MATERIALS MANAGEMENT

ETZC 342

Chapter 1:Introduction of Materials Management

Chapter 2:Production Planning System

Operating Environment

Operations Management

Government

Economy

Competition

Customers

QualityOrder Qualifiers

and winners

Manufacturing Strategy

Introduction

To get the most profit, a company must have at least four main objectives:– Provide best customer service– Provide lowest production costs– Provide lowest inventory investment– Provide lowest distribution costs

Possible way of providing the best customer service ( Marketing Department Objective):Maintain high inventories so goods are always available for the customer.Interrupt production runs so that a non inventoried item can be manufactured quickly.Create an extensive and costly distribution system so goods can be shipped to the customer rapidly

Way of keeping investment and costs low (Finance Department Objective):

Reduce inventory so inventory investment is at a minimum.

Decrease the no of plants and warehouses.Produce large quantities using long

production runs.Manufacture only to customer order.

Way of keeping operating costs as low as possible (Production Department Objective):Make long production runs of relatively few

products. Fewer changeovers will be need and specialized equipment can be used, thus reducing the cost of making the product.

Maintain high inventories of raw materials and work-in-process so production is not disrupted by shortages

ORDER WINNERMinimum requirements set for the supplier to

be considered a viable competitor in the marketplace.

Example :Price for a certain product must fall within a range for the supplier to be considered .

ORDER QUALIFIERCompetitive characteristics, or combination

of characteristics, that persuade a company’s customer to choose its products or services.

- provide competitive advantage to the firm

- may change over time

-may well be different for different markets

Example: Fast delivery may be vital in market and may not be other market

Effects of Product life cycle

• Introduction -- design and availability

• Growth -- quality and delivery

• Maturity -- price and delivery

• Delivery Lead time: should be minimal

-Supplier’s perspective: time from receipt of an order to the delivery of the product

-customer’s perspective: may also include time for order preparation and transmittal

Manufacturing strategy

4 basic Manufacturing Strategies

Design Purchase Manuf Assemble Ship

Inv. Manuf. Assemble Ship

Manuf. Inv. Assemble Ship

Manuf. Assemble Inv. Ship

Engineer to order

Make to order

Assemble to order

Make to stock

The Supply Chain Concept

Physicalsupply MPC

DOMINANT FLOW OF PRODUCTS AND SERVICES

DOMINANT FLOW OF DEMAND AND DESIGN INFORMATION

PHYSICAL DISTRIBUTION

Current trends in SCM• All the stages are viewed as linked together

• Flow of materials, information and fund transfers are major issues

• Manage the recovery, recycling, and reuse of material

• Need to efficiently plan material and information flows along the chain to max. cost efficiency ,effectiveness, delivery, and flexibility.

• Supported by highly integrated information system and a different set of performance measures.

CONFLICTING OBJECTIVES

• The concept of having one department responsible for the flow of materials, from supplier through production to consumer is relatively new.

• The name usually given to this function is materials management.

• Materials management is a coordinating function responsible for planning and controlling materials flow.

What is Materials Management ?

Example

a. If the cost of direct material is 60%, direct labor is 10%, and overhead is 25% of sales, what will be the improvement in profit if direct material is reduced 5 %?

b. How much will sales have to increase to give the same increase in profit? (Overhead cost is constant)

Before improvement After improvement

Revenue(sales) 100% 100%

Cost of goods sold

Direct material 60% 55%

Direct labor 10% 10%

Overhead 25% 25%

Total cost of goods sold

95% 90%

Gross Profit 5% 10%

b. Profit = sales-(direct material + direct labor + 0.25) = sales-(0.6sales + 0.1 sales + 0.25) = sales-0.7 sales+ 0.25 0.1=0.3 sales – 0.25 0.3 sales= 0.35 Sales= 0.35/0.3= 1.17 Sales must increase 17% to give the same increase in profile.

a.

Objectives

Maximize the use of the firm’s resources

Provide the required level of customer service

Role of manufacturing planning and control (MPC)

• It is responsible for the planning and control of the flow of materials through the manufacturing process

Activities:• Production planning Forecasting Master planning Material requirement planning Capacity planning• Implementation and control • Inventory management

MPC

Product description

Process specification

BOM Forecast

Available facilities

Work centre file

MPC is responsible for the planning and control of the flow of materials through the manufacturing process.

