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Unit 1: Introduction to Materials Management

1. Meaning and Introduction of Materials Management
Definition of Materials Management Materials Management is the process of planning,
acquiring, storing, moving, controlling, and utilizing materials efficiently within an
organization to minimize cost and ensure smooth production and distribution. It integrates
activities such as: Purchasing, Inventory control, Storage, Material handling, Warehousing,
Standardization, and Distribution logistics.
Simple Meaning It is concerned with the movement and control of materials within an
organization.
Concept of “Materials” Materials include all objects or items that are moved to generate
products or services. Materials may be:
●​ Tangible materials: Physical items like Raw materials, Components, Spare parts,
Finished goods, Newspapers, milk packets, etc.
●​ Intangible materials: Non-physical items such as Information, Messages, Data
signals, and Communication flows.

Materials as One of the 5 M’s of Management The 5 M’s are: Men, Machines, Money,
Methods, and Materials. Among these, materials are highly significant because they form a
major portion of production cost.

2. Categories of Materials
Materials are classified into three broad categories:

1. Purchased Materials These are materials procured from outside suppliers. Examples
include Raw materials, Components, Spare parts, and Consumables.

Features: Used directly or indirectly in production; May or may not appear in the final
product.

2. In-Process Materials These are semi-finished materials undergoing production.

Features: Present in intermediate stages; Require further processing. Example:

Half-assembled machinery parts.

3. Finished Goods These are completely manufactured products ready for sale to
customers. Examples include Packaged consumer products and Final electronic goods.

3. Objectives of Materials Management

The major objectives are:
●​ Procurement of materials at minimum cost
●​ Maintaining required quality standards
●​ Ensuring uninterrupted production flow
●​ Maintaining optimum inventory levels
●​ Reducing wastage and losses
●​ Improving coordination among departments
●​ Ensuring timely availability of materials
●​ Maintaining good supplier relations

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4. Importance of Materials Management

Why Materials Management is Important:

1.​ High Share in Total Cost: Material cost in manufacturing accounts for approximately
50–70% of total expenditure.
2.​ Profit Improvement: Reduction in material cost directly increases profit.
3.​ Production Continuity: Ensures uninterrupted supply of materials.
4.​ Better Product Quality: Quality of the final product depends heavily on material
quality.
5.​ Inventory Optimization: Helps avoid overstocking, understocking, and stock-outs.
6.​ Efficient Resource Utilization: Prevents wastage of space, time, money, and labor.

5. Evolution of Materials Management

Materials Management gained importance in the early 1960s. Industries realized that
material costs exceeded combined costs of Men, Machines, and Methods. Thus, materials
management emerged as a critical area for cost reduction, profit enhancement, and
operational efficiency.

6. Core Principle of Materials Management

The basic principle is: “Right material, in right quantity, at right price, at right time.” This is
known as the 5 Rights of Materials Management.

7. Functions of Materials Management

1.​ Materials Planning and Control:
Meaning: Determining material requirements for production. Activities: Forecasting material
needs, planning procurement, and controlling material flow.
Importance: Prevents shortages and avoids excess inventory.

2.​ Purchasing: Meaning: Procurement of materials from suppliers.

Activities: Vendor identification (Identifying supply sources), market research, calling
tenders, negotiation, and supplier selection.
Objective: To obtain quality materials at the best possible price.

3.​ Inventory Control: Meaning: Managing storage and availability of materials.

Objectives: Maintain optimum inventory, reduce carrying costs, and avoid stock-outs.
Importance: Balances availability and cost efficiency.

4.​ Store Keeping:

Meaning: Safe receipt, storage, and issue of materials.
Functions: Receiving materials, recording materials, issuing materials, and preventing
damage and theft.
Objective: Minimum handling and minimum wastage.

5.​ Material Handling:

Meaning: Movement of materials within the organization.
Objectives: Reduce handling cost, improve workplace efficiency, and ensure safe
movement. Equipment Used: Conveyors, cranes, and forklifts.

6.​ Warehousing:
Meaning: Providing storage facilities for materials.

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Facilities Included: Storage space, weighing facilities, handling equipment, and fire-fighting
equipment.
Importance: Protects materials from damage, theft, and deterioration.

7.​ Standardization and Simplification:

Meaning: Setting standards for materials and products.
Objectives: Uniform quality, reduced variety, easy procurement, and cost reduction.
Areas Covered: Sizes, performance, raw materials, and quality standards.

8.​ Organization and Appraisal of Materials:

Meaning: Ensuring coordination among material activities.
Objectives: Smooth flow of materials, avoid delays, eliminate wastage, and improve
coordination.

8. Costs Involved in Materials Management

1.​ Cost of Materials: Direct purchase cost paid to suppliers.
2.​ Purchasing Cost: Includes staff salaries, tendering expenses, postage, processing,
and inspection.
3.​ Inventory Carrying Cost: Includes storage cost, interest on capital, obsolescence,
and warehouse expenses.
4.​ Packaging Cost: Cost of plastic, paper, metal containers, and wooden boxes.
5.​ Transportation Cost: Cost incurred in movement of materials.
6.​ Material Handling Cost: Cost of handling equipment like cranes and conveyors.
7.​ Wastage Cost: Cost arising from scrap, obsolete stock, and disposal.

9. Management of Flow of Materials

Meaning: Materials management controls the systematic flow of materials from suppliers to
final customers.

Scope: The role begins when materials enter the organization and continues until finished
goods reach customers.

10. Activities Involved in Material Flow

The following table outlines the key activities:

Activity Function
Planning Setting goals and finance
Scheduling Deciding quantity and delivery
Purchasing & Procurement Vendor selection
Inspection & Quality Control Ensuring quality
Stores & Inventory Control Maintaining inventory
Material Handling & Logistics Distribution and shipment

11. Total Materials Management Concept

Meaning: An integrated approach coordinating all material-related functions.

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Benefits: Lower costs, better communication, reduced stock-outs, improved inventory

turnover, and faster response to problems.

12. Materials Logistics Management (MLM)

Introduction: MLM was introduced in the 1980s by Bowersox et al.

Purpose: To integrate purchasing, manufacturing, and physical distribution.

Main Objective: Smooth flow of materials from suppliers to customers.

13. Two Important Flows in MLM

1.​ Information Flow: Moves from customers to suppliers. Includes: Demand information,
orders, and forecasts.
2.​ Materials Flow: Moves from suppliers to customers. Includes: Raw materials,
components, and finished goods.

14. Objectives of MLM

Controlled customer service, inventory reduction, minimum operational variance, minimum
total cost, and product quality control.

15. Interfaces in MLM

A. Physical Distribution Interface
Interfaces (connects) with: Customers and Manufacturing. Key Concepts:
●​ Demand Management: Reducing uncertainty in customer orders.
●​ Scheduled Distribution: Quick fulfillment of orders.
●​ Postponement: Delaying activities until profitable.

B. Manufacturing Interface
Interfaces with: Physical distribution and Purchasing. Key Concepts:
●​ Master Schedule Management: Coordinates forecasts, orders, and back orders.
●​ Just In Time (JIT): Aims at near-zero inventory. Techniques: Small lot sizes, quality
control, preventive maintenance.
●​ Flexibility: Achieved through pull systems and computerized planning.

C. Purchasing Interface Interfaces with: Suppliers and Manufacturing. Key Concepts:

●​ Supply Management: Long-term purchasing strategy.
●​ Schedule Requirements: Accurate lead-time and requirement information.
●​ Responsiveness: Quick adaptation to customer changes.

16. Interfaces of Materials Management

Materials management has both internal interfaces and external interfaces.

17. Internal Interfaces

1.​ Marketing Forecasting: Forecasting demand for production planning.
2.​ Production: Ensuring uninterrupted material supply.
3.​ Finance: Large amount of finance is tied up in materials and inventory.
4.​ Inventory Control: Ensures material availability.
5.​ Inspection and Quality Control: Maintains material quality.

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6.​ Logistics and Distribution: Ensures timely physical distribution.

18. External Interfaces

1.​ Customers: Occasional interaction regarding materials.

2.​ Suppliers: Maintaining strong vendor relationships. Includes: Vendor evaluation and
supplier coordination.

19. Major Functions Highlighted by Dutta (1998)

Forecasting and budgeting, purchasing and procurement, receiving and inspection, storage
and warehousing, material handling, and dispatch and shipping.

20. Materials Flow Process

Purpose: Efficient coordination of material flow and information flow.

21. Material Flow Sequence

Vendor/Supplier - Purchasing - Receiving - Inspection - Stores -
Production/Manufacturing - Logistics - Warehousing - Customer.

22. Information Flow

Information flows across all departments: Production planning,

Purchasing, Inventory control, and Sales and marketing.
Importance: Decision-making depends on accurate information.

23. Factors Affecting Integrated Material Flow System

According to Noble et al. (1998), important factors include:
●​ Facility Layout: Buildings, departments, aisles.
●​ Material Handling: Equipment, routing, loading.
●​ Scheduling: Dispatching, priority, due dates.
●​ Material Characteristics: Size, density, fragility, volatility.
●​ Process Factors: Capacity, reliability, setup time.
●​ Product Factors: Quantity, variation, perishability.
●​ Inventory Factors: Storage methods, space requirement, inventory policy.

24. Key Facts for Exams

●​ Materials cost constitutes 50–70% of total manufacturing cost.
●​ Materials Management became important in the 1960s.
●​ MLM concept was introduced in the 1980s.
●​ Main aim: Right material, right quantity, right price, right time.
●​ JIT aims at zero inventory.
●​ Two flows in MLM: Information flow and Material flow.
●​ Interfaces of materials management: Internal and External.
●​ 5 M’s: Men, Machines, Money, Methods, Materials.

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UNIT 2 – Strategic Role of Materials Management

1. Introduction to Materials Management
Materials Management is one of the most important functions in production and operations
management. It ensures that the required materials are available at the right place, right
time, right quantity, right quality, right source, and right price.

Importance

Production activities cannot begin unless materials are available. Hence, materials
management acts as the initiator of the production process.

The main aim is to minimize total material cost, ensure uninterrupted production, improve
operational efficiency, and support customer satisfaction.

2. Six Rights of Materials Management

The basic principle of materials management is known as the 6 Rights:

Right Meaning
Right Quality Correct quality specifications
Right Quantity Required amount of material
Right Time Timely availability
Right Source Reliable supplier
Right Place Correct delivery location
Right Price Economical procurement

3. Definition and Scope of Materials Management

Definition Materials Management refers to: Planning, acquisition, storage, movement,
control and distribution of materials from supplier to consumer efficiently and economically.

Scope of Materials Management

The scope includes all activities related to material flow:
1.​ Physical Supply (Movement of raw materials from suppliers).
2.​ Production Planning and Control (Ensuring material availability for production).
3.​ Inventory Control (Maintaining optimum stock levels).
4.​ Purchasing and Procurement (Buying materials economically).
5.​ Warehousing and Storage (Safe storage of materials).
6.​ Transportation and Logistics (Movement of materials and finished goods).
7.​ Physical Distribution (Distribution of finished products to customers).

4. Production Challenges (According to Skinner)

Modern production systems face challenges such as producing a greater variety of products,
shorter lead times, smaller production runs, maintaining flawless quality, reducing costs
through automation, managing low inventories, keeping flexible schedules, and meeting
domestic and global competition. Materials management helps overcome these challenges.

5. Objectives of Materials Management

Main Objectives include: Procurement at optimum cost, Inventory balancing, Continuity of

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supply, Reduction in waste, and Improving operational efficiency.

6. Goals of Materials Management

The goals are divided into Primary and Secondary categories:

A. Primary Goals

Goal Explanation
Right Price Purchase economically
Higher Inventory Turnover Faster inventory movement
Low Procurement Cost Reduced purchasing expenses
Dependable Supply Continuous material availability
Quality Conformance Standard quality
Vendor Development Build supplier relationships
Systematic Information Flow Efficient communication

B. Secondary Goals

Goal Meaning
Economic Forecasting Predict future conditions
Product Improvement Enhance products
Standardization Uniform specifications
Make-or-Buy Decision Decide manufacturing vs purchasing
New Product Development Support innovation

7. Criticality of Materials Management

Materials management is critical because it supports the following key areas:

7.1 Accurate Inventory Levels Inventory acts as a buffer against uncertainties.

Problems of excess inventory include high carrying costs, storage costs, damage,
misplacement, and obsolescence.

7.2 Enabling Just-In-Time (JIT) Production JIT means materials arrive exactly when
required for production.

Formula: Inventory Carrying Cost

Inventory Carrying Cost = Annual Carrying Cost \ Average Inventory

Objectives involve minimizing inventory, reducing waste, and improving responsiveness.

Requirements include reliable suppliers, timely delivery, and high quality standards.

7.3 Freight and Logistics Cost Optimization Effective planning helps reduce
transportation costs, improve logistics efficiency, and reduce delays.

7.4 Effective Quality Control In JIT systems, materials directly enter production, making
supplier quality critical. Vendor quality management is essential and quality must be ensured
at the source.

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8. Role of Materials Managers

Materials managers coordinate between suppliers, production, warehouses, finance,
marketing, and logistics.

Major roles include:

1.​ Make-or-Buy Decision: Factors considered are supplier reliability, quality standards,
production capacity, and cost analysis.
2.​ Materials Forecasting: Addresses future demand, technological changes, future
price rises, and supplier survival.
3.​ Materials Planning and Budgeting: Ensures proper planning, cost control, and
budget allocation.
4.​ Supplier Selection: Selection based on price trends, supplier capability, and market
research.
5.​ Purchasing: Involves large capital commitment. Functions include negotiation,
procurement, and purchase planning.
6.​ Price Forecasting: Helps estimate future prices and reduce procurement risk.
7.​ Stores Management and Inventory Control: Includes proper storage, stock
verification, scrap management, and obsolescence control.

9. Supply Chain Concept

Definition: Supply chain includes all entities involved in satisfying customer demand.

Components include suppliers, manufacturers, transporters, warehouses, retailers, and

customers.

Important Fact: The customer is an integral part of the supply chain.

Objectives are to integrate demand and supply, ensure smooth product flow, and improve
customer satisfaction.

10. Supply Chain Flows

●​ Physical Flow: Movement of goods
(Supplier - Manufacturer - Distributor - Customer).
●​ Information Flow: Exchange of demand information, forecasts, and production
schedules.
●​ Fund Flow: Movement of payments across the supply chain.

11. Material Flow in Organization

Materials management handles different types of flow within the organization:

Type of Flow Description

Raw Material Flow Supplier to factory
Work-in-Process (WIP) Within production
Finished Goods Flow Factory to customer

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12. Orientation and Implementation of Supply Chain Principles

Modern organizations require cross-functional coordination, the elimination of departmental
silos, and strong supplier relationships.

13. Significance of Materials Management

Specialized materials management is needed when material costs are high, inventory costs
are high, multiple suppliers exist, lead times are long, and demand fluctuations are high.

Strategic contributions help in cost reduction, better inventory control, supplier

development, continuous supply, and customer satisfaction.

14. Materials Management and Profit Maximization

Illustration: Initial Situation

Component Amount (Rs.)

Sales Revenue 1,00,000
Direct Materials 50,000
Direct Labour 20,000
Overheads 20,000
Gross Profit 10,000

Gross Profit Formula

= 1,00,000 - 90,000 = 10,000

Gross Profit % = 10,000/{1,00,000*100 = 10%

After Materials Management Improvement

Component Amount (Rs.)

Sales Revenue 1,00,000
Direct Materials 40,000
Direct Labour 15,000
Overheads 20,000
Gross Profit 25,000

New Gross Profit %

(25,000/1,00,000 )*100 = 25%

Important Conclusion: Efficient materials management can significantly improve

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profitability.

15. Operational Excellence through Materials Management

Materials management improves quality, delivery performance, inventory control, cost
efficiency, and customer satisfaction.

16. Critical Challenges in Materials Management

A. Material Planning Issues: Supplier reliability, coordination problems, demand
uncertainty, and information sharing.
B. Product Design Issues: Frequent design changes, process revisions, and
communication of updates.
C. Obsolescence Issues: Managing outdated inventory, technological upgrades, and new
product adaptation.
D. Procurement Issues: Buying procedures, legal formalities, import-export customs, and
procurement risks.

17. Buyer-Supplier Relationship

Modern supply chain management emphasizes long-term relationships.
Traditional vs Supply Chain Driven Organizations

Basis Traditional Supply Chain Driven

Purchase Criteria Lowest Price Competency
Relationship Short-term Long-term
Suppliers Many Few
Quality Inspection-based Quality at source
Delivery Large batches Small frequent batches
Interaction Formal Collaborative

Important Facts:

●​ Quality at Source means the supplier ensures quality before delivery.

●​ Smaller Batch Delivery reduces inventory carrying costs.

18. Integrated Materials Management (IMM)

Definition: Integrated Materials Management is the coordinated management of materials
using technology, MIS, and resource optimization.
Objectives of IMM include cost reduction, coordination, better decision-making, and
resource optimization.

Functions of IMM

Function Meaning
Materials Purchase Procurement decisions
Power Centralization Unified authority
Functional Coordination Department integration
Data Analysis Computerized systems
Growth Exploration Future opportunities

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Conflicting Objectives in IMM

Objective 1 Objective 2
High service level Low inventory cost
High quality Low material cost
High liquidity Continuous supply

19. Materials and Information Flow

Successful materials management requires the simultaneous management of material flow
and efficient information sharing. Effects on Organizational Functions:
●​ Purchasing: Vendor performance data helps supplier selection.
●​ Production: Ensures uninterrupted production.
●​ Finance: Reduces working capital blockage.
●​ Inventory Control: Synchronizes procurement with production.
●​ Quality Control: Maintains quality standards.
●​ Logistics: Improves material handling and distribution.

