOD
In this illustration we assume that a 3-year weighted moving average is being used. We will
also assume that, in the absence of data at start-up, we made a guess for the year 1 forecast
(300).
26 Then, after year 1 elapsed, we used a naïve method to make a forecast for year 2 (310)
and year 3 (365). Beyond that point we had sufficient data to let our 3-year weighted
moving average forecasts unfold throughout the years. The weights that were to be used are
as follows: Most recent year, .5; year prior to that, .3; year prior to that, .2
Year Actual Forecast Note
Demand (Ft)
(At)
1 310 300 This forecast was a guess at the beginning.

2 365 310 This forecast was made using a naïve approach.

3 395 365 This forecast was made using a naïve approach.

4 415 369 From this point forward, these forecasts were
made on a year-by-year basis using a 3-yr wtd.
moving avg. approach.
5 450 399
6 428.5
 EXPONENTIAL SMOOTHING METHOD
27

 Exponential smoothing method: The new forecast for

next period (period t) will be calculated as follows:
 New forecast = Last period’s forecast +
(Last period’s actual demand – Last
period’s forecast)
Ft = Ft-1 + (At-1 – Ft-1) (equation 1)
Ft = At-1 + (1- )Ft-1 (alternate equation 1 – a bit more user friendly)

Where is a smoothing coefficient whose value is between 0 and

1.
 5. EXPONENTIAL SMOOTHING
ILLUSTRATION
28
In this illustration we assume that, in the absence of data at start-up, we made a guess for
the year 1 forecast (300). Then, for each subsequent year (beginning with year 2) we made a
forecast using the exponential smoothing model. After the forecast was made, we waited to
see what demand unfolded during the year. We then made a forecast for the subsequent
year, and so on right through to the forecast for year 5.
Year Actual Forecast Note
Demand (A) (F)

1 310 300 This was a guess, since there was no prior demand
data.
2 365 301 From this point forward, these forecasts were made
on a year-by-year basis using exponential smoothing
with = 0.1
3 395 307.4
4 415 316.16
5 326.044
 Measuring Accuracy of naive methods

29

 Measurement of accuracy shows which model has the

smallest historical forecasting error.

 Forecasting error refers to how close forecasts come to

actual data. Because forecasts are made before actual
data are known, the accuracy of forecast can be
determined only after the passage of time.

 If forecasts are very close to the actual data, we say that

they have high accuracy and the forecasting error is low.
 Cont……
30

 The popular measurement of forecasting error is mean

absolute deviation/error (MAD). Thus the one with
the lowest MAD will be the best forecasting method.

 Mathematically, MAD=
∑/error/
n

 Where;
n= the number of periods
Forecast error =demand (actual value) – forecast
THE 31

PURCHASING
FUNCTION OF
MM
 Purchasing: Meaning
32

 Purchasing is the process of

acquiring materials (goods), services
that can be used in the operation of
an organization in exchange for
funds. Purchasing responsibilities
extend beyond the limited “buying”
of a product.
Purchasing department responsibilities include:
33

 Identify and develop sources of supply.

 Select suppliers and negotiate contracts.

 Maintain working relations and control

vendor performance
 Evaluate supply-demand economies and

initiate cost and make-or buy studies

 Maintain supply system database
 Basic principles of purchasing
34

 The basic principles of purchasing

regarded as the provision of the
required materials:
 In the Right Quality
 In the Right Quantity
 In the Right Time
 At the Right Price
 From the Right Supplier
 Steps in purchasing system
35

 Origination of purchase requisition

 Verification of purchase required and budget
 Determination of request for bids(quotation)
 Preparation of bid documents
 Invitation to bid
 Evaluation and selection of suppliers
 Purchase order
 Follow-up and expediting
 Receiving and inspecting
 Maintenance of records and files
 Supplier selection
36

 Evaluation methods for

selection
 Categorical methods
 The weighted point method
 The Cost Ratio Method
 Foreign Purchasing
37

 Reasons for Making Foreign

Purchase
 Price
 Technology
 Unavailability of domestic

products
 Quality
 Problems of Foreign Purchasing
38

 The problem of evaluating and selecting a foreign supplier

 The length of delivery time
 Follow-up of purchasing is difficult, if the foreign
supplier’s personnel are not responsive
 Political and labor problems existing in vendor’s country
 Currency problem
 Payment method
 The government policy on imported goods
 The legal and court systems by which the purchaser and
the supplier to be judged
 Transportation methods
 Terms used international trading
(INCOTERMS)
39

 FAS (Free Alongside Ship)

 FOB (free on board)

 C & F (cost & freight)

 CIF (cost, insurance and freight)

 Language and cultural difference

 EXS (ex ship)

 DDP (delivered duty paid)

 FOR/FOT (free on rail/truck)