The primary activities are :1.Production planning

2.Implementation and control

3.Inventory management

MANUFACTURING AND CONTROL (MPC)

Inputs to MPC• Product description (Engineering drawing,

specifications and BOM)

• Process specifications (Operations required, Sequence of operations, Equipment and accessories required)

• Time needed to perform operations (Standard time: the time taken by an average worker working at normal pace)

• Available facilities (Equipment and labor)

• Quantities ( Forecasts, Customer orders and MRP)

Product description

• It shows how the product will appear at some stage of production

• Engineering drawings and specifications are methods of describing the product

• BOM is important part of product description

• It describes the components used to make product and subassemblies at various stages of manufacture

Process Specification

• It describes the steps necessary to makethe end product• Information is usually recorded on a route sheet

or in a routing file• They are computer files giving info. on the

manufacture of product such as :Operations required to make the productSequence of operationsEquipment and accessories required Standard time required to perform each

operation

Time needed to perform operations

• Generally expressed in standard time

• Needed to schedule work through the plant , load the plant, make delivery promises, and cost the product

Available facilitiesMPC must know the plant, equipment, and

labor available to carry out the process

Physical supply and distribution• Includes all the activities involved in

moving goods, from the supplier to the beginning of the production process, and from end of production process to customer

• Its activities are:

Transportation

Distribution inventory

Warehousing

Packaging

Materials handling and order entry

Supply chain metrics

• A metric is a verifiable measure stated in either quantitative or qualitative term defined with respect to reference point

• Importance of metrics:Control by superiorsReporting of data to superiors and external

groupsCommunicationLearning Improvement

Major challenges • Customers are very difficult to satisfy

• A supply chain that is large and must be managed

• A product life cycle that is getting shorter and shorter

• A vast amount of data

• An emphasis on profit margins that are most squeezed

• An increasing number of alternatives

Measurement

• A performance measure must be both quantified and objective in nature, containing at least two parameters. For example: the number of orders per day consists of both a quantity and a time measurement.

• Transforming company policies into objectives and specific goals creates performance standards

PRODUCTION PLANNING SYSTEM

Questions before manufacturing• What is to be made?• What does it take to make it?• What do we have?• What do we need?

Priority vs. Capacity• Priority refers what products in what quantity and

when they are needed?• Capacity refers to resources of company like

machines, labor and financial resources and availability of material from suppliers

PRIORITY

•Relates to what products are needed, how many are needed, and when they are needed. •The market place establishes the priorities. •Manufacturing is responsible for devising plans to satisfy the market demand if possible.

CAPACITY

•Is the capability of manufacturing to produce goods and services. •Eventually it depends on the resources of the company-the machinery, labor, and financial resources, and the availability of material from suppliers. •In the short run, capacity is the quantity of work that labor and equipment can perform in a given period.

Levels in MPC system Strategic business plan ( A statement of the broad direction of the

company and shows the kind of business to do in future)

Production plan(A plan for the production of each group, desired inventory levels)

Master production schedule (A plan for the production of individual items)

Material requirements plan(A plan for production and purchase for of the components)

Purchasing and production activity control(Implementation and control phase of the production planning and control)

About each level

Each level varies in purpose, time span, and level of detail.

The purpose changes from general direction to specific detailed planning, the time span decreases from years to days, and the level of detail increases from general categories to individual components and workstations.

Questions evaluated at each level: What are the priorities- how much of what is to be

produced and when? What is the available capacity what resources do we

have? How can differences between priorities and capacity

be resolved?

Manufacturing requirement plan

Strategic businessplan

Production plan

Master productionschedule

Material requirementplan

Production activityControl and purchasing

MASTER PLAN

Planning

Implementation

Levels differ by:•Purpose•Planning horizon•Levels of detail•Planning cycle

Strategic business plan (SBP)• It is a statement of major goals and objectives

to be achieved over a span of time

• Responsibility of senior management

• Reviewed every six months to a year

Strategic plan

Strategic businessplan

Engineeringplan

Financial plan

Marketing plan

SBP as coordinator

ProductionPlan

FinancialPlan

EngineeringPlan

MarketingPlanSBP

The production plan

• Quantity of each product group to be produced

• Desired inventory levels

• Resources of equipment, labor,& material needed in each period

• Availability of resources needed

What it does?

• Market and financial plans

• Implementing the strategic and business plans

• 6 to 18 months

Master production schedule• Plans for the production of individual end items

• Breaks production plan to show the qty. of each end item to be made

• Level of detail high then production plan. E.g.: no. of cycles in SBP while no. of models of each type in MPS

• 3-18 months depending on purchasing and manufacturing lead times

• Master production schedule is end result of process

Materials requirement plan• Plan for the production and purchase of

components for making MPS

• What quantity and when to use them?

• For making sourcing decisions

• High level of detail is needed

• Planning horizon is at least as long as the combined purchase and manufacturing lead time i.e. 3-18 months

Purchasing and production activity control (PAC)

• Implementation and control phase

• Purchasing is responsible for planning and controlling the flow of work in the factory

• Planning horizon: day-week-month

Level of detail

PAC

MRP

MPS

Production plan

SBP

Planning Horizon

Capacity Management

• It is a process of calculating the capacity needed to manufacture the priority plan and of finding methods to make that capacity available

• It involves determining the capacity required, capacity available, and making adjustments

Sales and operations planning• Process of continuously revising the SBP and coordinating

plans of various departments• Involves sales and mktg., product development, operations

and senior management• Operations represents supply while marketing represents

demand

SBP

Sales and operations plan

Marketingplan

Productionplan

Detailed sales plan MPS

Benefits of SOP

• Means of updating the SBU with conditions

• Means of managing change ensures plans are realistic, coordinated, and support the business plan

