1. Introduction to Material Management

1.1 Introduction

• Wealth is measured by the output of goods and services produced in a given time.

• Goods are physical objects and services are the performance of some useful function.

• A production function is needed to transform resources into useful goods.

• At each stage in the development of the final product, value is added, thus creating more wealth.

• To get the most value out of our resources, we design production processes that make products most efficiently.

• Once the processes exist, we need to manage the operation so it produces goods most economically.

• Managing the operation means planning for and controlling the resources used in the process: labor, capital and material.

• The major way in which management plans and controls is through the flow of materials; the right materials in the right quantities and at the right time.

1.2 Operating Environment

• The most important factors affecting the environment in which we operate are Government, Economy, Competition, Customers and Quality.

• Government regulation of business affects the way business is conducted.

• Economic conditions influence demand for products or services and availability of inputs.

• Companies face global competition. Transporting materials is less costly today. Global communications are fast, effective and inexpensive.

• Customers expect more from suppliers. Customer selection criteria include a fair price, quality products and services, reduction in delivery lead-time, better pre and post sales service, and product and volume and flexibility.

• Quality must meet or exceed customer expectations.

Definitions

• Order Qualifier - Minimum requirements that a supplier must meet to be a viable competitor

• Order Winners - Competitive Characteristics that persuade a customer to choose a particular product or service

• Delivery Lead Time - Time from the receipt of an order to the delivery of the product. (From the customer perspective may include order prep time)

Manufacturing Strategies (Four Lead Time Strategies)

Pull Strategy (The Customer Pulls his needs)

• Engineer-To-Order ETO

  Designed to customer specification

  Products whose customer specifications require unique engineering design or significant customization. Each customer order requires a cost estimate, and special pricing. These orders generally result in a unique set of components, bills of material, and production routings
  www.leanmean-manufacturing.com/glossary2.html

• Make-To-Order MTO

  Standard design, produced only upon order

  A manufacturing process strategy where the trigger to begin manufacture of a product is an actual customer order or release, rather than a market forecast. For Make-to-Order products, more than 20% of the value-added takes place after the receipt of the order or release, and all necessary design and process documentation is available at time of order receipt.

Pull / Push Strategy

• Assemble-To-Order ATO

  Subassemblies produced, assembled upon order

  " A production environment where a product or service can be made after receipt of a customer's order. The end item finished product is generally a combination of standard components and custom designed components that meet the unique needs of a specific customer. Where options or accessories are pre-stocked prior to customer orders, the term assemble-to-order is frequently used."

• www.leanmean-manufacturing.com/glossary2.html

Push Strategy (the Company pushes its products to the markets)

• Make-To-Stock MTS :

  Finished product made prior to order

  "Make to Stock - A production environment where end item products are usually finished before receipt of a customer order. Customer orders are generally filled from finished goods inventories, and production orders are used to replenish finished goods inventories"

  www.leanmean-manufacturing.com/glossary2.html

Operation Decision Making

Manufacturing Strategy and Lead Time

 

 

1.3 The Supply Chain Concept

• The supply chain system contains three Basic Elements:

  • Supply,

  • Production

  • Distribution

• Supply chain includes all activities and processes to supply a product or service to a final customer.

• Any number of companies can be linked in the supply chain. Sometimes called the Value Chain.

• The total chain can have any number of supplier/customer relationships.

• The chain includes intermediaries such as wholesalers, warehouses, and retailers

• Product or services usually flow from supplier to customer and design and demand information usually flow from customer to supplier

Traditional SC

• Traditionally, management focused on internal operating issues, constraints and parameters. Suppliers were considered adversaries.

• Conflicts in traditional systems often appear because differing departments maximize departmental objectives without considering the impact to other parts of the system.

Growth of  SC concept

• The first major change evolved through the explosive growth of Just-in-Time (JIT) concepts. Suppliers were viewed as partners

• The growth of the supply chain concept continues to be influenced by

  • The explosive growth in computer capability,

  • Software applications (Enterprise Resource Planning) and the ability to link companies electronically (Internet),

  • Growth in global competition,

  • Growth in Technology leads to dramatic reduction in product life cycles and the resulting design flexibility and ability to effectively communicate changes to suppliers and distributors.

