Introduction To Materials Management, 8e Introduction To Materials Management, 8e

Introduction to
MATERIALS MANAGEMENT
CHAPTER 1
Introduction to
Materials Management
IntroductiontotoMaterials
Introduction MaterialsManagement,
Management,8e 8e Copyright © 2017 by Pearson Education, Inc.
Chapman,Arnold,
Chapman, Arnold,Gatewood,
Gatewood,and
andClive
Clive All Rights Reserved
Wealth
• What is it?
• Where does it come from?
• Adding value
▪ Designing the process
▪ Managing the process
Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Chapman, Arnold, Gatewood, and Clive All Rights Reserved
Wealth
• Natural resources
• Transformation
• Conversion
• Managing the process
• Services

Operating Environment
• Government
▪ Regulations
▪ Safety
• Economy
▪ Affects 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
▪ Exceeds customer expectations

Order Winners and Qualifiers
• Order Qualifiers
▪ Customer requirements for price, quality,
delivery, etc.
▪ A company must meet or exceed minimum level
to qualify for order
• Order Winners
▪ Characteristics that persuade customers to select
a product/service from a qualifying company
“Today’s order winners are
tomorrow’s 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

Configure-to-Order
• Customer allowed to configure product based on

features and options
• May be an entirely new configuration
• Since features and options often available, no
significant design time required
▪ Typically implies shorter delivery time
• Similar characteristics to Make-to-Order

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 or no customer involvement with design
• Shortest lead time

• Inventory held as finished goods

Postponement
• Shift differentiation in product as close to

customer as possible
• Reduced number of different items in the supply
chain
▪ Implies lower supply chain inventory
▪ Implies faster delivery

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
• Retailers
• Flow of products, services, information and cash

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 inter-organizational relations
• Subcontracting or outsourcing work

Current Supply Chain Concept
• Manage the flow of materials

• Share information through the internet
• Transfer funds electronically
• Reverse logistics
▪Recover
▪Recycle
▪Reuse

Supply Chain Organization

Supply Chain Metrics
• Metric = a verifiable measure

• Used to
▪ Communicate expectations
▪ Identify problems
▪ Direct action
▪ Motivate people
• Must be timely

Challenges
1. Customers are rarely 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 set 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 participant
6. Apply consistently

Conflicts in Traditional Systems
Company main objectives to provide

1. Best customer service
2. Lowest production costs
3. Lowest inventory investment
4. Lowest distribution costs


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

• Planning and controlling the flow of materials

• Objectives
▪ Maximize the use of the firm’s resources
▪ Provide the required level of customer service

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 $1,000,000 100
Cost of Goods Sold
Direct Material $500,000 50
Direct Labor $200,000 20
Overhead $200,000 20
Total Cost of Goods Sold $900,000 90

Gross Profit $100,000 10

• Reduce Materials by 12% 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 the
manufacturing process through
▪ Production planning
▪ Implementation and control
▪ Inventory management

is a Balancing Act
Priority Capacity
The
The Ability to
Demand
Produce
For
Products
Products
Trade-offs
Between Cost of
Customer Providing
Service The Service

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?

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 master

Available Facilities
• What equipment is available

• What labor is available
• Obtained from the Work Center master

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
• Material Handling ● Order Entry

Supply Chain
rvi er Co
Se tom
ce st
s
Cu
ion
tat
or
sp
an
Tr

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
• 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
▪ 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 meeting the
goals of the company


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Introduction to

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Figure 1.1 Manufacturing strategy and lead time

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Manufacturer does not start until the order is

• Long lead time

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Manufacturer does not start until the order is

• Lead time is reduced

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Customer allowed to configure product based on

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Manufacturer inventories standard components

• Shorter lead time

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Manufacturer produces the goods in anticipation

• Shortest lead time

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Shift differentiation in product as close to

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Figure 1.2 Supply-production-distribution system

• Includes all activities and processes to supply a

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• In the past there were well defined and rigid

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Integrated systems (ERP) and the sharing of

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Manage the flow of materials

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Metric = a verifiable measure

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

1. Customers are rarely satisfied

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Figure 1.4 Metrics context

1. Establish company goals and objectives

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Company main objectives to provide

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Objective: High Revenue Low Cost Cash Flow

Customer Service High Low Low

Inventories High High Low

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Planning and controlling the flow of materials

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Total Cost of Goods Sold $900,000 90

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Profit has increased 60%

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• Sales must increase by 20%

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.

• To meet the demands of the marketplace

Introduction to Materials Management, 8e Copyright © 2017 by Pearson Education, Inc.