What is Material Planning

Table of Contents:-

  • What is Material Planning?
  • Meaning of Material Planning
  • Definition of Material Planning
  • Guidelines for Effective Material Planning
  • Factors Affecting Material Planning
  • Techniques of Material Planning
  • Material Budgeting
  • Material Control

What is Material Planning?

Material Planning is a scientific method of determining the requirements of raw materials, spares, components, and other items that go into meeting production needs within the economic investment policies. Thus, by definition, it follows that the materials planning function is a sub-system in the overall planning activity.

The ability to plan for inventory both in the short-term and long-term is essential to every enterprise The goals of this function are to be able to effectively translate marketing and sales forecasts into detailed inventory requirements, to project resource requirements associated with capital, manpower, materials, and physical plant, and to perform strategic simulation to validate overall enterprise goals.

System tools used by material planners include Material Requirement Planning (MRP) for manufacturing inventory planning statistical inventory replenishment models and Distribution Requirements Planning (DRP) for finished goods inventory planning. Just-in-time techniques apply to both areas.

Meaning of Material Planning

Materials planning can be used to assess the firm’s requirement for different planning horizons. As the planning horizon exceeds one year, the accuracy of the forecast decreases. Normally planning is done every quarter as materials planned at the beginning of every quarter will find that some materials are in short supply and some in excess, owning to errors in forecasting.

According to G.R. Terry, “Planning is a deliberate, conscious research used to formulate the design and orderly sequence of actions through which it is expected to reach the objectives”.

In any integrated Materials Management (MM) environment, the starting point for the material management process is material planning. This initial stage sets the foundation for the procurement function and subsequent material operations. 

Definition of Material Planning

Material planning is a systematic approach to determining the requirements, starting with consumables, raw materials, spare parts, and all other materials necessary to meet the given production plan for a certain period.

Material planning is an essential component of organizational planning. it serves as a sub-plan within the broader organizational plan. Its major function is to forecast and initiate the procurement of materials required for the functioning of the organization.

Material planning is essentially an activity of an enterprise for the procurement and use of materials, distinctly separated from the procurement process and the use of human skills and labour, to attain some predetermined objectives. In an organisation, material planning requires a constant balancing of interrelated objectives, which often need the sacrifice of one objective for the achievement of another.

For example, in some industries which use scarce materials for the manufacture of some components and parts to be used in complex machines, the cost factor does not dominate, whereas, timely availability is more important. In other industries such as aircraft and precision-instrument industries, consistency in quality and reliability may be the sole criterion because of the high complexity of end products.

Again, in many industries inventory turnover may be the turning point, because they stock not only thousands of spares and parts that go to make a complicated machine but also keep them ready for after-sale customer service. Here a balance between stockouts and the build-in-inventory is the single most objective of material planning.

Guidelines for Effective Material Planning

Various guidelines for effective materials planning are as follows:

1) When determining the horizon for planning purposes, the most extended lead times must be considered so that they are adequately covered.

2) The operating environment of the firm must be carefully analysed. Thus if the demands fluctuate or show seasonal variation, they will affect the planning system and this should be taken care of.

3) When the planning horizon is short, if more plans are made in a year, the materials plan will be more reliable. However, a compromise has to be struck. The quarterly plans are very popular with firms in India.

4) Computerisation of the materials planning process should be done to streamline operations and improve efficiency within the organization. This is important because computers are ideally suited to handle fluctuations in demand and work out new and revised materials plans.

This aspect is best appreciated when people realise that one organisation in India is in a position to work out its requirements and changes thereof, and within 24 hours a change in product mix is effected. Thus, handsome savings in time and effort, apart from accurate forecasts, are obtained through computerisation.

Factors Affecting Material Planning

The factors which affect materials planning can be classified into the following two categories:

1) Macro Factors

Some of the macro factors which affect materials planning are price trends, business cycles, government import policy, credit policy, etc. The recent credit squeeze followed by the interim report submitted by the study group to frame guidelines for follow-up of bank credit is an excellent case in point.

This study group headed by Mr. P.L. Tandon has now given guidelines for inventory levels of raw materials, stocks in process, and finished goods as well as for receivables and bills purchased and discounted. Materials planners must adhere to these guidelines, as banks extend credit only by them. Such macro-level policy changes are bound to occur in the future and must be considered when developing the materials plan.

