MANAGING MATERIALS FLOW

Chapter 2

MATERIALS MANAGEMENT DEFINEDAn integral part of logistics management,

which encompasses the administration of raw materials, subassemblies,

manufactured parts, packing material and in-process inventory.

It is concerned with activities that are related to the “physical” supply of

materials in an organization

OBJECTIVES1. To identify the activities of materials

management2. To examine the concept of Total

Quality Management (TQM)3. To identify and describe a variety of

materials management techniques including just-in-time systems, MRP, ERP and DRP.

IMPORTANCE OF MATERIALS MANAGEMENT

Has a significant impact on level of customer service offered

Directly affects the ability of the firm to compete with other companies

Has an effect on level of sales and profits achieved in market place

Without an efficient and effective management of inbound materials flow, the manufacturing

process cannot produce products at the “desired price” and at the “time required” for distribution

to the form’s customers.

SCOPE OF MATERIALS MANAGEMENT ACTIVITIES

Materials management is typically comprised of four

basic activities:1. Anticipating materials requirements2. Sourcing and obtaining materials3. Introducing materials into the organization4. Monitoring the status of materials as a

current asset

Company Objectives

Objectives of Materials

Management

1. Low Costs

To optimize materials costs, capital costs and overhead expenses

2. High level of service

To optimize response towards production and markets

3. Quality Assuran

ce

To maintainand

improvethe quality

of materials

4. Low level of tied up capital

To optimize the level of capital tied up in inventories

5. Suppor

t of other

functions

To supports sales, design/

development

Reasons for rising importance:1. Shorter product life cycles, rapid technological

changes and more sophisticated customers have made flexibility and agility increasingly important

2. Emergence of global economy has forced companies to broaden their horizons

3. Revolution in information technology and telecommunication has provided low-cost, high-spewed automated alternatives to manual activities

PURCHASING & PROCUREMENT They are not same Purchasing is the actual buying of

materials and those activities associated with the buying process

Procurement is broader in scope and includes purchasing, traffic, warehousing and receiving inbound materials

PURCHASING vs. PROCUREMENT

PRODUCTION CONTROL An activity traditionally positioned

under manufacturing Two-fold role

1. Production activity determines how much and what kinds of finished goods to produce

2. Directly determines the company’s needs for raw materials, subassemblies and component parts that are used in the manufacturing process

INBOUND TRANSPORTATION Managers must know

Various transport modes and modal combinations available

Any regulations that might affect the transportations carrier that the firm uses

Decision of private versus for-hire Leasing Evaluating mode and carrier performance Cost/service tradeoffs involved in inbound

movement of the product

Difference b/w Inbound and Outbound transportation

1. Market demand that generates the need for outbound transportation is uncertain and fluctuating

2. Inbound is concerned with bulk movements of raw materials or large shipments hat have different handling and loss/or damage characteristics

3. Firms generally exercise less control over inbound logistics as they look at “total delivered cost”. In-depth analysis can result in significant cost savings

WAREHOUSING & STORAGE Raw materials are either stores on site

or delivered as needed (JIT) JIT reduces or rather eliminates the

need for inbound warehousing Open or outside storage is also possible Damage or loss due to weather,

spoilage or theft is minimal because of their low value per pound

DATA AND INFORMATION SYSTEMS Material managers need direct access to firm’s

information system Type of information required:

Demand forecasts by production Names of suppliers and supplier characteristics Pricing data Inventory levels Production schedules Transportation routing Various other financial and marketing facts

Provides inputs on suppliers, delivery schedules, pricing etc,

INVENTORY PLANNING & CONTROL Concepts like ABC analysis, inventory

carry costs and economic order quantity (EOQ) are directly applicable to materials management

REVERSE LOGISTICSDisposal or recycling of scrap, surplus

or obsolete materials; purchasing of remanufactured or refurbished

goods; and the handling of product returns and defects are all aspects of

a total reverse logistics

TOTAL QUALITY MANAGEMENT (TQM)

TQM is both a philosophy and a set of guiding principles that represent the

foundation of a continuously improving organization

Difficulties in TQM Implementation1. Too much training required2. Too little focus on human issues3. Underestimating the time and effort

required losing sight of the customer4. Trying to encompass too many

elements5. Lack of integration into form’s core

values and competencies

KEYS TO TQM SUCCESS1. Focus on continuous improvement that lead

to superior quality and better customer support

2. Cultural change focusing more on process improvement rather than activities

3. Employee involvement4. Senior management commitment and

leadership

Relationship b/w TQM & LOGISTICSTQM LOGISTICS

Provides a TQM management environment

Uses systematic, integrated, consistent organization-wide perspective to satisfy the customer

Reduces chronic waste Emphasis on “doing it right the first time”

Nurtures supplier partnerships and customer relationships

Knows the importance of supplies and partnershipsKey to customer relations

Creates a continuous improvement system

Uses logistics support analysis for continuous improvement

Includes quality as an element of design

Influences design by emphasizing reliability, supportability and maintainability

Provides training constantly Provides constant technical trainingLeads long term continuous improvement efforts geared towards prevention

Focuses on reducing life cycle costs by quality improvements geared to prevention

TQM LOGISTICSEncourages teamwork Stresses the integrated efforts of

everyoneSatisfies the customer (internal and external)

Places the customer first

ADMINISTRATION & CONTROL OF MATERIAL FLOWS

Firm must be able to “measure”, “report” and “improve performance”

