Material Management



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Material Management

CONTENTS Introduction......................................................................................................................3 Technical Terms...............................................................................................................3 The Supply Chain Concept..............................................................................................3 Manufacturing Strategy...................................................................................................4 Production Planning System............................................................................................5 The Manufacturing Planning and Control System...........................................................5 Manufacturing Resource Planning (MRP 2)....................................................................7 Production Plan................................................................................................................7 Master Production Scheduling (MPS).............................................................................8 Material Requirements Planning (MRP).........................................................................9 Production Activity Control (PAC)...............................................................................12 Purchasing......................................................................................................................14 Forecasting.....................................................................................................................15 Conclusion.....................................................................................................................30

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Material Management

This document briefly describes the material management, which is a coordinating function responsible for planning and controlling material flow. Its objectives are to maximize the use of the firm’s resources and provide required level of customer service. The planning and process is generally used as basis in Enterprise Resource Planning (ERP) application.

Technical Terms
Lead Time From the supplier’s perspective, this is the time from the receipt of an order to the delivery of the product. From the customer’s perspective, it may include time for order preparation and transmittal. Bill of Materials (BOM) Bill of materials (BOM) is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture a final product. Capacity The amount of work can be done in a specified time period. JIT Just-in-time is an inventory strategy that strives to improve a business's return on investment by reducing in-process inventory and associated carrying costs. Kanban Kanban is a signaling system to trigger action. It signals the need for an item and related to JIT in production.

The Supply Chain Concept
There are three phases to the flow of materials. Raw materials flow into a manufacturing company from a physical supply system, they are processed by manufacturing, and finally finished goods are distributed to end consumers through physical distribution system. The below graphic shows one supplier and one customer, usually the supply chain consists of several companies linked in a supply / demand relationship. For example, the customer of one supplier buys product, add value to it, and supplies yet

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Delivery lead time is shortest. Engineer-To-Order (ETO):Customer’s specification requires unique engineering design or required customization. Delivery lead time is long because it includes not only purchase lead time but also design lead time. Assemble-To-Order (ATO):Product is made from standard components that manufacturer can inventory and assemble according to customer order. Delivery lead time is reduced because little design time needed and raw material is available in inventory. Delivery lead time is further reduced because no design time is required and components are available in inventory.Material Management another customer. The basic elements are Supply. one customer may have several suppliers and may in turn supply several customers. Make-To-Order (MTO):Manufacture does not start an order until the customer’s order is received. Make-To-Stock:The supplier manufactures the goods and sells from finished goods inventory. Thus. Similarly. Production and distribution. operations must have a strategy that allows it to supply the needs of the marketplace and provide fast on-time delivery. Supplier Manufacturer Distribution System Customer Manufacturing Strategy A highly market-oriented company will focus on meeting or exceeding customer expectations and order winners. Page 4 of 30 .

the firm must organize all these factors to make the right goods at right time at top quantity and do so economically as possible. equipment. Some firms make few products while others make many products. each uses a variety of processes.Material Management Production Planning System Manufacturing is a complex process. However. labor. machinery. a) b) c) d) e) Strategic Business Plan Production Plan (Sales and Operation Plan) Master Production Schedule Materials Requirement Plan Purchasing and Production activity control STRATEGIC BUSINESS PLAN Master Plan PRODUCTION PLAN Planning MASTER PRODUCTION SCHEDULE MATERIAL REQUIRMENTS PLAN Implementation PRODUCTION ACTIVITY CONTROL AND PURCHASING Page 5 of 30 . To be profitable. It is a complex problem and essential to have a good planning and control system. skills and materials. The Manufacturing Planning and Control System There are five major levels in the manufacturing planning and control system.

financial. Production Activity control system controls the flow of work through factory. 4.Material Management 1. for each period. 2. The Material Requirements Plan (MRP) It is a plan for production and purchase of components used in the making items in the master production schedule. 3. and engineering plans. The Master Production Schedule (MPS) It is a plan for production of individual end items. the quantity of each end item to be made. Strategic Business Plan It is a statement of major goals and objectives that company expects to achieve over next two to ten years or more. production. production management is concerned with the following: • The quantities of each product group that must be produced in over period of time • The desired inventory levels. labor. Purchasing is responsible for establishing and controlling the flow materials to factory. The level of detail is high. and material needed in each period. 5. • The resources of equipment. Page 6 of 30 . Purchasing and Production Activity Control (PAC) It represents the implementation and control phase of the production planning and control system. It is based on long forecasts and direction and coordination among the marketing. The Production Plan Given the objectives set by strategic business plan. It breaks down the plan to show. • The available of resources needed.