The current SC concept

• Emphasis was on trust in the relationship, i.e. elimination of receiving inspection, reduction in administrative paperwork replaced with the exchange of electronic data, mutual analysis of cost reductions and shared benefits, and shared product design.

• To result an Optimal Performance, the supply chain of activities, from raw material to final customer, should be managed as an extension of the partnership. This implies three critical issues: flow of materials, flow of information electronically and fund transfers. More recently, the new trend is to manage the recovery, recycling and reuse of material.

• The need for SC Integration:

  • To manage a supply chain, try to efficiently plan material and information flows to maximize cost efficiency, effectiveness, delivery, and flexibility.

  • This requires systems integration and reevaluating performance measures. To maximize profit, set objectives that provide better customer service, lowest production costs, lowest inventory investment, and lowest distribution cost.

  • Stress the need to supply customers with what they want when they want it and to keep inventories at a minimum

1.4 What Is Materials Management?

• The problem is to balance conflicting objectives to minimize the total of all the costs involved (maximize the use of the firm’s resources) and maximize customer consistent with the goals of the organization.

• This requires some type of Integrated Materials Management or Logistics Organization responsible for supply, production and distribution. The name we are giving this function is Materials Management.

• Reducing cost contributes directly to profit. Increasing sales increases direct costs of labor and materials so profit does not increase directly.

Manufacturing Planning and Control MPC

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

• MPC activities are:

1. Production Planning includes:

   • Forecasting,

   • Master planning MPS

   • Material Requirements Planning MRP

   • Capacity Planning

2. Implementation and control (Production Activity Control) PAC

3. Inventory management

   Provide buffer against the differences in demand rates and production rates

• There are Five Basic Inputs to the manufacturing planning and control system MPC:

  • Product Description (engineering drawings, specifications and bill of material BOM),

  • Process specifications,

  • Standard time needed to perform operations,

  • Available facilities, and

  • Quantities Required (independent demand).

Physical Supply / Distribution

Includes all activities involved in transporting goods, from the supplier to the beginning of the production process, and from the end of the production process to the customer, including:

• Transportation,

• distribution inventory,

• warehousing,

• packaging,

• materials handling, and

• order entry.

Material Management Objectives

• Maximize service and minimize cost. The objective is to be able to deliver what customers want, when and where they want it, and do so at minimum cost.

• To achieve this objective, materials management must make trade-offs between the level of customer service and the cost of providing that service.

• As a rule, costs rise as the service level increases, and materials management must find that combination of inputs to maximize service and minimize cost.

Material Management can do much to improve a company's profit

P/L Statement

P/L After a 10% reduction in materials and 5% in direct labor

60% increase in profit

To get the same increase by increasing sales

Profit = Sales- (Direct Material+ Direct Labor + 200,000)

160,000 = Sales - 0.5 Sales - 0.2 Sales - 200,000

360,000= 0.3 Sales

Sales = 360000/ 0.3 = $ 1,200,000

Direct Material = 1,200,000 x 0.5 = $ 600,000

Direct Labor = 1,200,000 x 0.2 = $ 240,000

2. Production Planning System

2.1 Introduction

• A good planning system must answer four questions of priority and capacity:

  • What are we going to make? 

  • What does it take to make it? 

  • What do we have? 

  • What do we need?

• Priority

  As established by the marketplace, relates to what products are needed, how many are needed, and when they are needed.

• Capacity

  is the capability of manufacturing to produce goods and services (deliverables).  It depends on company resources and the availability of material from suppliers.

2.2 Manufacturing Planning and Control System

• The Five major levels in the manufacturing planning and control system are:

  1. Strategic Business Plan

  2. Production Plan (sales and operations plan) SOP

  3. Master Production Schedule MPS

  4. Material Requirements Plan MRP

  5. Purchasing and Production Activity Control PAC

• Each level varies in

  • Purpose

  • Time span (planning horizon)

  • Level of detail

  • Planning cycle (Frequency).

