Introduction to

Materials
Management
MODULE NO. 1
Introduction

 The wealth of a country is measured by its gross national product—the output of

goods and services produced by the nation in a given time.
 Goods are physical objects, something we can touch, feel, or see.
 Services are the performance of some useful function such as banking, medical
care, restaurants, clothing stores, or social services
Introduction

 A production function is needed to transform our resources into useful goods.

 Production takes place in all forms of transformation— extracting minerals from
the earth, farming, lumbering, fishing, and using these resources to manufacture
useful products.
 At each stage in the development of the final product, value is added, thus
creating more wealth.
 If ore is extracted from the earth and sold, wealth is gained from our efforts, but those
who continue to transform the raw material will gain more and usually far greater
wealth
Operating Environment

 Government
 Regulation of business by the various levels of government is extensive.
 Regulation applies to such areas as the environment, safety, product liability, and
taxation.
 Government, or the lack of it, affects the way business is conducted.
Operating Environment

 Economy
 General economic conditions influence the demand for a company’s products or
services and the availability of inputs.
 During economic recession the demand for many products decreases while others may
increase.
 Materials and labor shortages or surpluses influence the decisions management makes.
 Shifts in the age of the population, needs of ethnic groups, low population growth,
freer trade between countries, and increased global competition all contribute to
changes in the marketplace.
Operating Environment

 Competition
 Manufacturing companies face competition from throughout the world. They find
foreign competitors selling in their markets even though they themselves may not be
selling in foreign markets.
 Companies also are resorting more to worldwide sourcing.
 Transportation and the movement of materials are relatively less costly than they used
to be.
 Worldwide communications are fast, effective, and cheap. Information and data can be
moved almost instantly halfway around the globe. The Internet allows buyers to search
out new sources of supply from anywhere in the world as easily as they can from local
sources.
Operating Environment

 Customers
 Both consumers and industrial customers have become much more demanding, and
suppliers have responded by improving the range of characteristics they offer. Some of
the characteristics and selection customers expect in the products and services they buy
are:
 A fair price.
 Higher-(right) quality products and services.
 Delivery lead time.
 Better presale and after-sale service.
 Product and volume flexibility.
Operating Environment

 Quality
 Since competition is international and aggressive, successful companies provide
quality that not only meets customers’ high expectations but exceeds them.
Operating Environment

 Order qualifiers and order winners

 Customer requirements may be based on price, quality, delivery, and so forth and are
called order qualifiers.
 For example, the price for a certain type of product must fall within a range for the supplier
to be considered. But being considered does not mean winning the order.
 To win orders a supplier must have characteristics that encourage customers to choose
its products and services over competitors’. Those competitive characteristics, or
combination of characteristics, that persuade a company’s customers to choose its
products or services are called order winners.
 Order winners change over time and may well be different for different markets. For
example, fast delivery may be vital in one market but not in another. Characteristics that are
order winners today probably will not remain so, because competition will try to copy
winning characteristics, and the needs of customers will change.
Operating Environment

 Manufacturing Strategy
 A highly market-oriented company will focus on meeting or exceeding customer
expectations and on order winners. In such a company all functions must contribute
toward a winning strategy. Thus, operations must have a strategy that allows it to
supply the needs of the marketplace and provide fast on-time delivery.
Operating Environment

 Delivery lead time

 From the supplier’s perspective, this is the time from receipt of an order to the delivery
of the product.
 From the customer’s perspective it may also include time for order preparation and
transmittal.
 Customers want delivery lead time to be as short as possible, and manufacturing must
design a strategy to achieve this.
 There are four basic strategies: engineer-to-order, make-to-order, assemble-toorder,
and make-to-stock.
Operating Environment

 Delivery lead time

The Supply Chain Concept

 There are three phases to the flow of materials. Raw materials flow into a
manufacturing company from a physical supply system, they are processed by
manufacturing, and finally finished goods are distributed to end consumers
through a physical distribution system
The Supply Chain Concept

 Conflicts in Traditional Systems

 To get the most profit, a company must have at least four main objectives:
 Provide best customer service.
 Provide lowest production costs.
 Provide lowest inventory investment.
 Provide lowest distribution costs.
 These objectives create conflict among the marketing, production, and finance
departments because each has different responsibilities in these areas
 The Supply Chain Concept

 Conflicts in Traditional Systems

 Marketing’s objective is to maintain and increase revenue;
therefore, it must provide the best customer service possible.
There are several ways of doing this:
 Maintain high inventories so goods are always available for the
customer.
 Interrupt production runs so that a no inventoried item can be
manufactured quickly.
 Create an extensive and costly distribution system so goods can
be shipped to the customer rapidly.
 The Supply Chain Concept

 Conflicts in Traditional Systems

 Finance must keep investment and costs low. This can be
done in the following ways:
 Reduce inventory so inventory investment is at a minimum.
 Decrease the number of plants and warehouses.
 Produce large quantities using long production runs.
 Manufacture only to customer order
 The Supply Chain Concept

 Conflicts in Traditional Systems

 Production must keep its operating costs as low as possible.
This can be done in the following ways:
 Make long production runs of relatively few products. Fewer
changeovers will be needed and specialized equipment can be
used, thus reducing the cost of making the product.
 Maintain high inventories of raw materials and work-in-process
so production is not disrupted by shortages.
What is Materials Management?

