Introduction To Materials Management

Introduction to Materials
Management
Chapter 1
Arnold, Chapman, & Clive: Intro Materials 2008 Pearson Education, Upper Saddle River, NJ 07458.
Management, 6th ed. All Rights Reserved.
Wealth
What is it?
Where does it come from?
Adding value
Designing the process
Managing the process
Wealth
Natural resources
Transformation
Conversion
Managing the process
Services
Operating Environment
Government
regulations
safety
Economy
effects demand
shortages and surpluses
Competition is now global
reduced costs of transportation
communications, reduced costs and increased
speed
Operating Environment
continued
Customers demand
Lower prices
Improved quality
Reduced lead time
Improved pre-sale and after-sale service
Product and volume flexibility
Quality
Order Qualifiers:
customer requirements for price, quality,
delivery, etc
Order Winners:
those characteristics that persuade customers to
select a product or service
Todays order winners are tomorrows order
qualifiers
Manufacturing Strategy
Figure 1.1 Manufacturing strategy and lead time

Engineer-to-Order
Manufacturer does not start until the order
is received
Custom designs
Unique products
Long lead time

Inventory purchased after order is received
Make-to-Order
Manufacturer does not start until the order
is received
Often uses standard components
Little design time
Lead time is reduced

Inventory held as raw materials
Assemble-to-Order
Manufacturer inventories standard
components
No design time required
Assembly only required
Shorter lead time

Inventory held as standard components
Make-to-Stock
Manufacturer produces the goods in
anticipation of customer demand
Little customer involvement with design
Shortest lead time

Inventory held as finished goods
The Supply Chain Concept
Figure 1.2 Supply-production-distribution system

The Supply Chain Concept
Includes all activities and processes to
supply a product or service to the customer
Links many companies
Has a number of supplier/customer
relationships
May contain intermediaries such as:
wholesalers, warehouses and retailers
Historical Perspective
In the past there were well defined and rigid
boundaries between organizations
JIT viewed suppliers as partners
mutual analysis for cost reduction
mutual product design
greatly reduced inventory
improved communications (internet, EDI)
Growth of Supply Chain Concept
Integrated systems (ERP) and the sharing of
information
Global competition and supply
Flexible designs - reduced product life
cycles
JIT approach to interorganizational relations
Subcontracting or outsourcing work
Current Supply Chain Concept
Manage the flow of materials
Share information through the internet
Transfer funds electronically
Recover, recycle or reuse materials
Conflicts in Traditional Systems
Company main objectives
1. Best customer service
2. Lowest production costs
3. Lowest inventory investment
4. Lowest distribution costs
Figure 1.3 Conflicting Objectives

Marketing Production Finance
Objective High Revenue Low Cost Cash Flow
Implications
Customer Service High Low Low
Production Disruptions Many Few Few
Inventories High High Low
Materials Management
Planning and controlling the flow of
materials
Objectives:
Maximize the use of the firms resources
Provide the required level of customer service
Company Objectives
Income = Revenue - Expense
Need to increase income with:

Best customer service
Lowest production costs
Lowest inventory investment
Lowest distribution costs
and Profits
Direct labor
Direct material
Varies with volume sold
Overhead
Does not vary with volume sold
and Profits (continued)
Dollars % of Sales
Sales Revenue $1,000,000 10
Cost of Goods Sold
Direct Material $500,000 50
Direct Labour $200,000 20
Overhead $200,000 20
Total Cost of Goods Sold $900,000 90

Gross Profit $100,000 10
Reduce Materials by 10% and Labor by 5%
Dollars % of Sales
Cost of Goods Sold
Total Cost of Goods Sold $840,000 84
Profit has increased 60%
To get the same result (+ 60% profit) through Sales
Dollars % of Sales
Cost of Goods Sold
Total Cost of Goods Sold $1,040,000 87
Sales must increase by 20%
Manufacturing
Planning and Control
Planning and controlling the flow of
materials through the manufacturing
process through:
Production Planning
Implementation and Control
Inventory Management
Production Planning
To meet the demands of the marketplace
Establish priorities
Ensure capacity
Activities
Forecasting
Master Planning
Materials Requirements Planning
Capacity Planning
Implementation and Control
Putting into action and achieving the plans
(made by production planning)
Production Activity Control

Shop Floor Control
Purchasing
Inventory Management
To support production (Raw Materials) or
as a result of production (Finished Goods)
Provide a buffer against the differences in

demand rates and production rates
How much is enough?

