Managing Materials Flow

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Content of Materials Management

Materials management ; is an integral part of the logistics

management process, encompasses the administration of raw

materials, subassemblies, manufactured parts, packing materials, and in-process inventory,

critical to the total logistics process.

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Price/cost advantage

Without efficient and effective management of inbound materials flow, the manufacturing process cannot produce products at the desired price and the right cost.

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Time Advantage

Without efficient and effective management of inbound materials flow, the manufacturing process cannot produce products at time required for distribution to the customer.

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Results of Poor Materials Management

STOCK OUT IN RETAIL,– Customers seek substitutes or shop elsewhere.

In a service such as health care, lack of needed materials may delay testing or vital patient treatment, causing at least inconvenience and, at worst, threatening patient health.

e.g. organ transplantation

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Old Thinking New ThinkingMarket Seller’s market; low

competition; restricted exportBuyer’s market; keen competition; global oriented

Products Small assortment; long life cycle; low technology

Wide assortments; short life cycle; high technology

Production Full capacity load; low flexibility; large lot sizes, long lead times; low costs, make instead of buy

Full capacity load; high flexibility; low lot sizes; short lead times; low costs; buy instead of make

Service level High service level; high inventories;slow logistics process; long transport time

High service level; low inventories; quick logistics process; short transport time

Information Technology Manual data processing; paper administration

Electronic data processing, paperless factory

Enterprise Strategy Production oriented Market oriented

Materials Management: Old versus New

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61 Materials Management

Activities

1. Anticipating materials requirements2. Sourcing and obtaining materials3. Introducing materials into the

organization4. Monitoring the status of materials as a

current asset

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Low CostsTo optimize materials

costs,capital

costs, andoverheadexpences

Company Objectives

Objectives of Materials Management

High Level of ServiceTo optimizeresponse

towardproduction

andmarkets

Quality AssuranceTo maintain

and improve the

quality ofmaterial

Low Level of

Tied-upCapital

To optimizecapital

tied-up ininventories

Support of Other

FunctionsTo support Sales andDesign

development

The Objectives of Integrated Materials Management

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Scope of Materials Management

Purchasing and procurement Production control Inbound logistics Warehousing and storage

Data and information systems Inventory planning and control Forecasting Materials disposal

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Differences Between Purchasing and Procurement

The terms purchasing and procurement are often used interchangeably although they differ in scope;– Purchasing generally refers to the actual

buying of materials and those activities associated with buying process.

– Procurement is a broader in scope and includes purchasing, traffic, warehousing, and all activities related to receiving inbound materials.

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Relationship between Production and Logistics

Production affects the logistics process in two significant ways:1. Production activity determines the quantity

and types of finished goods that are produced.2. Production directly determines the company’s

need for raw materials, subassemblies,and component parts used in the manufacturing process.

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Differences Between Inbound and Outbound Transportation

Market demand that generates the need for outbound movement is more uncertain and fluctuating

Inbound transportation concern with bulk movements of raw materials, large shipments of parts and subassemblies.

Firms exercise less control over inbound transportation due to total delivered pricing programs-not having a separate analysis of inbound costs

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Warehousing and Storage Unlike the warehousing of finished goods, which

usually occurs in the field, items awaiting use in production are usually stored on-site, that is at the point of manufacture; or they are delivered on an “as needed” basis by a just-in-time (JIT) supplier.

With JIT, the need for inbound warehousing is greatly minimized or eliminated.

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Warehousing and Storage

If the JIT system is not used, the materials manager is usually much more concerned with inbound warehousing and inventory costs because they account for a larger percentage of product value.

Warehousing of requirements for raw materials are usually quite different: open/outside storage with many raw materials like sand, coal…

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Data and Information Systems

The materials manager needs direct access to the organization’s information system

The types of information needed include *demand forecasts for production, *names of suppliers and supplier

characteristics, *inventory levels *pricing data, and *other financial and marketing facts.

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Inventory Planning and Control

Inventory planning and control of raw materials, component parts, subassemblies, and goods-in-process are just as important as the management of finished goods inventory.

