Introduction to Material Management
Session - 1
Agenda
Supply Chain Concepts
Need for Materials Management Operating Environment Production Control & Manufacturing Strategies Conflicts in Traditional Supply Chains Benefits Of Materials Management The MPC Framework
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The Supply Chain Concept
A linked chain of activities from raw material extraction to final customer purchase.
Inbound Logistics Supplier Manufacturer
Outbound Logistics Customer
DOMINANT FLOW OF PRODUCTS &SERVICES
DOMINANT FLOW OF DEAMND & DESIGN INFORMATION
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The Supply Chain Concept
The supply chain includes all activities and processes to supply a product or services to a final customer
Any number of companies can be linked in a supply chain A customer can be a supplier to another customer so the total chain can have a number of supplier / customer relationships It can contain a number of intermediaries such as warehouses, wholesales, distributors and retailers Product or services usually flow from supplier to customer and design and demand information usually flows from customer to supplier
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Elements in a supply chain
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Organization's Objectives
MAXIMISE PROFITS [Profit = Revenue Expense]
While maintaining
Best customer service Lowest production costs Lowest inventory investment Lowest distribution costs
Demand
Resources
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Why Materials Management ?
All customers have a need/requirement for a product /service. They want their demand to be fulfilled
At a fair price
In the shortest time With the best quality With a good pre/post sales service With a good volume & variety flexibility
Manufacturers / Service Providers try to meet this demand. Suppliers provide the raw material to manufacturers to process.
At every stage VALUE is being added to the materials (from raw materials to work in progress inventory to finished goods)
To add this value some COST is incurred at every stage.
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Why Materials Management ?
Materials / resources are limited or constrained. Costs incurred can be in the form of
Material cost
Handling cost Wages Transportation costs etc.
The goal is to continue to add value while simultaneously reducing the cost associated while trying to meet the customer demand.
Maximize the use of firms resources
Provide the required level of customer service
This is the domain of supply chain & materials management!
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Operating Environment
Factors that affect Supply Chain & Materials Management
Government
Economy
Competition
Customer
Quality
Lays the regulations for business
Demand is influenced by economic conditions Material / Labor shortages or excesses arise from economic conditions Free Trade and Global competition
Foreign companies in markets Less costly transportation and movement of materials
Fair Price High Quality Delivery Lead time Better Presales and after sales service
Order Qualifiers Competitive characteristics needed to be a viable competitor Order Winner Competitive characteristics that cause customers to choose that firms products and services
Effective, fast and cheap worldwide communication
Product and Volume flexibility
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The Need For Production Control
To get the most value out of our resources, production processes must be designed to make products most efficiently. Once the processes exist, we need to manage their operations so they produce goods most economically. Managing the operation means planning and controlling the resources in the process Labor, Capital and Material
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Manufacturing Strategy
To meet customer expectations, a company must be marketoriented
All functions in a business must support this concept Operations must be tuned to meet the needs of the marketplace and provide fast on-time delivery
Delivery Lead Time The time from the receipt of a customer order to the delivery of the product Cumulative Lead Time - The longest planned length of time to accomplish the activity in question
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Manufacturing Strategies
Supplier manufactures the goods and sells from finished goods inventory
Product is made from standard components that the manufacturer can inventory and assemble according to customer order.
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Manufacturing Strategies
The manufacturer doesnt start to make the product until a customers order is received. The final product is usually made from standard items but may include custom-designed components as well.
EngineerTo-Order
Delivery Lead Time
Design Purchase Manufacture Assemble Ship
The process starts with the preparation of unique / highly customized engineering designs of the product, with the close involvement of the customer.
