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Introduction to Materials Management

Introduction to

MATERIALS MANAGEMENT

CHAPTER

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Wealth

What is it?

Where does it come from?

Adding value

Designing the process

Managing the process

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Wealth

Natural resources

Transformation-needs production function

Conversion- adds value

Managing the process effectively and efficiently

Services

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Operating Environment – 5 areas

Government-affects way business is conducted

regulations

safety

Economy

affects demand

shortages and surpluses

Competition is now global and fierce

reduced costs of transportation

communications, reduced costs, increased speed and change

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Operating Environment (continued)

Customers demand

Lower prices

Improved quality

Reduced lead time

Improved pre-sale and after-sale service

Product and volume flexibility

Quality

Exceeds customer expectations

EASY…RIGHT?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Order Winners and Qualifiers

Order Qualifiers

Customer minimum requirements for price, quality, delivery, etc.

A company must meet or exceed minimum level to qualify for order

Order Winners

Characteristics that persuade customers to select a product/service from a qualifying company

core competencies

examples?

“Today’s order winners are

tomorrow’s order qualifiers”

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Manufacturing Strategy

Figure 1.1 Manufacturing strategy and lead time

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Engineer-to-Order

Manufacturer does not start until the order is received (Pull production system)

Custom designs

Unique products

Loooong lead time

Inventory purchased after order is received

Examples?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Make-to-Order

Manufacturer does not start until the order is received

Often uses standard components

Little design time

Lead time is reduced

Inventory held as raw materials

Examples?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Configure-to-Order

Customer allowed to configure product based on features and options

May be an entirely new configuration

Since features and options often available, no significant design time required

Typically implies shorter delivery time

Similar characteristics to Make-to-Order

Examples?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Assemble-to-Order

Manufacturer inventories standard components (Push production system)

No design time required

Assembly only required

Shorter lead time

Inventory held as standard components

Examples?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Make-to-Stock

Manufacturer produces the goods in anticipation of customer demand

Little or no customer involvement with design

Shortest lead time

Inventory held as finished goods

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Postponement

Shift differentiation in product as close to customer as possible

Reduced number of different items in the supply chain

Implies lower supply chain inventory

Implies faster delivery

Examples?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

The Supply Chain Concept

Figure 1.2 Supply-production-distribution system

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

The Supply Chain Concept

Includes all activities and processes to supply a product or service to the customer

Links many companies

Has a number of supplier/customer relationships

May contain intermediaries such as

Wholesalers

Warehouses

Retailers

Flow of products, services, information and cash

Importance of supply, production, and distribution elements depends on cost of each

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Historical Perspective

In the past there were well defined and rigid boundaries between organizations

Suppliers were viewed as adversaries

JIT viewed suppliers as partners

Mutual analysis for cost reduction

Mutual product design

Greatly reduced inventory

Improved communications and information flow (internet, EDI)

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Growth of Supply Chain Concept

Integrated systems (ERP) and the sharing of information

Global competition and supply

Flexible designs - reduced product life cycles and increased change

JIT approach to inter-organizational relations

Subcontracting or outsourcing work

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Current Supply Chain Concept

Manage the flow of materials

Share information through the internet

Transfer funds electronically

Reverse logistics (3 Rs)

Recover

Recycle

Reuse

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Supply Chain Organization

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Supply Chain Metrics

Metric = a verifiable measure

Links strategy to operations and used to

Communicate expectations

Identify problems

Direct action

Motivate people

Must be timely

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Challenges

1. Customers are rarely satisfied

2. Supply chains are large

3. Product life cycles are getting shorter

4. Lots of data

5. Narrow profit margins

6. Increasing number of alternatives

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Metrics

Performance measures

Quantified and objective

Contain two parameters

e.g. Orders per day, Sales per person

Performance standards

Sets the goals

Establishes controls

Performance standards set the goal

Performance measure say how close you came

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Metrics

Strategy

Customer

Strategic

Metrics

Operational

Focus

Standard

Figure 1.4 Metrics context

Metrics give us:

Control by superiors

Data reporting to management/external groups

Communication

Learning

Improvement

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Metrics Program – Six Steps

1. Establish company goals and objectives

2. Define performance

3. State the measurement

4. Set performance standards

5. Educate the participant

6. Apply consistently

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Conflicts in Traditional Systems

Company main objectives to provide:

1. Best customer service

2. Lowest production costs

3. Lowest inventory investment

4. Lowest distribution costs

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Conflicts in Traditional Systems

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Conflicts in Traditional Systems

Marketing Production Finance

Objective: High Revenue Low Cost Cash Flow

Implications:

Customer Service High Low Low

Production

Disruptions Many Few Few

Inventories High High Low

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management

Planning and controlling the flow of materials

Objectives

Maximize the use of the firm’s resources

Provide the required level of customer service

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management is a Balancing Act

Trade-offs

Between

Customer

Service

Cost of

Providing

The Service

Priority

The Demand

For Products

Capacity

The Ability to

Produce

Products

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Company Objectives

Income = Revenue - Expense

Need to increase income with:

Best customer service

Lowest production costs

Lowest inventory investment

Lowest distribution costs

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management and Profits

Direct labor

Direct material

Varies with volume sold

Overhead

Does not vary with volume sold

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management and Profits (continued)

Dollars % of Sales

Sales Revenue $1,000,000 100

Cost of Goods Sold

Direct Material $500,000 50

Direct Labor $200,000 20

Overhead $200,000 20

Total Cost of Goods Sold $900,000 90

Gross Profit $100,000 10

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management and Profits (continued)