Marketing. low cost plant operation. Senior managements may adjust the production plan to reflect overall changes in demand or resources. It provides mechanism for coordination between Marketing.Material Management Manufacturing Resource Planning (MRP 2) It is a master plan for all the departments in a company. Basic Strategies 1) Chase Strategy 2) Production Leveling 3) Subcontracting 1) Chase (demand) Strategy It means producing the amounts demanded at any given time. finance and production agree on a total workable plan expressed in the production plan. Marketing and Production must work together on a weekly basis and daily basis to adjust the plan as changes occur. All departments work through the MRP 2 System. Production Plan The production plan sets the general level of production and inventories over the planning horizon. market demand. 2) Production Leveling It means continually producing an amount equal to average demand. customer service. backlogs (unfilled customer orders). labor relations and so on. Page 7 of 30 . to produce to meet the demand. And it is a method for the effective planning of all resources of a manufacturing company. Its prime purpose is establishing the production rate that will accomplishes the objectives of strategic business plan. Marketing managers and production managers may change the Master Production Schedules to meet changes in forecast demand. Inventory levels remain stable while production varies to meet demand. These include inventory levels. Companies calculate their demand over period of time and on the average. 3) Subcontracting It means always producing at the level of minimum demand and meeting any additional demand through subcontracting. production.

As a master planner. It also forms a link between Sales and Production as per given below. The opening inventory is 50 and the item to be made in 100 lots. it tells Sales and Manufacturing when goods will be available for delivery. To maintain the inventory requirement at optimum level. It forms a link between production planning and what manufacturing will actually build. It is a contract between marketing and manufacturing. And it forms a basis for calculating the capacity and resources needed. As schedule of items to be built. • • It makes possible valid order promises. prepare an MPS. labor and equipment. To make the best use of material. Week Forecast Sales Projected 1 75 ? 2 50 ? 3 30 ? 4 40 ? 5 70 ? 5 20 ? Page 8 of 30 . It is a priority plan for manufacturing. As such. the Master Production Schedule and Bill of Material (BOM) will determine what components are needed from manufacturing and purchasing. It drives the Material Requirement Planning (MRP).Material Management Master Production Scheduling (MPS) The MPS is a vital link in production planning system. Question and Answer:Question:The sales department has forecast an item for six weeks. The following information needed to develop an MPS: • • • • • The production plan Forecasts for individual end items Actual orders received from customers and for stock replenishment Inventory levels for individual end items Capacity Details The objective in developing an MPS as follows: • • • To maintain the desired level of customer service by maintaining finished goods inventory levels or scheduling to meet customer delivery requirements. The MPS is a plan of what is to be produced and when.

One is determine requirement and other one is.50 Forecast -.75 Required Item Quantity = Forecast Sales – Opening Quantity = 75 – 50 = 25 The planner should schedule and complete one lot (ie) 100 to meet the demand.Material Management Available (Opening Inventory is 50) MPS Answer Week Forecast Sales Projected Available (Opening Inventory is 50) MPS 1 75 75 2 50 25 3 30 95 4 40 55 5 70 85 5 20 65 ? ? ? ? ? ? 100 100 100 Week 1:Opening Inventory -. Projected Quantity Available at the end of week1 = 100 – 25 = 75 Material Requirements Planning (MRP) The material requirement planning is the system that establishes a schedule (priority plan) showing the components required at each level of the assembly and based on lead times. The material requirement objective is to determine what components are Page 9 of 30 . keep priorities current. it calculate when these components will be needed. Objectives of MRP It has two requirements. Determine Requirement:The main objective of any manufacturing planning and control system is to have the right materials in the right quantities available at the right time to meet the demand for the firm’s product.