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Physical Supply / Distribution
Movement of goods from suppliers to the beginning of the production process and from the end of the production process to consumers
Activities involved are
Transportation
Distribution inventory Warehousing Packaging
Materials handling
Order entry
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Quiz - 1
Delivery lead time in a Engineer-to-order environment consists of :
A) Only Designing B) Designing and Manufacturing
C) Designing, Purchasing, Manufacturing, Assembling and Shipping
D) Designing, Manufacturing, Assembling and Shipping
Answer : C
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Quiz - 2
Manufacturing, Assembling and Shipping constitute the deliver lead time for which of the following environments:
A) Engineer to order
B) Make to order C) Assemble to order D) Make to stock
Answer : B
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Conflicts in Traditional Systems
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
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Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing, production and finance departments because each has different responsibilities in these areas
FUNCTION Marketing
OBJECTIVE High Revenues High Product Availability
IMPLICATION
High Low
Customer Service
Production
Low Production Cost High Level Production Long Production Runs Low investment and Costs
High Low
Disruptions to Production
High Low
Inventories
Finance
Fewer Fixed Costs
Low Inventories
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Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing, production and finance departments because each has different responsibilities in these areas
FUNCTION Marketing
OBJECTIVE High Revenues High Product Availability
IMPLICATION
High Low
Customer Service
Production
Low Production Cost High Level Production Long Production Runs Low investment and Costs
Many Few
Disruptions to Production
High Low
Inventories
Finance
Fewer Fixed Costs
Low Inventories
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Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing, production and finance departments because each has different responsibilities in these areas
FUNCTION Marketing
OBJECTIVE High Revenues High Product Availability
IMPLICATION
High Low
Customer Service
Production
Low Production Cost High Level Production Long Production Runs Low investment and Costs
Many Few
Disruptions to Production
High Low
Inventories
Finance
Fewer Fixed Costs
Low Inventories
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Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing, production and finance departments because each has different responsibilities in these areas
FUNCTION Marketing
OBJECTIVE High Revenues High Product Availability
IMPLICATION
High Low
Customer Service
Production
Low Production Cost High Level Production Long Production Runs Low investment and Costs
Many Few
Disruptions to Production
High Low
Inventories
Finance
Fewer Fixed Costs
Low Inventories
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Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing, production and finance departments because each has different responsibilities in these areas
FUNCTION Marketing
OBJECTIVE High Revenues High Product Availability
IMPLICATION
High Low
Customer Service
Production
Low Production Cost High Level Production Long Production Runs Low investment and Costs
Many Few
Disruptions to Production
High Low
Inventories
Finance
Fewer Fixed Costs
Low Inventories
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Quiz - 3
Which of the following are elements of a supply chain? A) Customers B) Manufacturers C) Distributors D) All the above
Answer : D
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Quiz - 4
Which of the following is not true about a supply chain : A) A number of companies can be linked in the supply chain network B) A supplier to one manufacturing facility cannot be a customer to another manufacturing facility C) A number of intermediaries (distributors, wholesalers, retailers etc., ) form part of the supply chain
D) All the above are true
Answer : B
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How the cost structure of one entity in a supply-chain impacts other entities
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Benefits of Materials Management
Dollars Revenue (sales) Cost of Goods Sold Direct Material Direct Labor Factory Overhead Total Cost of Goods Sold Gross Profit $500,000 $200,000 $200,000 $900,000 $100,000 50% 20% 20% 90% 10% $1,000,000 Percent of Sales 100%
If, through a well-organized materials management department, direct materials can be reduced by 10% and direct labor by 5%
Dollars Revenue (sales) Cost of Goods Sold Direct Material Direct Labor $450,000 $190,000 45% 19% $1,000,000 Percent of Sales 100%
Factory Overhead
Total Cost of Goods Sold Gross Profit
$200,000
$900,000 $100,000
20%
84% 16%
Profit has been increased by 60%
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Benefits of Materials Management
To get the same increase in profit ($60,000) by increasing revenue, sales would have to increase to $1.2 million from $1 million
Dollars Revenue (sales) Cost of Goods Sold Direct Material Direct Labor Factory Overhead Total Cost of Goods Sold Gross Profit $600,000 $240,000 $200,000 $900,000 $300,000 $1,200,000
Percent of Sales 100%
50% 20% 17% 87% 13%
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Quiz - 5
If the cost of manufacturing (direct material and direct labor) is 60% of sales and profit is 10% of sales, what would be the improvement in profit if, through better planning and control, the cost of manufacturing was reduced from 60% to 50%?