2) Micro Factors

The materials planner must also consider many factors at the micro level. They include corporate objectives, plant capacity utilization, rejection rates, lead times, inventory levels, working capital, seasonality, delegation of powers, and communication systems.

Techniques of Material Planning

The techniques of materials planning are as follows:

1) Bill of Materials Explosion

The basis for materials planning is the forecast of demand for the end products. Various forecasting techniques, such as the moving averages method, exponential smoothing, and time series are useful in demand forecasting.

Once the demand forecast is made, it is possible to go through the exercise of materials planning. Requirements of various materials are arrived at from the demand forecast, using a bill of materials, through explosion charts. Computers can be very effectively used for “exploding” bills of materials with demand forecasts. A Bill of materials is nothing but a document which shows for a given component the list of materials required, unit consumption, and location code. The condition of supply such as purchased or made in-house, will also be identified. An explosion chart is just a series of bills of materials grouped in a matrix form so that combining the requirements for different components can be done.

Materials planning can be used to assess the “firm requirements” for different planning horizons. As the planning horizon exceeds one year, the accuracy of the forecast reduces. Normally, planning is done every quarter. This is because the materials planner, at the beginning of every quarter, may find that some materials are in short supply and some in excess,  due to inaccuracies in forecasting.

Thus, operating every quarter helps to rectify these errors. At the same time, since quarterly periods are sufficiently long enough in most cases, realistic ordering can be done with the suppliers. This technique is perfectly suited for the engineering sector industries.

2) Past Consumption Analysis

For items that are consumed continuously and for which no bill of materials is possible, this technique is used. Here the past consumption data is analyzed and a projection for the future is made, taking into account the past and future production.

Certain guidelines have been established for each item, based on the “average” or “mean” consumption and the “standard deviation”.These statistics tools are very effective for tackling fluctuation in consumption. This technique is particularly used for direct and indirect materials for which no straightforward norms of consumption can be worked out. The technique has been successfully used in process industries.

Material Budgeting

A materials forecast requirement is prepared based on the analysis of the forecasted demand and the production plan. The budget is prepared for materials. A forecast of inventory levels is also prepared. Based on the forecasts orders are scheduled and progress is monitored about production and sales.

A material budget can be prepared once the material requirements are worked out. The process of budgeting is derived from material requirements. The material budget shows the estimated quantity as well as the cost of each type of material required for producing the number of units in the production budget.

First, quantities of different types of materials are estimated. Thereafter, the price of each kind of material and component is found to obtain the cost of different types of materials and components consumed in production,

The purchase budget considers both the current inventory and pending orders. Additionally, the budget may be designed to achieve specific targeted inventory levels. Generally, budgets are created to outline both the quantity of materials needed and the associated costs.

Material Control

Material control is defined as “a systematic control over purchasing, storing and consumption of materials to maintain a regular and timely supply of material at the same time, avoiding over-stocking”.

From this definition, it is clear that material control implies taking care of materials and their cost from the stage of procurement to the stage of their ultimate consumption.

The various activities under material control include procuring, storing and supplying the material required for production, at the lowest cost per unit, consistent with the required quality and with the least investment in inventory.

Material control function ensures a smooth and uninterrupted flow of materials to production while preventing the accumulation of unnecessary large stocks.

Importance of Material Planning

Efficient material planning offers many benefits to organizations, some of which are as follows:

1. Cost Reduction: Effective material planning helps to reduce costs by enabling buyers to negotiate better prices with suppliers through bulk purchases or long-term contracts. It minimizes rush orders and expediting costs associated with last-minute procurement.

2. Enhanced Customer Satisfaction: Reliable production schedules and on-time delivery or before-time delivery of products result in higher customer satisfaction levels, essential for maintaining a loyal customer base and help in gaining a competitive edge.

3. Optimized Inventory Levels: Using material planning, organizations can maintain optimal inventory levels, accurately forecast demand, and schedule procurement accordingly. This will prevent overstocking, reduction in storage costs, and minimize stockouts while ensuring smooth production flow.

4. Improved Production Efficiency: Effective material planning enables the timely availability of materials, and production schedules can be adhered to, ultimately minimizing downtime and delays. These factors lead to the improvement of overall production efficiency and timely delivery of products to customers.

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