• Better management of inventory, production and backlog

• Provides realistic plan that can achieve company objectives

MRP-II• Manufacturing resource planning• Needs more responsive and an integrated approach

that works from top down & bottom up feedback • It integrates the plans and activities of marketing,

finance and production • To adjust priority plans the changes are to

incorporated at all the planning levels. Thus a feedback is must throughout the system

• Fully integrated planning and control system is called MRP-II( Manufacturing resource plan

• Called MRP-II in order to differentiate from MRP

( material requirement plan)

ERP• More evolved form of MRP

• Computers and information technologies (IT) becoming fast , and more powerful led to development of MRP

• It is more advantageous in speed, accuracy, and capability of integrated computer based management

• Movement towards integration of knowledge and decision making in areas that impact material flow and materials management

More about ERP

• ERP does not dwell on manufacturing alone• ERP encompasses the total company and MRP

–II is concerned with manufacturing alone• ERP allows tracking of orders across whole

supply chain• Large costs are involved• Time consuming• Difficult to implement

Making the production plan• Based on market production plan set the

limits or levels of manufacturing activity • It integrates the capabilities and capacity

of factory with market and plans • It sets the general levels of production and

inventories over the planning horizon• Prime purpose is to establish production

rates by taking in to account inventory levels, backlog, market demand, customer service, low cost plant operations, labor relations etc

Establishing product groups• Multi product firms need to establish product

groups based on similarity of manufacturing process

• Demands of goods must be translated to demand for capacity

• Example: several calculator models must share the same processes and need same types of capacity, regardless of the variations in the models

Production Planning

• A time horizon of12 months is used, with periodic updating perhaps every month or quarter

• Production demand consists of one or a few product families or common unit

• Demand is fluctuating or seasonal

• Plant & equipment are fixed within the time horizon

• A variety of management objectives such as low inventories, efficient plant operation, good customer service, and good labor relations

Basic strategies for developing a production plan:

Chase strategy

Production leveling

Subcontracting

Chase (demand matching) strategy:

– Producing the amounts demanded at any given time. Inventory levels remain stable while production varies to meet demand.

– Company must have enough capacity to be able to meet the peak demand

– Companies have to hire and train people for the peak periods and lay them off when the peak is past.

– The advantage is that inventories can be kept to a minimum

Production levelingProduction leveling is continually producing

an amount equal to the average demand

The advantage of a production leveling strategy is that it results in a smooth level of operation that avoids the costs of changing production levels.

The disadvantage is that inventory will build up in low demand periods.

This inventory will cost money to carry

Subcontracting

• Subcontracting means always producing at the level of minimum demand and meeting any additional demand through subcontracting. Subcontracting can mean buying the extra amounts demanded or turning away extra demand.

• The major advantage of this strategy is cost. Costs associated with excess capacity are avoided, and because production is leveled, there are no costs associated with changing production levels.

• The advantage is that the cost of purchasing (item cost, purchasing, transportation, and inspection costs) may be greater than if the item were made in the plant

• Amalgamated fish sinkers makes a product group of fresh fish sinkers and wants to develop a production plan for them. The expected opening inventory is 100 cases, and they want to reduce that to 80 cases by the end of the planning period. The no of working days is the same for each period. There are no back orders. Changing the production level by one case costs $20. The expected demand for the fish sinkers is as follows:

PROBLEM

How much should be produced each period? What is the ending inventory for each period? If the cost of carrying inventory is $5 per case per period

based on ending inventory, what is the total cost of carrying inventory?

What will be the total cost of the plan?

Solution: Total production required = 600+80-100 =580 cases

Production each period =580 / 5=116 cases

Ending inventory = opening inventory + production-demand

Ending inventory after first period = 100+116-110= 106 cases

Ending inventory (period 2)=106+116- 120 =102cases

Period 1 2 3 4 5 Total

Forecast (cases) 110 120 130 120 120 600

Production 116 116 116 116 116 580

Ending inventory 100 106 102 88 84 80

The total cost of carrying inventory would be:

( 106+102+88+84+80)($5)= $2300

Since there were no stock-outs and no changes in the level of production, this would be the total cost of the plan.

Chase strategy: Change from 50 to 60 would cost =(60-50)X$20=$200

The opening inventory is 100 cases and the company wishes to bring this down to 80 cases in the first period. The required production in the first period would then be: 110-(100-80)=90 cases.

Assuming that production in the period before period 1was 100 cases, below fig shows the changes in production levels and in ending inventory.

Period 0 1 2 3 4 5 Total

Demand (cases) 110 120 130 120 120 600

Production 100 90 120 130 120 120 580

Change in production 10 30 10 10 0 60

Ending inventory 100 80 80 80 80 80

The cost of the plan :

Cost of changing production level = ( 60)( $20)=$1200

Cost of carrying inventory =

(80 cases) ( 5 periods ) ( $5) = $ 2000

Total cost of the plan = $ 1200 + $ 2000 = $ 3200

Total cost of the plan =$2300 (Production leveling)

END OF LECTURE