Answer : Profits would improve 100%
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Supply Chain & MPC
MPC
SRM
CRM
Inbound Logistics Supplier Manufacturer
Outbound Logistics Customer
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Why Plan?
To satisfy customer demand & ensure the availability of resources
Material Capacity
These are questions of priority and capacity.
Priority = Demand & Capacity = Resources
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Manufacturing Planning &Control
Manufacturing Planning and Control is responsible for the planning and control of the flow of materials through the manufacturing process
The primary activities carried out are:
Production Planning Production must be able to meet the demand of the marketplace. It involves
Forecasting Master Planning Material requirements planning Capacity Planning
Implementation and Control These are responsible for putting into action and achieving the plans made by production planning Inventory Management Inventories are materials and suppliers carried on hand either for sale or to provide material or supplies to the production process. They provide a buffer against the differences in demand rates and production rates
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Manufacturing Planning & Control (MPC) - Framework
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MPC - Input and Outputs
INPUTS From Marketing, Finance, Production & Engineering Long range forecasts Business Plan, Financial Plan, Market Plan, Capacity etc. Production Plan, Forecasts, Customer Orders, Inventory, Capacity PRODUCTION PLAN OUTPUT
STRATEGIC BUSINESS PLAN
Broad direction/Mission, Product lines etc Company objectives in long term
MASTER PRODUCTION SCHEDULE
PLANNING
Aggregate Plan : By product groups and Inventory Levels
Detailed Plan: By week and at end item level
MPS, Bill of Materials Inventory, Capacity
MATERIAL REQUIREMENT PLAN EXECUTION
Time phased purchase orders: For raw materials and components
PRODUCTION & ACTIVITY CONTROL
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MPC Framework Time Horizon
Long Term
Strategic Business Plan
Capacity Planning
Relatively Long Term
Resource Planning Sales & Operations Planning DM
Medium Term
Rough-cut capacity Planning
Master Production Scheduling
Capacity Requirements Planning
Material and Capacity Plans
Finite Loading
Short Term
Input/Output analysis
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Shop-floor Systems
Vendor Systems
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MPC Framework Time Horizon
PPAC
Level of Complexity / Detail
MRP
MPS
S & OP
Strategic Business Plan
Weeks/Days
Months
Years
Time Duration
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Quiz - 6
Which plan has the maximum time duration?
A. Sales and Operations Plan B. MPS
C. MRP
D. All have same time horizon
Answer : A
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Quiz - 7
Master production Scheduling is for
A. Long Term B. Relatively Long Term
C. Medium Term
D. Short Term
Answer : C
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Thank You
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Appendix
Key Terminologies
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Key terminologies
Elements of SCM : Customers, Producers ( Retailers, Distributors, Manufacturer), Suppliers
Business processes that connect various elements in SCM: Product development, Order fulfillment, Demand management, Customer relationship management
Product development process integrate customers and suppliers early in the development process, reduce time to market, incorporate supply chain considerations into product design and employ concurrent product development practices
Order fulfillment process requires manufacturing process to flexibly respond to market changes with rapid changeover possibilities for mass customizations, Customer need dates and requirements to drive the process, Manufacturing, distribution and transportation plans to be integrated.
Demand management process requires demand requirements and supply capabilities to be continuously modeled using POS and key customer demand data, market requirements and production plans to be coordinated on an enterprise-wide basis, Demand and production rates to be synchronized and inventories need to be managed CRM process should provide single source of customer information, instant promising/availability information to the customer, On-line/Real-time access to product, pricing and order-status information.
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Key terminologies
Manufacturing lead time: The total time required to manufacture an item, exclusive of lower level purchasing lead-time.
