Purchasing and Supply Management by W. C. Benton

Purchasing and Supply Management by W. C. Benton

Chapter Four

Materials Management

Copyright ©2007 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin

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Learning Objectives1. To identify the activities of materials management.

2. To identify the four functions of inventory.

3. To understand the relationship between purchasing and materials management.

4. To determine how the materials management concept makes a contribution to profitability.

5. To understand why firms are moving toward materials management.

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MATERIALS MANAGEMENT

The purpose of materials management is to support the transformation of raw materials and component parts into shipped or finished goods

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Five Functions of Inventory The five functions of inventory are

1. Pipeline inventories (raw materials/in process)2. _________3. _________4. _________5. _________

These five basic functions of inventory are fundamental to achieving smooth flow, reasonable equipment utilization and materials handling costs, and maintenance of good customer service.

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Suppliers

The supplier is the source of raw materials and component part inventories. ____________________________________________________________________________________________________________

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When planning to acquire materials, whether raw materials, component parts, or finished goods, the capacity must be considered for both the buyer and seller.

Each materials acquisition must be translated into a capacity requirement by the supplier.

For example, suppose we have a scenario as shown on the next slide

Production Planning

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FIGURE 4.1 Production Inventory System

(Purchasing) (Purchasing)

Information flows - - -Physical flows

(Demand management)

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Capacity Planning

Say capacity is the potential to produce 50 assemblies an hour. ____________________________________________________________________________________________________________________________________.

A manufacturing plant is designed to produce 1,000 units of product a day. Is it possible for the plant to operate at a rate of 10, 50, or 120 units a day? There is a lower limit beyond which it is not economical to run.

At some point, ________________________________________________________________________________________.

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The upper level of production is limited by the process technology and/or the disposition of the workforce.

Can a plant manager exhort workers to produce, in the short run, at very high levels of production to satisfy a very important customer? Probably yes, but not very often.

Pushing the plant (equipment, people, and suppliers) to produce at very high levels of _____________________________________________________________________________________________________________________

Capacity Planning

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Capacity and Inventory

In general, inventory is stored capacity.

If capacity is insufficient to ____________________________________________________________________________________________________________.

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THROUGHPUT TIME The delay between receipt of raw materials and the

availability of the finished goods produced from them is throughput time (TPT). _________________________________________________________________________________________________.

For the whole system, TPT should be as short as possible. Consumers prefer to obtain goods or services in the shortest possible time. _________________________________________________

The longer an order for material stays in the plant, the larger the work-in-process inventory will be, ________________________________________________________________________________________________

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ORDER CYCLE The order cycle is both a link and a set of

activities. As a link, the order cycle facilitates the flow of information and materials

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The pipeline is the means by which

various resources flow

1. Information (orders, billings, inquiries)

2. __________

3. __________

4. Title

Pipeline

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Integrated Materials System It is not necessary that all resource flows

between components occur at the same time or in the same manner.

This idea is called channel separation and is useful when designing supply-distribution systems. __________________________________________________________________.

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Integrated Materials System The order cycle has some important characteristics.

First, an order cycle has “length.” The distance between supplier and customer determines, in part, how long it takes to transmit data and transport materials

A customer may elect to have an order moved by various transportation technologies (modes):

1. ______2. ______3. ______4. ______5. ______

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Customer orders also may be transmitted byalternative technologies:

1. _________2. _________3. _________4. _________5. _________

The prices of these modes vary; although morerapid service usually implies a higher price,technologies such as the Internet have somewhat changed that paradigm.

Speed, Reliability, Inventory, and Cost Tradeoff

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Speed, Reliability, Inventory, and Cost Tradeoff

The more rapid, the higher the price. ________________________________________________________________________.

The shorter the order cycle, the quicker the customer is served and the less inventory the customer needs

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Order Cycle—Activities The order cycle is not only a link, but a set of

activities. The principal activities and the locus of responsibility are

_______________________________Responsibility

Customer Customer Supplier Supplier Customer

Activity

Order preparation Order transmission Order processing Order transportation Order receipt

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Each activity is in turn a bundle of tasks. For example, the receipt of materials by the customer involves

1. Physical receipt

2. ______________

3. ______________

4. ______________

5. ______________

6. ______________

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Lead Time If we represent the order cycle as a set of activities,

we can identify an important property of the order cycle—___________.

Some may argue ______________________________________________________________________________.

We'll go a step earlier include order preparation, which begins when the need for material is recognized.

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The managers of integrated materials systems have two objectives:

Customer satisfaction

_________________________

Customer Satisfaction

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Material Availability

Two cases must be distinguished. If a firm makes products to order, customer service is measured by the degree to which products are completed and shipped as promised.

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Material Availability Conceivably, an order may be rescheduled at

the request of the customer, in which case the revised date is used to determine whether the order was shipped on time, early, or late

Many make-to-order (MTO) firms _______________________________________________________________________.