Manufacturing Planning and Control System INPUT Business Plan Finance Plan Market Plan Capacity PLAN OUTPUT Aggregate Plan *) By Product Groups *) Inventory Levels Production Plan Production Plan Forecasts Customer Orders Inventory Capacity MPS BOM Inventory Capacity Master Production Schedule Detailed Plan *) By Week *) By End Item Material Requirements Plan Time – Phased MF and PO *) For Raw material *) For Components PURCHASING PRODUCTION ACTIVITY CONTROL Page 10 of 30 . scrap occurs and machines break down. to calculate the periods when the components must be available. Component gets used up. The material requirement plan must be able to reorganize priorities to keep plans current.Material Management needed to meet the master production schedule (MPS) and based on lead time. expedite and change orders. It must determine the following: • • • • What to order How much to order When to order When to schedule delivery Keep Priorities Current:The demand and supply of components change daily. It must be able to add. Customer enters or change order. suppliers are late with delivery. delete.

Material Management Inputs to MRP:A) MPS B) Inventory Records C) Bills of Material ( BOM) Material Requirements Planning Process The purpose of material requirement planning is to determine the components needed.2) Offsetting It is process of placing the exploded requirements in their proper periods based on lead time. if 50 units of A required in week 5. it must be released in week 4. For example. The basic MRP technique discussed below. quantities and due dates so items in the MPS are made on time. And the 50 Bs and 50 Cs should be made available in week 4 A (LT: 1 Week) B (LT: 2 Weeks) C (LT: 1 Week) D (LT: 1 Week) E (LT: 1 Week) Page 11 of 30 . a) Exploding and Offsetting b) Gross and net requirements c) Releasing Orders a.1) Exploding Exploding is the process of multiplying the requirements by the usage quantity and recording the appropriate requirement throughout the product tree. a. then in order to assemble A.

Before manufacturing order is released. At same time. machines.Material Management Figure:. it must make good use of labor. minimize work in process inventory. The MRP authorizes PAC: • • • • To release work orders to shop for manufacturing To take control of work order and make sure they are completed on time Responsible for immediate detailed planning of the flow of orders through manufacturing. Production Activity Control (PAC) The PAC is responsible for executing the Master Production Schedule and Material Requirement Plan. the component available must be checked.Product Tree LT – Lead Time b) Gross and Net Requirements:Gross requirement = 50 Inventory Available = 20 Net requirement = Gross requirement – Inventory Available = 50 – 20 = 30 c) Releasing Order Authorization is given to purchasing to buy the necessary material or to manufacturing to make the component. and maintain customer service. carrying out the plan and controlling the work as it progressing to completion To manage day-to-day activity and provide the necessary support Activities of PAC: A) Planning B) Implementation C) Control function Page 12 of 30 .

order quantities. rescheduling or adjusting capacity to meet the customer requirement. the process must be monitored to learn what is happening. tooling. This is called dispatching. • Routings are fixed and work centers are arranged according to the routing. • Track the actual performance of work orders and compare it planned schedules. lead times and work center queues. • Rank the shop orders in desired priority sequence by work center. Page 13 of 30 . the PAC put them into action by advising shop floor what must be done. Manufacturing Systems 1) Flow Manufacturing 2) Intermittent Manufacturing 3) Project Manufacturing 1) Flow Manufacturing It is concerned with production of high volume standard products. shop orders are released. personnel.Material Management Planning • • Ensure that required materials. • Release order to shop floor as authorized by the MRP. the PAC must take corrective actions by replanning. Implementation Once the plans are made. • Gather the information needed by the shop floor to make the product. Ensure that schedule start and completion dates for each shop order at each work center. Gasoline) then it is called continuous manufacturing. operation time. If the units are discrete then process is usually called repetitive manufacturing and if goods are made in a continuous flow ( eg. • Monitor and control work in process. and scrap. • Report work center efficiency. and information are available to manufacture the components when needed. Control Once the plans are made. Where necessary.

