Material management flow and DRP
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This document provides an overview of materials management. It defines materials management and its objectives. It discusses the importance of materials management and its scope, which includes anticipating requirements, sourcing materials, introducing materials, and monitoring materials status. The document also covers topics like purchasing, production control, transportation, warehousing, information systems, inventory planning, quality management, and planning tools like MRP, ERP, and DRP.
Material management flow and DRP
- 2. MATERIALS MANAGEMENT DEFINED An integral part of logistics management, which encompasses the administration of raw materials, subassemblies, manufactured parts, packing material and in-process inventory. It is concerned with activities that are related to the “physical” supply of materials in an organization
- 3. OBJECTIVES 1. To identify the activities of materials management 2. To examine the concept of Total Quality Management (TQM) 3. To identify and describe a variety of materials management techniques including just-in-time systems, MRP, ERP and DRP.
- 4. IMPORTANCE OF MATERIALS MANAGEMENT Has a significant impact on level of customer service offered Directly affects the ability of the firm to compete with other companies Has an effect on level of sales and profits achieved in market place Without an efficient and effective management of inbound materials flow, the manufacturing process cannot produce products at the “desired price” and at the “time required” for distribution to the form’s customers.
- 5. SCOPE OF MATERIALS MANAGEMENT ACTIVITIES Materials management is typically comprised of four basic activities: 1. Anticipating materials requirements 2. Sourcing and obtaining materials 3. Introducing materials into the organization 4. Monitoring the status of materials as a current asset
- 6. Company Objectives Objectives of Materials Management 1. Low Costs To optimize materials costs, capital costs and overhead expenses 2. High level of service To optimize response towards production and markets 3. Quality Assuranc e To maintain and improve the quality of materials 4. Low level of tied up capital To optimize the level of capital tied up in inventorie s 5. Support of other function s To supports sales, design/ developmen t
- 7. Reasons for rising importance: 1. Shorter product life cycles, rapid technological changes and more sophisticated customers have made flexibility and agility increasingly important 2. Emergence of global economy has forced companies to broaden their horizons 3. Revolution in information technology and telecommunication has provided low-cost, high-spewed automated alternatives to manual activities
- 8. PURCHASING & PROCUREMENT They are not same Purchasing is the actual buying of materials and those activities associated with the buying process Procurement is broader in scope and includes purchasing, traffic, warehousing and receiving inbound materials
- 10. PRODUCTION CONTROL An activity traditionally positioned under manufacturing Two-fold role 1. Production activity determines how much and what kinds of finished goods to produce 2. Directly determines the company’s needs for raw materials, subassemblies and component parts that are used in the manufacturing process
- 11. INBOUND TRANSPORTATION Managers must know Various transport modes and modal combinations available Any regulations that might affect the transportations carrier that the firm uses Decision of private versus for-hire Leasing Evaluating mode and carrier performance Cost/service tradeoffs involved in inbound movement of the product
- 12. Difference b/w Inbound and Outbound transportation 1. Market demand that generates the need for outbound transportation is uncertain and fluctuating 2. Inbound is concerned with bulk movements of raw materials or large shipments hat have different handling and loss/or damage characteristics 3. Firms generally exercise less control over inbound logistics as they look at “total delivered cost”. In- depth analysis can result in significant cost savings
- 13. WAREHOUSING & STORAGE Raw materials are either stores on site or delivered as needed (JIT) JIT reduces or rather eliminates the need for inbound warehousing Open or outside storage is also possible Damage or loss due to weather, spoilage or theft is minimal because of their low value per pound
- 14. DATA AND INFORMATION SYSTEMS Material managers need direct access to firm’s information system Type of information required: Demand forecasts by production Names of suppliers and supplier characteristics Pricing data Inventory levels Production schedules Transportation routing Various other financial and marketing facts Provides inputs on suppliers, delivery schedules, pricing etc,