20. Internal Interfaces of Materials Management

The roles of internal interfaces are structured as follows:

Interface Role
Market Forecasting Predict demand
Production Ensure material availability
Finance Cost reduction
Inventory Control Minimize stock
Quality Control Maintain standards
Logistics Distribution efficiency

21. Single Sourcing vs Multi Sourcing

Multi Sourcing
Meaning: Purchasing from multiple suppliers.
Advantages: Reduced dependency, more alternatives, and competitive pricing.
Disadvantages: Higher variability, difficult control, and inconsistent quality.
Single Sourcing Meaning: Purchasing from one supplier. Advantages: Better quality
control, long-term relationship, lower variability, and easier coordination.
Disadvantages: Dependency risk and supplier failure impact.

Comparison Table

Basis Multi Sourcing Single Sourcing

Suppliers Many One/Few
Quality Variable Consistent
Control Difficult Easier
Relationship Transactional Long-term
Inventory Higher Lower
JIT Suitability Low High

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22. Key Formulas from the Unit

1. Gross Profit

2. Gross Profit Percentage

Gross Profit %= (Gross Profit / Sales Revenue)* 100

3. Total Cost of Goods Sold

Where A = Direct Materials, B = Direct Labor, C = Overheads

4. Inventory Carrying Cost

Inventory Carrying Cost = Annual Carrying Cost

Average Inventory

23. Important Exam Facts

●​ Materials management is the initiator of production.
●​ JIT aims at minimum inventory.
●​ Customer is an integral part of supply chain.
●​ Materials management improves both operational and financial performance.
●​ Single sourcing supports JIT systems better.
●​ Integrated materials management focuses on coordination and optimization.
●​ Efficient materials management increases gross profit.
●​ Quality at source is critical in modern supply chains.
●​ Inventory acts as a shock absorber against uncertainty.
●​ Materials management includes procurement, storage, movement and control.

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Unit 3: Designing Supplier Network (Evaluation,

Selection and Development)
1. Introduction to Supplier Network
A Supplier Network refers to the interconnected system of suppliers, manufacturers,
distributors, and customers involved in producing and delivering products.

Evolution of Business Orientation

1950–1970. - Cost-based focus
1990 onwards - Quality + Cost focus
This shift changed business from:

Producer-driven orientation → Customer-driven orientation

Present Competitive Environment

Modern business faces:
●​ Rapid market changes
●​ Unpredictable customer demand
●​ Changes in product specifications

Need for:
●​ High quality
●​ Low cost
●​ Short lead time
●​ Product flexibility

Need for Supplier Networks

No single organization can efficiently satisfy changing market demands alone because:
●​ Large firms → slow and complex
●​ Small firms → limited resources
Hence, firms create:
●​ Dynamic supply chain networks
●​ Temporary alliances
●​ Collaborative partnerships

Objectives of Supplier Networking

●​ Increase expertise
●​ Share resources
●​ Reduce investment risk
●​ Improve responsiveness
●​ Increase flexibility

2. Selection of Suppliers: A Key Issue

Supplier selection is one of the most critical activities in supply chain management.

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Sound selection is critical because the performance of the entire chain depends on every
single organization involved.

Importance of Supplier Selection

The performance of the entire supply chain depends on:
●​ Every participating organization
●​ Their coordination
●​ Reliability
●​ Efficiency

Key Criteria for Supplier Selection

Suppliers are evaluated on:
●​ Strategic compatibility
●​ Manufacturing capability
●​ Logistics capability
●​ Cost
●​ Quality
●​ Delivery performance

Important Models and Researchers

(i) Samadhi and Hoang (1998)
Suggested a 3-stage procedure for supplier evaluation: Stages:
●​ Strategic factors
●​ Manufacturing attributes
●​ Logistical factors

(ii) Talluri et al. (1999) Proposed a 2-stage framework:

●​ Data Envelopment Analysis (DEA)
●​ Goal Programming Technique
Purpose:
●​ Design an efficient value chain network

(iii) De Boer et al. (1998)

Suggested:
●​ Outranking methods
●​ Based on multi-criteria decision making

Operational-Level Contributions
D’Amours et al. (1996)
Developed:
●​ Price-based planning and scheduling model
●​ For multiple product manufacturing network

D’Amours et al. (1999) Focused on:

●​ Information sharing in networked manufacturing

Li and O’Brien (1999) Developed a model considering:

●​ Make-to-Order (MTO)
●​ Make-from-Stock (MFS)
●​ Make-to-Stock (MTS)

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3. Overview of Decisions in Supply Chain Network

Objective of Supply Chain Network

Main Objective:
●​ To minimize customer dissatisfaction.

Customer dissatisfaction depends on:

●​ Price
●​ Delivery lead time

Initiator in Supply Chain

The manufacturer receiving customer order directly is called Initiator.
Functions of Initiator:
●​ Coordinates supply chain
●​ Sets goals for suppliers
●​ Makes chain-level decisions

Goals Set by Initiator

The following table:

Symbol Meaning

d - Delivery due date

q - Quantity required

r - Required unit price

4. Decision Levels in Supply Chain

(A) Operational-Level Decisions Concerned with:
●​ Manufacturing optimization
●​ Logistics optimization
●​ Meeting customer requirements

Focus:
●​ Production scheduling
●​ Transportation
●​ Inventory management

(B) Chain-Level Decisions Concerned with:

●​ Supplier evaluation
●​ Bid analysis
●​ Final network configuration

5. Different Flows in Supply Chain Network

Flow 1: Invitation to Bid Contains:
●​ Delivery due date (d)
●​ Order quantity (q)
●​ Target unit price ®

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Flow 2: Supplier’s Bid Includes:

●​ Offered quantity
●​ Minimum quantity
●​ Delivery lead time
●​ Pricing details

Flow 3: Results of Bid

●​ Allocation of production quantity to selected suppliers.

Flow 4: Physical Flow

Movement of:
●​ Materials
●​ Components
●​ Finished products

6. Purchasing Performance and Supplier Development

Meaning of Supplier Development

Supplier development means:
●​ Activities undertaken by buying firms to improve supplier capabilities and performance.
Importance
Organizations use supplier development to:
●​ Improve quality
●​ Reduce costs
●​ Enhance competitiveness
●​ Strengthen supply chain performance

Contributions of Researchers
Hahn et al. (1990)
●​ Developed conceptual model for supplier development.

Krause and Ellram Identified critical elements:

●​ Two-way communication
●​ Top management involvement
●​ Cross-functional teams
●​ Large purchasing power

Krause Studied factors influencing supplier development:

●​ Supplier commitment
●​ Relationship continuity
●​ Buyer-supplier communication

7. Supplier Development Models

Important Concepts
Direct Supplier Development
Buyer directly assists supplier through:
●​ Technology
●​ Equipment
●​ Capital

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●​ Expertise
●​ Support personnel

Expected Outcomes

●​ Better quality
●​ Reduced waste
●​ Process improvement
●​ Strategic effectiveness

8. Influencing Factors of Supplier Development

(i) Long-Term Strategic Goals
Focus should be on:
●​ Future capabilities
●​ Technology development
●​ Product development

Key Point:
●​ Clarity of long-term goals determines success.

(ii) Effective Communication Includes:

●​ Open communication
●​ Frequent communication
●​ Early supplier involvement

Benefits:
●​ Better understanding
●​ Faster problem solving
●​ Improved coordination

(iii) Partnership Strategy

Buying firms treat suppliers as: Strategic partners Characteristics:
●​ Long-term relationship
●​ Mutual commitment
●​ Cooperation

(iv) Top Management Support Top management:

●​ Initiates supplier development
●​ Allocates resources
●​ Supports purchasing management

(v) Supplier Evaluation Purpose:

●​ Identify weak suppliers
●​ Determine improvement areas
●​ Decide development priorities

(vi) Direct Supplier Development Buyer may provide:

●​ Capital
●​ Equipment
●​ Technology
●​ Training
●​ Process improvement assistance

(vii) Supplier’s Strategic Objectives Supplier development succeeds only if:

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●​ Supplier goals align with buyer goals

9. Supplier Networking

Meaning
Supplier networking means:
●​ Formation of collaborative relationships among firms for mutual benefit.

Reasons for Networking

●​ Respond quickly to market changes
●​ Reduce transaction costs
●​ Share risks
●​ Access technology
●​ Focus on core competencies

10. Importance of Business Networks

Definition
Business networks are:
●​ Long-term purposeful arrangements among organizations for sustainable competitive
advantage.

Characteristics
●​ Interdependence
●​ Resource sharing
●​ Strategic collaboration
●​ Long-term relationships

Japanese Supplier System

Japanese firms use: Hierarchical supplier structure

First-tier - Supply systems

Lower-tier suppliers - Supply components

Features:
●​ Fewer suppliers
●​ Strong coordination
●​ Cross-exchange of staff

11. Integrated Procurement Strategy

Should include:
●​ Value chain positioning
●​ Environmental analysis
●​ Objective setting
●​ Organizational structuring
●​ Make-or-buy decisions
●​ Core competency analysis

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●​ Partnership/network strategies

12. Advantages of Networking

Major Advantages
●​ Risk sharing
●​ Cost reduction
●​ Technological specialization
●​ Competitive advantage
●​ Flexibility
●​ Faster response
●​ Global competitiveness

13. Problems and Risks in Vendor Networking

●​ Demand Risks: Decreased demand for end products or the OEM losing its market
position.
●​ Management Challenges: Primary suppliers must manage demand fluctuations and
ensure supply flexibility.
●​ Cost Management: Increasing responsibilities often require heavy investments,
increasing financial risk.
●​ Dependence: Being overly dependent on a single customer or specific network.
●​ Information Issues: Problems with information transfer, trust, and the need for
efficient information systems.

(i) Low or Inappropriate Demand

Causes:
●​ Economic slowdown
●​ Product changes
●​ Loss of OEM market position
Risk:
●​ Supplier may lose business.

(ii) Problems in Customer Deliveries Issues:

●​ Delivery delays
●​ Quality failures
●​ Supply inflexibility

Key Challenge:
●​ Managing subcontractors effectively.

(iii) Cost Management and Pricing Problems:

●​ High investments
●​ Poor cost control
●​ Fixed-price contracts
●​ Demand fluctuations

(iv) Resource Development and Flexibility Challenges:

●​ Technological changes
●​ Market competition
●​ Need for innovation

Important Point:

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●​ Suppliers bear risk of investments.

14. Key Terms and Definitions

●​ Supply Chain Network: Interconnected organizations involved in product flow.
●​ Supplier Development: Improving supplier capabilities through buyer support.
●​ Supplier Networking: Strategic collaboration among firms.
●​ OEM (Original Equipment Manufacturer): Company that markets final product.
●​ Make-to-Order (MTO): Production starts after customer order.
●​ Make-to-Stock (MTS): Products manufactured before orders.
●​ Make-from-Stock (MFS): Assembly using stocked components.

15. Important Facts for Exams

Important Researchers and Contributions

Researcher Contribution

Samadhi & Hoang 3-stage supplier evaluation

Talluri et al. DEA + Goal programming

De Boer et al. Outranking methods

D’Amours et al. Price-based planning

Li & O’Brien MTO, MFS, MTS strategies

Hahn et al. Supplier development model

Krause & Ellram Critical supplier development factors

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16. Short Notes for Revision

Key Objectives of Supplier Development

●​ Improve supplier capability
●​ Enhance quality
●​ Reduce costs
●​ Strengthen relationships

Critical Success Factors

●​ Communication
●​ Partnership
●​ Strategic goals
●​ Management support
●​ Supplier evaluation

Risks in Networking
●​ Demand uncertainty
●​ Delivery failures
●​ Cost escalation
●​ Technological changes

18. Conclusion
Supplier network management has become essential in modern competitive business
environments. Organizations now depend heavily on:
●​ Strategic supplier partnerships
●​ Supplier development programs
●​ Networking arrangements
While supplier networking offers:
●​ Flexibility
●​ Competitive advantage
●​ Risk sharing
It also involves:
●​ Operational risks
●​ Investment risks
●​ Coordination challenges
Therefore, successful supplier network management requires:
●​ Strategic planning
●​ Effective communication
●​ Strong evaluation systems
●​ Long-term partnerships

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UNIT 4: DYNAMICS OF BUYER–SELLER

RELATIONSHIPS
Objectives of the Unit
After studying this unit, you should be able to:
●​ Understand buyer–seller relationships
●​ Explain relationship marketing
●​ Develop negotiation skills
●​ Understand sales presentation
●​ Explain customer service
●​ Analyse buyer–supplier issues
●​ Understand supplier selection, evaluation and development

1. INTRODUCTION
In business, especially in:
●​ International Business
●​ Marketing
●​ Materials Management the relationship between buyer and seller is extremely
important.
The relationship depends on:
●​ Cost
●​ Quality
●​ Product specifications
●​ Customer service
●​ Profitability
●​ Trust and cooperation
The relationship may be direct or through representatives. Long-term success depends
upon maintaining healthy and mutually beneficial relationships.

2. BUYER AND SELLER INTERACTION

The interaction between buyer and seller representatives forms the basis of business
relationships.

Representative Gap: Relationships are often managed by agents. Buyers may perceive
sellers as "smooth talkers" or manipulative, while sellers may see buyers as "calculative" or
lacking vision.

Bridging this gap is essential for long-term cooperation.

Key Factors Affecting Interaction

A. Perception Perception means how one party views the other. Buyer’s perception of
seller:
●​ Competitive
●​ Talkative
●​ Manipulative
●​ Optimistic

Seller’s perception of buyer:

●​ Calculative

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●​ Reserved
●​ Lacks vision

Important Point:
Companies with good reputation, high credibility, and strong goodwill are trusted more
in negotiations.

B. Role
The representative must:
●​ Have decision-making authority
●​ Be trusted by the organization
●​ Communicate effectively
If the representative lacks authority or trust, deals may fail.

C. Behaviour

Irresponsible behaviour can destroy trust, delay negotiations, and cause business failure.

Professional behaviour strengthens business relationships.

3. RELATIONSHIP MARKETING

Meaning
Relationship marketing focuses on:
●​ Building long-term emotional ties
●​ Customer retention
●​ Customer satisfaction
●​ Loyalty development
Instead of focusing only on short-term sales or immediate profits, it emphasizes long-term
customer relationships.

Advantages of Relationship Marketing

1. Acquiring New Customers
Finding new customers requires:
●​ High cost
●​ More time
●​ Marketing expenses
Relationship marketing reduces acquisition cost through customer loyalty.

2. Retaining Existing Customers Existing customers:

●​ Feel comfortable
●​ Trust sellers
●​ Continue purchasing
Retention is cheaper than acquisition.

3. Product Innovation Close interaction helps firms understand:

●​ Customer needs
●​ Buying behaviour
●​ Preferences
This leads to:
●​ Product innovation

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●​ Feature improvement
●​ Value addition

4. Long-term Strategy Development Interaction helps firms:

●​ Build long-term plans
●​ Improve branding
●​ Use social relationship marketing tools

5. Reduction in Marketing Cost

Word-of-mouth publicity reduces advertising expenditure and increases sales naturally.

Examples of Relationship Marketing

●​ Tesco: Gives reward points redeemable for vouchers, meals, fuel, movies. Benefit:
Customer loyalty and feedback.
●​ Apple: Uses targeted marketing by synchronizing user preferences and personalized
recommendations.
●​ Uber: Uses social media data and a rewards system to quickly resolve complaints and
retain customers.
●​ British Airways: Provides reward points and membership tiers for air tickets, hotels,
and holidays.
●​ McDonald’s: Focuses heavily on customer satisfaction and regional customer support
teams.
●​ Coca-Cola: Uses customer information to target customers and resolve complaints
quickly.
●​ Unilever: Uses software for demand forecasting, customer complaint management,
and productivity enhancement.
●​ Zara: Stores customer transactions and preferences to serve repeat customers better.
●​ BMW: Uses “Owner’s Circle” loyalty scheme with online maintenance tracking,
financing, reminders, and owner chats.
●​ Amazon: Provides tailored recommendations, fast reordering, and quick delivery.

4. SALES PRESENTATION

Meaning
A sales presentation is a:
●​ Sales pitch
●​ Product demonstration
●​ Persuasive communication used by sellers to convince buyers.

Features of Good Sales Presentation

1. Relevance and Focus
●​ Presentation should be product-specific
●​ Must target customer needs

2. Connection and Physical Demonstration

●​ Builds buyer–seller connection
●​ Physical demonstration improves understanding

3. Framework
●​ Presentation should explain product benefits, relationship benefits, and mutual

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advantages.

5. NEGOTIATION

Meaning
Negotiation is a strategic discussion between buyer and seller to reach mutually acceptable
agreements.
It helps in:
●​ Lowering prices
●​ Reducing debt
●​ Better contracts
●​ Customer retention
●​ Understanding customer needs

Objectives of Negotiation
●​ Customer satisfaction
●​ Better pricing
●​ Increased profitability
●​ Sales growth
●​ Long-term relationship

Key Aspects of Negotiation

Before Negotiation
Seller must understand:
●​ Customer needs, price sensitivity, delivery urgency, and competition.
Buyer must assess:
●​ Product substitutes, and seller’s strengths and weaknesses.

