Session01_Introduction to Material Management

Introduction to Material Management Session - 1

Agenda 

Supply Chain Concepts

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Need for Materials Management

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Operating Environment

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Production Control & Manufacturing Strategies

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Conflicts in Traditional Supply Chains

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Benefits Of Materials Management

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The MPC Framework

The Supply Chain Concept  “A linked chain of activities from raw material extraction to final customer purchase.”

Inbound Logistics Supplier

Outbound Logistics Manufacturer

DOMINANT FLOW OF PRODUCTS &SERVICES

DOMINANT FLOW OF DEAMND & DESIGN INFORMATION

Customer

The Supply Chain Concept  

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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

Elements in a supply chain 

Organization's Objectives  

MAXIMISE PROFITS [Profit = Revenue  – Expense]

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While maintaining 

Best customer service

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Lowest production costs

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Lowest inventory investment

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Lowest distribution costs

Demand

Resources

Why Materials Management ?  

All customers have a need/requirement for a product /service.

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They want their demand to be fulfilled •

At a fair price

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In the shortest time

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With the best quality

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With a good pre/post sales service

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With a good volume & variety flexibility

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Manufacturers / Service Providers try to meet this demand.

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Suppliers provide the raw material to manufacturers to process.

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At every stage VALUE is being added to the materials (from raw materials to work in progress inventory to finished goods)

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To add this value some COST is incurred at every stage .

Why Materials Management ?  

Materials / resources are limited or constrained.

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Costs incurred can be in the form of

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Material cost

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Handling cost

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Wages

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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

•

Provide the required level of customer service

firm’s

resources

This is the domain of supply chain & materials management!

Operating Environment  Factors that affect Supply Chain & Materials Management

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Lays the regulations for business

Competition

Economy

Government 

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Demand is influenced by economic conditions Material / Labor shortages or excesses arise from economic conditions Free Trade and Global competition

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Foreign companies in markets Less costly transportation and movement of materials Effective, fast and cheap worldwide communication

Customer 

Fair Price

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High Quality

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Quality 

Delivery Lead time Better Presales and after sales service Product and Volume flexibility

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Order Qualifiers  Competitive characteristics needed to be a viable competitor Order Winner  Competitive characteristics that cause customers to choose that firm’s products and services

The Need For Production Control 

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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 

Manufacturing Strategy  

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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 

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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

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.

Manufacturing Strategies 

The manufacturer doesn’t start to make the product until a customer’s 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.

Physical Supply / Distribution  

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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

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Distribution inventory

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Warehousing

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Packaging

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Materials handling

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Order entry

Quiz - 1 

Delivery lead time in a Engineer-to-order environment consists of : 

A) Only Designing

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B) Designing and Manufacturing

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C) Designing, Purchasing, Manufacturing, Assembling and Shipping D) Designing, Manufacturing, Assembling and Shipping

Answer : C

Quiz - 2  

Manufacturing, Assembling and Shipping constitute the deliver lead time for which of the following environments:

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A) Engineer to order

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B) Make to order

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C) Assemble to order

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D) Make to stock

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Answer : B

Conflicts in Traditional Systems  

To get the most profit, a company must have at least four main objectives 

Provide Best customer service

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Provide lowest Production Costs

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Provide lowest inventory investment

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Provide lowest distribution Costs

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

Production

Finance

OBJECTIVE

IMPLICATION

•

High Revenues

High

•

High Product Availability

Low

•

Low Production Cost

•

High Level Production

•

Long Production Runs

•

Low investment and Costs

High

•

Fewer Fixed Costs

Low

•

Low Inventories

High Low

Customer Service

Disruptions to Production

Inventories

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

Production

Finance

OBJECTIVE

IMPLICATION

•

High Revenues

High

•

High Product Availability

Low

•

Low Production Cost

•

High Level Production

•

Long Production Runs

•

Low investment and Costs

High

•

Fewer Fixed Costs

Low

•

Low Inventories

Many Few

Customer Service

Disruptions to Production

Inventories

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

Production

Finance

OBJECTIVE

IMPLICATION

•

High Revenues

High

•

High Product Availability

Low

•

Low Production Cost

•

High Level Production

•

Long Production Runs

•

Low investment and Costs

High

•

Fewer Fixed Costs

Low

•

Low Inventories

Many Few

Customer Service

Disruptions to Production

Inventories

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

Production

Finance

OBJECTIVE

IMPLICATION

•

High Revenues

High

•

High Product Availability

Low

•

Low Production Cost

•

High Level Production

•

Long Production Runs

•

Low investment and Costs

High

•

Fewer Fixed Costs

Low

•

Low Inventories

Many Few

Customer Service

Disruptions to Production

Inventories

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

Production

Finance

OBJECTIVE

IMPLICATION

•

High Revenues

High

•

High Product Availability

Low

•

Low Production Cost

•

High Level Production

•

Long Production Runs

•

Low investment and Costs

High

•

Fewer Fixed Costs

Low

•

Low Inventories

Many Few

Customer Service

Disruptions to Production

Inventories

Quiz - 3  

Which of the following are elements of a supply chain?

