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MaterialsManagement Chapter 1 Problems
You must show all work in all problems. You will receive zero (0) credit for providing only the answer.
1. The cost of manufacturing (direct material and direct labor) is 70% of sales. Profit is 10% of sales. You should now be able to determine the remaining overhead (fixed costs). Determine the profit improvement if, through better planning and control, the cost of manufacturing was reduced from 70% of sales to 65% of sales.
2. In the above problem, how much would sales need to increase to achieve the same increase in profits?
3. On average, a firm has a 6 week lead time for work-in-process, and annual cost of goods sold is $10 million. Assuming that the firm operates 50 weeks per year:
a. What is the value of the work-in-process?
b. If the lead time could be reduced to 4 weeks, what would be the reduction in WIP?
4. A firm has an average 8 week lead time for work-in-process, and annual cost of goods sold is $20 million. Assuming the firm operates 50 weeks per year
and WIP = ½ of final inventory value:
a. What is the value of the work-in-process?
b. If the lead time could be reduced to 6 weeks, and the annual cost of carrying inventory is 20% of the inventory value, what would be the annual savings?
5. ABC Logistics sales are $10 million. The company spends $4 million for direct materials purchases, $3 million for direct labor purchases. Overhead is $2 million and profit is $1 million. Direct labor and direct materials vary with sales, but overhead (fixed costs) does not. The company wants to
double
its profit.
a. By how much should the firm increase annual sales?
b. By how much should the firm decrease material costs?
c. By how much should the firm decrease labor costs?
6. If the cost of manufacturing (direct materials and direct labor) is 65% of sales and profit is 15% of sales, what is the new profit percentage if the direct costs for manufacturing were reduced from 65% to 60%?
Introduction to
Materials Management
1
Introduction to
MATERIALS MANAGEMENT
CHAPTER
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Copyright © 2017 by Pearson Education, Inc.
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Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Wealth
What is it?
Where does it come from?
Adding value
Designing the process
Managing the process
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Wealth
Natural resources
Transformation-needs production function
Conversion- adds value
Managing the process effectively and efficiently
Services
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Operating Environment – 5 areas
Government-affects way business is conducted
regulations
safety
Economy
affects demand
shortages and surpluses
Competition is now global and fierce
reduced costs of transportation
communications, reduced costs, increased speed and change
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
EASY…RIGHT?
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Order Winners and Qualifiers
Order Qualifiers
Customer minimum 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
core competencies
examples?
“Today’s order winners are
tomorrow’s order qualifiers”
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Manufacturing Strategy
Figure 1.1 Manufacturing strategy and lead time
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Engineer-to-Order
Manufacturer does not start until the order is received (Pull production system)
Custom designs
Unique products
Loooong lead time
Inventory purchased after order is received
Examples?
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Examples?
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Assemble-to-Order
Manufacturer inventories standard components (Push production system)
No design time required
Assembly only required
Shorter lead time
Inventory held as standard components
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
The Supply Chain Concept
Figure 1.2 Supply-production-distribution system
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Importance of supply, production, and distribution elements depends on cost of each
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Historical Perspective
In the past there were well defined and rigid boundaries between organizations
Suppliers were viewed as adversaries
JIT viewed suppliers as partners
Mutual analysis for cost reduction
Mutual product design
Greatly reduced inventory
Improved communications and information flow (internet, EDI)
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Growth of Supply Chain Concept
Integrated systems (ERP) and the sharing of information
Global competition and supply
Flexible designs – reduced product life cycles and increased change
JIT approach to inter-organizational relations
Subcontracting or outsourcing work
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Current Supply Chain Concept
Manage the flow of materials
Share information through the internet
Transfer funds electronically
Reverse logistics (3 Rs)
Recover
Recycle
Reuse
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Supply Chain Organization
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Supply Chain Metrics
Metric = a verifiable measure
Links strategy to operations and used to
Communicate expectations
Identify problems
Direct action
Motivate people
Must be timely
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Metrics
Strategy
Customer
Strategic
Metrics
Operational
Focus
Standard
Figure 1.4 Metrics context