Important Negotiation Steps

●​ Clarify objectives
●​ Identify customer priorities
●​ Analyse competition
●​ Assess substitutes
●​ Prepare strategy
●​ Pre-decide negotiable terms
●​ Clarify terms and conditions
●​ Explain product value
●​ Discuss discounts
●​ Prepare written agreement

Negotiation Process
Step 1: Preparation
Purchasing agent should evaluate:
●​ Supplier strengths, supplier weaknesses, and own bargaining power.

Step 2: Establish Objectives

Numerical objectives may include:
●​ Delivery dates, quality standards, and cost levels.

Major Cost Elements Negotiated

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●​ Material quality
●​ Quantity
●​ Labour cost
●​ Wages
●​ Factory overhead
●​ Other costs

Supplier Bargaining Strength

Depends on:
1.​ Desire for Contract: More eagerness = weaker bargaining position.
2.​ Certainty of Getting Contract: If supplier knows they will win, they become less
flexible.
3.​ Time Available: Short lead time weakens buyer’s position.

Purchasing Agent’s Bargaining Strength

Depends on:
1.​ Competition Among Suppliers: More suppliers = stronger buyer power.
2.​ Cost and Price Analysis: Better knowledge = stronger negotiation.
3.​ Thorough Preparation: Knowledge about product, market, substitutes, and supplier
proposal improves bargaining strength.

Negotiation Techniques
1.​ Hold Important Concessions: Avoid giving major concessions early.
2.​ Keep Supplier Defensive: Make supplier justify their position.
3.​ Use Questions Wisely: Questions help control negotiation and extract information.
4.​ Be a Good Listener: Listening helps understand supplier needs, weaknesses, and
hidden opportunities.
5.​ Manage Emotions: Use jokes, tea breaks, and diversions to reduce tension.

Important Formula / Principle

Negotiation Outcome Ratio Usually negotiations result in a 60 : 40 advantage because
one negotiator is generally more skilled.

Competitive Bidding vs Negotiation

Basis Competitive Bidding Negotiation

Nature Standardized Customized

Communication Paperwork Face-to-face

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Price Established Flexible

Product Standard product Unique/complex product

Discussion Limited Extensive

Negotiation is Used When:

●​ Product is unique
●​ Prices are fixed
●​ Few suppliers exist
●​ Quotations are unsatisfactory
●​ Existing contract needs modification

6. RECIPROCITY

Meaning
Reciprocity means mutual cooperation and rewarding actions between buyer and seller.

Importance
It helps in:
●​ Commitment
●​ Trust
●​ Profitability
●​ Cooperative advertising
●​ Long-term partnerships
Key Point:

Reciprocity is beneficial only if both organizations gain profit.

7. CUSTOMER SERVICE

Meaning
Customer service means assisting customers before, during and after sales.

Good customer service: Improves satisfaction, retains customers, and increases sales.

Poor service: Causes customer loss and increases competition advantage.

Characteristics of Good Customer Service

1.​ Listening: Understand customer requirements carefully.
2.​ Asking Questions: Helps solve customer problems.
3.​ Responsibility: Representative must be loyal, responsible, and accountable.

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4.​ Responsiveness: Quick adaptation to customer needs.

5.​ Knowledge: Representative should have product knowledge, confidence, and
updated information.
6.​ Timeliness: Prompt service is essential.
7.​ Accuracy: Information given should be correct and truthful.

8. MANAGING BUYER–SELLER RELATIONSHIP

Stages of Relationship
●​ Pre-relationship
●​ Exploratory
●​ Development
●​ Stable
●​ Final stage

Types of Relationships
●​ Transactional
●​ Collaborative
●​ Alliance
●​ Reciprocal

Causes of Conflict : Lack of trust, Uncertainty, Power differences ,

Operational differences

Conflict Resolution Methods: Negotiation , Bargaining , Persuasion

Guarantees and Warranties

Guarantees
●​ Assurance of satisfactory performance
●​ Value-added service

Warranties Written statement allowing:

●​ Repair, replacement, or refund.

After-Sales Service and Technical Assistance

Used to differentiate products, build relationships, and understand customer needs.
Examples:
●​ Hero Motors
●​ Pidilite (Fevicol)
●​ Auto manufacturers providing insurance and financing

Business Creation Methods by Manufacturers

1.​ Repackaging: Selling products in grouped forms.
2.​ Access to Infrastructure: Providing facilities and infrastructure support.
3.​ Financing: Providing financing options to customers. Example: TVS with Sundaram
Finance.
4.​ Distribution: Retail and delivery support. Example: Gokuldas → Weekender outlet.

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9. SUPPLIER SELECTION, EVALUATION AND DEVELOPMENT

Supplier Selection
Meaning
Choosing the best supplier based on:
●​ Quality, price, delivery, and reliability.
The process follows a sequence:
Survey → Enquire → Evaluate → Negotiate → Select → Assessment.

Steps in Supplier Selection

1.​ Survey Sources: Catalogues, trade journals, directories, and internet. Screening
Factors: Price, quality, delivery, location, and government compliance.
2.​ Enquiry Collect information regarding: Technical capability, financial position, labour
force, experience, plant details, and quality systems.
3.​ Evaluation Methods: Weight allocation, ranking, and rating.
4.​ Negotiate and Select Discuss: Price, quality, after-sales service, and contract terms.
5.​ Experience/Assessment Evaluate supplier performance on: Delivery, product quality,
and relationship management.

Supplier Evaluation
Meaning
Assessing supplier performance continuously.

Techniques of Supplier Evaluation

1.​ Cost-Based Approach: Quantifies the "true cost" by looking at hidden expenses like
delivery delays or poor quality. An objective approach considering hidden costs,
administrative costs, and lifecycle costs.

2.​ Categorical Approach: A qualitative approach where suppliers are rated (e.g., Good,
Neutral, Poor) across various departments. A subjective approach without weights.

3.​ Weighted Approach: Different weights assigned to factors. Assigns specific weights
(percentages) to factors like quality (40%), price (30%), and service (30%) to create a
score.

4. Total Cost of Ownership (TCO)

Meaning: Evaluates total cost associated with a product.

Includes: Hidden costs, service costs, quality costs, and lifecycle costs.

Limitation: Complex and difficult to implement.

Supplier Development
Meaning: Continuous process of improving suppliers.

Objectives: Develop new suppliers, maintain existing suppliers, spread risk, improve quality,
and build long-term relationships.

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Sourcing Strategies
Multi Sourcing
●​ Advantages: Risk reduction, better availability, and competitive pricing.
Single Sourcing
●​ Advantages: Strong relationship, customized solutions, high reliability, better
inventory management, and cost reduction.

Methods of Supplier Development

●​ Financing supplier equipment
●​ Sharing technical knowledge
●​ Joint R&D
●​ Sharing profits and business leads
●​ Collaborative procurement and development

IMPORTANT EXAM FACTS

●​ Most Important Examples:
●​ Tesco → Reward points;
●​ Apple → Personalized marketing;
●​ Uber → Social media relationship marketing;
●​ BMW → Owner’s Circle;
●​ Amazon → Tailored recommendations;
●​ ITC → E-Chaupal;
●​ Pidilite → Fevicraft.

Important Formula / Numerical Concept:

Negotiation Advantage Ratio is 60 : 40 (one negotiator generally gains more advantage).

Key Formulas & Logical Checks

Supplier Rating (Weighted)

(Where W is weight and R is the rating for a specific attribute).

TCO Logic:

One-Line Revision Points

●​ Relationship marketing focuses on long-term customer loyalty.

●​ Good customer service increases retention.
●​ Negotiation helps achieve mutually beneficial contracts.
●​ Supplier selection is based on quality, cost and delivery.
●​ TCO evaluates all hidden and visible costs.
●​ Single sourcing creates stronger buyer–supplier relationships.
●​ Reciprocity strengthens partnerships.

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Unit 5 – Materials Planning and Budgeting

1. Introduction
Materials Planning and Budgeting is one of the most important functions of materials
management. It ensures that the right materials are available in the right quantity, at the right
place, at the right time, and at the minimum cost.

Meaning of Production

Production is the process of converting raw materials into finished goods

through activities such as:
●​ Mining
●​ Farming
●​ Logging
●​ Fishing
●​ Manufacturing A production function transforms inputs into outputs.

2. Materials Management
Definition Materials management refers to planning, organizing, and controlling:
●​ Purchase of materials
●​ Storage of materials
●​ Movement of materials
●​ Distribution and consumption of materials It aims at:
●​ Maximum utilization of resources
●​ Desired customer service level
For a typical manufacturing company, direct materials can account for 50% of the cost of
goods sold.

Objectives of Materials Management

●​ Reduce material cost
●​ Ensure uninterrupted production
●​ Maintain optimum inventory
●​ Improve customer service
●​ Increase profitability
●​ Reduce waste

Importance of Materials Management Efficient materials management:

●​ Controls material flow
●​ Reduces production delays
●​ Improves profitability
●​ Minimizes waste and inefficiency

Profit Illustration

The following table shows the cost breakdown:

Particulars Amount % of Sales

Revenue $1,000,000 100%
Direct Material $500,000 50%
Direct Labour $200,000 20%

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Particulars Amount % of Sales

Factory Overhead $200,000 20%
Total Cost $900,000 90%
Gross Profit $100,000 10%

Reducing material cost significantly increases profit.

3. Manufacturing Planning and Control (MPC)

Meaning Manufacturing Planning and Control manages:
●​ Flow of raw materials
●​ Production process
●​ Finished goods Its purpose is to produce the right quantity at the right time with
optimum resource utilization. The MPC system operates in five distinct stages, where
detail increases as the time horizon decreases:

Stage Planning Horizon Focus / Level of Detail

Strategic Business Plan 2 to 10 years Broad direction; product lines and
markets in dollars.
Production Plan 16 to 24 months Product families (e.g., tricycles)
rather than individual items.
Master Production Schedule (MPS) 3 to 18 months Specific end items (e.g., Model
A23 scooter).
Material Requirements Plan (MRP) 3 to 18 months Individual components and raw
materials.
Purchasing & Production Activity 1 day to 1 month Implementation; specific
Control (PAC) workstations and orders.

Components of Manufacturing Planning

I. Production Planning: Includes Forecasting, Master Planning, Material Requirements

Planning (MRP), and Capacity Planning.

II. Application and Control: Includes Shop floor control and Purchasing control.

III. Inventory Management: Inventory acts as a buffer between supply and demand.

4. Production Planning System

A successful production planning system answers four questions:
●​ What are we going to make?
●​ What does it take to make it?
●​ What do we have?
●​ What do we need?

Priority and Capacity

●​ Priority: Refers to what is required, in what quantity, and when. It is set by the market
and determines what is needed, the quantity needed, and the time required.

●​ Capacity: The organization's capability to produce goods, determined by machinery,

labor, financial resources, and material availability. It refers to machine capability,
labour availability, material availability, and financial resources. Production planning

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balances priority and capacity.

5. Manufacturing Planning and Control System (MPC)

Five Stages of MPC
●​ Business Strategy
●​ Production Plan
●​ Master Production Schedule (MPS)
●​ Material Requirements Planning (MRP)
●​ Purchasing and Production Activity Control

Characteristics of Each Stage

Feature Long-term Planning Short-term Planning

Time Horizon Years Days/Weeks
Detail Level General Detailed
Goal Strategic direction Operational control

Three Questions at Every Planning Level

●​ What should be produced and when?
●​ What capacity is available?
●​ How will gaps between capacity and priorities be resolved?

6. Strategic Business Plan

Meaning A long-term plan (2–10 years) defining product lines, markets, financial goals, and
manufacturing direction.

Functional Areas
●​ Marketing: Responsible for market research, product strategy, pricing, and
advertising.
●​ Finance: Responsible for budgeting, cash flow, and investment planning.
●​ Production: Responsible for efficient use of plants, machinery, labour, and materials.
●​ Engineering: Responsible for product design and product improvement.

7. Master Production Schedule (MPS)

Definition MPS is a detailed plan showing what products will be produced, the quantity to be
produced, and production timing.

Features of MPS
●​ Must be realistic
●​ Must balance capacity and demand
●​ Coordinates production and delivery
●​ Basis for MRP

Importance
●​ Helps timely delivery
●​ Supports order booking
●​ Guides production planning
●​ Reduces delays

8. Material Requirements Planning (MRP)

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Definition MRP is a computerized system used to determine what materials are required,
how much is required, and when materials are required.

Objectives of MRP
●​ Ensure material availability
●​ Minimize inventory
●​ Improve customer service
●​ Improve production efficiency
●​ Reduce lead time
●​ Determine Requirements: Identify what, how much, and when to order/deliver.
●​ Keep Priorities Current: Adjust orders based on machine breakdowns, late supplies,
or scrap.

Inputs of MRP
●​ Master Production Schedule (MPS)
●​ Bill of Materials (BOM)
●​ Inventory records

Outputs of MRP
●​ Planned order releases
●​ Purchase orders
●​ Production schedules

9. Bill of Materials (BOM)

Meaning A BOM is a list of raw materials, components, and subassemblies required to
manufacture a finished product.

Uses of BOM
●​ Material planning
●​ Production scheduling
●​ Cost estimation
●​ Inventory control
●​ Procurement planning

10. MRP Process

Steps in MRP

1.​ Prepare Master Production Schedule

2.​ Create Bill of Materials
3.​ Check inventory records
4.​ Calculate gross requirements
5.​ Calculate net requirements
6.​ Generate planned orders
7.​ Schedule production and purchasing

11. Exploding and Offsetting

●​ Exploding: Breaking parent item requirements into component requirements.
Example: If 1 A requires 2 B and 1 C, then 50 A requires 100 B and 50 C.

●​ Offsetting: Adjusting order timing according to lead time. Example: If 50 units of A are
needed in Week 5 and Lead time = 1 week, then production must start in Week 4.

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12. Lead Time

Definition Lead time is the total time needed to complete an operation. It includes
preparation time, waiting time, processing time, transportation time, and inspection time.

13. Planned Orders

●​ Planned Order Receipt: Quantity expected to be received in a specific period.

●​ Planned Order Release: Quantity planned to start production or purchasing.

Formula
Planned order Release Date = Required Date - Lead time

14. Gross and Net Requirements

●​ Gross Requirement: Total quantity needed before considering inventory.

●​ Net Requirement: Actual quantity needed after deducting available inventory.

Net Requirement = Gross Requirement - Available Inventory

Example: Gross Requirement = 50, Inventory Available = 20. = 50 - 20 = 30. Net

Requirement = 30 units.

15. Purchasing and Production Activity Control (PAC)

Meaning PAC controls production activities and material flow.

Functions
●​ Shop floor control
●​ Purchasing coordination
●​ Monitoring production schedules

Features
●​ Short-term planning
●​ Highly detailed
●​ Continuous monitoring

16. Capacity Management

Meaning Capacity management involves calculating required capacity, comparing with
available capacity, and making adjustments.

Adjustment Methods
●​ Extra shifts
●​ Overtime
●​ Subcontracting
●​ Additional machinery

17. Manufacturing Resource Planning (MRP II)

Definition MRP II is an integrated system combining marketing, finance, production, and
purchasing. It is a comprehensive "closed-loop" system that facilitates collaboration between
marketing, finance, and production to ensure plans are valid and financially desirable.

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Features
●​ Computerized system
●​ Top-down planning
●​ Bottom-up feedback
●​ Cross-functional coordination

Advantages
●​ Better communication
●​ Better production planning
●​ Improved resource utilization
●​ Faster decision making

18. Production Planning Strategies

1. Chase Strategy Production matches demand exactly.
●​ Features: Workforce changes frequently, low inventory, flexible production.
●​ Advantages: Lower inventory costs, better demand matching.
●​ Disadvantages: Labour instability, frequent hiring/firing.

2. Level Production Strategy Production rate remains constant.

●​ Features: Stable workforce, inventory absorbs demand fluctuations.
●​ Advantages: Stable operations, easier scheduling.
●​ Disadvantages: Higher inventory cost.

3. Subcontracting Part of production is outsourced.

●​ Advantages: Handles excess demand, reduces capital investment.
●​ Disadvantages: Less control, quality issues possible.

19. Planning and Budgeting in Process Industries

MRP is also useful in the steel industry, chemical industry, and fertilizer industry.

Special Features of Process Industries

●​ Continuous production
●​ Bulk materials
●​ Variable wastage
●​ Different operating conditions

BOM in Process Industry BOM must specify material quantities, ratios, and consumption
rates. Regular updates are necessary because losses vary and operating conditions change.

20. Important Formulas

Net Requirement
Net Requirement = Gross Requirement - Available Inventory

2. Gross Profit

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Gross Profit = Sales - Cost of Goods Sold

3. Profit Percentage
Profit % = (Profit/Sales)*100

4. Material Cost Percentage

Material Cost % = (Material Cost/Sales)* 100

5. Total Production Required = Total Forecast Demand + Back Orders + Desired Ending
Inventory - Opening Inventory.

6. Average Daily Production = Total Production / Total Working Days.

21. Important Exam Facts

●​ MRP stands for Material Requirements Planning.
●​ MRP II stands for Manufacturing Resource Planning.
●​ MPS is the basis for MRP.
●​ BOM lists all components required for production.
●​ Inventory acts as a buffer between supply and demand.
●​ Lead time includes waiting, processing, transportation, and inspection.
●​ Net requirement is calculated after deducting available inventory.
●​ PAC means Purchasing and Production Activity Control.
●​ Capacity management balances available and required capacity.
●​ MRP is best suited for dependent demand items.