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A) Customers

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B) Manufacturers

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C) Distributors

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D) All the above

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Answer : D

Quiz - 4  

Which of the following is not true about a supply chain :

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A) A number of companies can be linked in the supply chain network

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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

How the cost structure of one entity in  a supply-chain impacts other entities 

Benefits of Materials Management Dollars Revenue (sales)

Percent of Sales $1,000,000

100%

Cost of Goods Sold Direct Material

$500,000

50%

Direct Labor

$200,000

20%

Factory Overhead

$200,000

20%

Total Cost of Goods Sold

$900,000

90%

Gross Profit

$100,000

10%

If, through a well-organized materials management department, direct materials can be reduced by 10% and direct labor by 5% Dollars Revenue (sales)

Percent of Sales $1,000,000

100%

Cost of Goods Sold Direct Material

$450,000

45%

Direct Labor

$190,000

19%

Factory Overhead

$200,000

20%

Total Cost of Goods Sold

$900,000

84%

Gross Profit

$100,000

16%

Profit has been increased by 60%

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)

Percent of Sales $1,200,000

100%

Cost of Goods Sold Direct Material

$600,000

50%

Direct Labor

$240,000

20%

Factory Overhead

$200,000

17%

Total Cost of Goods Sold

$900,000

87%

Gross Profit

$300,000

13%

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%?

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Answer : Profits would improve 100%

Supply Chain & MPC  MPC

SRM

CRM

Inbound Logistics Supplier

Outbound Logistics Manufacturer

Customer

Why Plan?  To satisfy customer demand & ensure the availability of resources 

Material

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Capacity

These are questions of priority and capacity. Priority = Demand & Capacity = Resources

Manufacturing Planning &Control  

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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   

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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

Manufacturing Planning & Control  (MPC) - Framework 

MPC - Input and Outputs  INPUTS From Marketing, Finance, Production & Engineering

OUTPUT Broad direction/Mission, Product lines etc

STRATEGIC BUSINESS PLAN

Company objectives in long term

Long range forecasts Business Plan, Financial Plan, Market Plan, Capacity etc.

PRODUCTION PLAN

Production Plan, Forecasts, Customer Orders, Inventory, Capacity

MASTER PRODUCTION SCHEDULE

MPS, Bill of Materials Inventory, Capacity

MATERIAL REQUIREMENT PLAN

PRODUCTION & ACTIVITY CONTROL

   G    N    I    N    N    A    L    P

   N    O    I    T    U    C    E    X    E

Aggregate Plan : By product groups and Inventory Levels

Detailed Plan: By week and at end item level

Time phased purchase orders: For raw materials and components

MPC Framework  – Time Horizon Long Term Strategic Business Plan

Capacity Planning Relatively Long Term Sales & Operations Planning

Resource Planning

Medium Term Rough-cut capacity Planning

Master Production Scheduling

Capacity Requirements Planning

Finite Loading

Input/Output analysis

Material and Capacity Plans

Short Term

Shop-floor Systems

Vendor Systems

DM

MPC Framework  – Time Horizon PPAC

   l    i   a    t   e    D    /   y    t    i   x   e    l   p   m   o    C    f   o    l   e   v   e    L

MRP

MPS

S & OP

Strategic Business Plan

Weeks/Days

Months

Time Duration

Years

Quiz - 6  

Which plan has the maximum time duration?

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A. Sales and Operations Plan

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B. MPS

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C. MRP

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D. All have same time horizon

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Answer : A

Quiz - 7  

Master production Scheduling is for

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A. Long Term

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B. Relatively Long Term

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C. Medium Term

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D. Short Term 

Answer : C

Thank You

Appendix

Key Terminologies

Key terminologies  

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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.

Key terminologies  

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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.

Key terminologies  

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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, supplier’s capabilities, and, in some cases, money.

Key terminologies  

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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. 

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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.

Key Terminologies  

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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.