• At each level, three questions must be answered:

  • 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?

Strategic Business Plan

• It is senior management’s statement of the broad direction of the firm, major goals and objectives the company expects to achieve over the next two to ten years or more.

• It is based on long-range forecasts and provides a framework that sets the goals and objectives for further planning by marketing, finance, engineering and production/operations. The level of detail is not high.

• It is concerned with general market and production requirements. It is often stated in dollars rather than units.

Production Plan (PP)

• Given the objectives set by the strategic business plan, production management is concerned with the  following:

  • The quantities of each product group or family that must be produced in each period,

  • The desired inventory levels,

  • The resources of equipment, labor, and material needed in each period

  • The availability of the resources needed.

• For effective planning, there must be a balance between priority and capacity.

• The planning horizon is usually six to 18 months and is reviewed perhaps each month or quarter.

Master Production Schedule (MPS)

• MPS breaks down the production plan to show, for each period, the quantity of each end item to be made.

• Inputs to the MPS are

  • The production plan,

  • the forecast for individual end items,

  • sales orders,

  • inventories, and

  • existing capacity.

• The level of detail for the MPS is higher than for the production plan.

• The planning horizon usually extends from three to 18 months but primarily depends on the purchasing and manufacturing lead times.

• Master scheduling describes the process of developing a master production schedule;

• The term master production schedule is the end result of the process.

• Plans are reviewed and changed weekly or monthly.

Material Requirements Plan (MRP)

• MRP is a plan for the production and purchase of the components and/or services used in making the items in the MPS.

• The MRP establishes when the components and services are needed to make each end item.

• The level of detail is high.

• The planning horizon is similar to MPS, extending from 3 to 18 months.

Purchasing and Production Activity Control (PAC)

• PAC represents the implementation and control phase (execution phase).

• Purchasing is responsible for establishing and controlling the flow of raw materials into the factory.

• PAC is responsible for planning and controlling the flow of work through the factory.

• The planning horizon is very short

• The level of detail is high.

Capacity Management

• At each level in the manufacturing planning and control system, the priority plan must be tested against the available resources and capacity of the manufacturing system.

• The basic process is one of calculating the capacity needed to manufacture the priority plan and of finding methods to make that capacity available.

• If the capacity cannot be made available when needed then the plans must be changed.

 

2.3 Sales and Operations Planning (SOP)

• SOP is a process for continually revising the strategic business plan and coordinating plans of the various departments.

• SOP is a cross-functional business plan that involves sales and marketing, product development, operations, and senior management.

• Operations represents supply, marketing represents demand.

• The SOP is the forum in which the production plan is developed and a dynamic process in which the company plans are updated on a regular basis, at least monthly.

• SOP ha several benefits:

  • Means of updating Strategic business plan

  • Means of managing change rather than reacting to change

  • Ensure that various department plans are realistic, coordinated and support the business plan

  • Better management of production, inventory and backlog

2.4 Manufacturing Resource Planning (MRP II)

• MRP II is a master game plan for all departments in the company and works from the top down with feedback from the bottom up

• This fully integrated planning and control system is called a manufacturing resource planning, or MRP II, system.

• The phrase “MRP II” is used to distinguish the “manufacturing resource plan” (MRP II) from the “materials requirement plan” (MRP).

2.5 Enterprise Resource Planning (ERP)

• Enterprise Resource Planning (ERP) – is an accounting oriented information system for identifying and planning the enterprise---wide resources needed to make, ship, and account for customer orders.

• ERP encompasses the total company and MRP II is manufacturing.

2.6 Making the Production Plan

• Based on the market plan and available resources, the production plan sets the limits or levels of manufacturing activity for some time in the future.

• The production plan sets the general levels of production and inventories over the planning horizon.

• Its prime purpose is to establish production rates that will accomplish the objective of the strategic business plan, including inventory levels, backlogs (unfilled customer orders), market demand, customer service, low-cost plant operation, labor relations, and so on.