When customer service is measured this way, we speak of a firm’s ___________________

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High delivery performance may only indicate scheduling inflexibility on the part of the supplier.

The second case is the firm that produces standard products in anticipation of demand for them—__________________________.

Service Level

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Service Level

If all customer orders are processed without delay, the level of service is 100 percent. Service level (SL) for an MTS firm is the ratio

SL = ____________________________________

Unfilled orders are processed in one of three ways:1. __________2. __________3. __________

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This element of customer service is a variation on the notion of availability. _____________________________________________________________________________________.

If an order is shipped on time, it is presumed that the customer is well served. Realistically, customers are more concerned about when the materials are received.

Customers place orders based on need dates. The more imminent the calendar date, the more urgently material is needed.

To say an item is needed on the 10th of the month means that, if the item is not actually in hand on that date, dire consequences ensue.

_____________________________________________________.

On-Time Shipment On-Time Receipt

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Orders commonly call for numerous items, sometimes in matched sets.

A manufacturer of office furniture receives orders for matched desks, chairs, tables, and file cabinets.

An order probably contains the requirements to furnish one particular office. The customer expects to receive all items at the same time.

The quality ____________________________________________________________________________________________________. Packaging, loading, transport, and unloading can all take a toll.

Although damages can be claimed, materials received in poor condition are unsuitable for processing .

Complete Shipment Quality of Receipt

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Flexibility is the extent to which a supplier can accommodate a customer’s requests. Perhaps the request is for special processing, packaging, or shipment.

______________________________________________________________________________________.

Note that the costs of these extras are borne by the customer. The question is not who pays, but the willingness and ability of suppliers to cost-effectively perform nonstandard tasks for the customer.

Customers want assurances that their orders are on schedule, especially as the shipping date nears.

This element of customer service is the timeliness and accuracy of the information a supplier provides a customer.

Suppliers who can’t locate an order on the shop floor, or in the warehouse, or who answer all inquires with, “It just went out on the truck,” inspire little confidence.

FlexibilityResponsiveness to

Inquiry

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Customer Satisfaction—The Balance To summarize, customers want

1. _______________

2. Good quality

3. _________________

4. _________________

5. ________________ The cost of satisfying a customer’s delivery time

needs may not be entirely known, but we can argue that none of these elements of customer satisfaction are realized without cost.

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If poor quality is produced, goes undetected, and is shipped, the costs to both supplier and customer are substantial.

____________________________________________________________________________________________________________________.

Yet the more important and difficult-to-measure costs are those associated with the damage to a supplier’s reputation, the loss of a customer’s capacity, and the dissatisfaction if the customer in the field vows never again to buy the product.

Customer Satisfaction—The Balance

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Customer Satisfaction

We could describe the costs of providing the other elements of customer dissatisfaction similarly. The balance that management seeks is between

1. __________________________

2. __________________________

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QUALITY We hear so much about quality that it may come as a

surprise that even experts don’t agree about how to achieve it. Fortune recently asked the gurus of industrial quality to define it and to assign responsibility for quality.

_____________________________________________________________________________________________.

To others, quality is a statistical measure that utilizes sampling to achieve process control and make certain that inferior quality material isn’t shipped from the plant.

There is a third view—_____________________________________________________________________________________________

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QUALITY

Quality is neither good nor bad until______________________________________.

Even though the technology of quality is steeped in statistics and manufacturing engineering, materials managers first need to consider quality as part of the expectations of customers, whether intermediate or final.

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Quality is a strategic decision. What should the quality of a product or material be?

How do we compete with off-shore manufacturers who enjoy reputations for leadership in quality?

What’s the quality level of domestic producers in our industry?

___________________________________________________________.

QUALITY

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QUALITY

Quality, in large part, is what people perceive it to be.

Once formed, perceptions about the quality of a supplier’s materials are slow to change.

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QUALITY To qualitatively evaluate consumer products and

services, Consumers Union first identifies the relevant characteristics of a product. It then tests comparable products of various manufacturers and classifies products as

Best buy _______________ _____________________ ______________________________________. Value = Quality/Price

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In a recent issue of Consumer Reports, low-price lawn mowers were evaluated.

The quality-defining product characteristics were

1. Evenness of cut

2. Dispersal of clippings

3. Freedom from clumping

4. Handling

Lawn Mower Quality Example

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The quality-defining characteristics ____________________________________________.

Owners of lawn mowers are not primarily concerned with detailed mechanical or electrical specifications. They want a product that leaves a good-looking lawn and provides relatively trouble-free operation.

Owners look first at the way a product serves the purpose for which it was acquired. The perceptions of quality held by the consumer and the producer are both important.

The Owners View

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Specifications

Design means setting the specifications for a material or product.

Specifications _________________________________________________________________.

The job of the materials manager is to ensure that products are made in the least-costly way so that the item qualifies as a best buy.