Reduce Materials by 12%

Dollars % of Sales

Sales Revenue $1,000,000 100

Cost of Goods Sold

Direct Material $440,000 44

Direct Labor $200,000 20

Overhead $200,000 20

Total Cost of Goods Sold $840,000 84

Gross Profit $160,000 16

Profit has increased 60%

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management and Profits (continued)

To get the same result (+ 60% profit) through Sales

Dollars % of Sales

Sales Revenue $1,200,000 100

Cost of Goods Sold

Direct Material $600,000 50

Direct Labor $240,000 20

Overhead $200,000 20

Total Cost of Goods Sold $1,040,000 87

Gross Profit $160,000 13

Sales must increase by 20%

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management and Profits (continued)

Profit = Sales – (D.M. + D.L. + Overhead)

= Sales – (0.50 sales + 0.20 sales + 0.20)

= Sales – 0.7 sales – 0.20

0.16 = 0.3 sales – 0.20

0.36 = 0.3 sales

Sales = 0.36

0.3

= 1.20 or sales must increase 20% to achieve the same increase in profit.

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Work-in-Process Inventory Example

Inventory that is purchased to be processed into finished goods

Example problem (assume WIP = ½ of final inv. value):

A firm averages a 10-week production lead time and annual COGS of $30 million. Assuming a firm works 50 weeks/year:

What is the dollar value of WIP?

If lead time is reduced to 6 weeks, and annual cost of carrying inventory is 10% of inventory value, what are annual savings

Answer:

Weekly COGS = $30,000,000 per yr./50 weeks = $600,000/week

WIP value @ 10 weeks LT = 10 x $600,000 x ½ = $3,000,000

WIP value @ 6 weeks LT = 6 x $600,000 x ½ = $1,800,000

Reduction in WIP = $3,000,000 - $1,800,000 = $1,200,000

Annual Savings = $1,200,000 x 10% = $120,000

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Materials Management is a Balancing Act

Trade-offs

Between

Customer

Service

Cost of

Providing

The Service

Priority

The Demand

For Products

Capacity

The Ability to

Produce

Products

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Manufacturing Planning and Control

Planning and controlling the flow of materials the manufacturing process through:

Production planning

Implementation and control

Inventory management

Let’s look at each area…

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Production Planning

To meet the demands of the marketplace

Establish priorities

Ensure capacity

Activities include:

Forecasting

Master planning

Materials requirements planning

Capacity planning

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Implementation and Control

Putting into action and achieving the plans

Made by production planning

Production activity control

Shop floor control

Purchasing

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inventory Management

To support production (raw materials) or as a result of production (finished goods)

Provide a buffer against the differences in demand rates and production rates

How much is enough and DOES INVENTORY LEVEL REALLY MAKE A DIFFERENCE?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inventory Turns

Inventory Turns Ratio = Annual Cost of Goods Sold

Average Inventory in Dollars

Example: If the annual cost of goods sold is $1 million dollars and the average inventory is $500,000, then:

Inventory Turns = $1,000,000 = 2 times/year

$500,000

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inventory Turns Example

What will be the Inventory Turns Ratio if the annual C of GS is $24 million and the average inventory is $6 million?

b. What would be the reduction in inventory if turns were increased to 12 times per year?

c. If the cost of carrying inventory is 25% of the average inventory what will the annual savings be?

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inventory Turns Example

. Inventory Turns = annual C of G S

average inventory

= $24,000,000

$6,000,000

= 4 turns per year

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inventory Turns Example (cont’d)

What would be the reduction in inventory if turns were increased to 12 times per year?

b. Average Inventory = annual C of G S

inventory turns

= $24,000,000

=$2,000,000

Inventory Reduction = $6,000,000 -$2,000,000

= $4,000,000

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inventory Turns Example (cont’d)

If the cost of carrying inventory is 25% of the average inventory what will the annual savings be?

b. Inventory = $4,000,000

Annual Savings = $4,000,000 x .25

Answer= $1,000,000

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inputs to the Manufacturing Planning and Control System

1. Product description

2. Process specifications

3. Time needed

4. Available facilities

5. Quantity required

Let’s look at each input…

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Product Description

Engineering Drawings

Specifications

Bill of Material

Components used to make the product

Sub-assemblies at stages of production

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Process Specifications

Recorded on a Route Sheet

Describe how the product (steps needed) is made

Operations required to make the product

Sequence of operations

Equipment and accessories required

Standard time to perform each operation

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Time Needed to Perform Operations

Expressed as Standard Time

An average operator, working at a normal pace

Obtained from the Routing master

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Available Facilities

What plant is available

What equipment is available

What amount and kind of labor is available

Obtained from the Work Center master file

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Quantities Required

Information from

Forecasts

Customer Orders

Production Planning

Expressed in the Shop Order

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Physical Supply / Distribution

All the activities involved in moving goods

From the supplier to the beginning of the production process

From the end of the process to the customer

Transportation ● Distribution Inventory

Warehousing ● Packaging

Material Handling ● Order Entry

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Inventory

Customer Service

Transportation

Cost

Supply Chain

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Chapter 1 Summary

Manufacturing creates wealth

Must make the best use of

Labor, materials and capital

Need to plan the flow of materials

Into, through and out of production

Three elements in a material flow system

Supply

Manufacturing

Distribution

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Chapter 1 Summary (continued)

Need to balance

Customer service with the cost of supplying the service

There are three basic ways to organize manufacturing processes

Flow, intermittent and project

Determined by the

Item

Production rate

Range of products

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive

Chapter 1 Summary (continued)

Each manufacturing system requires the planning of materials

Need the right material at the right place at the right time

Metrics will help with control and meeting the goals of the company

Introduction to Materials Management, 8e

Chapman, Arnold, Gatewood, and Clive