- 15. INVENTORY PLANNING & CONTROL Concepts like ABC analysis, inventory carry costs and economic order quantity (EOQ) are directly applicable to materials management
- 16. REVERSE LOGISTICS Disposal or recycling of scrap, surplus or obsolete materials; purchasing of remanufactured or refurbished goods; and the handling of product returns and defects are all aspects of a total reverse logistics
- 17. TOTAL QUALITY MANAGEMENT (TQM) TQM is both a philosophy and a set of guiding principles that represent the foundation of a continuously improving organization
- 18. Difficulties in TQM Implementation 1. Too much training required 2. Too little focus on human issues 3. Underestimating the time and effort required losing sight of the customer 4. Trying to encompass too many elements 5. Lack of integration into form’s core values and competencies
- 19. KEYS TO TQM SUCCESS 1. Focus on continuous improvement that lead to superior quality and better customer support 2. Cultural change focusing more on process improvement rather than activities 3. Employee involvement 4. Senior management commitment and leadership
- 20. Relationship b/w TQM & LOGISTICS TQM LOGISTICS Provides a TQM management environment Uses systematic, integrated, consistent organization-wide perspective to satisfy the customer Reduces chronic waste Emphasis on “doing it right the first time” Nurtures supplier partnerships and customer relationships Knows the importance of supplies and partnerships Key to customer relations Creates a continuous improvement system Uses logistics support analysis for continuous improvement Includes quality as an element of design Influences design by emphasizing reliability, supportability and maintainability Provides training constantly Provides constant technical training Leads long term continuous improvement efforts geared towards prevention Focuses on reducing life cycle costs by quality improvements geared to prevention
- 21. TQM LOGISTICS Encourages teamwork Stresses the integrated efforts of everyone Satisfies the customer (internal and external) Places the customer first
- 22. ADMINISTRATION & CONTROL OF MATERIAL FLOWS Firm must be able to “measure”, “report” and “improve performance” Service levels can be measured by: Order cycle time for each supplier Variability in order cycle time for each supplier Order fill rate of each supplier Percentage of orders from each supplier that are overdue Number of stock-outs resulting from late deliveries from suppliers Number of production delays caused by materials being out of stock
- 23. Inventory can be controlled by following measures: Amount of dead stock Comparison of actual inventory levels with targeted levels Comparison of inventory turnover rates with data from previous time periods Percentage of stock-outs caused by improper purchasing decisions Number of production delays caused by improper purchasing decisions
- 24. Materials price level measures include: Gains and losses resulting from forward buying A comparison of prices paid for major items over several time periods Comparison of actual prices paid for materials with targeted prices Measures for quality control include: Number of product failures caused by material defects Percentage of materials rejected from each shipment from each supplier Overall measurement of performance: Compare the “actual budget consumed” to “targeted budget allocated”
- 25. MAJOR OPERATING REPORTS 1. Market & Economic conditions and price performance Price trends and changes for major materials and commodities purchased Changes in demand-supply conditions for major items purchased Lead-time expectations for major items 2. Inventory investment changes Dollar investment in inventories classified by major commodity and materials group Days’ or months’ supply and on order for major commodity and materials group Ratio of inventory dollar investment to sales dollar volume Rates of inventory turnover for major items
- 26. 3. Purchasing operations and effectiveness Cost reductions resulting from purchase research and value analysis studies Quality rejection rates for major items Percentage of on-time deliveries Number of out-of-stock situations hat caused interruptions in production schedules 4. Operation affecting administration and financial activities Comparison of actual departmental operating costs to budget Case discounts earned and cash discounts lost Changes in cash discounts allowed by suppliers
- 27. Just in Time (JIT) is a method of inventory control with a focus on waste elimination Introduced in 1970’s – is used interchangeably Efficient Consumer Response (ECR) for food industry Quick Response (QR) for retail sector Primary goals are: 1. To minimize inventories 2. Improve product quality 3. Maximize production efficiency 4. Provide optimal customer service levels
