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