22. Summary
●​ Materials planning ensures uninterrupted production.
●​ Manufacturing Planning and Control coordinates production activities.
●​ MPS converts demand into production schedules.
●​ MRP calculates material requirements and timing.
●​ BOM provides product structure information.
●​ Capacity management balances resources and production needs.
●​ MRP II integrates all organizational functions.
●​ Proper planning reduces cost, waste, and delays while improving profitability and
customer satisfaction.

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Unit 6 – Push and Pull System

Introduction to Push and Pull Systems
In supply chain and materials management, three major flows exist: material flow, money
(capital) flow, and information flow.

To manage these flows effectively, organizations use two major manufacturing and inventory
systems: Push System and Pull System.

These systems determine how production, inventory, procurement, and delivery are
controlled.

6.1 Push System

Meaning A Push System is a production system where goods are manufactured based on
forecasted demand, production schedules, and planning assumptions. Production happens
before actual customer orders are received.

Key Idea “Produce first and push products into the market.”

Characteristics of Push System

●​ Forecast-driven
●​ Large production volumes
●​ Continuous production
●​ Focus on maximum capacity utilization
●​ Higher inventory levels
●​ Suitable for stable demand

Example Parle-G biscuits are produced continuously and supplied to retail chains even
before actual customer purchases occur.

Advantages of Push System

●​ Better resource utilization
●​ Economies of scale
●​ Continuous production
●​ Availability of products in market
●​ Suitable for FMCG industries

Disadvantages of Push System

●​ Excess inventory
●​ Overproduction
●​ Forecast errors
●​ High storage cost
●​ Risk of obsolete stock

6.2 Push-Based Materials Management

Push systems are based on demand forecasting, production planning, and bulk
procurement. These systems work well where demand is stable and predictable.

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6.2.1 Dependent Demand

Meaning Demand for a component depends on demand for the final product. Example: If
there is demand for 10 Cars, then the demand for engines, tyres, gearboxes, and seats will
automatically depend on car production. Thus, these components are called Dependent
Demand Items.

Material Requirements Planning (MRP)

Definition MRP is a dependent demand inventory planning technique used to determine
what materials are required, how much is required, and when materials are required.

Objectives of MRP
●​ Ensure material availability
●​ Reduce inventory
●​ Improve production scheduling
●​ Improve customer service
●​ Improve resource utilization

Inputs of MR

●​ 1. Master Production Schedule (MPS): Specifies what is to be produced, quantity to

be produced, and time of production.

●​ 2. Bill of Materials (BOM): A complete list of raw materials, components, and

subassemblies required to manufacture a product. It is also called a Product Structure
File or Product Tree, and it shows the product assembly sequence.

Types of BOM

●​ Modular BOM: Subassemblies are manufactured and stocked separately.

●​ Super BOM: Contains optional components and variations.

Levels in BOM The level indicates stages required for assembly.

Level Items
Level 0 Final Product
Level 1 Major Subassemblies
Level 2 Components
Level 3+ Raw Materials

Other Inputs of MRP

3. Inventory Records: Current stock availability.

4. Scheduled Receipts: Outstanding purchase orders.

5. Lead Time: Time required to procure or manufacture materials.

6.2.3 MRP Procedure

●​ Step 1: Netting: Calculate net requirement.

●​ Step 2: Lot Sizing: Determine order quantity.

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●​ Step 3: Time Phasing: Schedule orders considering lead time.

●​ Step 4: BOM Explosion: Breaking down final product demand into component
demand.

MRP Example Given the weekly demand data:

Week Demand
1 15
2 20
3 50
Additional Data:
On-hand inventory = 30, Lot size = 75, Lead time = 1 week.
●​ Netting Calculation: Week 1: 30 - 15 = 15. Week 2: 20 - 15 = 5. Thus, Net
Requirement = 5.
●​ Planned Order Receipt: Orders are planned in lots of 75 units.
●​ Planned Order Release (POR): Order release considering lead time. If lead time = 1
week, the order is released in Week 1 and received in Week 2.

MRP Inputs and Outputs Summary

Inputs:

Input Meaning
MPS Production schedule
BOM Material structure
Inventory Status Stock details
Scheduled Receipts Existing purchase orders

Outputs:

Output Meaning
Planned Order Release Production/Purchase orders
Change Notices Rescheduling notices
Exception Reports Problem alerts

Shortcomings of MRP

1.​ Forecast Dependency: Errors in forecasting create inventory issues.

2.​ Overproduction: Focuses on capacity utilization rather than actual demand.
3.​ High Inventory: No strict limit on Work-in-Process (WIP).
4.​ Long Lead Times: Variability in operations increases delays.
5.​ Nervousness: Frequent changes in schedules create instability.

Techniques to Reduce Nervousness:

●​ Time Fences: Sections of schedule cannot be altered.
●​ Pegging: Tracing components to parent items.

Lot Sizing Techniques Determining how much quantity to order.

Types of Lot sizing
1.​ Fixed Period Requirement (POQ): Orders placed at fixed intervals.

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2.​ Economic Order Quantity (EOQ):

EOQ = √(2DS/H)

Where:

●​ D = Annual demand​

●​ S = Ordering cost per order / unit ​

●​ H = Holding cost per unit / order ​

6.3 Pull-Based Materials Management

Meaning Production occurs only after receiving customer demand or a downstream signal.

Key Idea “Produce only what is needed, when needed.”

Characteristics of Pull System

●​ Lower inventory
●​ Reduced WIP
●​ Demand-driven
●​ Better flow control
●​ Less congestion
●​ Reduced overproduction

Push vs Pull System Matrix

Basis Push Pull

Basis Forecast Actual Demand
Inventory High Low
Production Advance On Order
WIP High Controlled
Flexibility Low High

Strategic Pull Systems

Based on Takt Time and Lean Production.
●​ Takt Time Definition: Rate at which products must be produced to meet customer
demand.

Takt Time = Available Time / Customer Demand

MRP II (Manufacturing Resource Planning)

Meaning An extended version of MRP integrating materials, capacity, finance, personnel,
and production planning.

Functions of MRP II
●​ Resource Requirement Planning (RRP)

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●​ Aggregate Planning
●​ Capacity Requirement Planning (CRP)
●​ Production Activity Control (PAC)

Closed Loop MRP Integration of planning, purchasing, and shop floor control.

Extensions of MRP II
1.​ ERP (Enterprise Resource Planning): Provides enterprise-wide integration, a
common database, and real-time information (e.g., SAP ERP).

2.​ DRP (Distribution Resource Planning): Controls inventory replenishment across

supply chains.

Tactical Pull Systems Focus on real-time WIP control, flow management, and bottleneck
handling.

Kanban System
Meaning A Japanese word meaning Card or Signal.

Features of Kanban
●​ Pull-based scheduling
●​ Uses cards/signals
●​ Controls inventory flow
●​ Supports JIT production

Kanban Process
Downstream process consumes material -> Kanban card sent upstream -> Upstream
produces replacement quantity.

Advantages of Kanban
●​ Lower inventory
●​ Reduced lead time
●​ Better visibility
●​ Simple control system
●​ Less paperwork

Limitations of Kanban
●​ Best for repetitive manufacturing
●​ Requires stable schedules
●​ Less suitable for high variety products
●​ Requires discipline

Theory of Constraints (TOC)

Meaning A production system focused on bottlenecks.

Key Principle Bottlenecks determine overall throughput.

Steps in TOC
1.​ Identify bottlenecks.
2.​ Maximize bottleneck utilization.
3.​ Synchronize non-bottleneck operations.

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Important TOC Concepts

●​ Bottleneck: Resource limiting production.
●​ Throughput: Rate of finished product output.

Important TOC Rules

●​ Balance flow, not capacity.
●​ Bottlenecks control throughput.
●​ WIP should be minimized.
●​ Transfer batch \neq Process batch.

CONWIP System
Meaning Constant Work-in-Process System.

Features
●​ Uses cards like Kanban
●​ Controls WIP
●​ Cards are line-specific

POLCA System
Full Form Paired-cell Overlapping Loops of Cards with Authorization.

Features
●​ Visual card system
●​ Controls WIP
●​ Suitable for custom/high-variety production

Hybrid Systems
Combination of push systems and pull systems.

Kanban + MRP II

MRP II Kanban
Planning Execution
Long-term scheduling WIP control

Lean + TOC
Lean improves the entire process while TOC improves bottlenecks. The combined system
improves throughput, efficiency, and inventory control.

Choosing Between MRP, Kanban, and TOC

System Best For Weakness

MRP Forecast-based stable demand Poor for uncertain demand
Kanban Repetitive manufacturing Weak in volatile demand
TOC Bottleneck operations Difficult if constraints shift

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Important Definitions
●​ Push System: Production based on forecasts.
●​ Pull System: Production based on actual demand.
●​ MRP: System for material planning based on dependent demand.
●​ BOM: Complete list of materials/components.
●​ Takt Time: Production pace needed to meet customer demand.
●​ Kanban: Card-based pull scheduling system.
●​ TOC: Constraint-focused production management system.

Important Formulas

Important Formulas
1. EOQ Formula
EOQ = √(2DS/H)

2. Net Requirement
NR = GR - (OH + SR)

Where: NR = Net Requirement​

GR = Gross Requirement​
OH = On-hand Inventory​
SR = Scheduled Receipts​

3. Takt Time
Takt Time = Available Time / Customer Demand

Exam-Oriented Important Facts

●​ Push system is forecast-based.
●​ Pull system is demand-driven.
●​ MRP is suitable for dependent demand.
●​ Kanban is a pull scheduling system.
●​ TOC focuses on bottlenecks.
●​ ERP is an extension of MRP II.
●​ BOM is also called a Product Tree.
●​ Nervousness occurs due to frequent MRP changes.
●​ CONWIP controls WIP using cards.
●​ POLCA is suitable for high variety production systems.

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Unit 7: Process Inventory

(Work-in-Process Inventory)
1. Introduction to Process Inventory (WIP)
Meaning of Inventory Inventory has two perspectives:
●​ Protection from stock-outs
●​ Increase in opportunity and holding cost

Thus, organizations face a trade-off:

●​ Higher inventory → better availability but higher cost
●​ Lower inventory → lower cost but risk of shortages

Types of Inventory
1.​ Raw Material Inventory
2.​ Work-in-Process (WIP) / Process Inventory
3.​ Finished Goods Inventory

Basis of Inventory Decisions

Inventory Type Depends On

Raw Material Inventory EOQ, safety stock, buffer stock
Finished Goods Inventory Demand, supply lead time, order fulfilment
WIP Inventory Supply chain strategy & manufacturing process

2. Meaning, Concept and Need for WIP Inventory

Definition of WIP Inventory Process inventory or Work-in-Process (WIP) inventory
refers to: Intermediate goods produced during manufacturing but not yet converted into
finished goods.

Important Features
●​ Exists between production stages
●​ Represents partially completed goods
●​ Adds value at every stage of production
●​ Also called Value Added Work-In-Process (VAWIP)

3. Need for WIP Inventory

Ideally: Output of one stage should directly move to the next stage.
Practically: WIP exists due to mismatch between production stages.
Reasons for WIP Formation
1.​ Difference in Capacity If one stage produces faster than the next: Inventory
accumulates.
2.​ Difference in Cycle Time Unequal processing times create waiting inventory.
3.​ Batch Production When production occurs in batches instead of continuous flow.

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4. Supply Chain Strategies and WIP

A. Pull Supply Chain Strategy
Definition Production based on:
●​ Actual customer demand

Objectives
●​ Minimize finished goods inventory
●​ Increase customization

Characteristics
●​ Customer-driven
●​ Flexible
●​ Used in differentiation strategy

Advantages
●​ Lower finished goods inventory
●​ Better customization
●​ Reduced obsolescence

Disadvantages
●​ Complex production scheduling
●​ Higher WIP possibility
●​ Longer response time

B. Push Supply Chain Strategy

Definition Production based on:
●​ Forecasted demand

Characteristics
●​ Mass production
●​ Batch production
●​ Make-to-stock approach

Objectives
●​ Economies of scale
●​ Lower production cost

Advantages
●​ Lower per-unit cost
●​ High production efficiency

Disadvantages
●​ Higher finished goods inventory
●​ Risk of unsold goods

5. Example: T-Shirt Manufacturing Process

Production Stages
●​ Cutting
●​ Stitching

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●​ Dyeing
●​ Finishing

Pull Strategy Example

●​ Pre-dyed shirts stored as WIP
●​ Dyeing depends on customer color demand

Capacity Mismatch Example

If:
●​ Stitching = 100 shirts/day
●​ Dyeing = 50 shirts/day
Then:
●​ WIP inventory increases daily

6. WIP Inventory Calculation Table

Day Opening Stock Output Processed WIP Inventory Average Inventory
1 0 100 50 50 25
2 50 100 50 100 75
3 100 100 50 150 125

7. Production System and WIP Inventory

Importance of WIP
WIP is:
●​ A key performance indicator (KPI)
●​ Essential in production planning and control

Objective of Production System

Minimize:
●​ Waiting time
●​ Throughput time
●​ Cycle time
●​ Cost
●​ Energy usage

8. Important Concepts and Formulae

A. Cycle Time
Definition
Time taken from:
●​ Beginning to completion of manufacturing process

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Formula

B. Throughput Time
Definition
Time spent at each production stage including:
●​ Waiting
●​ Processing
●​ Inspection
●​ Movement

Formula

Interval Times Include

●​ Waiting time
●​ Processing time
●​ Inspection time
●​ Material movement time

C. Throughput
Definition Rate at which units pass through production system.

Formula

9. Numerical Example
Given
●​ Lead time = 12 hours/unit
●​ Throughput = 2 units/day

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●​ Cycle time = 2 days

Formula

WIP = Throughput * Cycle Time

WIP = 2 * 2

WIP = 4 units

10. Types of Production Systems

A. Make-to-Stock (MTS)
Features
●​ Production before demand
●​ Based on forecast
●​ Large volume production

WIP Depends On
●​ Throughput rate
●​ Lead time
●​ Cycle time

B. Make-to-Order (MTO)
Features
●​ Production after order received
●​ High customization

Characteristics
●​ Flexible layout
●​ Higher variety
●​ Complex production flow

C. Configure-to-Order (CTO)
Features
●​ Standard components assembled differently
●​ Mix of MTS and MTO

11. Cellular Manufacturing System (CMS)

Definition
Production divided into:
●​ Self-contained manufacturing cells

Features
●​ Workers skilled in multiple operations
●​ Reduces movement and waiting
●​ Faster production flow

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Objectives of CMS
●​ Reduce WIP
●​ Reduce throughput time
●​ Minimize intercell movement
●​ Improve efficiency

Types of Cell Layouts

●​ Linear layout
●​ Z-shaped layout
●​ T-shaped layout
●​ Circular layout

12. Flexible Manufacturing System (FMS)

Definition
A system producing:
●​ Variety of goods in same production setup

Features
●​ CNC machines
●​ Automation
●​ Robots and conveyors
●​ Minimal manual work

Objectives of FMS
●​ Reduce adjustment time
●​ Minimize WIP
●​ Lower cost
●​ Increase flexibility

13. Types of FMS Layouts

A. Loop Layout
●​ Machines arranged in circular/rectangular loop
●​ Focus on minimizing movement cost

B. Ladder Layout
●​ Machines arranged like ladder
●​ Easy access to workstations
●​ Reduces handling time

C. Open Field Layout

●​ Combination of loop and ladder
●​ Suitable for large part families

D. Robot-Based Layout
●​ Robots transport materials
●​ Useful when space is limited

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14. Factors Influencing WIP Inventory

1.​ Supply Chain Strategy
○​ Push vs Pull system
2.​ Production Strategy
○​ MTS, MTO, CTO
3.​ Buffer Stock
○​ Protection against breakdowns and shortages
4.​ Economies of Scale
○​ Larger lot size increases WIP
5.​ Capacity Difference
○​ Unequal workstation capacities increase WIP
6.​ Improper Layout
○​ Causes delays and bottlenecks
7.​ Machine Breakdown
○​ Interrupts flow and increases inventory

15. Methods of Controlling WIP Inventory

A. Planning and Coordination
Proper synchronization between workstations.

B. Lean Manufacturing
Focus on:
●​ Elimination of waste
●​ Reduced inventory

C. In-Process Quality Control

Improves flow and reduces defects.