- 28. Benefits: 1. Improved inventory turns 2. Improved customer service 3. Decreased warehouse space 4. Improved response time 5. Reduced logistics costs 6. Reduced transportation costs 7. Improved quality of vendor products 8. Reduced number of vendors 9. Reduced number of transportation carriers
- 29. Organizations that implement JIT have the following characteristics 1. Formalization of performance measurements 2. Greater reliance on logistics personnel with specialized skills 3. Delegation of decisions concerning logistics issues down the organizational charts 4. Greater involvement by senior managers in the creation of logistics strategy 5. An increased span of control of senior logistics executives as the company grows 6. Improved perception of the organization’s performance relative to the rest of the industry
- 30. Problems associated with JIT: 1. Production scheduling (plant) 2. Supplier production scheduling 3. Supplier locations 4. Organizational resistance 5. Lack of systems support 6. Lack of planning and inventory being shifted
- 31. Implications: Requires the firm to fully integrate all the logistics activities which may require few trade offs Transportation becomes vital component of logistics under JIT – requires better transportation decision making Warehousing assumes an expanded role – becomes a consolidation facility rather than a storage facility **Table below summarizes the areas of difficulty when attempting to implement JIT in a global arena
- 32. Required Elements JIT Global Purchasing Frequent deliveries Essential Difficult Small lots Essential Difficult Supplier location Close Far Single sourcing Common High risk Long term relationship Essential Difficult Early supplier involvement Possible and probable Unlikely Coordination & Monitoring of schedules and markets High Difficult Price High Difficult Transit loss/damage Low High Information sharing High Low Supplier flexibility and reaction time High Low Quality High low Potential pipeline instability Low high
- 33. MATERIAL PLANNING TOOLS Materials Requirement Planning = MRP I MRP I + financial + marketing + purchasing = MRP II Basic logic is that any system begins with a customer and how well the organization can supply their demands
- 34. “Pens have been sold” Now we need to know HOW MANY PENS ?and WHEN ARE THEY REQUIRED? Do we have stock in hand? YES NO Enter a shipping order Do we have the components to manufacture?
- 35. Got 3 main inputs to MRP 1. What do we need to fulfill customers’ demands? In this case, we need 20 pens by next week – Master Schedule 2. Do we have the inventory? Check the inventory in stock - if we do not have the required stock in hand check the material required to produce it – Gross requirement is the sum of needs for each particular component 3. Once the requirement is established, subtract the inventory from it,
- 36. MRP offers following advantages: 1. Improved business results 2. Improved manufacturing performances 3. Better manufacturing control 4. More accurate and timely information 5. Inventory reductions 6. Time phased ordering of materials 7. Increased reliability 8. More responsiveness to market demand 9. Reduced production costs
- 37. ENTERPRISE RESOURCE PLANNING (ERP) This system includes the core accounting functions of accounts payable, accounts receivable and general ledger coupled with logistics functions. Manage the distribution and manufacturing component of an organization Facilitator of an organization, moving data from one function to another& managing data centrally
- 38. DRP SYSTEMS DRP Systems (DRP I and DRP II) are time- phased models that include demand forecasts, purchase orders and customer orders DRP I (Distribution Requirement Planning) is a system of determining demands for inventory at distribution centers, consolidating demand information backwards and acting as an input to the production and materials system
- 39. DRP II (Distribution Resource Planning) is an extension of DRP I and includes planning of key resources in a distribution system- warehouse space, manpower levels, transport capacity and financial flows
- 40. Marketing benefits of DRP 1. Improved service levels resulting in on-time customer deliveries and fewer complaints 2. Ability to plan promotions and new introductions effectively 3. The ability to see in advance when a product will not be available so that it is not being marketed aggressively 4. Better working relationships with other functions of the company 5. The ability to offer the customers not only the product but also the service in helping them manage their own inventory.
- 41. Logistics benefits of DRP 1. Reduced freight costs to the distribution centers due to fewer rush or premium freight shipments 2. Better planning for loading trucks and rail cars 3. Lower inventories 4. Reduced warehouse space 5. Reduced distribution costs to customers
Editor's Notes
- #35: This is the central logic to MRP