PERL ZC424

MATERIALS MANAGEMENT
Lecture-2, 15Jan2016, 9.00am

BITS Pilani
Pilani Campus

Prof Sandeep Kayastha, at Hyderabad

1

Just-in-time (JIT)
In the past there were well defined and rigid boundaries
between organizations
JIT views suppliers as partners

mutual analysis for cost reduction

mutual product design
greatly reduced inventory
improved communications (internet, EDI)

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Conflicts in traditional
systems
Company main objectives
1. Best customer service
2. Lowest production costs
3. Lowest inventory investment
4. Lowest distribution costs

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Conflicts in traditional systems

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What is Materials Management /

flow?

Materials management is the concept of having one

department responsible for the flow of materials, from
supplier through production to consumer.

Materials management is a coordinating function

responsible for planning and controlling materials flow.

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Impact of materials cost on profit

Example
a.

b.

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 5%?
How much will sales have to increase to give the same
increase in profit? (Overhead cost is constant)

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Impact of materials cost on profit

Answer (a)
Before improvement After improvement
Revenue(sales)

100%

100%

Cost of goods sold

Direct material

60%

55%

Direct labor

10%

10%

Overhead

25%

25%

Total cost of goods

sold

95%

90%

Gross Profit

5%

10%
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Impact of materials cost on profit

Answer (b)
Profit = sales - (direct material + direct labor + 0.25)
= sales - (0.6 sales + 0.1 sales + 0.25)
= sales - 0.7 sales + 0.25
0.1 = 0.3 sales 0.25
0.3 sales = 0.35
Sales = 0.35/0.3= 1.17
Sales must increase 17% to give the same increase in
profit.

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What is Materials Management /

flow?
Physical supply and distribution
Includes all the activities involved in moving goods, from the
supplier to the beginning of the production process, and
from end of production process to customer
Activities
Transportation
Distribution inventory
Warehousing
Packaging
Materials handling and order entry

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Metrics
Return on investment
Debt to equity ratio
Liquidity ratio

Order Fill rate

Service level
Capacity utilisation
Inventory turnover
Cycle time
Flow rate
Variation in demand
Average production batch size

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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
Warehousing
Order Entry

Distribution Inventory
Packaging
Materials Handling

BITS Pilani, Pilani Campus

BITS Pilani
Pilani Campus

Chapter-2: Production Planning System

Planning System
What are we going to make? (Cars, TVs)
What does it take to make it? (Engines, Tyres, PCBs)
What do we already have?
(10 Engines, 5 tyres, 30 PCBs)
What do we need to get? (30 cylinders, 20 tyres, 40 capacitors)

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Levels of Planning and

Control
1. Strategic business plans
2. Sales and Operations Plans (Production Plans
and Marketing Plans)
3. Master Production Schedules
4. Material Requirements Plans
5. Purchasing and Production Activity Control

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Planning Hierarchy
Strategic
Business Plan
Production
Plan

Master
Plan
Planning

Master Production
Schedule
Material
Requirements
Plan

Production Activity
Control and
Purchasing

Implementation

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At Each Level, Need to Decide

What are the priorities
What to produce?
How much?
When?

What is the available capacity?

How can the differences between demand (or priorities)
and capacities best be resolved?
Demand

Capacity
(Resources)

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Level-1: Strategic Business

Plan
Setting up new plants- capacity and location
Acquiring other plants
New equipment
Closing plants
Shifting plants
Reorganising equipment

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Level-2: Production Plan

Quantities of each product group to be produced each
period
Projected/desired inventory levels
Resources needed
Equipment
Labor
Material

Availability of needed resources

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Level-3: Master Production

Schedule
Quantity of each end item to be made for each period, .
Level of detail is higher than the Production Plan
End items versus groups of items
Time periods usually shorter (e.g., weeks versus months)

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Level-4 and 5: MRP and PAC

Material Requirements Plan
End item requirements broken down into specific
components what to make or buy, and when

Production Activity Control

Execution plan, detailing specific orders to produce
items from the Material Requirements Plan

Purchasing
Similar to Production Activity Control, only includes
items to be purchased rather than produced.

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Capacity Management
At each level of the planning and control system,
reconciliation with resources must be made
Obtain resources or change the plan

Inadequate resources leads to missed production

schedules
Resources significantly exceed planned production leads
to idle resources and extra cost

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Sales and Operations Plan

Strategic
Business Plan

Annual

SALES AND OPERATIONS PLAN

Monthly
Marketing
Plan

Production
Plan

Detailed
Sales Plan

Master
Production
Schedule

Weekly
or
Daily

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Sales and Operations

Planning
Can be used to update the strategic plan
Provides a tool to manage change
Enforces functional plans to be realistic and coordinated
Represents a plan to achieve company objectives
Provides management visibility of production, inventory,
and backlogs.

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Developing the Production

Plan
Developing an effective planning strategy:
How flexible are the resources, both in quantity and
timing?
Are outside resources available (subcontracting)?
Can we utilize inventory to meet demand?

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Basic Production Plan

Strategies
Chase
Vary production rates to meet changes in demand
Often used when inventory cannot be used or when resources
are flexible and inexpensive to change

Level
Establish average demand level and set production rate to that
level
Often used when resources difficult or very expensive to
change

Hybrid use a combination of some chase and

some level

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For Example:
No. of Units

Demand
Time
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Chase Production:
No. of Units

Chase Production

Demand
Time
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Level Production:
No. of Units

Level Production

Demand
Time
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Level Production:
No. of Units

USE Inventory
Level Production

CREATE Inventory

Demand
Time
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Hybrid:
No. of Units

Hybrid
Demand
Time
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Numerical Example:
Demand forecast for a product family is given in the
table below. Assume the product family is a Make-toStock family with a starting inventory of 100 units.
Period
Forecast (Demand)

Total

150

160

180

175

155

140

960

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Production Plan using Chase

Strategy
Period

Total

Forecast (Demand)

150

160

180

175

155

140

960

Planned
Production

150

160

180

175

155

140

960

Planned Inventory

100

100

100

100

100

100

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Production Plan Using a Level

Strategy
Period

Total

Forecast (Demand)

150

160

180

175

155

140

960

Planned
Production

160

160

160

160

160

160

960

Planned Inventory

110

110

90

75

80

100

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Production Plan using a

Hybrid Strategy
Period

Total

Forecast
(Demand)

150

160

180

175

155

140

960

Planned
Production

140

140

140

175

175

175

945

Planned Inventory

90

70

30

30

50

85

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