Materials Planning

&Control

Introduction• With the development of ‘integrated materials

management’ and ‘supply chain management’, material managers have learnt that a majority of the material needs of their organizations over a period of one year or more can be forecasted in advance with acceptable standard of accuracy.

• Hence, material planning, materials budgeting and material control have taken prominent roles in the integrated materials management system.

• Planning of materials and working out realistic materials budget help the smooth functioning of the operations as well as to control the operations effectively

What is materials planning?

• Materials planning is the scientific way of determining the requirements of raw materials, components, spares and other items that go into meeting the production needs within economic investment policies.

• Materials planning is a subset of the overall production planning and control system.

• Material budgeting helps materials planning

Importance of Materials Planning

1. OVER-ORDERING OR UNDER-ORDERING

• Absence of materials planning leads to over ordering or under-ordering of materials.

• Over-ordering leads to over-investment and unproductive use of working capital.

• Under-ordering leads to material shortage which may incur delay in executive orders or may also leads to loss of customers

Importance of Materials Planning

2.Escalation of cost of operations Lack of planning leads to unwarranted

emergencies or rush of orders which may leads to costly transportation.

The overall cost of operations increases due to increase in cost of transportation, higher rate of interest on working capital, damages and pilferage etc

Importance of Materials Planning

3. Purchase becomes a professional activity Materials planning changes the role of

purchaser to purchase manager or purchase executive as he/she can take decisions independently.

This leads to higher accountability and utilization of funds in an optimum manner

Importance of Materials Planning

4. Effective Control Device Materials planning help the management to

track down the variations in actual activity as compared to the standards set by the plan.

This helps to control the entire activities related to materials

Since the activities are properly streamlined and standardized, it may motivate the people who work on that

Benefits of Materials Planning

1. Avoids the practice of crisis management

2. Helps to perform effectively and efficiently due to proper forecasts

3. Helps in materials budgeting

4. Helps in purchase planning

The Approaches to Materials Planning

• The basis of materials planning is generally the firm wide annual production or operating plan which in turn is based on demand or sales forecasts for finished goods produced by the firm

• First the annual sales forecast will be divided into quarterly or monthly sales forecasts for each product line or individual product

• The sales forecast is then translated into an aggregate production plan and master production schedule (MPS) taking into consideration of finished goods inventory levels as well as desired in-process inventory levels for specific items.

• It is always better to construct the sales forecast for shorter period of time as it gives more accurate results

• All materials planning subsequently flow from the preliminary MPS.

• Requirements of various materials are worked out by exploding the MPS for planning period through the planning horizon

• This technique is referred to as “Bill of Materials Explosion”. BOM is nothing but a document which shows for a given product or subunit, the list of materials required, unit consumption, and location code (for storage)

• The condition of supply such as ‘brought out” or “made-in-house” will also be indicated.

• Computers are very effective for exploding BOM with demand forecasts as the basis and the product structure (part list) as the input data to the computer system.

• Another approach to materials planning is based on the past consumption levels and its analysis.

• Wherever items are used on continuous basis for a long period of time, then this method is the most apt one.

• The past consumption data is analyzed and based on it a project will be prepared.

Relationship between Materials Planning, Production Program and Sales Forecasting

• When it is possible to forecast the future demand for the products, then it is better to plan the production program to match with the sales forecasts.

• Based on the forecasts, heavy procurement will take place before the commencement of the actual production in a firm

• When purchase involve longer procurement lead time, the supply of seasonal products are adjusted to the availability of raw materials in the market.

• Thus the organization makes a balance in between the purchase, production and delivery of goods to the market

• When production schedule matches with the sales forecast perfectly, the finished goods inventories will be the minimum

• The relationship between materials planning with production programs and sales forecasts can be shown as below:

Sales Forecasting Techniques

Sales Forecasts

Sales Programs(Sales Budgets)

Production Program(Production Budgets)

Bill of Materials(BOM)

Planning Requirements

Delivery Schedules for Materials

Explosion Chart

SALES PLANNINGMATERIALS PLANNING

Production Planning

Materials Budgeting or Direct Material Budget

• The direct materials budget calculates the materials that must be purchased, by time period, in order to fulfill the requirements of the production budget. It is typically presented in either a monthly or quarterly format in the annual budget. In a business that sells products, this budget may contain a majority of all costs incurred by the company, and so should be compiled with considerable care. Otherwise, the result may erroneously indicate excessively high or low cash requirements to fund materials purchases.

Steps in  Preparing a Direct Materials Purchases Budget

1. Record projected units to be produced (from Production Budget).

2. Multiply by the Raw Materials Needed per Unit to calculate the amount of materials needed.

3. Calculate the desired ending inventory (usually a percentage of next quarter's needs).

4. Add to calculate Total Materials needed.

5. Subtract the beginning inventory (which is last quarter's ending inventory) to calculate the Raw Materials Needed to be Purchased.

6. Calculate the Cost of Raw Materials based on price per kilogram.

7. Complete the Schedule of Expected Cash Disbursements according to percentages provided.

SAMPLE OF DIRECT PURCHASE MATERIALS BUDGET

Sample Schedule of Expected Cash Disbursement

The Process of Preparation of Materials Budget

Requirements of Materials

Amount of Materials to be Purchased

Purchase Budget or Materials Budget

Variance Report for Control

Inventory of Materials on Hand

Inventory Norms and Targets

Forecasts of Prices and Rates

Actual Purchase

Purpose of Materials Budget

• Can calculate the financial availability

• Can compare the price escalation that takes place due to the difference between budgetary price and the actual price

• Can project the cash requirements correctly

Materials Control• “The function of maintaining constantly available

supply of raw materials , purchased parts and supplies that are required for the manufacture of products. The functional responsibilities include the requisitioning of raw materials for purchase of economic quantities at the proper time and their receipts, storage and production, the issuing of materials to production upon authorized request and the maintenance and verification of inventory records’.

• (American Production and Inventory Control Society)

Materials Control Cycle• Determining material needs• Preparing requisitions for purchased items and

requests for work orders for parts made in the shops

• Receiving purchased materials and finished parts• Inspecting purchased materials and parts• Entering receipts in stores records• Issuing of parts and materials to the shop for

production and assembly

Recording the issue in stores records Entry of receiving and issuing transactions

to cost and accounting records Determining necessity for replacements.