Management Consulting/Materials Management


QUESTION: 1.   If the responsibility for maintaining the quality of the product and incurring less cost on its production is the responsibility of the “production/ operation” and deciding the price of the product and finding the customers that will buy it comes under “marketing”. What do the “materials management function” does?

ANSWER: .      If the responsibility for maintaining the quality of the product and incurring less cost on its production is the responsibility of the “production/ operation” and deciding the price of the product and finding the customers that will buy it comes under “marketing”. What do the “materials management function” does?

It is concerned with planning, organizing and controlling the flow of materials from their initial purchase through internal operations to the service point through distribution.
Material management is a scientific technique, concerned with Planning, Organizing &Control of flow of materials, from their initial purchase to destination.

To get
 1. The Right quality
 2. Right quantity of supplies
 3. At the Right time
 4. At the Right place
 5. For the Right cost
•   To gain economy in purchasing
•   To satisfy the  demand during period of replenishment
•   To carry reserve stock to avoid stock out
•   To stabilize fluctuations in consumption
•   To provide  reasonable level of client services
Objective of material management

•   Right price
•   High turnover
•   Low procurement
•   & storage cost
•   Continuity of supply
•   Consistency in quality
•   Good supplier relations
•   Development of personnel
•   Good information system
•   Forecasting
•   Inter-departmental harmony
•   Product improvement
•   Standardization
•   Make or buy decision
•   New materials & products
•   Favorable reciprocal relationships