D. Removal of Bottlenecks
Constraint stage with excessive lead time should be improved.

16. Manufacturing Cycle Efficiency (MCE)

Definition
Ratio of:
●​ Allowable production time to actual elapsed time
Formula

MCE = Allowable Time / Actual Time

Interpretation

Value Meaning
=1 Efficient
<1 Inefficient

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17. Work Centre Efficiency

Definition Ratio of:
●​ Permissible workstation time to actual time spent

Formula

Work Centre Efficiency = Permissible Time / Actual Time

If Ratio < 1 → Indicates inefficiency

18. Techniques to Improve Work Centre Efficiency

A. Quality Circles (QC)
Small worker groups solving:
●​ Quality issues
●​ WIP issues
●​ Cycle time problems

B. Total Quality Management (TQM)

Objectives
●​ Maintain quality standards
●​ Reduce production cost
●​ Lower WIP
●​ Enable Just-in-Time (JIT)

C. Lean Six Sigma

Lean Focus:
●​ Eliminate waste
●​ Reduce lead time
Six Sigma Focus:
●​ Reduce variation and defects

DMAIC Model

Step Meaning
D Define
M Measure
A Analyze
I Improve
C Control

D. 5 'S' Approach
●​ Sort, Set-in-Order, Shine, Standardize, and Sustain.

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19. Methods of Monitoring WIP Inventory

A. Kanban System
Definition
Visual system for:
●​ Monitoring workflow
●​ Identifying bottlenecks

Uses
●​ Signals movement of goods
●​ Supports pull production systems

Tools Used
●​ Cards
●​ Dashboards
●​ Signals

B. CONWIP (Constant Work-In-Process)

Definition
●​ A Kanban variant for high-variety systems.
●​ It uses temporary identification numbers instead of fixed part numbers and requires
human intervention to trigger steps.
●​ Modified Kanban system for high variety manufacturing.
Features
●​ Temporary part numbers
●​ Requires human intervention

Difference Between Kanban and CONWIP

Kanban CONWIP
Fixed part numbers Temporary part numbers
Less human intervention More human intervention
Best for low variety Best for high variety

20. PERT and CPM

PERT and CPM: Project management techniques that identify "critical activities" (those with
no slack time). Delays in these activities directly increase WIP.
Purpose
Used for:
●​ Production scheduling
●​ Time management
●​ WIP reduction

PERT (Project Evaluation and Review Technique)

Used for:
●​ Uncertain activity times

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CPM (Critical Path Method)

Used for:
●​ Identifying critical activities

Critical Activities
Activities with:
●​ No slack time

Delay in these activities:

●​ Delays production
●​ Increases WIP

21. Optimization Approaches

Operations Research Techniques

●​ Linear Programming
●​ Non-linear Programming
●​ Goal Programming
●​ Dynamic Programming
●​ Queuing Theory
●​ Simulation Models

Heuristic Methods

●​ Genetic Algorithm (GA)

●​ Particle Swarm Optimization (PSO)

22. Key Performance Indicators (KPIs)

Important KPIs

●​ Average WIP
●​ Cycle time
●​ Throughput time
●​ Throughput rate
●​ Manufacturing cycle efficiency
●​ Work centre efficiency

23. Advantages of Low WIP

●​ Lower holding cost
●​ Faster production
●​ Lower lead time
●​ Better machine utilization
●​ Improved productivity
●​ Faster customer response

24. Disadvantages of High WIP

●​ High holding cost
●​ Longer production cycle
●​ Increased waiting time

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●​ Poor space utilization

●​ Higher opportunity cost
●​ Greater production complexity

25. Important Formula Sheet

Important Formula Sheet

Formula 1

Formula 2

Formula 3

Formula 5

Formula 6
MCE = Allowable Time / Actual Time

Formula 7
Work Centre Efficiency = Permissible Time / Actual Time

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Unit 8: Spare Parts Management

1. Meaning of Spare Parts Management
Spare parts are replacement components used to substitute failed or worn-out machine
parts so that operations continue without interruption.

Proper spare parts management ensures:

●​ Continuous production
●​ Reduced downtime
●​ Lower maintenance cost
●​ Better equipment reliability
●​ Optimal inventory levels

Spare parts management involves:

●​ Forecasting spare requirements
●​ Maintaining inventory
●​ Deciding reorder levels
●​ Determining order quantity
●​ Disposal and recycling of parts

2. Importance of Spare Parts Management

Objectives
●​ Avoid machine breakdowns
●​ Ensure uninterrupted production
●​ Minimize downtime
●​ Reduce inventory carrying cost
●​ Improve maintenance efficiency
●​ Achieve optimal stock levels

MRO Items
●​ Maintenance, Repair, and Operations items include consumables (e.g., cartridges),
lubricants, and spare parts.
●​ Problems Due to Poor Spare Parts Management
○​ Overstocking
●​ High holding cost
●​ Capital blockage
●​ Obsolescence risk
●​ Increased storage cost

●​ Understocking
○​ Production stoppage
○​ Equipment downtime
○​ Emergency purchases
○​ Customer dissatisfaction

3. Classification of Spare Parts

A. VED Analysis

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Classifies items based on criticality.

Category Meaning Importance

V Vital Production stops if unavailable
E Essential Production affected partially
D Desirable Minor inconvenience if unavailable

Key Points

●​ Vital items require highest service level.

●​ Used mainly in maintenance inventory control.
●​ Helps prioritize stocking decisions.

B. ABC Analysis
Based on annual consumption value.

Pareto Principle
●​ Approximately 20% items account for 80% consumption value.

Category Full form Consumption Value Control Level

A Always High Strict control
B Better Medium Moderate control
C Control Low Simple control

Features
●​ A items need tight monitoring.
●​ C items require simple controls.

C. HML Analysis
Based on unit price of items.

Category Cost
H High cost
M Medium cost
L Low cost

Uses
●​ Purchasing decisions
●​ Insurance decisions
●​ Storage security

D. FSN Analysis
Based on usage frequency.

Category Meaning
F Fast moving
S Slow moving
N Non-moving

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Importance
●​ Identifies obsolete stock
●​ Helps reduce dead inventory

E. XYZ Analysis
Classifies based on variability in demand.

Category Demand Variation Characteristics

X Low variation High predictability, Continuous demand, Lowest safety
stock needed
Y Moderate variation Medium predictability, Fluctuating demand
Z High variation Irregular demand, Low predictability, Highest uncertainty

Important Point

●​ JIT and VMI are easier for X items.

●​ Difficult for Y items.
●​ Usually not feasible for Z items.

4. ABC–XYZ Relationship
Item Class Characteristics
AX High value + predictable
AY High value + fluctuating
AZ High value + irregular
CX Low value + predictable
CZ Low value + irregular

Important Observation

●​ AZ items are most difficult to manage because they have high cost, irregular demand,
and high criticality.

5. Spare Parts Requirement Forecasting

Prognostic Maintenance
●​ Predicts future condition and residual life of components.

Objectives
●​ Predict failures before occurrence
●​ Arrange spare parts in advance
●​ Improve maintenance planning

6. Forecasting Methods
A. Data-Driven Method
Uses:
●​ Machine Learning
●​ Neural Networks
●​ Sensors

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●​ Historical data

Purpose
●​ Predict Residual Useful Life (RUL).

Advantages
●​ Handles large datasets
●​ Learns complex patterns

Limitations
●​ Overfitting possible
●​ Requires huge data

B. Model-Based Method
Uses mathematical/statistical models.

Techniques
●​ Non-linear models
●​ Spatial models
●​ NHPP (Non-Homogeneous Poisson Process)

Principle
●​ Establishes relationship between failure/performance (dependent variable) and causes
of failure (independent variables).

C. Hybrid Method
Combination of:
●​ Data-driven approach
●​ Model-based approach

Advantage
●​ Greater prediction accuracy.

7. Spare Parts Life Cycle

The spare parts life cycle has six stages:
1.​ Requirement Identification Uses:
●​ Bathtub analysis: Bathtub Curve
○​ Failure rates often follow a "bathtub curve," which is divided into three
stages:
○​ Initial/Early Failure Stage: High failure due to manufacturing defects or
installation errors.
○​ Constant Performance Stage: Stable failure rates with high
predictability.
○​ Decline/Wear-out Stage: High failure rates as components reach the
end of their economic life.

●​ MTBF
●​ MTTF
●​ Prognostic maintenance

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Purpose
Determine:
●​ Quantity required
●​ Time of replacement

2. Specification
Most critical stage.

Importance
Wrong specifications can:
●​ Reduce machine performance
●​ Damage other components

Recommendation
●​ Prefer Original Equipment Manufacturer (OEM) spares.

3. Reorder Level (ROL)

Formula

ROL = L*C
Where:
●​ L = Lead time
●​ C = Consumption during lead time​

Where:

●​ {LT} = Lead Time

●​ {QC} = Average daily consumption
●​ {SS} = Safety Stock

Meaning
●​ Inventory level at which reorder should be placed.

4. Quantity Ordered

Under Stable Demand

●​ Use: EOQ

Under Uncertainty
●​ Use:
○​ Safety stock
○​ Reorder level models

5. Usage

Inventory monitored as:

●​ Fast moving

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●​ Slow moving
●​ Non-moving
●​ Inventory levels adjusted accordingly.

6. Disposal

Includes:
●​ Reuse
●​ Recycling
●​ Sustainable disposal

Circular Economy Principle

●​ Reduce, Reuse, Recycle.

8. Inventory Management Systems

A. P System (Periodic Review System)
Also called:
●​ Fixed period inventory system

Features
●​ Review at fixed intervals
●​ Order quantity varies
Formula

Order\ Quantity = ROL - Quantity\ in\ stock

Example
●​ Monthly inventory review.

B. Q System (Continuous Review System)

Also called:
●​ Fixed quantity system

Features
●​ Continuous monitoring
●​ Fixed order quantity
●​ Variable reorder timing

Important Point
●​ EOQ is generally used as fixed quantity.

9. Economic Order Quantity (EOQ)

Purpose
Determine optimal order quantity minimizing:
●​ Ordering cost
●​ Holding cost

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EOQ Suitable When

●​ Demand constant
●​ Supply instantaneous
●​ Lead time stable

10. Safety Stock

Meaning
●​ Extra inventory maintained to avoid stockouts caused by uncertainty.

11. Service Level and Z Value

Service Level Z Value
99.90% 3.09
99% 2.33
95% 1.64
90% 1.28
84% 1.00
50% 0

Important Facts
●​ Higher z-value → Higher safety stock
●​ Higher safety stock → Lower stockout risk
●​ But holding cost increases

12. Safety Stock Formulas

Method 1 (Fixed Days):

(where DSS is Days of Safety Stock).

• Method 2 (Average-Max):

Safety Stock (Demand Variation)

When:

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●​ Demand varies and Lead time stable​

Formula

Where:

●​ SS = Safety Stock​

●​ z = Service coefficient​

●​ = Standard deviation of demand​

●​ L = Lead time​

Safety Stock (Lead Time Variation)

When: Demand stable and Lead time varies​

Formula

Where: = Standard deviation of lead time​

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●​ = Average demand​

Safety Stock (Independent Variation)

When: Both demand and lead time vary independently​

Formula

Where:: L = Lead time​

= Standard deviation of demand​

= Average demand

= Standard deviation of lead time​

Method 6
When: Demand and lead time both vary and Variations are dependent​

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Formula

●​ z = Service coefficient
●​ L = Average Lead time

●​ = Standard deviation of demand

●​ = Average demand​

= Standard deviation of lead time

13. Distributions Used in Spare Parts Forecasting

Normal Distribution

Suitable when:
●​ Demand pattern stable
●​ Large usage volume

Poisson Distribution
Suitable for:
●​ Slow-moving items
●​ Intermittent demand

Negative Binomial Distribution

Suitable for:
●​ Sporadic/erratic demand

14. Capital Spares and Insurance Spares

Capital Spares

●​ Critical spares maintained for expensive equipment.

●​ Example: Production loss higher than spare cost.

Insurance Spares

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●​ Spare parts that insurance companies mandate to maintain throughout equipment life.

15. Adaptive Inventory Control

Uses:

●​ Machine Learning
●​ Data Mining

Applications

●​ Predict failures
●​ Forecast demand
●​ Cluster similar materials

Techniques

Technique Purpose
K-Means Clustering Group similar items
Regression Demand prediction
Random Forest Failure prediction

16. Important Concepts

MTBF (Mean Time Between Failures)
●​ Average operating time between two failures.
●​ Higher MTBF = Better reliability

MTTF (Mean Time To Failure)

●​ Average time before a component fails.
●​ Lower MTTF/MTBF indicates poor component quality or weak maintenance.

17. Important Exam Facts

●​ VED → Based on criticality
●​ ABC → Based on consumption value
●​ XYZ → Based on demand variability
●​ FSN → Based on movement/usage
●​ EOQ minimizes total inventory cost
●​ Safety stock prevents stockouts
●​ P system → Fixed review period
●​ Q system → Fixed order quantity
●​ X items → Most predictable
●​ Z items → Least predictable
●​ Poisson distribution → Slow-moving items
●​ Hybrid forecasting → Most accurate modern method

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19. Short Notes for Exams

JIT (Just in Time)
●​ Inventory arrives exactly when needed.

Suitable For
●​ X category items
●​ Predictable demand

VMI (Vendor Managed Inventory)

●​ Supplier manages buyer inventory.
●​ OR: The supplier holds stock on behalf of the manufacturer, reducing the
manufacturer's holding costs.

Benefits
●​ Reduced stockouts
●​ Lower inventory cost

Prognostic Maintenance
●​ Predicting the future condition and residual life of components to replace them before
failure.

20. Overall Conclusion

Spare parts management is essential for maintaining uninterrupted industrial operations.

Effective management requires:

●​ Proper classification
●​ Accurate forecasting
●​ Correct safety stock
●​ Scientific inventory systems
●​ Predictive maintenance
●​ Sustainable disposal methods

Modern organizations increasingly use:

●​ Machine Learning
●​ Prognostic maintenance
●​ Data analytics
●​ Hybrid forecasting models
●​ to improve spare parts inventory efficiency while minimizing costs and operational
disruptions.

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Unit 9: Codification and Standardisation of Materials

1. Introduction
With rapid industrial growth and increasing demand for products, materials management has
become extremely important. Organisations deal with thousands of items differing in value,
size, volume, cost, and usage.

Efficient storage, warehousing, inventory control, and procurement require a proper system
for identifying materials.

Different departments may use different names for the same item, creating confusion.
Hence, organisations require classification, codification, standardisation, and simplification.

These systems help in inventory management, cost reduction, efficient procurement, better
storage, and faster identification of materials.

2. Classification of Materials
Meaning: Classification means grouping materials according to predetermined criteria. It
becomes difficult to manage materials individually when the number of items is large.

Objectives of Classification:
●​ Planning and Control: Helps in developing procedures for planning and controlling
materials.
●​ Uniform Purchase and Inspection: Common procedures can be developed for
purchasing, inspection, storage, and issuing.
●​ Accounting and Evaluation: Simplifies accounting, costing, and evaluation.
●​ Efficient Concentration of Efforts: Class-wise handling is more efficient than
item-wise handling.

3. Classification Systems
A. On the Basis of Nature of Materials

1.​ Raw Materials: Materials purchased from producers/manufacturers and used directly
in production.
Examples include cotton and yarn.
Important Point: One industry’s finished product can become another industry’s raw
material.

2.​ Machinery and Equipment: Includes machines, tools, and equipment.

Examples include lathe machines, electric motors, fans, and typewriters. Tools are generally
issued on a loan basis.

3.​ Consumable Items: Items used once and cannot be reused for the same purpose.
Examples include coal, lubricants, paints, paper, and ink.

4.​ Chemicals: Materials obtained through chemical processes.

Examples include acids and carbide.
Important Point: Require careful storage and handling because they may be hazardous.

5.​ Inflammable Items: Highly fire-sensitive items.

Examples include petrol, kerosene, and paints.

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Storage Requirement: Stored away from the main building with fire-fighting arrangements.

6.​ Fuel Stock: Consumables used as fuel in production processes.

Example: Coal. Important Fact: Fuel stock may sometimes also be treated as raw material.

7.​ Furniture: Examples include chairs, tables, and almirahs. Require maintenance and
record keeping.

8.​ Scrap Materials: Waste left after production or expiry of useful life.
Examples include production leftovers and damaged materials. Usually sold to scrap
dealers.

9.​ Packaging Materials: Materials used for packing and protection.

Examples include boxes, crates, bottles, plastic bags, and wax.

10.​General Items: Items not included in other categories.

Examples include soap, brooms, uniforms, and stationery.

B. On the Basis of Usability

●​ Serviceable Items: Temporarily defective items that can be repaired and reused.
●​ Unserviceable Items: Items beyond repair and fit only for scrap disposal.
●​ Obsolete Items: Items outdated due to new technology, new designs, or changed
usage.
●​ Finished Goods: Completely manufactured goods ready for sale.
●​ Semi-finished Goods: Partially manufactured items needing further processing.
●​ Dead Stock Items: Items with fixed life that cannot be written off before expiry.
○​ Examples include machinery, equipment, and furniture.
●​ Unused Items: Defective or damaged items that cannot be used.
○​ Distinction Note: Unlike scrap (which consists of production leftovers or
small-measurement remnants) or unserviceable items (which break down
from constant use), unused items are distinct defective or damaged stocks.

4. Codification
Meaning: Codification means assigning a unique code number or symbol to every inventory
item. It removes confusion caused by different names used by different departments.
Need for Codification: An item may be known by its commercial name, technical name,
formula name, or functional name. Codification ensures uniform identification.

Objectives / Uses of Codification:

●​ Uniformity: Ensures standard naming system.
●​ Reduces Ambiguity: Avoids confusion in identifying items.
●​ Quick Procurement: Speeds up purchasing and issue processes.
●​ Simplifies Classification: Makes grouping easier.
●​ Mechanisation: Supports computerised inventory systems.
●​ Inventory Control: Helps in requisitioning, ordering, receiving, and stock control.
●​ Prevents Losses: Controls pilferage, deterioration, and losses.

5. Features of a Good Code

A good code should identify commodities easily, specify item name, classify items, indicate
source/origin, show interrelationship between items, include transaction details, and support
processing systems.

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6. Types of Codification Systems

1.​ Arbitrary System: Items are allotted serial numbers.

Features: Sequential numbering with no logical relationship.

Example: Nuts - 5432, Screws - 5433.

Advantages: Unlimited coding possibility.

Disadvantages: Does not indicate item characteristics.

2.​ Mnemonic System: Uses alphanumeric symbols with meaning.

Example: P Sc ACH 201, where symbols indicate product type, department, and
characteristics.

Advantages: Easy identification and descriptive.

Disadvantages: Limited symbols and difficult for very large inventories.

3.​ Brisch System: Uses 7 digits and logical grouping. Classification is based on
characteristics and source of supply.
Example: Hardware, spares, and components are grouped separately.