 Public Purchasing in Ethiopia
40

 Characteristics of Public Purchasing:

 Source of Authority
 Budgetary Restrictions
 External Pressure
 Favoring disadvantaged segment of the population
 Clear Specification of Items
 Difficulty of modifying organizational structure
 Difference in Salary Level
 Open Bidding
 Absence of Interest cost
 Public Purchasing Practice in Ethiopia
41

 The foundations for the FDRE public procurement

are the following:
 Proclamation no. 430/2005, determining procedures of
public procurement and establishing its supervisory
agency;
 The implementing directives issued by the Ministry of
finance and Economic Development and,
 Standards set by Public Procurement Supervisory
Agency which are outlined as a separate standard bid
document (SBD) for goods, consultancy services and
works
 Types of the Ethiopian Government Purchases
42

 In public procurement of goods and

services to be purchased by a
government agency are divided as:
 goods,
 works,
 consultancy service and
 services
 Financial Sources of Public Purchasing
43

 Tax collected from the citizens

 Aid
 Loan
 Responsibility of Procuring Entity
44

 As per article 7 of proclamation no.430/2005 the procuring entity

is specifically responsible for:
 Establishing a procurement unit staffed an appropriate level,
 Establishing a tender committee and appointing its members
 Advertising bid opportunities
 Communicating award decision
 Certifying the availability of funds to support the procurement
activity before signing a contract
 Signing contracts for procurement activities
 Investigating complaints by bidders; and rendering decisions thereon
 Submitting a copy of any complaints and reports of the findings and
decision to the Agency
 Ensuring that the implementation of awarded contract is in
accordance with the terms and conditions

 Basic Procurement Rules
45

 Records of procurement
 Non-discrimination

 Form of communication

 Qualification of candidates

 Technical specification

 Rejection of all bids, proposals and

quotations
 Inducement from candidates
 Methods of procurement
46

 Open bidding
 Two stage bidding (request for

proposal)
 Restricted tendering

 Direct procurement

 Request for quotation

 Problems in Ethiopian public purchasing
47

 Highly controlled systems

 The feeling of indifference to committee work
 Back door dealings and corruption
 Additional costs are incurred for inviting bidders
and collecting quotations
 Unskilled workers assigned to purchasing activities
 Lack of purchasing plan
 Professional time spent on tender committee
meetings
 48

TRANSPORTATION AND
TRAFFICKING FUNCTION
OF MM
 Methods/Modes of Transportation
49

 Rail-way network
 High Way/ Motor carriers

 Water transport

 Air Transport

 Pipe-lines
 50

INVENTORY
FUNCTION OF
MATERIALS
MANAGEMENT
 Types of inventory
51

There are three major types of

inventory:
 raw materials inventory ,
 work in process inventory, and
 finished goods inventory.
 Significance of Inventory
52

 helps deal with uncertainties in

supply and demand.
 facilitates more economic

purchases
 inventory may be a useful means

of dealing with anticipated

changes in demand or supply
 Costs of Inventory
53

 Ordering Costs
 Costs of Carrying

 Cost of Investment

 Storage

 Insurance

 Taxes

 Depreciation Costs

 Determination and Obsolescence Costs

 Stock out Costs

 Economic Order Quantity (EOQ)
54

 The smaller the amount of inventory purchased in one lot,

the larger the number of orders, and higher is the total cost
of ordering.
 The smaller the size of inventories lowers the carrying
costs.

The relationship
b/n inventory
size and
ordering cost on
the one hand,
and carrying
cost on the other

Ordering quantity
 EOQ Formula
Same Problem

Pam runs a mail-order business for gym equipment.

Annual demand for the TricoFlexers is 16,000. The annual holding cost per
unit is $2.50 and the cost to place an order is $50. What is the economic
order quantity?
 The underlying assumptions of the EOQ
57

 The demand for the purchased or manufactured item

is at a uniform rate.
 Carrying cost of inventory per nit per year is constant.
 Unit cost of the item is constant.
 Lead-time or procurement time is constant and the
rate of delivery or the rate of manufacturing can be
predicted with a fair degree of accuracy.
 Quantity discounts are ignored.
 Minimum inventory or safety stock is assumed to be
zero.
 Limitations of EOQ
58

 The EOQ can be determined only, if the assumed

conditions are in operation.
 But in real-life situations, none of these conditions
are found to be operating.
 Lead times vary; rate of usage; unit price and carrying
costs are never constant.
 Companies often find it profitable to take
advantage of quantity discounts
 Safety stocks are needed to prevent the occurrence
of stock out contingencies
 Re-Order Point (ROP)
59

 ROP is the point in time when the inventory in

hand will be exactly equal to the total usage of
inventory during the procurement time
 It is the timing of the reorder, or the time when

the next order should be placed.