Techniques of ABC Analysis, EOQ and inventory carrying costs are directly applicable to materials management.

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Forecasting

Forecasting attempts to predict the future through quantitative or qualitative methods or some combination of both.

The essence of forecasting is to aid in logistics decision making.

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Why Forecast?1. Increasing customer satisfaction,2. Reducing stock outs,3. Scheduling production more efficiently,4. Lowering safety stock requirements,5. Reducing product obsolescence costs,6. Managing shipping better,7. Improving pricing and promotion

management, 8. Negotiating superior terms with suppliers,9. Making more informed pricing decisions...

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Materials Disposal

a firm often overlooks or considers following issues as minor:– the disposal of scrap, surplus, recyclable, or obsolete

materials.

reverse logistics

increased public awareness of the environment, more stringent government legislation, and a better recognition of the opportunities

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Key Questions Important to Materials Management

What is the means of communication between materials management and production?

Which issues are communicated and how often?

What is our suppliers’ involvement in the processes of materials forecasting and inventory management?

What sort of relationships do we have with our suppliers?

Are they eager to serve us and meet our needs, even in times when supplies are allocated?

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Key Questions Important to Materials Management

Who schedules production runs?

On what basis are production runs scheduled?

How frequently is scheduling performed and updated?

How do the policies or procedures of materials management impact other parts of the organization?

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Administration and Control of Materials Flow

-Computers are also used to improve materials management performance:

Kanban/Just-in-time systems» Kanban (Toyota Production System)» JIT & JIT II

MRP systems» Materials requirements planning (MRP I)» Manufacturing resource planning (MRP II)

DRP systems» Distribution requirements planning (DRP I)» Distribution resource planning (DRP II)

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Kanban

Developed by Toyota Motor Company (1950s-1960s)

Kanban ( kan means "visual," and ban means "card" or "board") is a concept related to lean and just-in-time (JIT) production.

Kanban Philosophy: Parts and materials should be supplied at the very moment they are needed in the factory production process.

Kanban can be applied to any other manufacturing process involving repetitive operations

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KANBAN- Kanban takes the product-material flow and the

information flow at the same time, prevents the waste.

-Kanban is a production management tool which is used for controlling the production and material flow

what to produce, where to produce, when to produce, how much to produce, where to send to the production processes.

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KANBAN CARDS INCLUDE:

The place it is used (stock origin point,consumption point, transportation way)

Item number Item name Item definition Kanban number (kanban card number) Item count (the demand of item by this Kanban

card for producing the main part) Kanban card box number The delivering point of Kanban ( the work station

number Kanban going to)

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Examples of Kanban Cards

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The Kanban - JIT Connection

Kanban is directly related to just-in-time (JIT) production by the fact that it improves communication about production flow and thereby can reduce stock-outs and overproduction.

Kanban is not a synonym for JIT — it is a tool that can form part of a more encompassing JIT system.

There is more to running a JIT system than just kanban and there is more to kanban than just managing inventory.

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JIT Aim: Zero stock JIT extends Kanban linking purchasing,

manufacturing and logistics.

JIT can be defined in several ways: as a production strategy, that works to reduce

the manufacturing costs and to improve quality by waste elimination and more effective use of existing company resources.

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Benefits Resulting from Implementing Just-in-Time

Productivity improvements and greater control between various production stages

Diminished raw materials, work-in-process, and finished goods inventories

Reduction in manufacturing cycle times Improved inventory turnover rates Better customer service Decreased warehouse space Improved response time

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Problems Associated with Implementing JIT

-While JIT offers a number of benefits it may not be suitable for all firms:

Production scheduling at plant(s) When stockout costs are great, JIt may not be the optimal system. Supplier production schedules Success of JIT depends on suppliers’ ability to provide parts in accordance with the firm’s

production schedule-smaller,more frequent orders can result in higher ordering costs, higher production and setup costs

Supplier locations As distance between supplier and the firm increases, delivery times may become more

erratic, shipping costs increase as LTL movements are made

Lack of system support, organizational resistance, lack of planning

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JIT and Logistics Manegement

Implementation of JIT requires a full integration of all logistics activities.

