Lecture 2
Introduction to Materials Management
Books
• Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming
College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M.
Clive, P.E., CFPIM, Fleming College
• Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005,
N.Y.: McGraw-Hill/Irwin.
Operating Environment
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Government
Economy
Competition
Quality
– Order qualifiers
– Order winners
Delivery Lead Time
•
•
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Engineer to order
Make to order
Assemble to order
Make to stock
Supply Chain Concepts
• 1970’s JIT (Toyota)
• 1980-90’s Enterprise Resource Planning (ERP)
• Currently Supply Chain Management (SCM)
– Flow of Materials, information, and $$$$$$
Suppliers’
Suppliers
Direct
Suppliers
Producer
Distributor
Final
Consumer
Conflicts in Traditional Systems
•
Four Main Objectives to get most Profit:
–
Provide best customer service
–
Provide lowest production
–
Provide lowest inventory
–
Provide lowest
costs
costs
investment
distribution
Conflicts in Traditional Systems
•
Is there any conflict in the objectives of best
customer service, lowest production costs, and
lowest inventory investment? Why?
•
How can the conflicts be managed?
Conflicts in Traditional Systems
Marketing
Finance
Production

Maintain high
inventories
 Reduce
inventory


Interrupt
production runs
 Decrease
plants and
warehouses
Make long
production
runs

Maintain high
inventories of
raw materials
and WIP

Create extensive
 Use long
and costly
production runs
distribution
 Manufacture to
system
customer order
What is Materials Management?
The grouping of management functions
supporting the complete cycle of material
flow, from the purchase and internal
control of production materials to the
planning and control of work in process to
the warehousing, shipping, and distribution
of the finished product
APICS Dictionary, 8th Edition
Management Make/Buy Considerations
Reasons for Making
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•
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lower production cost
unsuitable suppliers
assure adequate supply
utilize surplus labor and make a
marginal contribution
obtain desired quantity
remove supplier collusion
obtain a unique item that would
entail a prohibitive commitment
from the supplier
Reasons for Buying
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lower acquisition cost
preserve supplier commitment
inadequate capacity
reduce inventory costs
ensure flexibility and alternate
source of supply
product improvements may be
difficulty because it is a sideline
Objectives of Materials Management
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Maximize the use of the firm’s resources
• Manufacturing Planning and Control
Provide the required level of customer service
•
Customer service means being able to provide the
customer the right quality, quantity, time, place,
price
Manufacturing Planning & Control
•
Production Planning
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•
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•
–
–
Forecasting
Master Planning
MRP
Capacity Planning
Implementation and
Control
Inventory Management
Manufacturing and Control System
• Inputs
 Bill of Material
• Describes the
components used to
make the product
• Describes the
subassemblies at
various stages of
manufacturer
Inputs (continued)
 Process Specifications
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Operations required to make the product
Sequence of operations
Equipment and accessories required
Standard time required to perform each operation
 Time needed to perform operations
 Available facilities
 Quantities required
Physical Supply/Distribution
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Activities include
– Transportation
– Distribution Inventory
– Warehousing
Physical Supply/Distribution
 Packaging
 Materials Handling
 Order Entry
What is Value Added?
The actual increase of utility from the viewpoint of
the customer as a part is transformed from raw
material to finished inventory. It is the
contribution made by an operation or a plant to
the final usefulness and value of a product, as
seen by the customer. The objective is to eliminate
all non-value-added activities in producing and
providing a good or service.
APICS Dictionary, 8th Edition
Supply-Production-Distribution System
Raw Materials
S
U
P
P
L
I
E
R
Physical
Supply
Processing
Manufacturer
Manufacturing
Planning and
Control
Finished Goods
Distribution
System
Physical Distribution
C
U
S
T
O
M
E
R
Manufacturing Planning & Control
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Production Planning
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–
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Forecasting
Master Planning
MRP
Capacity Planning
Implementation and
Control
Inventory Management
Competitive Dimensions
1. Cost
Make it cheap
2. Quality (product & process) Make it good
3. Delivery Speed
Make it fast
4. Delivery Reliability
Deliver as promised
5. Demand Management
Handle Changes in Demand
6. Variety
Make more than one type
7. Innovation
First mover advantage
Competitive Dimensions
All of the competitive dimensions are important…
why not try to excel along every one?
Competitive Dimensions and Trade-offs
Trade-offs
Trade-offs: Decisions that arise because of the
inability of processes to excel simultaneously
across all competitive dimensions.
Which Dimensions Should Be the Focus?
Order winners: Criterion that differentiates one firm
from another.
Examples: Cost (Southwest Airlines), service quality
(Ritz-Carlton Hotels), Flexibility (Dell)
Order qualifier: Criterion that permits the firm’s products
to even be considered for purchase.
Example: basic quality necessary to be considered a
good car (consumer reports).
Example
Southwest Airlines overall corporate strategy is to
“serve price- and convenience-sensitive customers.”
Corporate Strategy
Finance
Strategy
Marketing
Strategy
Operations
Strategy
Developing an Operations Strategy
1. Segment the market according to the product group.
Example: High-end vs. low-end consumers
2. Identify (a) product requirements, (b) demand patterns, (c)
profit margins. Example: many components, seasonal,
low demand, high profit margin.
3. Determine the order winners and order qualifiers.
Example: delivery speed (winner), cost (qualifier)
4. Convert order winners into specific performance
requirements. Example: Must sell at or below $600
Developing an Operations Strategy
The next step is to analyze the process level…
1. Define the complexity and volume of your
product/service.
2. Define whether you offer few specific products/services
or highly customized products/services.
3. Determine product design, process design, supply chain
design, supplier relations, capacity management plan &
technology choice
Examples
Examples
• Southwest Operations – low cost
– Point-to-point between midsize cities & secondary
airports in large cities
– 15-min gate turnaround
– No meals
– No assigned seats
– No interline baggage checking
– No premium classes of service
– Automated gate ticketing
– Standardized fleet of aircraft
Measuring whether the strategy is working
Productivity is a common measure for how
well a company is utilizing its resources
Outputs
Productivi ty 
Inputs
• Productivity measurement shows how well the
company performs for a given level of inputs.
• Partial measures may give more specific details
about performance.
Output
Output
Output
or
or
Labor
Captial
Material
Productivity Measurement
Example: Consider the following case. A bank has net
output (income) of $500,000. The bank employs 40,000
people.
The partial labor productivity is 500,000 / 40,000 = 12.5
What does this tell you?
Productivity Measurement
The productivity index is a relative measure.
It has to be compared with something else:
1. Benchmarking.
2. Changes over time.
The important thing is to be consistent in measurement!
Examples
Examples
• Walmart – low cost
– High investment into IT to manage inventory,
analyze point of sales data, track shipments, etc.
– Management by data
– Scale
– Negotiation power with suppliers
Summary and Conclusions
1. Firms must trade-off competitive dimensions when
defining operations strategy.
2. This can be done by defining order winners and
order qualifiers.
3. A Productivity Index can measure the relative
performance between firms (or products, SBU’s, etc)
End of Lecture 2