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270 CHAPTER 8 The Material Planning Process

Material planning is concerned with answering three basic questions:
(1) What materials are required, (2) how many are required, and (3) when are
they required? The inability to answer any of these three questions accurately
will result in ineffi ciencies, lost revenues, and customer dissatisfaction. The
main objective of material planning is to balance the demand for materials
with the supply of materials so that an appropriate quantity of materials is
available when they are needed.
The fi rst part of this equation—the demand for materials—is driven
largely by other processes. For example, the fulfi llment process uses trad-
ing goods and fi nished goods, and the production process uses raw materials
and semifi nished goods. If the materials are not available when they are needed,
these processes will not function effectively. If raw materials are not available,
for example, then the company cannot produce fi nished goods in a timely
manner. Consequently, it will be unable to fulfi ll customer orders because it
does not have the necessary materials in stock. This situation is known as a
stock-out. A stock-out can result in lost sales if customers are not willing to
accept late deliveries.
The supply side of the demand-supply equation is usually the domain of
the procurement and production processes. That is, materials usually are either
purchased or produced. Buying or producing more materials than what are
needed will result in excess inventory, which ties up cash until the materials
are eventually used. The money tied up in inventory represents an opportunity
cost to the company. Additional costs are related to the cost of storage, insur-
ance, and the risk of obsolescence. In addition, the value of some materials, such
as computer components like memory and hard drives, can decrease rapidly.
Thus, the longer the materials remain in storage, the more money the company
loses. In some cases, materials may never be used at all and must be discarded, as
illustrated in the example of Cisco Systems in Business Processes in Practice 8-1.

Business Processes in Practice 8.1: Cisco
Systems

In 2001, Cisco Systems was selling huge amounts of organization so that they could reduce their production
their key networking products, driven largely by the capacity to sell off their ‘‘safety stock’’ of fi nished goods
dot-com boom. Cisco was having a diffi cult time keep- and also reduce the amount of raw materials they were
ing up with the demand for their products due to severe purchasing to reduce their supply buffer.
shortages of raw materials, so they had placed double This mismatch between lower demand, substan-
and triple orders for some parts with their suppliers to tial inventories of raw materials, and excessive produc-
‘‘lock up’’ the parts. In addition, they had accumulated tion capacity ultimately forced Cisco to write off more
a ‘‘safety stock’’ of fi nished goods based on optimis- than $2.5 billion of excess inventory from their books in
tic sales forecasts. When the Internet boom started to 2001—the largest inventory write-off in history.
crash, however, orders began to taper off quickly. Even
more damaging for Cisco, the company was unable Source: Compiled from Cisco company reports; and ‘‘Cisco
to communicate the drop in demand through their ’Fesses Up to Bad News,’’ Infoworld, April 16, 2001.

The above discussion focused on fulfi llment and production. Almost
all processes, however, either use materials (e.g., plant maintenance, project
system, warehouse management) or make them available when they are needed
(e.g., project systems, inventory, and warehouse management). Therefore,

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