Transportation becomes a more vital component of logistics under a JIT system

Warehouses takes the role of a consolidation facility instead of storage facility

JIT systems are usually combined with other systems for controlling and planning materials flow into, within and out of organization- MRP and ERP,DRP

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JIT II- Supplier Park

The in-plant is then authorized to purchase materials from the supplier for the customer.

Supplier's sales representative works full-time in a customer firm while being paid by the supplier.

The customer serves as the host organization, and the supplier representative "in-plant"--functions as an employee of the customer's purchasing department, attending planning meetings and determining material needs.

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JIT II- Supplier Park (Con’t)

Developed by Bose Corporation,

Improves mutual understanding between the buyer and supplier, reduces waste and redundancy of efforts, improves supplier responsiveness, and creates a positive working environment.

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MRP MRP has been used to signify systems called

materials requirements planning(MRP I) and manufacturing resource planning(MRP II)

An MRP system is intended to simultaneously meet 3 objectives:

1. Ensure materials and products are available for production and delivery to customers.

2. Maintain the lowest possible level of inventory. 3. Plan manufacturing activities, delivery schedules and

purchasing activities.

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MRP Imaterials requirements planning

MRP I consists of – a computing system for dependent demand,– a manufacturing information system,

building on inventory, production scheduling, and administrating all inputs to production and,

– a concept and philosophy of management.

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MRP I systems offer many advantages over traditional systems, including;

Improved business results(ROI, profits...) Improved manufacturing performance results Better manufacturing control More accurate and timely information Less inventory Time-phased ordering of materials Less material obsolescence Higher reliability More responsiveness to market demand Reduced production costs

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Disadvantages of MRP I

MRP I does not tend to optimize materials acquisition costs. Because inventory levels are kept to a minimum, materials must be purchased more frequently and in smaller quantities. This results in increased ordering costs.

Higher transportation bills and higher unit costs are incurred because the firm is less likely to qualify for large volume discounts.

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Disadvantages of MRP I

MRP I is a potential hazard of a production slowdown or shutdown that may arise because of such as unforeseen delivery problems and materials shortages.

MRP I arises from the use of standardized software packages, which may be difficult to accommodate within the unique operating simulations of a given firm- need for modification according to the firm’s needs

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Elements of MRP I System

Inventory transactions Customers’ orders Forecasts Engineering changes

Inventory status( finished items, work in progress,

planned orders)

Master production scheduleWhich products to produce,

when,in what quantityBill-of-materials file

MRP I System

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MRP II manufacturing resource planning

MRP I is expanded , MRP II includes the entire set of activities involved in the planning

and control of production operations, production planning, resource requirements planning, master production scheduling, demand management, the ability to perform what-if analyses, to book orders, materials requirements planning(MRP I), shop floor control, purchasing, control inventory, perform accounting and financial analyses capacity control.

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The Advantages of MRP II

Inventory reductions of one-fourth to one-third

Higher inventory turnover Improved consistency in on-time

customer delivery Reductions in purchasing costs due to

few expedited shipments Minimization of workforce overtime

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DRP I

Distribution requirements planning(DRP I) –

“ the application of MRP principles to the distribution environment, integrating the special needs of distribution.”

a dynamic model that looks at a time-phased plan of events that affect inventory.

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DRP II DRP II(distribution resource planning) is an extension

of distribution requirements planning(DRP I).

DRP II applies the time-based DRP I logic to replenish inventories in multiechelon warehousing systems including warehouse space, manpower levels, transportation capacity, financial flows.

DRP II system, translates the forecast demand for each SKU (stock keeping unit) at each warehouse and DC into a time-based replenisment plan.

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ERP –Enterprise Resource Planning

A software that organizes and manages a company’s business processes by sharing info across functional areas and across countries.

ERP-integration of accounting, sales, distribution, manufacturing, planning, purchasing, HR

SAP, Oracle

Modules Finance module (ABC, capital budgeting,…) Sales/marketing (Distribution req., customer complaints,…) Production (CAD, MRP, supplier evaluations, allocation of

resources,…) HR ( job descriptions, org. charts,…)

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