• The plan must extend far enough in the future to plan for the labor, equipment, facilities, and material needed to accomplish it.

Establishing Product Groups

• For planning purposes, a common unit or small number of product groups based on similarity of manufacturing processes is what is needed.

• Manufacturing is concerned more with the demand for the specific kinds of capacity needed to make the products than with the demand for the product.

• Capacity is the ability to produce goods and services.

• It means having the resources available to satisfy demand.

• Capacity can be expressed as the time available or as the number of units or dollars produced in a given period.

• The demand for goods must be translated into the demand for capacity.

• This requires identifying product groups, or families, of individual products based on the similarity of manufacturing process.

• Usually the following can be varied to adjust capacity:

  • People can be hired and laid off, overtime and short time can be worked, and shifts can be added or removed.

  • Inventory can be built up in slack periods and sold or consumed during high demand.

  • Work can be subcontracted or extra equipment leased.

  Manufacturing management is responsible for determining the least-cost alternative consistent with the goals and objectives of the business.

Basic Strategies

• Three or four basic strategies can be used in developing a production plan:

  • Chase (demand matching) strategy – producing the amount demanded at any given time  Inventory levels remain stable while production varies to meet demand.

 

 

• Production leveling – continually producing an amount equal to the average demand. Companies calculate their total demand over the time span of the plan and, on the average, produce enough to meet it. Production leveling means the company will use its resources at a level rate and produce the same amount each day it is operating. The advantage is that it results in a smooth level of operation that avoids the costs of changing production levels. The disadvantage is that inventory build up during periods of low demand

• Subcontracting – means producing at the level of minimum demand and meeting any additional demand through subcontracting. Costs associated with excess capacity are avoided, and because production is leveled, there are no costs associated with changing production levels. The main disadvantage is that the cost of purchasing may be greater than if the item were made in the plant

• Hybrid strategy – is a combination of the other three strategies. Production management is responsible for finding the combination of strategies that minimizes the sum of all costs involved, providing the level of service required, and meeting the objectives of the finance and marketing plans.

• The objective in developing a production plan is to minimize the costs of carrying inventory, changing production levels, and stocking out (not supplying the customer what is wanted when it is wanted). The information needed to make a production plan is as follows: forecast by period for the planning horizon, opening inventory, desired ending inventory, and any past-due customer orders (back orders).

Developing a Make-to-Stock Production Plan

•  Products are made and put into inventory before an order is received. Sale and delivery are made from inventory.

• Make to stock when

  • demand is fairly constant and predictable,

  •  there are few product options,

  • delivery times demanded by the marketplace are much shorter than the time needed to make the product, and

  • product has a long shelf life.

• Level production plan

  The general procedure for developing a plan for level production is total the forecast demand for the planning horizon, determine the opening inventory and the desired ending inventory,

  • calculate the total production required

  • (Total Production = total forecast + back orders + ending inventory – opening inventory), calculate the production required each period by dividing the total production by the number of periods, and calculate the ending inventory for each period.

Example on Level production plan

• Opening Inventory = 100

• Required End Inventory = 80

• Equal Number of working days/month

• No Back orders

• Forecast as in the table below

• Inventory carrying cost = $5 per unit

Required

• Production per period

• Ending Inventory per period

• Total Carrying cost

Answer

Total Production Required = 600 + 80 -100 = 580 Unit

Production/ period = 580 / 5 = 116 Unit / month

Ending Inventory after each period = Opening Inventory + Production - Demand

Ending Inventory after the first period = 100 + 116 - 110 = 106 Unit

Ending Inventory after the second period = 106 + 116 - 120 = 102 Unit

Total Carrying cost = (106+102 +88 +84 +80) x 5 = $2300

 

1.Level
Period		1	2	3	4	5	Total
Forecast		110	120	130	120	120	600
Production		116	116	116	116	116	580
Ending Inventory	100	106	102	88	84	80	460
Invent Carrying Cost