Introduction to
Introduction to
Material
Material
Management
Management
Session - 1
Session - 1
Agenda
Agenda
Supply Chain Concepts
Supply Chain Concepts
Need for Materials Management
Need for Materials Management
Operating Environment
Operating Environment
Production Control & Manufacturing Strategies
Production Control & Manufacturing Strategies
Conflicts in Traditional Supply Chains
Conflicts in Traditional Supply Chains
Benefits Of Materials Management
Benefits Of Materials Management
The Supply Chain Concept
The Supply Chain Concept
Supplier
Supplier Manufacturer Manufacturer CustomerCustomer Inbound
Inbound Logistics Logistics Outbound Outbound LogisticsLogistics
DOMINANT FLOW OF PRODUCTS &SERVICES DOMINANT FLOW OF PRODUCTS &SERVICES
DOMINANT FLOW OF DEAMND & DESIGN INFORMATION DOMINANT FLOW OF DEAMND & DESIGN INFORMATION
“A linked chain of activities from
“A linked chain of activities from
raw material extraction to final customer purchase.”
raw material extraction to final customer purchase.”
The Supply Chain Concept
The Supply Chain Concept
The supply chain includes all activities and processes to
The supply chain includes all activities and processes to
supply a product or services to a final customer
supply a product or services to a final customer
Any number of companies can be linked in a supply chain
Any number of companies can be linked in a supply chain
A customer can be a supplier to another customer so the total
A customer can be a supplier to another customer so the total
chain can have a
chain can have a number of supplier / customer relationships
number of supplier / customer relationships
It can contain a
It can contain a number of intermediaries such as warehouses,
number of intermediaries such as warehouses,
wholesales, distributors and retailers
wholesales, distributors and retailers
Product or services usually flow from supplier to customer
Product or services usually flow from supplier to customer
and design and demand information usually flows from
and design and demand information usually flows from
customer to supplier
Organization's Objectives
MAXIMISE PROFITS
[Profit = Revenue
–Expense]
While maintaining
Best customer service
Lowest production costs
Lowest inventory investment
Lowest distribution costs
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)
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 firm’s resources
• Provide the required level of customer service
Operating Environment
Factors that affect Supply Chain & Materials Management
Government Lays the regulations for business Economy Demand is influenced by economic conditions Material / Labor shortages or excesses arise from economic conditions
Free Trade and
Global competition Competition Foreign companies in markets Less costly transportation and movement of materials Effective, fast and cheap worldwide communication Customer Fair Price High Quality Delivery Lead time Better
Pre-sales and after sales service Product and Volume flexibility Quality 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
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
Manufacturing Strategy
To meet customer expectations, a company must be
market-oriented
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
Manufacturing Strategies
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.
Design Purchase Manufacture Assemble Ship
Engineer-To-Order Delivery Lead Time
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
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
Quiz - 1
Answer : C
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
Quiz - 2
Answer : B
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
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
Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing,
production
and finance departments because each has different
responsibilities in these areas
Marketing
Production
Finance
FUNCTION OBJECTIVE IMPLICATION
• High Revenues
• High Product Availability
• Low Production Cost • High Level Production • Long Production Runs • Low investment and Costs • Fewer Fixed Costs
• Low Inventories Customer Service Disruptions to Production Inventories High Low High Low High Low
Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing,
production and finance departments because each has different
responsibilities in these areas
Marketing
Production
Finance
FUNCTION OBJECTIVE IMPLICATION
• High Revenues
• High Product Availability
• Low Production Cost • High Level Production • Long Production Runs • Low investment and Costs • Fewer Fixed Costs
• Low Inventories Customer Service Disruptions to Production Inventories High Low Many Few High Low
Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing,
production and finance departments because each has different
responsibilities in these areas
Marketing
Production
Finance
FUNCTION OBJECTIVE IMPLICATION
• High Revenues
• High Product Availability
• Low Production Cost • High Level Production • Long Production Runs • Low investment and Costs • Fewer Fixed Costs
• Low Inventories Customer Service Disruptions to Production Inventories High Low Many Few High Low
Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing,
production and finance departments because each has different
responsibilities in these areas
Marketing
Production
Finance
FUNCTION OBJECTIVE IMPLICATION
• High Revenues
• High Product Availability
• Low Production Cost • High Level Production • Long Production Runs • Low investment and Costs • Fewer Fixed Costs
• Low Inventories Customer Service Disruptions to Production Inventories High Low Many Few High Low
Conflicts in Traditional Systems
Organizational objectives create conflict among the marketing,
production and finance departments because each has different
responsibilities in these areas
Marketing
Production
Finance
FUNCTION OBJECTIVE IMPLICATION
• High Revenues
• High Product Availability
• Low Production Cost • High Level Production • Long Production Runs • Low investment and Costs • Fewer Fixed Costs
• Low Inventories Customer Service Disruptions to Production Inventories High Low Many Few High Low
Quiz - 3
Answer : D
Which of the following are elements of a supply chain?
A) Customers
B) Manufacturers
C) Distributors
D) All the above
Quiz - 4
Answer : B
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
How the cost structure of one entity in
a supply-chain impacts other entities
Benefits of Materials Management
Dollars Percent of Sales
Revenue (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 Percent of Sales
Revenue (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%
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 Percent of Sales
Revenue (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%?
Supply Chain & MPC
Supplier Manufacturer Customer
Inbound Logistics Outbound Logistics
SRM CRM
Why Plan?
To satisfy customer demand & ensure the availability of resources
Material
Capacity
Priority = Demand & Capacity = Resources
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
Manufacturing Planning & Control
(MPC) - Framework
MPC - Input and Outputs
STRATEGIC BUSINESS PLAN PRODUCTION PLAN MASTER PRODUCTION SCHEDULE MATERIAL REQUIREMENT PLAN PRODUCTION & ACTIVITY CONTROL INPUTS From Marketing, Finance, Production &Engineering Long range forecasts
OUTPUT
Broad direction/Mission, Product lines etc
Company objectives in long term
Business Plan, Financial Plan, Market Plan,
Capacity etc.
Aggregate Plan : By product groups and
Inventory Levels
Production Plan, Forecasts, Customer
Orders, Inventory, Capacity
Detailed Plan: By week and at end item level
MPS, Bill of Materials Inventory, Capacity
Time phased purchase orders: For raw
materials and components P L A N N I N G E X E C U T I O N
Master Production Scheduling Rough-cut capacity Planning
Material and Capacity Plans
Vendor Systems Shop-floor Systems
Resource Planning
Capacity Requirements Planning Finite Loading
Input/Output analysis
Sales & Operations Planning DM Strategic Business Plan
Long Term
Relatively Long Term
Medium Term
Short Term Capacity Planning
Time Duration L e v e l o f C o m p l e x i t y / D e t a i l
Weeks/Days Months Years
Strategic Business Plan S & OP MPS MRP PPAC
Quiz - 6
Which plan has the maximum time duration?
A. Sales and Operations Plan
B. MPS
C. MRP
D. All have same time horizon
Quiz - 7
Master production Scheduling is for
A. Long Term
B. Relatively Long Term
C. Medium Term
D. Short Term
Appendix
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.
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
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,
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.
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