Economy in material management
•   Containing the costs  
•   Instilling efficiency in all activities
Four basic needs of Material management
1.   To have adequate materials on hand when needed
2.   To pay the lowest possible prices, consistent with quality and value requirement for purchases materials
3.   To minimize the inventory investment
4.   To operate efficiently
Basic principles of material management   
1.   Effective management & supervision
It depends on managerial functions of
•   Planning
•   Organizing
•   Staffing
•   Directing
•   Controlling
•   Reporting
•   Budgeting
2.   Sound purchasing methods
3.Skillful & hard poised negotiations
4.Effective purchase system
5.Should be simple
6.Must not increase other costs
7.Simple inventory control programme
Elements of material management
1.   Demand estimation
2.   Identify the needed items
3.   Calculate from the trends in Consumption   during last 2 years.
4.   Review with resource constraints
Functional areas of material management
1. Purchasing
2. Central service supply
3. Central stores
4. The print shops
5. The pharmacy
6. Dietary
& Linen services
1. Directorate general of supply & disposal (DGS & D, Govt. Of India]
2. Medical stores depot (M. S.D. Government of India, Ministry of H & FW]
3. Private or public sector undertakings.
4. Receiving donations.
Procurement cycle
•   Review selection
•   Determine needed quantities
•   Reconcile needs & funds
•   Choose procurement method
•   Select suppliers
•   Specify contract terms
•   Monitor order status
•   Receipt & inspection
Objectives of procurement system
•   Acquire needed supplies as inexpensively as possible
•   Obtain high quality supplies
•   Assure prompt & dependable delivery
•   Distribute the procurement workload to avoid period of idleness & overwork
•   Optimize inventory management through scientific   procurement procedures
•    First technical bid is opened & short listed
•   Then financial bid of selected companies are opened & lowest is selected  
•   Delayed tenders & late tenders are not accepted. But if, in case of delayed tenders, if the rate quoted is very less, then it can be accepted.
•   Quotations are opened in presence of indenting department, accounts & authorized persons of party
•   Validity of tenders – generally 90 days
Restricted or limited tender
From limited suppliers (about 10)
Lead-time is reduced
Better quality
Negotiated procurement
Buyer approaches selected potential Suppliers & bargain directly
Used in long time supply contracts
Direct procurement
Purchased from single supplier, at his quoted price
Prices may be high
Reserved for proprietary materials, or low priced, small quantity & emergency purchases
Points to remember while purchasing
•   Proper specification
•   Invite quotations from reputed firms
•   Comparison of offers based on basic price, freight & insurance, taxes and levies
•   Quantity & payment discounts
•   Payment terms
•   Delivery period, guarantee
•   Vendor reputation
(reliability, technical capabilities, Convenience, Availability, after-sales service, sales assistance)
•   Short listing for better negotiation terms
•   Seek order acknowledgement
•   Store must be of adequate space
•   Materials must be stored in an appropriate place
•    in a correct way
•   Group wise & alphabetical arrangement helps in
•   identification & retrieval
•   First-in, first-out principle to be followed
•   Monitor expiry date
•   Follow two bin or double shelf system, to avoid
•   Stock outs
•   Reserve bin should contain stock that will cover
•   lead time and a small safety stock
Issue & use
Can be centralized or decentralized
Inventory control
It means stocking adequate number and kind of stores, so that the materials are available whenever required and wherever required. Scientific inventory control results in optimal balance
Functions of inventory control
•   To provide maximum supply service, consistent with maximum efficiency & optimum investment.
•   To provide cushion between forecasted & actual demand for a material
Economic order of quantity
EOQ = Average Monthly Consumption X Lead Time [in months] + Buffer Stock – Stock on hand
•    Re-order level: stock level at which fresh order is placed.
•    Average consumption per day x lead time + buffer stock
•    Lead time: Duration time between placing an order & receipt of material
•    Ideal – 2 to 6 weeks.
•   (ABC = Always Better Control)
•   This is based on cost criteria.
•   It helps to exercise selective control when confronted with large number of items it rationalizes the number of orders, number of items & reduce the inventory.
•   About 10 % of materials consume 70 % of resources
•   About 20 % of materials consume 20 % of resources
•   About 70 % of materials consume 10 % of resources
Small in number, but consume large amount of resources
Must have:
•   Tight control
•   Rigid estimate of requirements
•   Strict & closer watch
•   Low safety stocks
•   Managed by top management
Larger in number, but consume lesser amount of resources
Must have:
•   Ordinary control measures
•   Purchase based on usage estimates
•   High safety stocks
ABC analysis does not stress on items those are less costly but may be vital
•    Based on critical value & shortage cost of an item
–   It is a subjective analysis.
•   Items are classified into:
•   Shortage cannot be tolerated.
•   Shortage can be tolerated for a short period.
   Shortage will not adversely affect, but may be using more resources. These must be strictly Scrutinized
Points to be noted before purchase of an equipment:
•   Latest technology
•   Availability of maintenance & repair facility, with minimum down time
•   Post warranty repair at reasonable cost
•   Upgradeability
•   Reputed manufacturer
•   Availability of consumables
•   Low operating costs
•   Installation  
•   Proper installation as per guidelines
•   Purchase with warranty & spares.
•   Safeguard the electronic equipments with: (as per guidelines)
•   Voltage stabilizer, UPS
•   Automatic switch over generator
•   Requirement of electricity, water, space, atmospheric conditions, etc. Must be taken into consideration
•   Well equipped maintenance cell must be available
•   All equipment must be operated as per instructions with trained staff
•   Monitoring annual maintenance contracts. (AMC)
•   Maintenance cell
•   Communications between maintenance cell & suppliers of the equipment.
•   Follow-up of maintenance & repair services
•   Repair of equipment
•   Outside agencies
In-house facility
Criteria for condemnation:
The equipment has become:
1. Non-functional & beyond economical repair
2. Non-functional & obsolete
3. Functional, but obsolete
4. Functional, but hazardous
5. Functional, but no longer required
1. Verify records.
2. History sheet of equipment
3. Log book of maintenance & repairs
4. Performance record of equipment
5. Put up in proper form & to the proper authority
Material management is an important management tool which will be  very useful in getting the right quality & right quantity of supplies at right time, having good inventory control & adopting sound methods of condemnation & disposal will improve the efficiency of the organization & also make the working atmosphere healthy any type of organization, whether it is Private, Government ,Small organization, Big organization  and Household.
Even a common man must know the basics of material management so that he can get the best of the available resources and make it a habit to adopt the principles of material management in all our daily activities