Engineer to order : Products whose customer specifications require unique engineering design, significant customization, or new purchased materials. Each customer order results in a unique set of part numbers, bills of material, and routings
Make to order: Products are manufactured after the receipt of customer orders for that product, hence there is no buildup of inventory of the finished goods but takes into account the amount of customer orders to be fulfilled which is also known as Backlog Assemble to order: In this environment, standard components are manufactured and stocked and depending on the customer orders, the required components are assembled to meet the required customer options. Hence there is buildup of inventory of standard components and backlog of the customer orders. Make to stock: In a Make-to-Stock environment, products are manufactured and inventoried. Sales of products are done from the inventory.
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Key terminologies
Strategic business Plan: The strategic business plan incorporates the plans of marketing, finance, and production. Marketing must agree that its plans are realistic and achievable. Finance must agree that the marketing plan is financially viable, and production must agree that it can meet the desired demand. Sales and Operations planning: A process that provides management the ability to strategically direct its business to achieve competitive advantage on a continuous basis by integrating customer-focused marketing plans for new and existing products with the management of supply chain.
Resource planning: Capacity planning conducted at the business plan level. The process of establishing, measuring, and adjusting limits or levels of long range capacity.
Master production scheduling: The anticipated build schedule for those items assigned to the master scheduler. It represents what the company plans to produce expressed in specific configurations, quantities, and dates. Rough cut Capacity Planning: The process of converting the master production schedule into requirements for key resources, often including labor, machinery, warehouse space, suppliers capabilities, and, in some cases, money.
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Key terminologies
Customer service ratio : A measure of delivery performance of finished goods, usually expressed as a percentage. In a make-to-stock company, this percentage usually represents the number of items or dollars (on one or more customer orders) that were shipped on schedule for a specific time period, compared with the total that were supposed to be shipped in that time period.
Distribution requirements planning (DRP): The function of determining the need to replenish inventory at branch warehouses. A time-phased order point approach is used where the planned orders at the branch warehouse level are exploded via MRP logic to become gross requirements on the supplying source. Inventory control: The activities and techniques of maintaining the desired levels of items, whether raw materials, work in process, or finished products. Inventory management: The branch of business management concerned with planning and controlling inventories Inventory turnover: A frequently used method to compute inventory turnover is to divide the average inventory level into the annual cost of sales. Production planning: The function of setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planed levels of sales (sales plan or forecasts), while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan.
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Key Terminologies
Material requirements planning: A set of techniques that uses bill of material data, inventory data, and the master production schedule to calculate requirements for materials. Capacity requirements planning: The function of establishing, measuring, and adjusting limits or levels of capacity. The term capacity requirements planning in this context refers to the process of determining in detail the amount of labor and machine resources required to accomplish the tasks of production. Finite loading: Assigning no more work to a work center than the work center can be expected to execute in a given time period. Infinite loading: Calculation of capacity required at work centers in the time periods required regardless of the capacity available to perform this work. Input/Output Control: A technique for capacity control where planned and actual inputs and planned and actual outputs of a work center are monitored. Shop floor control/Vendor plans: This is where the action takes place, and all the detailed planned is brought into fruition. Monitoring is very important and any deviation has to report up to keep priorities current.
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Key terminologies
Purchasing: The term used in industry and management to denote the function of and the responsibility for procuring materials, supplies, and services.
Purchase requisition: An authorization to the purchasing department to purchase specified materials in specified quantities within a specified time.
Purchase order: The purchasers authorization used to formalize a purchase transaction with a supplier. A purchase order, when given to a supplier, should contain statements of the name, part number, quantity, description, and price of the goods or services ordered, agreed-to terms as to payment, discounts, date of performance, and transportation, and all other agreements pertinent to the purchase and its execution by the supplier. Inventory: Those stocks or items used to support production (raw materials and workin-process items), supporting activities (maintenance, repair, and operating supplies), and customer service (finished goods and spare parts).
Inventory Management: The branch of business management concerned with planning and controlling inventories
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