Metrics give us:
Control by superiors
Data reporting to management/external groups
Communication
Learning
Improvement
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Metrics Program – Six Steps
1. Establish company goals and objectives
2. Define performance
3. State the measurement
4. Set performance standards
5. Educate the participant
6. Apply consistently
Copyright © 2017 by Pearson Education, Inc.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Conflicts in Traditional Systems
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Conflicts in Traditional Systems
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
Planning and controlling the flow of materials
Objectives
Maximize the use of the firm’s resources
Provide the required level of customer service
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
is a Balancing Act
Trade-offs
Between
Customer
Service
Cost of
Providing
The Service
Priority
The Demand
For Products
Capacity
The Ability to
Produce
Products
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Company Objectives
Income = Revenue – Expense
Need to increase income with:
Best customer service
Lowest production costs
Lowest inventory investment
Lowest distribution costs
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
and Profits
Direct labor
Direct material
Varies with volume sold
Overhead
Does not vary with volume sold
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
and Profits (continued)
Reduce Materials by 12%
Dollars % of Sales
Sales Revenue $1,000,000 100
Cost of Goods Sold
Direct Material $440,000 44
Direct Labor $200,000 20
Overhead $200,000 20
Total Cost of Goods Sold $840,000 84
Gross Profit $160,000 16
Profit has increased 60%
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
and Profits (continued)
To get the same result (+ 60% profit) through Sales
Dollars % of Sales
Sales Revenue $1,200,000 100
Cost of Goods Sold
Direct Material $600,000 50
Direct Labor $240,000 20
Overhead $200,000 20
Total Cost of Goods Sold $1,040,000 87
Gross Profit $160,000 13
Sales must increase by 20%
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management and Profits (continued)
Profit = Sales – (D.M. + D.L. + Overhead)
= Sales – (0.50 sales + 0.20 sales + 0.20)
= Sales – 0.7 sales – 0.20
0.16 = 0.3 sales – 0.20
0.36 = 0.3 sales
Sales = 0.36
0.3
= 1.20 or sales must increase 20% to achieve the same increase in profit.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Work-in-Process Inventory Example
Inventory that is purchased to be processed into finished goods
Example problem (assume WIP = ½ of final inv. value):
A firm averages a 10-week production lead time and annual COGS of $30 million. Assuming a firm works 50 weeks/year:
What is the dollar value of WIP?
If lead time is reduced to 6 weeks, and annual cost of carrying inventory is 10% of inventory value, what are annual savings
Answer:
Weekly COGS = $30,000,000 per yr./50 weeks = $600,000/week
WIP value @ 10 weeks LT = 10 x $600,000 x ½ = $3,000,000
WIP value @ 6 weeks LT = 6 x $600,000 x ½ = $1,800,000
Reduction in WIP = $3,000,000 – $1,800,000 = $1,200,000
Annual Savings = $1,200,000 x 10% = $120,000
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
is a Balancing Act
Trade-offs
Between
Customer
Service
Cost of
Providing
The Service
Priority
The Demand
For Products
Capacity
The Ability to
Produce
Products
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Manufacturing
Planning and Control
Planning and controlling the flow of materials the manufacturing process through:
Production planning
Implementation and control
Inventory management
Let’s look at each area…
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Production Planning
To meet the demands of the marketplace
Establish priorities
Ensure capacity
Activities include:
Forecasting
Master planning
Materials requirements planning
Capacity planning
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Implementation and Control
Putting into action and achieving the plans
Made by production planning
Production activity control
Shop floor control
Purchasing
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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 and DOES INVENTORY LEVEL REALLY MAKE A DIFFERENCE?
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns
Inventory Turns Ratio = Annual Cost of Goods Sold
Average Inventory in Dollars
Example: If the annual cost of goods sold is $1 million dollars and the average inventory is $500,000, then:
Inventory Turns = $1,000,000 = 2 times/year
$500,000
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example
What will be the Inventory Turns Ratio if the annual C of GS is $24 million and the average inventory is $6 million?
b. What would be the reduction in inventory if turns were increased to 12 times per year?
c. If the cost of carrying inventory is 25% of the average inventory what will the annual savings be?
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example
. Inventory Turns = annual C of G S
average inventory
= $24,000,000
$6,000,000
= 4 turns per year
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example (cont’d)
What would be the reduction in inventory if turns were increased to 12 times per year?
b. Average Inventory = annual C of G S
inventory turns
= $24,000,000
12
=$2,000,000
Inventory Reduction = $6,000,000 -$2,000,000
= $4,000,000
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example (cont’d)
If the cost of carrying inventory is 25% of the average inventory what will the annual savings be?