Materials Management Roles  include   the  following
1. Vendor   Administrator  role.
[externally --manages  the coordination  with  vendors  of  material  supply]
2. Centralized Material Master Administrator  role.
[internally - manages  the  total  material  management  operation ]
3. Buyer  role
[externally - manages  the  buying  operation with  the  supplier
4. Contract Administrator  role.
[externally -manages  the  outsourcing  of  contract  jobs ]
5. Purchase  Administrator  role.
[internally - collaborates  with  the  buyer ]
6. Inventory Administrator  role
Inventory Issuer  role.
[internally --manages  the  coordination  with the   INVENTORY MANAGER]
Inventory  Receiver   role.
[internally --manages  the  coordination  with the   INVENTORY MANAGER]
7.Material  Planning  Role
[internally --manages  the  material  requirements  with  production  planning ]
8. Raw  material Inventory Display  role.
[internally - manages  the  stock  level of   raw  materials.
9.Raw material  quality  control  role.
[internally --manages the  quality  control of  incoming  materials   with  QC.
10. Material  Budgeting role.
[internally - manages  the  department  planning  / budget ]


---------- FOLLOW-UP ----------

QUESTION: How does JIT differ from MRPII? Briefly discuss the basic requirements and assumptions of JIT implementation.

How does JIT differ from MRPII? Briefly discuss the basic requirements and assumptions of JIT implementation.

'Just In Time - JIT'
An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.

This method requires that producers are able to accurately forecast demand.

A good example would be a car manufacturer that operates with very low inventory levels, relying on their supply chain to deliver the parts they need to build cars. The parts needed to manufacture the cars do not arrive before nor after they are needed, rather they arrive just as they are needed.

This inventory supply system represents a shift away from the older "just in case" strategy where producers carried large inventories in case higher demand had to be met.
Just in time production (JIT)
Just in time is a ‘pull’ system of production, so actual orders provide a signal for when a product should be manufactured. Demand-pull enables a firm to produce only what is required, in the correct quantity and at the correct time.
This means that stock levels of raw materials, components, work in progress and finished goods can be kept to a minimum. This requires a carefully planned scheduling and flow of resources through the production process. Modern manufacturing firms use sophisticated production scheduling software to plan production for each period of time, which includes ordering the correct stock. Information is exchanged with suppliers and customers through EDI (Electronic Data Interchange) to help ensure that every detail is correct.
Supplies are delivered right to the production line only when they are needed. For example, a car manufacturing plant might receive exactly the right number and type of tyres for one day’s production, and the supplier would be expected to deliver them to the correct loading bay on the production line within a very narrow time slot.
Advantages of JIT
•   Lower stock holding means a reduction in storage space which saves rent and insurance costs
•   As stock is only obtained when it is needed, less working capital is tied up in stock
•   There is less likelihood of stock perishing, becoming obsolete or out of date
•   Avoids the build-up of unsold finished product that can occur with sudden changes in demand
•   Less time is spent on checking and re-working the product of others as the emphasis is on getting the work right first time
Disadvantages of JIT
•   There is little room for mistakes as minimal stock is kept for re-working faulty product
•   Production is very reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed
•   There is no spare finished product available to meet unexpected orders, because all product is made to meet actual orders – however, JIT is a very responsive method of production
MRP 11
Manufacturing Resource Planning (MRP II) is defined by APICS as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning in dollars, and has a simulation capability to answer "what-if" questions and extension of closed-loop MRP.
Manufacturing Resource Planning (or MRP2) -
This is not exclusively a software function, but a marriage of people skills, dedication to data base accuracy, and computer resources. It is a total company management concept for using human resources more productively.
MRP II is not a proprietary software system and can thus take many forms. It is almost impossible to visualize an MRP II system that does not use a computer, but an MRP II system can be based on either purchased–licensed or in-house software.

