Procurement and Materials Management – Materials

Management

Arvind Tiwari

Guest Faculty IIFT

Overview

• Materials Management

• Production Planning

• Materials Requirement Planning

• Supplier Scheduling

• Inventory

• Inventory Costs

• JIT

Materials Management

• Business function for

– Planning

– Purchasing

– Moving

– Storing

Material in a manner to minimise the material related costs in the organisation without adversely affecting availability

Materials Management

• Scope of Materials Management varies across organisations. Includes

– Production planning

– Material planning

– Purchasing

– In plant material movement

– Storage

– Inventory control

– Waste management

Production Planning

• Plans

– Sales

– Despatch

– Production

– Materials

• Inventory at each stage to ensure availability to customer - internal or external

Production Planning

• Objective is optimise utilisation of

– Machines

– Manpower

– Material

• Ideally No

– Machine should be waiting / idle for material or manpower

– Man should be waiting / idle for material or machine

– Material should idle / waiting for machine or manpower

Production Planning

• Production planning

– What to produce

– How much to produce

– When to produce

• Involves

– Process planning (Routing)

– Loading

– Scheduling

Production Planning

• Has direct impact on

– Capacity utilisation

– Manpower cost

– Utilities consumption and cost

• PP inputs are used for

– Materials Requirement Planning (MRP)

– Manpower planning

– Machinery requirement

Materials Requirement Planning

• Based on Production Plan

• Changes in PP entail changes in MRP

• Now usually done through ERP systems

• MRP run as many times as there is substantial change in PP

• Data accuracy specially BOM and Stock information is essential to get the right output

Supplier Schedules

• Supplier schedules generated from MRP

• Share of Business information is also updated in the ERP in case of multiple suppliers

• Usually a manual override available for use if necessary before a MRP output gets converted to supplier schedule

• SS informed to suppliers electronically

Understanding Inventory

• Types of inventory

– Raw material and semi finished item

– Work-in-process (WIP)

– Finished goods

– Pipeline/In-transit

– Maintenance, repair, and operating supplies (MRO)

Raw Material andSemi finished Item Inventory

• Items purchased from suppliers or produced internally to directly support production requirements

• Bulk quantities

• Unfinished condition

Work-in-Process Inventory

• Waiting to be moved to another process

• Currently being worked on at work center

• Lining up at processing center due to capacity bottleneck or machine breakdown

Finished Goods Inventory

• Completed items

• Available for shipment or future customer orders

• Environments

– Make-to-stock (MTS)

– Make-to-order (MTO)

– Just-in-time (JIT)

Pipeline/In-Transit Inventory

• In transit moving to customer

• Located at various places throughout distribution channel

Maintenance, Repair, andOperating Supplies Inventory

• Used to support production and operations

• Not physically part of finished product

• Critical for continuous operation of plant, equipment, and offices

Inventory-Related Costs

• Unit costs

• Ordering costs

• Carrying costs

Unit Costs

• Price that buyer pays for each unit

• Actual costs of making or providing each unit

– Direct materials

– Direct labor

– Allocated overhead

Ordering Costs

• Associated with the release of material order

– Generating and sending material release

– Transportation costs

– Any other cost of acquiring a good

• With internal production, may include machine set-up costs

Carrying Costs

• Cost of capital

• Cost of storage

• Costs of obsolescence, deterioration, and loss

• Opportunity cost

Costs of Storage

• Costs related to storage space

• Insurance costs

• Costs of maintaining inventory, i.e., cycle counting

• Vary with level of inventory

• Considered variable cost

Inventory – Asset or Liability?

• Historically considered current asset

– Disregarded inventory carrying costs

– Negative impact on cash flow, working capital requirements, and profitability

• Inventory ≠ Cash and Receivables

• Need to translate real impact on organization’s financial measures

• Determine key performance indicator

Right Reasons for Inventory

• Avoid disruptions in operational performance

• Support operational requirements

• Support customer service requirements

• Hedge against marketplace uncertainty

• Take advantage of order quantity discounts

Wrong Reasons for Inventory

• Poor quality and material yield

• Unreliable supplier delivery

• Extended order cycle times from global sourcing

• Inaccurate or uncertain demand forecasts

• Specifying custom items for standard applications

• Extended material pipelines

• Inefficient manufacturing processes

Just In Time Requirements

• Commitment to zero defects by both buyer and supplier

• Frequent shipments of small lot sizes

– Strict quality and delivery performance standards

• Closer, even collaborative, buyer-supplier relationships

JIT Requirements

• Stable production schedules sent to suppliers on regular basis

• Extensive sharing of electronic information between supply chain members

• Electronic data interchange (EDI) capability with suppliers

JIT Requirements

• Requires effective and detailed supply planning

• Ongoing requirement to establish …

– Financial health of all players

– Ability to grow with the company

– Ability to continuously improve

• Need to co-locate supplier engineers and material managers with buyer

JIT Requirements

• Begins and ends with thorough and well-developed commodity strategies

• Plan for continuous cost improvement establishes critical cost drivers

JIT Barriers

• Dispersed supply base

• Historic buyer-supplier relationships

• Number of suppliers

• Supplier quality performance

Downside of Poor Forecasting

• Higher inventory volumes

• Higher inventory carrying charges

• Poor customer service

– Inventory is misallocated across locations and products

• Excessive safety stock levels

JIT – how much does it work

• Objective of JIT is to reduce the inventory related costs in the supply chain upto manufacturing

• Many companies in India also claim to follow JIT

• They have very low inventory and single / multiple supplies daily

• The additional cost of this operation is not visible and can be substantial

JIT – how much does it work

• In situations with stable demand and therefore stable production volumes there are advantages to manufacturer, Tier 1 and Tier 2 suppliers

• In other cases the suppliers are forced to carry inventory with all the associated costs

• These costs are eventually borne by the customer

• The costs may be higher than those incurred by the customer had it held inventory