4.​ Numerical Method: Used specifically when inventory accounting is mechanized via
computers or punched cards.

5.​ Numerical-cum-Alphabetical Method: Allots both numbers and letters to every

item.

7. Characteristics of Good Codification

●​ Concise: Code should be short, precise, and use minimum digits. Example:
[Link].
●​ Logical: Must follow logical arrangement.
●​ Flexible: Should allow new additions without disturbing old codes.
●​ Unique: Each item must have one unique code.
●​ Proper Symbols: Avoid confusing symbols like O and 0, I and 1, S and 5, Z and 2.
●​ Adequate Capacity: Coding system should accommodate future items.
Important Formula/Fact:

Total Combinations = 10^n

(where n is the number of digits. For instance, a 4-digit code provides 10^4 = 10,000 unique
combinations).

8. Advantages of Codification
1.​ Easy Identification: Improves accuracy.
2.​ Prevents Duplication: Avoids repeated stocking.
3.​ Standardisation: Reduces variety.
4.​ Simplifies Purchasing: Helps in invoices, purchase orders, and requisitions.
5.​ Better Accounting: Improves recording and stock maintenance.
6.​ Easy Location and Inspection: Items can be found quickly.
7.​ Automation: Supports computerized inventory systems.

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9. Bar Codes
Meaning: Barcodes are machine-readable visual representations of data using lines and
spaces.

Used for inventory tracking, stock counting, and automated inventory management.

History: Introduced in 1951 and widely adopted in the mid-1970s.

Types of Barcodes:
●​ UPC (Universal Product Code): One-dimensional barcode containing product and
manufacturer information.

●​ QR Code: Two-dimensional barcode storing larger information, including pricing and

shipping details.

Barcode Inventory Process: Products arrive at warehouse -> Purchase orders received
-> Information entered into system -> Barcode generated -> Barcode printed -> Barcode
pasted on items -> Barcode scanned -> Items picked -> Stock updated automatically ->
Product delivered.

Benefits of Barcodes: Accurate inventory tracking, safety stock control, reorder point
determination, EOQ management, and perpetual inventory systems.

Steps in Implementing Barcode System:

●​ Step 1: Select Barcode Type (e.g., UPC, QR, SKU).
●​ Step 2: Define Requirements (e.g., raw materials, finished goods, MRO supplies).
●​ Step 3: Decide Information (may contain item description, size, colour, supplier
details, location).
●​ Step 4: Select Software and Hardware (scanners may be wireless, portable, or
fixed).
●​ Step 5: Implement System (includes employee training, KPI identification, and
location identification).

Supply Chain Technology & MSMEs (Case Context):

Micro, Small, and Medium Enterprises (MSMEs) are vital economic drivers, employing 130
million people and generating 33% of India's GDP. Cloud computing, AI, and barcode
automation are helping these businesses handle global supply chain disruptions.

●​ Real-time Visibility: Digital tools provide real-time data regarding production, transit,
and consumption, allowing companies to adjust operations dynamically to match true
demand instead of relying on flawed forecasts.
●​ Advanced Logistics: Emerging technologies like warehouse bots, drone deliveries,
and AI route tracking optimize resource use and eliminate waste.
●​ AI Safety Applications: AI-driven driver-facing cameras analyze facial expressions in
real time to alert drivers displaying signs of fatigue or drowsiness, actively preventing
transport accidents.

10. Standardisation
Meaning: Standardisation means establishing uniformity in materials, components, parts,
and products to ensure interchangeability and mass production.

Objectives of Standardisation: Reduce production cost, enable mass production, reduce

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replacement cost, simplify procurement, and reduce variety.

Standardisation Agencies:
●​ BIS (Bureau of Indian Standards): The national standards body of India. It issues
quality certifications (like the ISI certification) in tandem with organizations like the
National Test House.

●​ International Standards Organization (ISO): Headquartered in Geneva, it develops

global engineering and procedural specifications.

●​ Codex Alimentarius Commission: Develops international food safety and product

standards under the joint direction of the FAO and WHO.

●​ Other Organisations: American Society for Testing and Materials (ASTM), British
Standards (BS), and American Standards Association (ASA).

Characteristics of Standardisation:
Enables mass production, establishes standard sizes for uniform products, drives variety
reduction (maximum output through minimum variety), and sets measurable standards for
quality, quantity, and performance.

Advantages: Less specifications required, better resource utilisation, fewer design

mistakes, lower unit cost, better quality, better production control, effective manpower
utilisation, easier automation, greater sales and profit, easier availability of spares, faster
delivery, and better storage.

Disadvantages: Changing consumer preferences may reduce demand, limited variety, less
flexibility, favors big companies, and difficult to introduce changes.

11. Classification and Simplification

Simplification Meaning: Simplification means reducing unnecessary variety and
standardising products (also called Variety Reduction).

Core Impacts of Simplification:

●​ Manufacturing Operations: Streamlines floor configurations by limiting the sizes,
colors, grades, and shapes of items.

●​ Inventory Control: Reduces overall stock quantities, cuts warehousing costs, and
minimizes the risk of component obsolescence.

●​ Customer Experience: Improves product quality, lowers retail prices, ensures reliable
after-sales service, and accelerates order delivery times.

Objectives of Simplification: Improve efficiency, reduce complexity, and lower costs.

The Workflow Sequence:

Define All Materials -> Classify by Shared Features -> Allot Code Numbers -> Simplify
Line (Reduce Variety).

Advantages of Simplification:
Fewer manufacturing operations, reduces obsolescence, increases production volume,
quick delivery, better after-sales service, lower inventory, reduced production cost, better
quality, and lower selling price.

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12. Important Exam Facts

Important Full Forms:

Acronym Full Form / Meaning

BIS Bureau of Indian Standards
ISO International Organization for Standardization
ASTM American Society for Testing and Materials
UPC Universal Product Code
QR Quick Response
EOQ Economic Order Quantity
MRO Maintenance, Repair and Operating Supplies

Important Differences:

Codification Standardisation Simplification

Assigning codes Creating uniform standards Reducing variety
Identifies items Ensures uniformity Removes complexity
Helps inventory control Helps mass production Improves efficiency

Key Formulas / Numerical Facts:

Coding Capacity Formula for an n-digit numeric code:

Total Combinations = 10^n

n possible combinations

Example: A 4-digit code provides 10^4 = 10,000 possible codes.

Quick Revision Points:

●​ Codification = Unique identification system.

●​ Standardisation = Uniformity.
●​ Simplification = Variety reduction.
●​ QR code stores more data than UPC.
●​ BIS issues ISI certification in India.
●​ Good code must be concise, logical, flexible, unique.
●​ Barcodes improve automated inventory control.
●​ Standardisation reduces cost and increases mass production efficiency.

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Unit 10: Location and Layout of the Warehouse

1. Warehouse and its Objectives
Meaning of Warehouse: A warehouse is a planned and intentionally designed place used
for storing raw materials, semi-finished goods, and finished goods.

Warehousing includes the storage of goods and material handling activities.

Warehouses play an important role in supply chain management by helping in the smooth
movement of goods, balancing supply and demand, and reducing transportation and
production delays.

Important Concept: Warehousing is also called “Transportation at zero miles per hour”.
This means goods remain stationary but still form part of the transportation and distribution
system.

Importance of Warehousing: Warehousing is necessary because production time is not

zero, transportation time is not zero, and demand and supply rarely match perfectly.
Therefore, storage becomes essential.

Benefits of Warehousing:

Improves customer service, reduces transportation costs, supports economical production

lot sizes, reduces uncertainties, helps inventory control, and coordinates supply chain
operations.

Important Fact:

Warehousing activities absorb nearly 20% of a firm’s physical distribution cost.

Objectives of Warehousing:

Coordination between supply and demand, better customer service, clear visibility of stock at
different supply chain points, reduction in transportation costs, smooth movement of
materials, inventory management, and protection and safety of goods.

2. Warehouse Classification on the Basis of Sub-functions

Warehouses are mainly classified into two sub-functions:

1.​ Storage Space / Holding Function: Concerned with storing inventory over time and
holding products safely.

2.​ Material Handling Function: Concerned with loading, unloading, movement of

goods, and order filling.

3. Storage Space / Holding Functions

●​ Holding Function: Organized storage of inventory in protected conditions. Goods
stored include finished goods, semi-finished goods, and raw materials.
○​ Important Point: Warehouse layout and location depend upon the time
duration of storage and the nature of goods.

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●​ Consolidation: Combining small shipments from different suppliers into one large
shipment.
○​ Purpose: Reduce transportation cost and achieve economies of scale.
○​ A warehouse used mainly for consolidation is called a Distribution
Warehouse, which features more space for temporary storage and fast
product flow.

●​ Cross Docking: Goods move directly from the inbound dock to the outbound dock
with little or no storage.
○​ Time Limit: Usually within 24 hours.

●​ Breakbulk: Breaking large shipments into smaller shipments for different destinations.
○​ Purpose: Reduce transportation costs and serve customers ordering small
quantities.
○​ Location: Breakbulk warehouses are usually located near customers.

●​ Mixing: Combining products from different manufacturers/sources to create final

customer orders.
○​ Example: Parts from different suppliers are mixed together to complete
assemblies.
○​ Benefit: Reduces transportation cost of small direct shipments.

4. Material Handling Functions

Material handling includes all movement-related activities inside the warehouse.
●​ Loading and Unloading:
○​ Unloading involves activities performed when goods arrive (removing goods
from vehicles using cranes, forklifts, tow machines, etc., and sorting/checking
quality).
○​ Loading involves activities performed before dispatch (packing, quality
checking, documentation, and safe loading for transportation).

●​ Movement To and From Storage: Movement of goods from unloading point to

storage, and from storage to dispatch area.
○​ Equipment used includes forklifts, trucks, carts, and automated stacking
systems.

●​ Order Filling: Collecting products according to customer orders.

○​ Importance: One of the most labour-intensive and costly warehouse
activities.
○​ Objective: Ensure correct quantity, correct product, and timely dispatch.

5. Warehouses Based on Ownership

Warehouses are classified into private, public, and rented warehouses.
●​ Private Warehouse: Owned by manufacturers or service organizations.
○​ Features: Dedicated storage space and better operational control.
○​ Advantages: Cost-effective in the long run, better supervision/control,
specialized handling possible, property value appreciates, and multi-purpose
use possible.
○​ Suitable when high operational control is needed, special skills are required,
or large-scale operations exist.

●​ Public Warehouse: Warehouse providing storage services to public users at

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reasonable charges.
○​ Advantages: No fixed capital investment, lower cost, flexible location shifting,
and professional services available.

Types of Public Warehouses:

●​ Mass Storage Warehouse: Stores oils, syrups, chemicals, and highway salts.
○​ Services include mixing and bulk breaking.

●​ Commodity Warehouse: Stores specific products like grain, cotton, and tobacco.

●​ Household Goods Warehouse: Stores furniture and household items.

●​ Mini Warehouse: Size is usually 20–200 square feet; used for small storage needs.

●​ Merchandise Warehouse: Stores a wide variety of goods and requires minimal

specialized equipment.

●​ Temperature-Controlled Warehouse: Used for vegetables, fruits, medicines, and

frozen foods. Requires strictly controlled temperature and humidity.

Special Warehouse Services:

●​ Bonding: Goods remain stored until taxes/duties are paid (e.g., liquor, tobacco).

●​ Field Warehousing: Private warehouse space converted into public warehouse use.

●​ Stock Spotting: Manufacturers place goods near target markets in public warehouses
to reduce order cycle time.

●​ Virtual Warehouse: Supplier inventory directly ships products to customers without

physical warehousing, enabled by technology and digital systems.

6. Warehouse Location
Meaning: Selection of a geographical place for storing goods.

Importance of Warehouse Location: Affects transportation cost, customer service, delivery

time, and supply chain efficiency. Warehouse location is dynamic in nature; unlike
manufacturing plant location, it changes according to market conditions.

Steps in Location Selection:

Step 1 is to select where the warehouse should be located.

Step 2 is to decide which products should be stored at which location inside the warehouse.

Questions Considered:
What should be the warehouse size?
Which market should it serve?
Which products should be stored?
Should product locations be fixed or flexible?

Reasons for Changing Warehouse Location:

●​ Cost Saving: Placing it closer to suppliers or customers reduces transportation cost.

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●​ Expansion: Needed when product lines increase or storage requirements grow.

●​ Consolidation: Multiple regional warehouses are merged into one central warehouse.

●​ Performance Improvement: Done to adopt modern technology and better

infrastructure.

Factors Affecting Warehouse Location:

●​ Workforce availability,
●​ cost of real estate (land cost),
●​ political/economic/environmental factors (government policies,
●​ climate suitability—cold storage warehouses prefer moderate climates),
●​ transportation connectivity (near railway stations, airports, dockyards, ICDs),
●​ availability of immediate partners (nearness to suppliers, distributors, and
●​ customers reduces logistics cost), and
●​ the specific operating zone (regional, zonal, or central warehouse).

7. Warehouse Layout
Meaning: Arrangement of men, materials, and machines for smooth movement with
minimum waste and minimum spoilage.

Importance of Warehouse Layout: A good layout improves productivity, ensures safety,

reduces handling cost, and optimizes space utilization.

Factors Affecting Layout:

●​ Cost minimization (space and handling costs),
●​ warehouse dimensions (height, width, length),
●​ ease of storage and movement,
●​ ease of material handling (equipment like forklifts and cranes must move easily),
●​ safety (protection of workers and materials), and
●​ future expansion possibility (allows alterations or technology upgrades).

Types of Warehouse Layout:

●​ Holding/Storage Warehouse Layout: Features large semi-permanent storage areas

with a long-term storage focus.

●​ Distribution Warehouse Layout: Features more order-picking areas, fast movement

of products, and short-term storage.

Comparative Concepts:

Holding Warehouse Distribution Warehouse

Long-term storage Short-term storage
More storage space More movement space
Inventory focus Product flow focus
Semi-permanent storage Temporary storage

Safety in Warehouse Layout:

A good warehouse must ensure fire safety, worker safety, product protection, safe

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equipment movement, proper ventilation, and emergency exits.

8. Important One-Liners & Operational Principles

●​ Warehousing is “Transportation at zero miles per hour”.
●​ Warehousing absorbs about 20% of physical distribution cost.
●​ Cross docking usually moves goods within 24 hours.
●​ Mini warehouses are generally 20–200 sq. ft.
●​ Temperature-controlled warehouses store perishables and medicines.

Formula / Concept-Based Points

Although this unit contains very few numerical formulas, the following operational
relationships are important:

Cost Trade-off Concept

Warehouse decisions are based on balancing:

Total Logistics Cost = Transportation Cost + Warehousing Cost + Inventory Cost

Space Utilization Principle

Efficient layout aims at:

Maximum Space Utilization + Minimum Material Movement

9. Conclusion
●​ Warehousing is a critical component of supply chain management.
●​ Efficient warehouse location and layout reduce costs,
●​ improve customer service, ensure safety, and increase operational efficiency.
●​ Warehouse success depends on proper location selection, effective layout planning,
smooth material handling, and strategic inventory management.

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Unit 11: Warehouse Risk Management

System
Introduction to Warehouse Risk Management
Warehouse Risk Management refers to the identification, assessment, prevention, and
control of risks that may disrupt warehouse operations.

Meaning of Risk
Risk is any unwanted incident or foreign element that disrupts business operations.

Dual Nature: Risk can carry both positive and negative outcomes for an organization,
requiring precise and adequate attention when it materializes.

The Warehouse Paradox: While historically perceived as a "necessary evil" that stops the
flow of items and incurs costs without adding value, warehousing is practically a vital driver
of supply chain management.

Risks may have positive effects or negative effects. In warehouses, risks mainly create
financial losses, damage to goods, employee injuries, and operational delays.

Why Warehouse Risk Management is Important

Warehouses handle storage of goods, loading and unloading, material handling, and
transportation coordination. Thus, warehouses are exposed to fire, floods, theft, equipment
failures, product damage, and employee accidents.

Major Warehouse Risks

1.​ Fire (Warehouse Blaze)
2.​ Flood
3.​ Equipment Failure
4.​ Theft or Burglary
5.​ Destruction of Goods
6.​ Improper Storage or Packaging
7.​ Employee Safety Risks

1. Warehouse Blaze (Fire Risk)

Meaning
Warehouse fire is one of the most common and dangerous risks causing huge financial
losses, loss of manpower, operational shutdown, and damage to infrastructure.

Causes of Warehouse Fire

Important causes include improper electrical wiring, electrocution, heat generated from
densely packed goods, poor ventilation, and ignition due to rivalry or sabotage. It is also
caused by the storage of flammable products like crackers, petroleum products, and
chemicals.

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Effects of Fire
Destruction of stock, damage to warehouse structure, human casualties, supply chain
disruption, and revenue loss.

Fire Prevention Measures

Important preventive measures include the installation of fire extinguishers, training
employees for fire emergencies, smoke detectors and fire alarms, regular inspections and
mock drills, no-smoking zones, emergency exits, and dedicated assembly areas.

Exam Point: Even a small fire may cause losses worth millions.

2. Warehouse Flood
Meaning
Flooding occurs when water enters warehouse premises and damages goods, equipment,
and infrastructure.

Causes of Flood Risk

Warehouse located in flood-prone areas, heavy rainfall, water seepage, and poor drainage
systems.

Effects of Flood
Damage to stock, seepage in walls, damage to records/documents, electrical hazards, and
damage to computers and printers.