Inventory Turns
Inventory Turns Ratio = Annual Cost of Goods Sold
Average Inventory in Dollars
Example: If the annual cost of goods sold is $1

million dollars and the average inventory is
$500,000, then:
Inventory Turns = $1,000,000 = 2
$500,000
Inventory Turns
Example Problem
a. What will be the Inventory Turns Ratio if the
annual C of GS is $24 million and the
average inventory is $6 million?
b. What would be the reduction in inventory if
turns were increased to 12 times per year?
c. If the cost of carrying inventory is 25% of
the average inventory what will the annual
savings be?
Inventory Turns
Example Problem
a. Inventory Turns = annual C of G S
average inventory
= $24,000,000
$6,000,000
= 4 turns per year

Inventory Turns
Example Problem (continued)
b. Average Inventory = annual C of G S
inventory turns
= $24,000,000
12
=$2,000,000
Inventory Reduction = $6,000,000 - $2,000,000
= $4,000,000
Inventory Turns
Example Problem (continued)
c. Reduction in Inventory = $4,000,000
Annual Savings = $4,000,000 x .25

= $1,000,000
Inputs to the Manufacturing
Planning and Control System
1. Product description
2. Process specifications
3. Time needed
4. Available facilities
5. Quantity required
Product Description
Engineering Drawings
Specifications
Bill of Material
Components used to make the product
Sub-assemblies at stages of production
Process Specifications
Recorded on a Route Sheet
Describe how the product is made
Operations required to make the product
Sequence of operations
Equipment and accessories required
Standard time to perform each operation
Time Needed to Perform
Operations
Expressed as Standard Time
An average operator, working at a normal pace
Obtained from the Routing File
Available Facilities
What equipment is available
What labor is available
Obtained from the Work Center File
Quantities Required
Information from
Forecasts
Customer Orders
Production Planning
Expressed in the Shop Order
Physical Supply / Distribution
All the activities involved in moving goods
from the supplier to the beginning of the
production process
from the end of the process to the customer
Transportation Distribution Inventory

Warehousing Packaging
Order Entry Materials Handling
Supply Chain Metrics
Metric - a verifiable measure
Used to:
communicate expectations
identify problems
direct action
motivate people
Must be timely
Challenges
1. Customers are never satisfied
2. Supply chains are large
3. Product life cycles are getting shorter
4. Lots of data
5. Narrow profit margins
6. Increasing number of alternatives
Metrics
Performance measures
Quantified and objective
Contain two parameters
e.g. Orders per day, Sales per person
Performance standards
Sets the goals
Establishes controls
Performance standards sets the goal. Performance
measure say how close you came.
Metrics
Strategy Focus
Strategic Metrics Operational
Customer Standard
Figure 1.4 Metrics context
Metrics Program
1. Establish company goals and objectives
2. Define performance
3. State the measurement
4. Set performance standards
5. Educate the users
6. Apply consistently
A Balancing Act
Inventory Transportation
Cost
of the
Customer Service
Service
Chapter 1 Summary
Manufacturing creates wealth
Must make the best use of
labor, materials and capital
Need to plan the flow of materials
into, through and out of production
Three elements in a material flow system:
supply, manufacturing and distribution
Chapter 1 Summary (continued)
Need to balance
Customer service with the cost of supplying the
service
There are three basic ways to organize
manufacturing processes:
flow, intermittent and project
determined by the: item, production rate and
range of products
Chapter 1 Summary (continued)
Each manufacturing system requires the
planning of materials
Need the right material at the right place at

the right time
Metrics will help with control and to meet

the goals of the company

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Introduction to Materials

Figure 1.1 Manufacturing strategy and lead time

Long lead time

Lead time is reduced

Shorter lead time

Shortest lead time

Figure 1.2 Supply-production-distribution system

Recover, recycle or reuse materials

Figure 1.3 Conflicting Objectives

Production Disruptions Many Few Few

Inventories High High Low

Income = Revenue - Expense

Need to increase income with:

Total Cost of Goods Sold $900,000 90

Production Activity Control

Provide a buffer against the differences in

How much is enough?

Example: If the annual cost of goods sold is $1

= 4 turns per year

Annual Savings = $4,000,000 x .25

Obtained from the Work Center File

Expressed in the Shop Order

Transportation Distribution Inventory

Figure 1.4 Metrics context

Need the right material at the right place at

Metrics will help with control and to meet

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