b. Inventory = $4,000,000
Annual Savings = $4,000,000 x .25
Answer= $1,000,000
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inputs to the Manufacturing Planning and Control System
1. Product description
2. Process specifications
3. Time needed
4. Available facilities
5. Quantity required
Let’s look at each input…
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Product Description
Engineering Drawings
Specifications
Bill of Material
Components used to make the product
Sub-assemblies at stages of production
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Process Specifications
Recorded on a Route Sheet
Describe how the product (steps needed) is made
Operations required to make the product
Sequence of operations
Equipment and accessories required
Standard time to perform each operation
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Introduction to Materials Management, 8e
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Time Needed to Perform Operations
Expressed as Standard Time
An average operator, working at a normal pace
Obtained from the Routing master
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Introduction to Materials Management, 8e
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Available Facilities
What plant is available
What equipment is available
What amount and kind of labor is available
Obtained from the Work Center master file
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Quantities Required
Information from
Forecasts
Customer Orders
Production Planning
Expressed in the Shop Order
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Introduction to Materials Management, 8e
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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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory
Customer Service
Transportation
Cost
Supply Chain
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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 Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Introduction to
Materials Management
1
Introduction to
MATERIALS MANAGEMENT
CHAPTER
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Wealth
What is it?
Where does it come from?
Adding value
Designing the process
Managing the process
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Wealth
Natural resources
Transformation-needs production function
Conversion- adds value
Managing the process effectively and efficiently
Services
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Operating Environment – 5 areas
Government-affects way business is conducted
regulations
safety
Economy
affects demand
shortages and surpluses
Competition is now global and fierce
reduced costs of transportation
communications, reduced costs, increased speed and change
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
EASY…RIGHT?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Order Winners and Qualifiers
Order Qualifiers
Customer minimum 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
core competencies
examples?
“Today’s order winners are
tomorrow’s order qualifiers”
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Manufacturing Strategy
Figure 1.1 Manufacturing strategy and lead time
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Engineer-to-Order
Manufacturer does not start until the order is received (Pull production system)
Custom designs
Unique products
Loooong lead time
Inventory purchased after order is received
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Assemble-to-Order
Manufacturer inventories standard components (Push production system)
No design time required
Assembly only required
Shorter lead time
Inventory held as standard components
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Examples?
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
The Supply Chain Concept
Figure 1.2 Supply-production-distribution system
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Importance of supply, production, and distribution elements depends on cost of each
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Historical Perspective
In the past there were well defined and rigid boundaries between organizations
Suppliers were viewed as adversaries
JIT viewed suppliers as partners
Mutual analysis for cost reduction
Mutual product design
Greatly reduced inventory
Improved communications and information flow (internet, EDI)
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Growth of Supply Chain Concept
Integrated systems (ERP) and the sharing of information
Global competition and supply
Flexible designs – reduced product life cycles and increased change
JIT approach to inter-organizational relations
Subcontracting or outsourcing work
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Current Supply Chain Concept
Manage the flow of materials
Share information through the internet
Transfer funds electronically
Reverse logistics (3 Rs)
Recover
Recycle
Reuse
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Supply Chain Organization
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Supply Chain Metrics
Metric = a verifiable measure
Links strategy to operations and used to
Communicate expectations
Identify problems
Direct action
Motivate people
Must be timely
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Metrics
Strategy
Customer
Strategic
Metrics
Operational
Focus
Standard
Figure 1.4 Metrics context
Metrics give us:
Control by superiors
Data reporting to management/external groups
Communication
Learning
Improvement
Copyright © 2017 by Pearson Education, Inc.
All Rights Reserved
Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Metrics Program – Six Steps
1. Establish company goals and objectives
2. Define performance
3. State the measurement
4. Set performance standards
5. Educate the participant
6. Apply consistently
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Conflicts in Traditional Systems
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Conflicts in Traditional Systems
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
Planning and controlling the flow of materials
Objectives
Maximize the use of the firm’s resources
Provide the required level of customer service
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
is a Balancing Act
Trade-offs
Between
Customer
Service
Cost of
Providing
The Service
Priority
The Demand
For Products
Capacity
The Ability to
Produce
Products
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Company Objectives
Income = Revenue – Expense
Need to increase income with:
Best customer service
Lowest production costs
Lowest inventory investment
Lowest distribution costs
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
and Profits
Direct labor
Direct material
Varies with volume sold
Overhead
Does not vary with volume sold
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
and Profits (continued)
Reduce Materials by 12%
Dollars % of Sales
Sales Revenue $1,000,000 100
Cost of Goods Sold
Direct Material $440,000 44
Direct Labor $200,000 20
Overhead $200,000 20
Total Cost of Goods Sold $840,000 84
Gross Profit $160,000 16
Profit has increased 60%
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Chapman, Arnold, Gatewood, and Clive
Materials Management
and Profits (continued)
To get the same result (+ 60% profit) through Sales
Dollars % of Sales
Sales Revenue $1,200,000 100
Cost of Goods Sold
Direct Material $600,000 50
Direct Labor $240,000 20
Overhead $200,000 20
Total Cost of Goods Sold $1,040,000 87
Gross Profit $160,000 13
Sales must increase by 20%
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management and Profits (continued)
Profit = Sales – (D.M. + D.L. + Overhead)
= Sales – (0.50 sales + 0.20 sales + 0.20)
= Sales – 0.7 sales – 0.20
0.16 = 0.3 sales – 0.20
0.36 = 0.3 sales
Sales = 0.36
0.3
= 1.20 or sales must increase 20% to achieve the same increase in profit.