Flood Prevention Measures

Important measures include regular stock assessment, monitoring flood warnings, backup
of records and documents, storing important goods at upper levels, using waterproof/plastic
packaging, installing electrical systems at higher ground, regular cleaning of waste, sealing
water entry points, installing water suction machines, employee flood-response training, and
a post-flood expert audit before restarting operations.

Example: A flood in a Food Corporation of India warehouse near the India-Nepal border
destroyed approximately 50% of storage capacity and around 600 quintals of food grain.

3. Failure of Equipment
Meaning
Breakdown or improper use of machines and handling equipment creates operational risks.

Causes
Untrained operators, improper maintenance, technological failure, cyber threats, and poor
handling of automation systems.

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Effects
Delays in shipment, loading/unloading failure, warehouse accidents, and financial loss.

Preventive Measures
Appoint trained employees, conduct regular hands-on training, ensure the proper use of IoT,
drones, and robots, perform timely charging and maintenance, and ensure data protection
against cyber threats.

4. Theft or Burglary
Meaning
Unauthorized stealing of warehouse goods.

Reasons for Theft

Involvement of internal employees, local criminal groups, and greed for quick money.

Warehouses Highly Vulnerable

Liquor warehouses, tobacco warehouses, opium storage, and valuable goods warehouses.

Preventive Measures
Important security measures include CCTV cameras, hidden burglar alarms, visitor logs,
physical stock verification, surprise inspections, separate zones for incoming/outgoing
consignments, lock coding systems, sharing shipment details with stakeholders, and RFID
and IoT tracking during transit.

Example: An Amazon warehouse theft in Manesar, Gurgaon (2020) resulted in goods worth
approx. ₹4 lakh being stolen.

5. Destruction of Goods
Meaning
Goods get damaged, rotten, crushed, or defective.

Causes
Faulty packaging, mishandling during transportation, improper warehouse handling, and
environmental exposure.

Effects
Revenue loss, customer dissatisfaction, and increased replacement cost.

Important Fact: Replacing damaged products costs more than shipping costs.

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6. Inappropriate Storage or Packaging

Meaning
Improper storage conditions or poor packaging damage products.

Problems Due to Improper Storage

●​ Product Damage: Exposure to sunlight, moisture damage, frozen products stored at
the wrong temperature, bad odour contamination, and perishable goods spoilage.
●​ Inventory Problems: Ghost inventory and wrong size/color records.

Preventive Measures
Store goods in a proper ambience, ensure proper packaging and labeling, perform regular
inspections, execute careful loading/unloading, properly use forklifts and cranes, use
symmetric pallets, maintain correct pallet positioning, and follow warehouse safety
guidelines.

7. Safety of Employees
Importance
Employee safety is a major warehouse responsibility. Unsafe warehouses reduce
productivity, morale, and efficiency.

Employee Safety Measures

Important measures include preferring automation, providing proper training, offering
insurance and medical benefits, utilizing safety equipment (helmets, jackets, safety shoes,
spectacles), installing proper signages, introducing welfare schemes, arranging regular mock
drills, reducing slips, trips, and falling objects, and following the safety handbook.

Warehouse Regulations
Warehouse operations are governed by safety regulations to protect employees, equipment,
goods, and infrastructure.

HASWA Act 1974 (Health and Safety at Work Act)

1. Employer’s Responsibility

Employee health and welfare, safety policies, safe equipment, and training programs. They
must also collaborate with safety experts to establish an Approved Code of Practice (ACOP),
which is legally binding.

2. Employee’s Responsibility

Attend safety training, follow safety rules, and report hazards.

3. Manufacturer’s Responsibility

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Produce safe equipment and ensure suitability for intended use.

Important Warehouse Safety Regulations

●​ 1. Display Screen Equipment Regulations 1992: Applies to Visual Display Units
(VDUs).
○​ Risks include eyestrain, backache, and limb pain.
○​ Solutions include backrests, screen protectors, and regular exercise.

●​ 2. PPE Regulations 2002 (Personal Protective Equipment): Examples include

safety jackets, goggles, warm clothing, and heated cabs. Dictates that when
automation or mechanical safety barriers cannot fully control a risk, employers must
provide specialized gear free of charge. PPE must be provided when risks cannot be
controlled otherwise.

●​ 3. PUWER 1998 (Provision and Use of Work Equipment Regulations):

Requirements state equipment must be suitable for its intended purpose, inspected
regularly, maintained properly, and checked for risks.

●​ 4. RIDDOR 1995 (Reporting of Injuries, Diseases and Dangerous Occurrences

Regulations): Requires management to formally notify regulatory bodies of critical
workplace accidents, occupational diseases, or dangerous near-miss events,
regardless of whether a physical injury occurred.
○​ Main objective is that employers must report workplace accidents, diseases,
and dangerous incidents.

●​ 5. Workplace Regulations Act 1992:

○​ Focuses on ventilation, lighting, cleanliness, washing facilities, and waste
disposal.
○​ It reduces risks of slipping, toxic environments, and fire exit blockages.

●​ 6. Manual Handling Operations Regulations 1992:

○​ Objective is the safe manual and machine handling of loads.
○​ It focuses on correct quantity handling, proper direction, and proper lifting
style.

●​ 7. COSHH Regulations 2002 (Control of Substances Hazardous to Health):

Consists of COSHH Regulations 2002 & CHIP (Chemical Hazard Information and
Packaging for Supply) Regulations 2002. It mandates the categorization, protective
packaging, and clear display of hazard data sheets for all dangerous or volatile
chemical compounds stored on-site.
○​ Purpose is protection from hazardous substances. Manufacturers and
suppliers must classify hazardous products, pack them safely, and display
hazard information.

Employer’s Responsibility in Safety

●​ Phase 1: In-place Arrangements: Establishing risk elimination planning, setting up a
structured health and safety organization, building control mechanisms to ensure
decisions are executed, and conducting continuous monitoring and operational
reviews.

●​ Phase 2: Active Health & Safety Arrangements: Providing proactive health

surveillance, sharing clear information transparently with employees, providing

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sufficient, regular training, maintaining a supportive, safe, and conducive working

environment, and enforcing and implementing all prevailing health and safety
legislation.

●​ Alternatively expressed as:

○​ Step 1: Risk Elimination Planning (Includes structured organization, control
mechanisms, continuous monitoring) and
○​ Step 2: Health and Safety Arrangements (Includes health surveillance,
information sharing, regular training, safe working environment, enforcement
of safety laws).

Warehouse Health and Safety Checklist

●​ Layout Checklist:
○​ Risk assessment conducted?
○​ People and vehicles separated?
○​ One-way systems used?
○​ Emergency exits accessible?
○​ Proper aisle width?
○​ Clear markings?

●​ Floor Checklist: Slip-proof floors, flat and level surfaces, and marked load-bearing
capacity.

●​ Lighting and Visibility: Sufficient lighting and clear labels/markings.

●​ Housekeeping: Clean aisles, spillages cleaned immediately, and proper waste

disposal.

●​ Fire Safety Checklist:

○​ Fire assessment done?
○​ Emergency lights available?
○​ Fire alarms installed?
○​ Staff fire training conducted?

●​ Loading and Unloading Safety:

○​ Traffic supervision available?
○​ Dock safety maintained?
○​ Personnel trained?

Warehouse Management System (WMS)

Meaning
WMS is a software-based system used to monitor warehouse operations, control inventory,
improve efficiency, and reduce operational errors.

Objectives of WMS
Cost effectiveness, operational efficiency, inventory control, and compliance management.

Components of WMS

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1. Interfaced Modules

Links core systems to synchronize data across external stakeholders.

Key integrations include:

TMS (Transport Management System) for carrier updates,

GTM (Global Trade Management) for international shipping data, and

ERP (Enterprise Resource Planning) for demand planning, work orders, accounting, and
replenishment.

2. Control Operations

Focuses on real-time task coordination and workflow efficiency.

Key functions

include task scheduling (managing receipts, lot control, order picking, and product packing)
and execution tracking (logistical management of labor hours, warehouse control system
signaling, and cross-dock staging).

3. Work Scheduling

Focuses on human resource optimization. It manages flexible workforce allocation based on

real-time customer demand, provides 24/7 continuous shift tracking adjusted for volume
fluctuations, and evaluates team and individual performance using standardized metrics.

4. Compliance Management

Automated documentation checking to ensure regulatory alignment. It generates localized

freight bills, packaging slips, and product labeling, and automates Advanced Shipping
Notices (ASN) and dispatch logs.

5. Inventory Control

Direct management of stored assets. It runs ABC analysis for optimized item placement,
manages cycle counting, bin replenishment, and slot optimization, and provides end-to-end
item tracking and tracing.

Important Terms for Exams

●​ RFID: Radio Frequency Identification used for tracking goods.

●​ IoT: Internet of Things used for smart warehouse operations.

●​ Ghost Inventory: Inventory shown in records but physically unavailable.

●​ Slot Optimization: Efficient placement of goods for faster retrieval.

●​ Cross Docking: Direct movement of goods from receiving to shipping with minimal
storage.

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Key Facts for Revision

●​ Fire and flood are the most common warehouse risks.
●​ HASWA Act introduced in 1974.
●​ PPE Regulations introduced in 2002.
●​ PUWER introduced in 1998.
●​ RIDDOR introduced in 1995.
●​ COSHH introduced in 2002.
●​ WMS improves warehouse efficiency and reduces risk.
●​ Employee safety directly impacts productivity and profitability.

Conclusion
Warehouse Risk Management is essential for employee safety, protection of goods,
reduction of operational losses, and efficient supply chain functioning.

An effective Warehouse Management System combined with proper safety regulations and
preventive measures ensures smooth warehouse operations, reduced accidents, better
customer service, and higher profitability.

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Unit 12: Materials Management and Its

Organisation
1. Introduction to Materials Management
Organisation
Materials Management Organisation focuses on the coordination of logistics and materials
activities; the efficient movement and storage of goods; and the integration of purchasing,
inventory, warehousing, transportation, and distribution to achieve organizational goals
through cooperation and coordination.

Main Objective
To minimize total cost while maintaining desired customer service levels. Materials
management is a critical organizational concept focused on integrating and managing the
sourcing, flow, and control of materials using a total systems perspective. Rather than having
separate functions report to different executives—which often leads to conflicting goals—this
structure coordinates the entire inbound process under a unified executive framework.

Key Reasons for Importance

●​ High Cost Proportion: Materials account for a substantive proportion of the total cost
of goods and services, frequently exceeding half the cost of doing business. They
make up 60%–70% of total expenditure in cotton textiles, silk yarns, automobiles,
rubber goods, sugar, and electrical goods industries, and 50%–60% of total
expenditure in engineering goods, nonferrous metals, and pharmaceutical industries.
●​ Resource Input & Target Completion: Proper availability of the right quality, right
quantity, at the right place and time is a prerequisite to meeting production targets.
Material shortages can be highly costly or even catastrophic.
●​ Global Competition & Margin Pressures: Global coordination of material flow
economics is mandatory to maintain profit margins and deliver customer satisfaction.
●​ Business Continuity: In a post-COVID-19 landscape shaped by geopolitical
dynamics and disasters, business continuity is directly tied to material availability.

Evolution of the Concept

●​ 1970s: Firms embraced the materials concept to combat vital material shortages and
rising prices, coordinating diverse functions to control related costs.
●​ 1990s: The concept evolved into Supply Chain Management (SCM) as manufacturers
and service providers sought backward vertical integration and collaboration with
suppliers. Materials management remains a core component of SCM and has
increasingly gained board-level representation.

Financial Metrics & Trade-Off Management

Financial Framework

In a typical manufacturing industry, 60% to 70% of total employed funds are tied up in
Current Assets, with inventory representing the most significant component. Materials
generally constitute 50% of total costs, meaning material cost reduction is the most powerful

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lever for earning profit when sales prices cannot be raised due to market competition.

The fundamental financial objective is maximizing Return on Investment (ROI):

Where:

(Note: Overheads include bank interest charges on inventory held).

Managing Trade-Offs

A Materials Manager must balance conflicting functional goals. For example, Materials
Control aims to keep raw material and work-in-process (WIP) inventories as low as possible
to minimize high inventory carrying costs, which must be balanced against production
schedules and transportation efficiencies.

Tangible Benefits of the Materials Concept

●​ Provides greater direct control over material costs.

●​ Develops a holistic "total system approach" among personnel instead of narrow
functional mindsets.
●​ Opens communication channels and breaks down functional silos.
●​ Supports career paths by rotating personnel across functional boundaries to build
well-rounded expertise.
●​ Streamlines data and material movement, creating overall operational synergy.

Core Activities and Functional Areas

Materials logistics management (or total systems management) spans all inbound,
production, and outbound activities.
●​ 1. Purchasing: A major function within the materials structure. Historically reported to

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manufacturing, but modern structures show the Purchasing Manager reporting directly
to the Materials Manager in approximately 70% of organized firms.

●​ 2. Inbound Transportation: Handles the specialized traffic and transportation

required to bring items into the firm. It is often the single largest category of
purchasing-related costs for highly diversified firms. Placing it under the materials
umbrella ensures the buyer tightly controls the inbound pipeline rather than leaving it
to suppliers.

●​ 3. Inbound Quality Control: Focus has shifted over the last 15 years from detection
(during receipt) to prevention early in the sourcing process. Progressive firms work
directly with suppliers to establish proper quality control procedures.

●​ 4. Receiving and Storage: Manages physical processing, handling, and staging of

inventory. Includes updating in-transit files, purchasing files, and accounts payable
systems via computer terminals upon receipt.

●​ 5. Materials Control vs. Inventory Control:

●​ Materials Control is responsible for tactical duties like generating material releases to
suppliers, altering order release quantities, and tracking inbound shipments to support
production.
●​ Inventory Control is responsible for determining finished goods levels to support
outbound physical distribution customer requirements. It is technically a part of the
distribution process, not materials management.
●​ 6. Production Planning and Scheduling: Determines aggregate production levels
for product families along with time-phased, detailed production schedules based on
sales forecasts. In firms with a designated materials manager, 77% report that
production planning reports directly to them (the highest reporting percentage among
all materials functions).
●​ 7. Vendor Development & Value Engineering:
●​ Vendor Development includes activities conducted by buyers to improve a vendor’s
capabilities and performance in design, product development, costing, quality, and
logistics.
●​ Value Engineering is an organized effort analyzing designed features, systems,
equipment, and material selections to achieve essential functions at the lowest
life-cycle cost without sacrificing performance, quality, reliability, or safety.

Logistics Organization and Structural Choices

Industry Typologies & Logistics Focus
The positioning of logistics depends on how costs are incurred and where customer service
demands are highest:

Industry Type Characteristics Primary Logistics Organizational Center

Focus
Extractive Bulk shipments, raw Mode selection, routing, Highly visible Materials
Industries material extraction, low equipment utilization, Management department.
(Lumber, product diversity. purchasing.
mining,
agriculture)
Service Converts tangible Purchasing and Materials Management
Industries supplies into service inventory management; (with little physical
(Hospitals, offerings; dispersed less emphasis on distribution).

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Industry Type Characteristics Primary Logistics Organizational Center

Focus
insurance, suppliers. transport.
transport)
Marketing Buys goods for resale Inbound traffic, Balanced, but favors a
Industries without altering product inventory control, strong Physical
(Distributors, form. warehousing, order Distribution setup.
retailers) picking, shipping.
Manufacturing Transforms wide Deeply embedded Integrated design:
Industries varieties of raw items logistics on both supply Materials Management +
into high-value goods. and distribution sides. Physical Distribution.

2. Types of Organizational Forms in Logistics

A. Informal Organizational Form

Relies on coercion, persuasion, or incentives to coordinate separate segments

(transportation, inventory, order processing) without changing the existing corporate
structure.
●​ Features: Coordination occurs through personal communication, coordination
committees, or executive supervision.
●​ Advantages: Flexible, simple, low cost.
●​ Disadvantages: Weak implementation authority; depends heavily on personal
relationships.
●​ Important Fact: Top management review is highly effective because executives can
observe sub-optimal decisions and lack of coordination between departments.
●​ Incentive Systems: Uses cross-charges, transfer costs, or cost-savings sharing
setups to motivate functional managers to cooperate.
●​ Coordinating Committees: Committees containing representatives from each area
establish communication, though they typically lack the formal power to implement
recommendations.

B. Semiformal Organizational Form (Matrix Organization)

Definition: A structure where logistics managers coordinate activities across several

functions without direct authority.
●​ Features: Logistics manager shares authority with functional managers while the
traditional organizational structure remains intact. Common in the aerospace industry
and large project-based organizations.

Aspect Description
Authority Shared
Structure Matrix
Coordination Cross-functional
Accountability Joint

●​ Advantages: Better coordination, flexibility, and balance between departments.

●​ Disadvantages: Blurred authority, conflicts difficult to resolve, and accountability

confusion.

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●​ Important Exam Point: The matrix organization is a compromise between an informal

organization and a highly structured formal organization.

C. Formal Organizational Form

Definition: A structure with clear lines of authority and responsibility for logistics activities.

●​ Features: The logistics manager is placed at a high organizational level, holding equal
importance with finance, operations, and marketing.

●​ Objectives: Improve coordination, increase authority of logistics, and resolve

economic conflicts effectively.

●​ Important Facts: Logistics is treated as a major organizational function; separate

managers are created for major logistics activities.

●​ Why Separate Activity Areas? Different logistics functions require different technical
skills. For example, transportation management skills differ from inventory
management skills.

●​ Key Principle: A balance between coordination and technical specialization.

3. Organizational Positioning
Meaning: Determining where logistics activities should be placed in the organization.

Major Issues: Centralization vs Decentralization, Staff vs Line organization, and Large vs

Small firms.