 Under conditions of certainty when the lead-

time or procurement time is constant and

known, and rate of usage of inventory item is
also constant, the re-order time (OP) can be
easily determined.
 Safety Stocks (Buffer Stocks)
60

 Safety stock is an addition to the optimum level

determined by EOQ.
 Safety or buffer stocks are additional inventory held
against unforeseen events such as an increase in demand or
a delay in the arrival of items ordered.
 It increases the average stock of inventory carried by the
company and hence increases in costs of inventories
 Safety stock has little or no turnover
 Safety stocks diminish the probability of occurrence of
stock-out, which cause interruptions in production and loss
of sales.
 They thus reduce the costs of stock-outs.
 Just-in-Time Inventory Control
61

 Is an approach to inventory control that emphasizes

having materials just as they are needed.
 Attempts to eliminate all sources of waste through
having the right part at the right place and time
 Helps organizations to minimize holding costs
 It also calls for:
 utilizing the full capabilities of workers,
 giving them greater responsibilities for the production
process, and
 involving them in continual efforts at improving the
production process.
 ABC Analysis
62

 What is ABC Analysis?

 is a basic analytical management tool, which enables top management to place
the effort where the results will be greatest.
 popularly known as Always Better Control or the alphabetical approach.
 tries to analyze the distribution of any characteristic by money value of
importance in order to determine its priority.
 applied in areas needing selective control, such as inventory, criticality of
items, obsolete stocks, purchasing orders, receipt of materials, inspection,
store-keeping, and verification of bills.
 Advantages:
 helps the materials manager to exercise selective control and focus his
attention only on a few items.
 Helps to rigorous control for ‘A’ items and minimum for ‘C’ items.
 Public inventory Administration in Ethiopia
63

 Objectives of Inventory Administration in

Ethiopia:
 To protect public properties from wastage and fraud.
 To have an effective and efficient control system that
enables the organization to handle inventories
properly, to control the flow of material so that they
can be used for the purpose they are purchased for.
 To have an effective inventory recording system for
reporting and follow-up
 To increase the efficiency and effectiveness of a
public organization in discharging its responsibilities
 Classification of Inventories
64

 Consumable items
 Non-consumable items:

 Buildings
 Plants and machines
 Vehicles
 Office furniture
 Office equipment
 Others
 65

THE STORING FUNCTION

OF MATERIALS
MANAGEMENT
 Importance of Stores
66
 receive raw materials, components, tools, equipment and other
items and account for them.
 provide adequate and proper storage and preservation to the
various items.
 meet the demands of the consuming departments by proper issues
and account for the consumption.
 minimize obsolescence, surplus and scrap through proper
codification, preservation and handling.
 highlight stock accumulation discrepancies and abnormal
consumption and effect control measures.
 ensure good house keeping so that material handling, material
preservation, stocking, receipt and issue can be done adequately.
 assist in verification and provide supporting information for
effective purchase action.
 Location and Layout of Stores
67
 Location:
 The normal practice is to locate the stores near the consuming
departments.
 This minimizes handling and ensures timely dispatch.
 Layout: in stores layout, the governing criteria are:
 easy movement of materials,
 good housekeeping,
 sufficient space for men and material handling equipment’s,
 optimum utilization of storage space,
 judicious use of storage equipment’s, such as shelves, racks,
pallets and proper preservation from rain, light and other such
elements.
 The important factors to be considered in the design of
 Cost Aspects and Productivity
68

 Costs involved in stores can be analyzed

under two heads;
 Fixed cost - incurred irrespective of the
utilization of the space of the stores and include
money spent on land and buildings, rent,
interest, repairs, maintenance, insurance
 Variable cost - costs vary with the volume of
throughput (items processed) and consist of
handling costs, damages, deterioration,
obsolescence, etc.
 Stock control and challenges of store management
69

 Effective stock control is achieved if the following

two basic conditions are satisfied:
 the existence of reliable forms used for appropriate
recording of the movements of items.
 the existence of clear delineation of authorities and
responsibilities between the staffs working in the store
department and between the different departments.
 The stocks; in public organizations, include:
 office supplies and spare parts that are consumed in the
operational activities of the organization and large size
machines that are kept in warehouse before they are
issued for services.
 Stock Control Forms Used in Public Organizations
70

 Forms for receiving goods

 Procedures for Receipt of New
Inventories
 Forms for maintaining internal records
 Distribution of goods within the

organization
 Procedures for stock issuing
 71

THE DISPOSAL FUNCTION OF

MATERIALS MANAGEMENT
 Disposal of Materials
72

 Managers are concerned on how

to handle the disposal of the
following three types of
inventories.
 Obsolete material or equipment
 Surplus Value
 Scrap
 Method of disposing
73

 Transferring the item to another

government agency
 To dispose the material by means of

selling in auction, tender or other

means
 Discarding the material
74

Thank You!