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The Quality Level The process technology and experience of a supplier limits

the range of quality possible. We wouldn’t expect a general machine shop to produce high-quality integrated circuit chips.

The design of a product must “be producible” given the process capability of the supplier. ___________________________________________________________________________________.

.

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Conformance to Specifications _______________________________________________

___________________________________________.

If conformance is high, the company can claim that product quality is high. Lawn mower specifications are complex. Hundreds of parts are produced and assembled.

Each part has numerous dimensions and properties. Surfaces of mating parts are finished to extremely small tolerances to ensure proper assembly.

Overall product specifications are fixed—engine size, weight, blade length, and so forth.

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Objective Quality

Is it possible that objectively a product is high quality but __________low quality?

Too often the answer is yes. High-quality products must both

1. __________________________.

2. __________________________.

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Can a product’s quality be too high? Again, the answer is yes, but in this case we mean that objective quality can be too high.

Tolerances are closer than need be, finishes are smoother than necessary—“the bottoms of the drawers are painted.”

_________________________________________________________________________________________________________________________________________________. It does in fact cost more to produce a Rolex watch than to produce a Timex.

Can Quality Be Too High?

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Rolex Vs. Timex

If accuracy, durability, and appearance are the quality-defining properties of wristwatches, the Rolex should meet the customer expectations better.

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We should now be able to understand that conformance isn’t a sufficient test of quality. _________________________________________________________________________________________________ In Figure below only one of four outcomes results in a high-quality product.

Quadrant Design Execution Quality

1 Good Good High

2 Good Poor Low

3 Poor Poor Low

4 Poor Good Low

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SPECIFYING MATERIALS Disagreements between supplier and customer

about quality often stem from misunderstandings about material specifications.

___________________________________________________________________________________________________________________________.

If one definition of quality is conformance to specs, the specifications must be unambiguous. ____________________________________.

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Raw Materials

These are semi-processed materials intended for further processing—__________________________________________________________________________.

The materials listed are called ___________. Their specifications result from agreements on standards, as, for example, the U.S. Department of Agriculture’s specifications for meat and grains.

By definition, commodities are homogeneous.

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Even though specifications are known, judgment is still a factor.

For example, the beef buyer for a fast-food restaurant chain may specify “USDA prime beef.” The grade, priori, implies age, appearance, weight, and so on

Recall the umpire calling balls and strikes. The strike zone is defined for each player. It can be measured. But once play begins, umpires rely on judgment to decide the location of a ball traveling 90 miles an hour as it passes in front of a batter.

Specification Examples

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Specification Examples

Materials such as steel are specified by process (e.g., “hot rolled”), physical properties (hardness, strength), and dimension.

__________________________________________________________________________________________________________.

It’s the same problem we discussed earlier—poor execution of a good design.

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Purchased Parts

Purchased parts include semi finished items that will be further processed and finished materials that will become components of finished end items.

The usual way of specifying purchased parts in a made-to-order environment is with a graphic description, that is,_____________________.

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Purchased Parts

Many parts can be purchased off the shelf. They are like commodities in the sense that they are standardized. _________________________________________________________.

Many small mechanical parts, for example, fasteners, are

manufactured to standards established by the Society of Automotive Engineers, SAE. ________________________________________________________________________________________________

The buyer is assured that the part is safe to use in a particular application and that its correct installation complies with standards, for example, building construction.

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MAINTENANCE, REPAIR, AND OPERATING (MRO) SUPPLIES

MRO materials are quite diverse; they are specified in various ways. The keys are quality and uniqueness.

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Maintenance

These are items that we expect to periodically replace in a piece of equipment. Over time, machine parts are subject to wear and are replaced.

________________________________________________________________________________.

Maintenance also means the application or renewal of

materials such as lubricants and coolants. ______________________________________________________________________________

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Repair

The distinction between maintenance and repair materials is not always clear. In theory, _____________________________________________________________________________________.

Repair suggests the unexpected, which means the need to patch up or replace equipment components that we don’t expect to fail. ____________________________________________________________________________________________.

The more common event is repair of equipment failure

in which the services of skilled craftsman are more important than specific materials.

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Operating Supplies These supplies, also called “indirect materials,” become

part of the end item and are essential for its production, __________________________________________________________________________________________.

A good example is rivets used in airframe construction. Rivets are “counted” by weighing them. __________________________________________________________________________________________.

Generally speaking, operating supplies are standard items and are specified by manufacturer or industry codes. ___________________________________________________________________________________________.

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TOOLING

There are two kinds of tooling with respect to their specifications.

The first kind is standard tooling. Various holding devices, partitioners, material cutting, and forming tools are standard with respect to their size and capacity. __________________________________________________________________________________________.

The second, nonstandard kinds of tooling require elaborate specification. _____________________________________________________________________________________________.

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TOOLING

Whether the tooling is designed to position or hold material during processing, or to modify or extend the operation of processing equipment, the tooling must be built to specifications; otherwise, the quality of the material produced is unacceptable.