Almost every MRP II system is modular in construction. Characteristic basic modules in an MRP II system are:

* Master Production Schedule (MPS)
* Item Master Data (Technical Data)
* Bill of materials (BOM) (Technical Data)
* Production Resources Data (Manufacturing Technical Data)
* Inventories and Orders (Inventory Control)
* Purchasing Management
* Material Requirements Planning (MRP)
* Shop Floor Control (SFC)
* Capacity planning or Capacity Requirements Planning (CRP)
* Standard Costing (Cost Control)
* Cost Reporting / Management (Cost Control)

together with auxiliary systems such as:

* Business Planning
* Lot Traceability
* Contract Management
* Tool Management
* Engineering Change Control
* Configuration Management
* Shop Floor Data Collection
* Sales Analysis and Forecasting
* Finite Capacity Scheduling (FCS)

and related systems such as:

* General Ledger
* Accounts Payable (Purchase Ledger)
* Accounts Receivable (Sales Ledger)
* Sales Order Management
* Distribution Requirements Planning (DRP)
* [Automated] Warehouse Management
* Project Management
* Technical Records
* Estimating
* Computer-aided design/Computer-aided manufacturing (CAD/CAM)

The MRP II system integrates these modules together so that they use common data and freely exchange information, in a model of how a manufacturing enterprise should and can operate. The MRP II approach is therefore very different from the “point solution” approach, where individual systems are deployed to help a company plan, control or manage a specific activity. MRP II is by definition fully integrated or at least fully interfaced.

Industry Specifics

MRP II systems have been implemented in most manufacturing industries. Some industries need specialised functions e.g. lot traceability in regulated manufacturing such as pharmaceuticals or food. Other industries can afford to disregard facilities required by others e.g. the tableware industry has few starting materials – mainly clay – and does not need complex materials planning. Capacity planning is the key to success in this as in many industries, and it is in those that MRP II is less appropriate.

Material Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII) are predecessors of Enterprise Resource Planning (ERP), a business information integration system. The development of these manufacturing coordination and integration methods and tools made today’s ERP systems possible. Both MRP and MRPII are still widely used, independently and as modules of more comprehensive ERP systems, but the original vision of integrated information systems as we know them today began with the development of MRP and MRPII in manufacturing.

The vision for MRP and MRPII was to centralize and integrate business information in a way that would facilitate decision making for production line managers and increase the efficiency of the production line overall. In order to calculate the raw materials needed to produce products and to schedule the purchase of those materials along with the machine and labor time needed, production managers recognized that they would need to use computer and software technology to manage the information.

Originally, manufacturing operations built custom software programs that ran on mainframes.
Material requirements planning (MRP) was an early iteration of the integrated information systems vision. MRP information systems helped managers determine the quantity and timing of raw materials purchases. Information systems that would assist managers with other parts of the manufacturing process, MRPII, followed. While MRP was primarily concerned with materials, MRPII was concerned with the integration of all aspects of the manufacturing process, including materials, finance and human relations.
MRPII was designed to integrate a lot of information by way of a centralized database. the vision had been established, and shifts in the underlying business processes along with rapid advances in technology led to the more affordable enterprise and application integration systems that big businesses and many medium and smaller businesses use today .
Material requirements planning (MRP) and manufacturing resource planning (MRPII) are both incremental information integration business process strategies that are implemented using hardware and modular software applications linked to a central database that stores and delivers business data and information.
MRP is concerned primarily with manufacturing materials while MRPII is concerned with the coordination of the entire manufacturing production, including materials, finance, and human relations. The goal of MRPII is to provide consistent data to all players in the manufacturing process as the product moves through the production line.
Paper-based information systems and non-integrated computer systems that provide paper or disk outputs result in many information errors, including missing data, redundant data, numerical errors that result from being incorrectly keyed into the system, incorrect calculations based on numerical errors, and bad decisions based on incorrect or old data. In addition, some data is unreliable in non-integrated systems because the same data is categorized differently in the individual databases used by different functional areas.
MRPII systems begin with MRP, material requirements planning. MRP allows for the input of sales forecasts from sales and marketing. These forecasts determine the raw materials demand. MRP and MRPII systems draw on a master production schedule, the breakdown of specific plans for each product on a line. While MRP allows for the coordination of raw materials purchasing, MRPII facilitates the development of a detailed production schedule that accounts for machine and labor capacity, scheduling the production runs according to the arrival of materials. An MRPII output is a final labor and machine schedule. Data about the cost of production, including machine time, labor time and materials used, as well as final production numbers, is provided from the MRPII system to accounting and finance .
For the companies that want to integrate their other departments with their manufacturing management, ERP software are necessary.
MRP II systems can provide:
•   Better control of inventories
•   Improved scheduling
•   Productive relationships with suppliers
For design / engineering:
•   Improved design control
•   Better quality and quality control
For financial and costing:
•   Reduced working capital for inventory
•   Improved cash flow through quicker deliveries
•   Accurate inventory records