 Materials management is a coordinating function responsible for planning and

controlling materials flow. Its objectives are as follows:
 Maximize the use of the firm’s resources.
 Provide the required level of customer service.
What is Materials Management?

 Direct labor and direct material are costs that increase or decrease with the quantity
sold. Overhead (all other costs) does not vary directly with sales. For simplicity this
section assumes overhead is constant, even though it is initially expressed as a
percentage of sales
What is Materials Management?
What is Materials Management?
What is Materials Management?

 Problem:
 If the cost of direct material is 60%, direct labor is 10%, and overhead is 25% of sales,
what will be the improvement in profit if direct material is reduced to 55%?
 How much will sales have to increase to give the same increase in profit? (Remember,
overhead cost is constant.)
What is Materials Management?

 Work-in-Process
 Inventory not only makes up a portion of the cost of goods sold but has to be
purchased at the beginning of production to be processed into finished goods.
 This type of inventory is called work-in-process (WIP). WIP is a major investment for
many companies, and reducing the amount of time that inventory spends in production
is a good way to reduce the costs associated with this investment.
 Labor, materials and overhead are applied to goods continuously throughout
production and the value of the WIP is estimated to be one half the final value.
What is Materials Management?

 Manufacturing Planning and Control

 Manufacturing planning and control are responsible for the planning and control of the
flow of materials through the manufacturing process.
 Production planning. Production must be able to meet the demand of the marketplace.
Finding the most productive way of doing so is the responsibility of production planning. It
must establish correct priorities (what is needed and when) and make certain that capacity is
available to meet those priorities. It will involve:
 Forecasting.
 Master planning.
 Material requirements planning.
 Capacity planning.
What is Materials Management?

 Manufacturing Planning and Control

 Manufacturing planning and control are responsible for the planning and control of the
flow of materials through the manufacturing process.
 Implementation and control. These are responsible for putting into action and achieving the
plans made by production planning. These responsibilities are accomplished through
production activity control (often called shop floor control) and purchasing.
 Inventory management. Inventories are materials and supplies carried on hand either for
sale or to provide material or supplies to the production process. They are part of the
planning process and provide a buffer against the differences in demand rates and production
rates.
What is Materials Management?

 Inputs to the manufacturing planning and control system.

 The product description shows how the product will appear at some stage of
production.
 Engineering drawings and specifications are methods of describing the product.
 Another method, and the most important for manufacturing planning and control, is the bill
of material.
 As used in materials management, this document does two things:
 Describes the components used to make the product.
 Describes the subassemblies at various stages of manufacture
What is Materials Management?

 Inputs to the manufacturing planning and control system.

 Process specifications describe the steps necessary to make the end product.
 They are a step-by-step set of instructions describing how the product is made.
 This information is usually recorded on a route sheet or in a routing file.
 These are documents or computer files that give information such as the following on the
manufacture of a product:
 Operations required to make the product.
 Sequence of operations.
 Equipment and accessories required.
 Standard time required to perform each operation
What is Materials Management?

 Inputs to the manufacturing planning and control system.

 The time needed to perform operations is usually expressed in standard time which is
the time taken by an average operator, working at a normal pace, to perform a task. It
is needed to schedule work through the plant, load the plant, make delivery promises,
and cost the product. Usually, standard times for operations are obtained from the
routing file.
What is Materials Management?

 Inputs to the manufacturing planning and control system.

 Available facilities. Manufacturing planning and control must know what plant,
equipment, and labor will be available to process work. This information is usually
found in the work center file.

 Quantities required. This information will come from forecasts, customer orders,
orders to replace finished-goods inventory, and the material requirements plan.
What is Materials Management?

 Physical Supply/Distribution
 Physical supply/distribution includes all the activities involved in moving goods, from
the supplier to the beginning of the production process, and from the end of the
production process to the consumer.
 The activities involved are as follows:
 Transportation.
 Distribution inventory.
 Warehousing.
 Packaging.
 Materials handling.
 Order entry.
Supply Chain Metrics

 A metric is a verifiable measure stated in either quantitative or qualitative terms

defined with respect to a reference point. Without metrics, no firm could expect to
function effectively or efficiently on a daily basis. Metrics give us:
 Control by superiors.
 Reporting of data to superiors and external groups.
 Communication.
 Learning.
 Improvement.
Supply Chain Metrics

 A performance measure must be both quantified and objective and contain at

least two parameters. For example, the number of orders per day consists of both
a quantity and a time measurement.

 Transforming company policies into objectives and specific goals creates

performance standards. Each goal should have target values. An example of this
would be to improve order fill rate to 98% measured by number of lines.

 Performance standards set the goal, while performance measures say how
close you came.