4. Centralization vs Decentralization
A. Centralized Structure

Definition: All logistics activities are controlled from a central corporate level.

Advantages Explanation
Increases leverage Better bargaining power
Reduces duplication Shared resources
Facilitates Uniform procedures
standardization
Enables specialization Expert management

●​ Additional Benefits: Better fleet utilization, shared warehousing, shared data

processing, and economies of scale.
●​
Disadvantages Explanation
Bureaucratic Slow decisions
challenges
Reduced flexibility Less local responsiveness

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B. Decentralized Structure

Definition: Each division or product group has its own logistics organization.

Advantages Explanation
Localized information Better customer understanding
Strong relationships Closer customer interaction
Faster response Quick decisions

Disadvantages Explanation
No economies of scale Higher cost
Duplication of work Repeated activities

●​ Best Suitable When: Product lines differ significantly or customer requirements vary
greatly.

5. Staff vs Line Organization

A. Line Organization

Definition: Direct authority over logistics operations (physical movement and storage of
goods).

●​ Features: Direct control, operational responsibility, and decision-making authority.

B. Staff Organization

Definition: Logistics acts as an advisory or consulting function to line operations

(Marketing/Manufacturing).

●​ Used When: Line authority may create conflicts, logistics is less critical, planning is
more important than execution, or logistics is treated as a shared service.

●​ Important Fact: Staff logistics departments are often positioned close to top
management.

6. Large vs Small Firm Logistics Structure

●​ Large Firms: Characterized by complex structures, divisional organizations, and
clearly defined logistics activities.

●​ Small Firms: Characterized by centralized structures, less formal logistics systems,

and fewer specialized departments.

●​ Important Point: Small firms still face significant logistics problems despite their size.

7. Inter-organizational Management
Meaning: Management of logistics activities between different firms in a supply chain.

Objective: Treat the supply chain as a “super organization”.

Importance: Decisions of one firm affect other firms in the channel.

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For example, carrier pricing affects buyer decisions.

8. Theory of Super Organization

Definition: A group of legally separate but vertically related firms cooperating for mutual
benefit.

Main Goal: Maximize collective profits through cooperation.

9. Managing the Super Organization

A. Relevant Information Sharing

Needed for decision-making, reducing uncertainty, and maintaining cooperation. Problems

include weak accountability and reluctance to share information.

B. Distribution of Profits

Objective: Ensure all channel members benefit fairly.

●​ Important Concept: If one member loses profit, cooperation may fail and the coalition
may dissolve.

●​ Key Principle: Fair redistribution maintains long-term cooperation.

10. Strategies for Conflict Resolution

Traditional Methods

Method Meaning
Bargaining Negotiation
Diplomacy Using representatives
Membership Personnel exchange
Ideology Education and persuasion
Third-party intervention Neutral mediator

Frazier and Summers’ Strategies

Strategy Meaning
Information exchange Discussion-based persuasion
Recommendations Suggested actions
Promises Rewards for compliance
Threats Negative consequences
Legalistic strategies Contracts and agreements
Requests Simple requests without pressure

11. Team Approach in Organizational Structure

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Cross-functional Teams

Definition: Teams composed of members from multiple departments.

Common Uses: Supplier evaluation, cost reduction, and new product development.

Benefit Explanation
Faster problem solving Team responsibility
Better communication Cross-functional interaction
Innovation Reduced bureaucracy
Better decisions Multiple experts involved

12. New Product Development Teams

●​ Traditional Approach: Sequential work process.
●​ Team Approach: Simultaneous work process.
●​ Benefit: Reduced concept-to-customer time and product development cycles.
●​ Competitive Advantage: Faster market entry.

13. Alliances and Third-party Service Providers

Logistics Alliances

Meaning: Two or more firms share logistics capabilities.

Benefits
Reduced costs, lower capital investment, better customer
service, access to technology, competitive advantage,
reduced risk, and better information.

Risks
Loss of control, dependency, trust issues, and service failure
concerns.

●​ In-House Operations (High Criticality + High Competency): Little benefit is gained

from outsourcing.
○​ Example: Walmart maintains total control over its superior supply channel.

●​ Outsourcing/3PL (Low Criticality + Low Competency): Yields major cost

reductions and customer service bumps
○​ . Example: Dell Computer considers marketing and hardware manufacturing
its core capabilities, outsourcing regional distribution to specialized 3PLs.

●​ Partnership/Alliance (High Criticality + Low Competency): The firm partners with a

stronger logistics entity to gain market access, specialized transportation equipment,
or administrative capabilities.

14. Third-party Logistics (3PL)

Definition: Outsourcing logistics activities to specialized service providers.

Examples: Transportation companies, warehousing firms, and integrated logistics providers.

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Important Fact: 3PL companies provide complete logistics solutions on a contract basis.

Reasons for Outsourcing: Logistics is not a core competency, cost reduction, better
efficiency, and improved customer service.

15. Logistics Alliances: Key Concerns

●​ Loss of control, lack of trust, unequal benefits, reporting incompatibility, fear of logistics
failures, and difficulty measuring benefits.

●​ Important Exam Point: Logistics alliances are fragile and difficult to maintain.

16. Organizing for Global Sourcing

Global Sourcing

Meaning: Obtaining goods and services from worldwide sources for cost and efficiency
advantages.

Factors Affecting Global Sourcing Structure

●​ A. Product Line: Different product lines require different sourcing structures.

●​ B. Customer Markets: Market characteristics influence sourcing decisions.
●​ C. Required Expertise: International sourcing requires specialized knowledge and
regional expertise.

17. Centralized International Purchasing Structure

●​ Features: Commodity managers purchase common items, international offices
support global sourcing, and centralized coordination is utilized.
●​ Advantages : Better contracts, cost efficiency, access to global suppliers, improved
quality, and better delivery performance

18. Benefits and Risks of Global Sourcing

BenefitsLow-cost production, access to technology, world-class skills, and competitive
advantage

Disadvantages : Coordination problems, transportation risks, supply chain disruptions,

ethical issues, and social challenges
Important Fact: COVID-19 exposed vulnerabilities in global sourcing systems.

19. VUCA Environment

Meaning of VUCA

Letter Meaning
V Volatile
U Uncertain
C Complex
A Ambiguous

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Key Point: Organizations must become agile, flexible, and innovative.

20. Important Exam Facts

●​ Matrix organization = shared authority
●​ Centralization = economies of scale
●​ Decentralization = faster response
●​ Staff organization = advisory role
●​ Line organization = direct authority
●​ 3PL = outsourced logistics services
●​ Super organization = cooperating supply chain firms
●​ Cross-functional teams improve innovation

21. Important Definitions

●​ Logistics Alliance: A cooperative arrangement between firms to improve logistics
performance.
●​ Third-party Logistics (3PL): Outsourcing logistics functions to external specialists.
●​ Matrix Organization: An organizational form with shared authority across functions.
●​ Centralized Organization: All logistics decisions controlled from one central point.
●​ Decentralized Organization: Logistics decisions made at divisional or local levels.
●​ Super Organization: A group of cooperating firms functioning as one system.

22. Important Comparison Tables

Centralized vs Decentralized

Basis Centralized Decentralized

Decision making Central Local
Flexibility Low High
Cost efficiency High Low
Customer Slower Faster
response
Duplication Low High

Staff vs Line Organization

Basis Staff Line

Authority Advisory Direct
Responsibility Indirect Operational
Decision power Limited High

23. Important Short Notes

●​ Why Firms Use Cross-functional Teams: Better decisions, faster implementation,
improved communication, and increased innovation.

●​ Why Firms Outsource Logistics: Reduce cost, focus on core competency, access
expertise, and improve efficiency.

●​ Challenges in Alliances: Trust deficit, loss of control, unequal benefits, and

communication problems.

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Unit 13 : Performance Evaluation and Appraisal in

Material Management
1. Introduction to Materials Management
Meaning of Materials Management Materials management is the planning, organization,
and control of the flow of materials from suppliers to the final customer. It includes:
procurement, inventory management, warehousing, work-in-progress management, shipping
and distribution, and quality control.

Key Inputs:

It uses Demand Forecasting to prepare a Master Production Schedule (MPS), which then
drives Materials Requirement Planning (MRP) to create a component-wise Bill of Materials
(BOM).

Key Objective: To ensure the right material, right quantity, right quality, right time, and
minimum cost.

Important Concepts
●​ Master Production Schedule (MPS): A schedule specifying what to produce,
quantity to produce, and time of production.

●​ Material Requirement Planning (MRP): MRP converts MPS into detailed component
requirements using the Bill of Materials (BOM), inventory records, and production
schedules.

Functions of Materials Management

Demand forecasting, purchasing, procurement, inventory control, warehousing, distribution,
and quality control.

2. Performance Appraisal in Materials Management

Meaning Performance appraisal is the periodic evaluation of the effectiveness and
efficiency of the materials management system.

Objectives: Identify strengths and weaknesses, compare targets with actual performance,
improve efficiency, reduce wastage, enhance customer service, and upgrade systems

. Areas Evaluated: Inventory control, supplier quality, delivery performance, procurement

efficiency, quality management, and cost control.

3. Why Control is Needed in Materials Management

1. High Material Cost: Materials form a major portion of production cost.

2. Inventory Reduction: Proper inventory management reduces carrying cost,

obsolescence, and wastage.

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3. Competitive Advantage: Low inventory and efficient systems improve competitiveness.

4. Timely Contract Execution: Ensures smooth procurement and timely production.

5. Supplier Coordination: Good supplier relations reduce uncertainties.

6. Customer Satisfaction: Timely and quality delivery increases customer satisfaction.

7. Productivity Improvement: Continuous monitoring improves operational efficiency.

4. Types of Control Needed in Materials Management

A. Forecasting Control
Meaning & Importance: Forecasting predicts future demand for products and services. It
serves as the basis for planning, helps inventory management, and reduces uncertainty.

Features: It is a dynamic process that requires continuous revision and improves planning
accuracy.

B. Purchasing and Procurement Control

Functions of Purchasing Manager: Reviewing procurement requests, evaluating suppliers,
negotiating contracts, monitoring materials flow, and developing procurement strategies.

Importance: Ensures timely supply, cost efficiency, and supplier reliability.

C. Stores and Stock Control

Main Functions & Objective: Binning and shelving, pallet storage, inspection of materials,
stock verification, and warehouse management.

The primary objective is the efficient storage and movement of materials.

D. Inventory Planning and Control

Objective: Maintain a high service level while keeping inventory costs to a minimum.

Two Important Decisions: When to order and how much to order.

Important Systems

1.​ Continuous Review System (Q System / ROP System): Inventory is monitored

continuously and orders are placed at a designated reorder point.

2.​ Periodic Review System (P System): Inventory is reviewed at fixed intervals.

E. Production Planning and Control

●​ MRP (Material Requirement Planning): Uses BOM, inventory status, and MPS to
generate purchase orders and production schedules.

●​ DRP (Distribution Requirement Planning): Works backward from customer demand

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to build efficient supply schedules. It focuses on distribution scheduling and supply

coordination.

5. Approaches to Materials Management

A. Japanese View
Characterized by bottom-up decision making, consensus-based decisions, nearby small
vendors, and a pull production system. It utilizes the Kanban System (cards to signal
production/movement) where production is based entirely on actual demand. ( Pull
production system )

B. US View
Mainly focuses on the Just-in-Time (JIT) system, featuring coordinated supplier deliveries,
minimal inventory, and direct delivery to the production line.

C. European View
Focuses strictly on the optimal utilization of plant, labor, capital, and resources.

D. Modern Practice
Current approaches typically apply a strategic mix of all three regional methodologies
alongside customized local practices.

6. ABC Analysis
Meaning: ABC analysis classifies inventory based on value and importance.

It is based on the Pareto Principle (20% of items account for 80% of value, and 80% of
items account for 20% of value).

Classification
●​ Class A: Top 20% of items, accounting for about 80% of total value. Strict control
required.
●​ Class B: Medium importance items requiring moderate control.
●​ Class C: Low value items requiring loose control. A larger safety stock is typically
maintained.

Step-by-Step ABC Calculation Method

1.​ Calculate Total Rupee-Volume:

Multiply Volume by Unit Cost for each item

Annual Usage Value = Volume * Unit Cost

2.​ Sort: Arrange items in descending order based on their Total Rupee-Volume.

3.​ Classify: Group top items making up roughly 80% of cumulative cost as Class A;
bottom items making up roughly 5-7% of cost (or 70-80% of item volume) as Class C;
place the remaining items into Class B.

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Control Policies (Q vs. P Systems)

●​ Continuous Review (Q) / Reorder Point (ROP) Systems: Requires constant
monitoring of inventory levels. Used primarily for Class A and Class B items. It is more
expensive to administer.

●​ Periodic Review (P) Systems: Material levels are checked only at pre-specified fixed
intervals. Used primarily for Class C items due to high convenience, utilizing an
order-up-to policy.

Example Calculation
Example Formula/Logic:

If you have an order-up-to target (T = 100) and a safety stock threshold (SS = 20), and your
checked inventory level (I) falls below safety stock (e.g., I = 16), you order:

Initial Dataset:
Material Volume Cost Rs. Volume
109 200 600 120,000
222 26,000 36 936,000
346 2,000 55 110,000
432 20,000 4 80,000
211 7,000 10 70,000

Final Classification after sorting and evaluating percentages:

Material Percentage Class

222 71.1% A
109 9.1% A
346 8.4% B
432 6.1% B
211 5.3% C

Important Points
For A and B Items
Use:

●​ Continuous Review (Q) System​

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For C Items
Use:

●​ Periodic Review (P) System​

6. Order-Up-To Policy Formula

Example: If Maximum Level = 100 units, Safety Stock = 20 units, and Current Stock = 16
units:

Order quantity = Maximum level - Current Inventory

= 100 - 16

= 84

7. Need for Performance Appraisal

Importance: Helps in evaluating effectiveness, improving productivity, reducing costs,
monitoring inventory, and improving supplier performance.

Traditional Measures: Average inventory, service level, lead time, and inventory cost.

Modern Approaches: Balanced Scorecard and SCOR Framework.

8. Approaches for Performance Appraisal

1.​ Inventory Levels: Check minimum inventory requirements.

2.​ Forecast Accuracy: Evaluate completeness, accuracy, and compatibility.

3.​ Materials Usage: Ensure efficient utilization.

4.​ Scrap Management: Control inactive materials and scrap.

5.​ Inventory Costs: Control capital cost, storage cost, insurance cost, and obsolescence
cost.

6.​ Quality Control: Evaluate statistical tools and quality improvement methods.

9. Matrices (Metrics) of Performance Appraisal

A. Inventory Turnover Ratio
Indicates how many times inventory is sold in a year.
●​ Interpretation: High ratio = Fast inventory movement; Low ratio = Slow movement.

●​ Limitation: Cannot compare firms from different industries.

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B. Safety Stock
Extra stock maintained to avoid stockouts caused by demand fluctuation and lead time
variation. It minimizes the risk of running into a stockout during the Lead Time (LT). Higher
safety stock leads directly to a higher service level.

10. Balanced Scorecard Approach

A strategic performance measurement system developed by Kaplan and Norton that
balances short/long-term objectives, financial/non-financial measures, and internal/external
performance metrics.

Four Perspectives
1.​ Financial Perspective: Reflects past outcomes (e.g., profitability, cost control, ROI).

2.​ Customer Perspective: Current indicators of performance (e.g., customer

satisfaction, growth, retention, service quality).

3.​ Internal Process Perspective: Leading performance indicators tracking operational

speed, efficiency, non-value-added work reduction, and quality control
.
4.​ Learning and Growth Perspective: Focuses on human resource systems,
development, employee innovation, and skill enhancement.

11. SCOR Framework

Meaning: SCOR stands for Supply Chain Operations Reference Model. It was developed by
PRTM Consulting and is maintained by the Supply Chain Council. It models the "Fulfill
Order" process and maps weaknesses against structural supply chain maturity.

SCOR Performance Attributes

External Performance Metrics:

●​ Supply Chain Delivery Reliability: Measures correct product, quantity, time, and
customer via metrics like delivery performance, fill rate, and perfect order fulfillment.

●​ Supply Chain Responsiveness: Speed of delivering products measured by order

fulfillment lead time.

●​ Supply Chain Flexibility: Ability to respond to market changes via response time and
production flexibility.

Internal Performance Metrics:

●​ Supply Chain Costs: Cost of goods sold, supply chain management cost, warranty
cost, and value-added productivity.
●​ Supply Chain Asset Management Efficiency: Cash-to-cash cycle time, inventory
days of supply, and asset turns.

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12. Important Formulas

1. Fill Rate
Fill Rate = Orders Fulfilled / Total Orders

2. Inventory Turnover Ratio

Inventory Turnover Ratio = COGS / Average Inventory

3. Annual Usage Value

Usage Value = Volume * Unit Cost

4. Order Quantity (Order-Up-To Policy)

Order Quantity = Maximum Level - Current Stock

13. Important Exam Facts

●​ Materials management controls the flow of materials from supplier to customer.
●​ MRP uses BOM, MPS, and inventory records.
●​ ABC analysis is based on the Pareto principle; A items require strict monitoring.
●​ Q System = Continuous review; P System = Periodic review.
●​ Safety stock reduces stockout risk.
●​ The Balanced Scorecard has four perspectives.
●​ SCOR stands for Supply Chain Operations Reference Model.
●​ The JIT system is emphasized in the US approach.
●​ Kanban is used in Japanese pull systems.

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