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Work-in-Process Inventory Example
Inventory that is purchased to be processed into finished goods
Example problem (assume WIP = ½ of final inv. value):
A firm averages a 10-week production lead time and annual COGS of $30 million. Assuming a firm works 50 weeks/year:
What is the dollar value of WIP?
If lead time is reduced to 6 weeks, and annual cost of carrying inventory is 10% of inventory value, what are annual savings
Answer:
Weekly COGS = $30,000,000 per yr./50 weeks = $600,000/week
WIP value @ 10 weeks LT = 10 x $600,000 x ½ = $3,000,000
WIP value @ 6 weeks LT = 6 x $600,000 x ½ = $1,800,000
Reduction in WIP = $3,000,000 – $1,800,000 = $1,200,000
Annual Savings = $1,200,000 x 10% = $120,000
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Materials Management
is a Balancing Act
Trade-offs
Between
Customer
Service
Cost of
Providing
The Service
Priority
The Demand
For Products
Capacity
The Ability to
Produce
Products
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Manufacturing
Planning and Control
Planning and controlling the flow of materials the manufacturing process through:
Production planning
Implementation and control
Inventory management
Let’s look at each area…
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Production Planning
To meet the demands of the marketplace
Establish priorities
Ensure capacity
Activities include:
Forecasting
Master planning
Materials requirements planning
Capacity planning
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Implementation and Control
Putting into action and achieving the plans
Made by production planning
Production activity control
Shop floor control
Purchasing
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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 and DOES INVENTORY LEVEL REALLY MAKE A DIFFERENCE?
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns
Inventory Turns Ratio = Annual Cost of Goods Sold
Average Inventory in Dollars
Example: If the annual cost of goods sold is $1 million dollars and the average inventory is $500,000, then:
Inventory Turns = $1,000,000 = 2 times/year
$500,000
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Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example
What will be the Inventory Turns Ratio if the annual C of GS is $24 million and the average inventory is $6 million?
b. What would be the reduction in inventory if turns were increased to 12 times per year?
c. If the cost of carrying inventory is 25% of the average inventory what will the annual savings be?
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Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example
. Inventory Turns = annual C of G S
average inventory
= $24,000,000
$6,000,000
= 4 turns per year
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example (cont’d)
What would be the reduction in inventory if turns were increased to 12 times per year?
b. Average Inventory = annual C of G S
inventory turns
= $24,000,000
12
=$2,000,000
Inventory Reduction = $6,000,000 -$2,000,000
= $4,000,000
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory Turns Example (cont’d)
If the cost of carrying inventory is 25% of the average inventory what will the annual savings be?
b. Inventory = $4,000,000
Annual Savings = $4,000,000 x .25
Answer= $1,000,000
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inputs to the Manufacturing Planning and Control System
1. Product description
2. Process specifications
3. Time needed
4. Available facilities
5. Quantity required
Let’s look at each input…
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Chapman, Arnold, Gatewood, and Clive
Product Description
Engineering Drawings
Specifications
Bill of Material
Components used to make the product
Sub-assemblies at stages of production
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Process Specifications
Recorded on a Route Sheet
Describe how the product (steps needed) is made
Operations required to make the product
Sequence of operations
Equipment and accessories required
Standard time to perform each operation
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Time Needed to Perform Operations
Expressed as Standard Time
An average operator, working at a normal pace
Obtained from the Routing master
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Available Facilities
What plant is available
What equipment is available
What amount and kind of labor is available
Obtained from the Work Center master file
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Quantities Required
Information from
Forecasts
Customer Orders
Production Planning
Expressed in the Shop Order
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
Inventory
Customer Service
Transportation
Cost
Supply Chain
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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
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Introduction to Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
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 Materials Management, 8e
Chapman, Arnold, Gatewood, and Clive