JIT is not about automation. JIT eliminates waste by providing the environment to perfect and simplify the processes. JIT is a collection of techniques used to improve operations It can also be a new production system that is used to produce goods or services.
"a philosophy of manufacturing based on planned elimination of all waste and continuous improvement of productivity. It encompasses the successful execution of all manufacturing activities required to produce a final product, from design engineering to delivery and including all stages of conversion from raw material onward. The primary elements include having only the required inventory when needed; to improve quality to zero defects; to reduce lead time by reducing setup times, queue lengths and lot sizes; to incrementally revise the operations themselves; and to accomplish these things at minimum cost."

When the JIT principles are implemented successfully, significant competitive advantages are realized. JIT principles can be applied to all parts of an organization: order taking, purchasing, operations, distribution, sales, accounting, design, etc.
Elimination of Waste:
JIT usually indentifies seven prominent types of waste to be eliminated:

Waste from Overproduction    Waste of waiting/idle time      
Transportation Waste    Inventory Waste      
Processing Waste    Waste of Motion      
Waste from Product Defects       
Material related costs are reduced by reducing the number of suppliers a company deals with and developing long-term contracts through  CREATIVE  SUPPLIER  NETWORKING , eliminating the need to count individual parts, reducing order scheduling, eliminating expediting, simplifying receiving systems, eliminating receiving inspection, eliminating most unpacking, eliminating the stocking of inventory, and eliminating excess material spoilage.
Manufacturing related costs are reduced by design for manufacture and design for assembly techniques where unnecessary parts or processes are eliminated. They are also reduced through the elimination of excess material handling, inspections, and storage of parts. The primary goal is to eliminate non-value adding tasks. Quick change over techniques replace long set-up times. Cells will replace traditional assembly lines.
Visual controls are often used to schedule the production of parts in place of systems such as  MRP. Statistical process control is used to assure that the outcome of production is consistently met with desired results.
The underlying  FACT  of JIT manufacturing is very simple. Buy only what is needed to produce finished goods that will be sold in the short term, rather than stockpiling large quantities of goods that may remain in inventory for an extended period of time. The idea is to make use of those raw materials as soon as they are delivered. At the same time, the finished goods should be on the way to consumers shortly after rolling off the ASSEMBLY  LINE . In order for JIT to work, this means careful planning and scheduling of both the ordering of raw materials and the labor and equipment needed to successfully deliver the goods on time.
Manufacturing plants often benefit from making use of JIT manufacturing processes. This is particularly true with industries where there is a great deal of variance in demand over the course of a year. Companies operating within industries that go through cycles of demand will project when the next big wave of demand will begin and secure raw materials just in time to begin producing finished goods to meet that demand. As a result, finished products do not have to set in warehouses for months on end. Instead, they may be stored for a very short time before being shipped to the buyer.



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Leo Lingham


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