Which of the following refers to the quantity of a material used in a given time?

Calculating Economic Order Quantity

The following formula is used to calculate the EOQ:

Economic Order Quantity:
√(2 x S x D)/H

Annual Demand (D)

The Annual demand is the number of units that you sell annually. If actual units are not available, then you can use expected sales figure based on your sales trend.

Order cost (S)

This refers to the costs that are involved with an order but cannot be directly associated with the purchase cost.

Holding cost (H)

This refers to all the costs that are involved in storing or handling the items in your store or warehouse. Usually, holding costs are fixed in nature.

What are the components of Economic Order Quantity?

Annual Demand Calculation (D)

The Annual demand is the number of units that you sell annually. If actual units are not available, then you can use expected sales figure based on your sales trend.

The following table will give you a better idea about what the other factors are that can have an impact on demand and your business operations:

Market conditions

• Change in customer taste
• Competition
• Shift in industry standards

Economic conditions

• Change in tax rate
• Trade regulations, domestic and international
• Monetary policy

Order Cost Calculation (S)

This refers to the costs that are involved with an order but cannot be directly associated with the purchase cost.

• ► Transport charges and custom duties incurred during the movement of the items
• ► Clerical charges paid to an outsourced agency for recording transaction
• ► Salary paid to the quality check team before the items enter your warehouse
• ► Amount spent in setting up a machine or equipments

Holding cost calculation (H)

This refers to all the costs that are involved in storing or handling the items in your store or warehouse. Usually, holding costs are fixed in nature.

• ► Monthly rent for the shop or warehouse that you use to store items
• ► Employees salary and warehouse labor wages
• ► Electricity and insurance cost

Assumptions while calculating EOQ

The EOQ is a great metric for any business dealing with the buying and selling of goods. However, it's important to remember the assumptions that the EOQ formula is based on:

The bottom line

Economic Order Quantity may not consider all the factors that affect each business, but it is still a powerful tool to help an entrepreneur or manager to make more calculated decisions. What makes the EOQ a compelling tool is that it is dynamic and can be revisited from time to time as your business grows. If there's a change in any of your inventory costs, you can always tweak the formula and generate a new EOQ to suit the current conditions.

Calculating the EOQ for your business helps you find a good balance for your order and inventory costs, which are easy to overlook in day-to-day business. The EOQ formula shouldn't be taken as gospel, but it's a useful tool for informed, effective inventory control.

Materials management is a core function of supply chain management, involving the planning and execution of supply chains to meet the material requirements of a company or organisation.  These requirements include controlling and regulating the flow of material while simultaneously assessing variables like demand, price, availability, quality, and delivery schedules.

Material managers determine the amount of material required and held in stock, plan for the replenishment of these stocks, create inventory levels for each type of item (raw material, work in progress or finished goods), and communicate information and requirements to procurement operations and the extended supply chain. Materials management also involves assessing material quality to make sure it meets customer demands in line with a production schedule and at the lowest cost. 

Material management systems embrace all of the activities related to materials and are a basic business function that adds value to a finished product. It can also include the procurement of machinery and other equipment needed for production processes as well as spare parts.

Typical roles in Materials Management include inventory analysts, inventory control managers, materials managers, material planners, and expediters as well as hybrid roles like buyer/planners.

Regardless of role, the main objective of Materials Management is assuring a supply of material with optimised inventory levels and minimum deviation between planned and actual results.

The objectives of material management are sometimes referred to as the ‘Five Rs of Materials Management:’

1. The right material
2. At the right time
3. In the right amount

And of the quality that is:

1. At the right price
2. From the right sources

Contents

Click the links below to skip to the section in the guide:

• Types
• What do material managers do?
• Why is it important?
• Conclusion

What are the Types of Material Management?

The work undertaken by materials management experts can be broken down into five different types, as follows:

1. Material Requirements Planning

This important step in material management directly affects profits as the lower the amount of material used, the lower the cost of production and the more profit is delivered. Reducing material overspend has caused some industries to consider ‘Just in Time (JIT)’ strategies that require very small levels of inventory. However, this still requires careful planning to maintain without impacting production schedules.

2. Purchasing

Purchasing should be done economically and on time to maintain material supplies and increase final profits by lowering expenses.

3. Inventory Control

An inventory can include a range of goods being held including partially finished items, goods ready for sale and those used in production. Many industries try to time purchasing so that materials enter stores just ahead of production, although there is also a need to gauge supplier levels so items can be stocked before they become unavailable.

Inventories are required to control the flow of raw materials, purchased goods and finished parts and components.

4. Material Supply Management

Supply chain management can require materials to be distributed to different sites or production centres, each of which needs to be continuously supplied. Lack of stock can lead to financial losses through having to source replacement production materials or having to halt production schedules.

Poor storage can also lead to material supply disruptions through damaged or misplaced stock. Material management teams should be able to mitigate against these situations by using alternative supply systems.

5. Quality Control

Quality control of materials is also important, since good quality materials lead to good quality products. Factors such as durability, dimensional accuracy, dependability, performance, reliability and aesthetic value can all be important quality factors for materials management, depending upon the applications.

All five of these types need to work together for the successful management of materials from purchase and supply through to utilisation.

What do Material Managers do?

The overriding aim of material managers is to maintain a consistent flow of materials for production. This seemingly straightforward task has a range of potential difficulties to overcome including incorrect bills of materials, inaccurate stock-taking, shipping and receiving errors, unreported scrap, and production reporting issues.

Planning, organising and controlling the flow of materials means it is possible to manage purchasing and shipping to coincide with a manufacturing process and the final delivery of products. While material managers oversee the inventory management needs of a company, the actual procurement of materials may be undertaken by a separate purchasing team.

Material managers don’t just manage the flow of materials to ensure on-time delivery, but also seek to manage costs and quality through the supply chain. Keeping track of the availability of raw materials and products can also deliver cost savings and ensure a maximum return on working capital.

Materials are usually classified as either direct or indirect materials. Direct materials are those that are required for a finished product, while indirect materials are those that do not directly generate the final product.

In either case, inventory management is a vital aspect of material management. This can be broken down into three factors:

1. Maximum Stock

This is the maximum amount of material that is held in stock at any given time.

2. Minimum Security Stock

As stock levels fluctuate during production, there is also a need to ascertain a minimum stock level, bearing in mind supplier delivery times, cost of the orders and production requirements.

3. Re-Order Point

This is the point at which orders should be made so as to keep warehouse supplies aligned with supplier delivery times and production schedules.

Why is it Important?

Materials management is vital to ensure there is an unbroken chain of materials for production purposes to meet customer demands. Not only does it make sure production schedules can be met, but it can also save costs for a finished product while also maintaining quality through the materials that are purchased and used.

Materials management crosses the line between purchasing, logistics and inventory management, making it vital for processes reliant on raw materials, machinery, and maintenance, among others.

Conclusion

Materials management uses inventories and production requirements for planning and control to ensure materials are available as required to meet production schedules.

This material planning includes managing logistics, stock levels, materials quality, cost and more. This requires a step-by-step overview of processes and requirements.

Materials management has been an important part of industrial processes since the industrial revolution (if not before!), and is still used by modern companies across a range of industries to prevent any pauses in production.

With ties to other business areas, such as purchasing and warehousing, material managers need to interact with a supply chain to make sure materials are delivered where they are needed at the right time.

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