Service levels can be measured by: Order cycle time for each supplier Variability in order cycle time for each supplier Order fill rate of each supplier Percentage of orders from each supplier that are overdue Number of stock-outs resulting from late deliveries from

suppliers Number of production delays caused by materials being

out of stock

Inventory can be controlled by following measures: Amount of dead stock Comparison of actual inventory levels with

targeted levels Comparison of inventory turnover rates with data

from previous time periods Percentage of stock-outs caused by improper

purchasing decisions Number of production delays caused by improper

purchasing decisions

Materials price level measures include: Gains and losses resulting from forward buying A comparison of prices paid for major items over

several time periods Comparison of actual prices paid for materials with

targeted prices Measures for quality control include:

Number of product failures caused by material defects Percentage of materials rejected from each shipment

from each supplier Overall measurement of performance:

Compare the “actual budget consumed” to “targeted budget allocated”

MAJOR OPERATING REPORTS1. Market & Economic conditions and price performance

Price trends and changes for major materials and commodities purchased

Changes in demand-supply conditions for major items purchased

Lead-time expectations for major items2. Inventory investment changes

Dollar investment in inventories classified by major commodity and materials group

Days’ or months’ supply and on order for major commodity and materials group

Ratio of inventory dollar investment to sales dollar volume Rates of inventory turnover for major items

3. Purchasing operations and effectiveness Cost reductions resulting from purchase research and value

analysis studies Quality rejection rates for major items Percentage of on-time deliveries Number of out-of-stock situations hat caused interruptions in

production schedules4. Operation affecting administration and financial

activities Comparison of actual departmental operating costs to

budget Case discounts earned and cash discounts lost Changes in cash discounts allowed by suppliers

Just in Time (JIT) is a method of inventory control with a focus on waste elimination

Introduced in 1970’s – is used interchangeably Efficient Consumer Response (ECR) for food industry Quick Response (QR) for retail sector

Primary goals are:1. To minimize inventories2. Improve product quality3. Maximize production efficiency4. Provide optimal customer service levels

Benefits:1. Improved inventory turns2. Improved customer service3. Decreased warehouse space4. Improved response time5. Reduced logistics costs6. Reduced transportation costs7. Improved quality of vendor products8. Reduced number of vendors9. Reduced number of transportation carriers

Organizations that implement JIT have the following characteristics1. Formalization of performance measurements2. Greater reliance on logistics personnel with specialized

skills3. Delegation of decisions concerning logistics issues down

the organizational charts4. Greater involvement by senior managers in the creation of

logistics strategy5. An increased span of control of senior logistics executives

as the company grows6. Improved perception of the organization’s performance

relative to the rest of the industry

Problems associated with JIT:1. Production scheduling (plant)2. Supplier production scheduling3. Supplier locations4. Organizational resistance5. Lack of systems support6. Lack of planning and inventory being

shifted

Implications: Requires the firm to fully integrate all the logistics

activities which may require few trade offs Transportation becomes vital component of

logistics under JIT – requires better transportation decision making

Warehousing assumes an expanded role – becomes a consolidation facility rather than a storage facility

**Table below summarizes the areas of difficulty when attempting to implement JIT in a global arena

Required Elements JIT Global Purchasing

Frequent deliveries Essential DifficultSmall lots Essential DifficultSupplier location Close FarSingle sourcing Common High riskLong term relationship Essential DifficultEarly supplier involvement

Possible and probable

Unlikely

Coordination & Monitoring of schedules and markets

High Difficult

Price High DifficultTransit loss/damage Low HighInformation sharing High LowSupplier flexibility and reaction time

High Low

Quality High lowPotential pipeline instability

Low high

MATERIAL PLANNING TOOLS Materials Requirement Planning = MRP

I MRP I + financial + marketing +

purchasing = MRP II

Basic logic is that any system begins with a customer and how well the organization can supply their demands

“Pens have been sold”Now we need to know HOW MANY PENS ?

and WHEN ARE THEY REQUIRED?Do we have

stock in hand?

YES NO

Enter a shipping

order

Do we have the components to manufacture?

Got 3 main inputs to MRP1. What do we need to fulfill customers’

demands? In this case, we need 20 pens by next week – Master

Schedule2. Do we have the inventory?

Check the inventory in stock - if we do not have the required stock in hand check the material required to produce it – Gross requirement is the sum of needs for each particular component

3. Once the requirement is established, subtract the inventory from it,

MRP offers following advantages:1. Improved business results2. Improved manufacturing performances3. Better manufacturing control4. More accurate and timely information5. Inventory reductions6. Time phased ordering of materials7. Increased reliability8. More responsiveness to market demand9. Reduced production costs

ENTERPRISE RESOURCE PLANNING (ERP) This system includes the core accounting

functions of accounts payable, accounts receivable and general ledger coupled with logistics functions.

Manage the distribution and manufacturing component of an organization

Facilitator of an organization, moving data from one function to another& managing data centrally

DRP SYSTEMS DRP Systems (DRP I and DRP II) are time-

phased models that include demand forecasts, purchase orders and customer orders

DRP I (Distribution Requirement Planning) is a system of determining demands for inventory at distribution centers, consolidating demand information backwards and acting as an input to the production and materials system

DRP II (Distribution Resource Planning) is an extension of DRP I and includes planning of key resources in a distribution system-warehouse space, manpower levels, transport capacity and financial flows

Marketing benefits of DRP 1. Improved service levels resulting in on-time customer

deliveries and fewer complaints2. Ability to plan promotions and new introductions

effectively3. The ability to see in advance when a product will not be

available so that it is not being marketed aggressively4. Better working relationships with other functions of the

company5. The ability to offer the customers not only the product

but also the service in helping them manage their own inventory.

Logistics benefits of DRP 1. Reduced freight costs to the distribution

centers due to fewer rush or premium freight shipments

2. Better planning for loading trucks and rail cars

3. Lower inventories4. Reduced warehouse space5. Reduced distribution costs to customers