Previous operations are scheduled back from the last operations. Scheduling Techniques 1) Forward Scheduling It assumes that material procurement and operation scheduling for a component start when the order is received. Purchasing Purchasing is the process of buying. • Machine and workers must be flexible enough to do variety of work. with right delivery (time and place). manufacturing and purchasing departments. The manufacturing planning and control must decide when to order which raw materials so that market demand can be satisfied. Obtaining the right materials. whatever the due date. It is commonly used in the industry because it reduces inventory. 3) Project Manufacturing It involves creation of one or small units. one work station takes more time than other. and that operations are scheduled from this date. 2) Backward Scheduling The last operation on the routing is schedule first and is scheduled for completion at the due date. engineering. Design of the product is often carried out and modified as project develops. Purchasing is then responsible for placing the orders and ensuring that goods arrive on time. As orders processed. in the right quantity. Page 14 of 30 . It is used to calculate how the long it will take to complete the task. Materials flow from one work center to other in some form of mechanical transfer. It is used to determine when an order must be started. • Capacity is depends on particular product and difficult to predict. from the right source and at the right price are all purchasing functions. 2) Intermittent manufacturing • Flow of work through the shop is varied and depends on the design of a particular product.Material Management • • • Work center is dedicated to produce set of products. Capacity is fixed. Market place determines the quantities and deliveries of the product. Choosing the right material requires input from marketing.

Purchasing Function • • • • Determining purchasing specification: Right quality. right quantity. and manufactures must anticipate future demand for products or services and plan to provide to provide capacity and resources to meet the demand. Purchasing Cycle 1) 2) 3) 4) 5) 6) 7) Receiving and analyzing purchase requisition Selecting Suppliers Determining the right price Issuing purchasing order Following up to assure delivery dates are met Receiving and accepting goods Approving supplier’s invoice for payment. Customers usually demand for products in reasonable time. Selecting Supplier Negotiating terms and conditions Issuing and administration of purchasing order. and right delivery. Demand Management Page 15 of 30 . Firms that make standard products need to have saleable goods immediately available or at least to have materials and subassemblies available to shorten the delivery time. Forecasting Forecasting is a prelude to planning. There are many circumstances and reasons but forecasting is inevitable in developing plans to satisfy future demand. Most firms cannot wait until orders are actually received before start to plan what to produce.Material Management Purchasing objective • • • • Obtaining goods and services of the required quantity and quality Obtaining goods and services at the lowest cost Ensuring best possible service and prompt delivery by the supplier Developing and maintaing good supplier relations and developing potential supplier.

Aggregate Inventory Management It deals with managing inventories according to their clarification (raw materials. they represent 20 to 60 % of total asset. medium and short term. Often they are substantial part of total asset. It occurs in the long. In the medium term. Forecasts are more accurate for nearer time periods.Material Management Demand Management is the function of recognizing and managing all demands for products. work in process and finished goods) and the function they perform rather than at individual item level. 1) Raw Materials Page 16 of 30 . it is needed for project aggregate planning for production planning. Inventory must be considered at each level of planning and is thus part of production planning. Inventory management is responsible for inventory planning from the raw material stage to customer. All businesses and institutions require inventories. Inventory and the flow of material There are many ways to classify inventories. demand projections are needed for strategic business planning of such things as facilities. master production scheduling and material requirement planning. In the long term. In the shorter run. Demand management has four activities a) b) c) d) Forecasting Order Processing Making Delivery promises Interfacing between manufacturing planning and control and the market plan. Principles of Forecasting a) b) c) d) Forecasts are usually wrong Every forecast should include an estimate of error. Item Inventory Management Inventory is not only managed at aggregate level but also at the item level. the demand management is needed for item and master production scheduling. Forecasts are more accurate for families or groups. On the balance sheet. Inventory Fundamentals Inventories are material and supplies that a business or institution carries either for sale or to provide inputs or suppliers to the production process.

Material Management These are purchased items received. 3) Finished Goods The finished products of the production process that are ready to be sold as completed items. SUPPLIER SUPPLIER SUPPLIER RAW MATERIALS PURCHASED PARTS AND MATERIALS Worked In Process Finished Goods WAREHOUSE WAREHOUSE WAREHOUSE CUSTOMER DEMAND CUSTOMER DEMAND CUSTOMER DEMAND Page 17 of 30 . component parts and subassemblies. 2) Work – In Process (WIP) The raw materials entered the manufacturing process and are being worked on or waiting to be worked. which does not have entered the production process. They include purchased materials.

vacation shutdown or possible a threat or strike. inventories can be classified according to the function they perform. For this situation exist. they are created ahead of peak selling season. grains or animal products are traded on worldwide market. they can purchase the hedge inventory where the prices are low. d) Transportation Inventory Transportation inventory exist because of the time needed to move goods from one location to another such as from a plant to a distribution center or a customer. This is to take advantage of discounts. If buyer expects price to rise. b) Fluctuation Inventory (Safety Stock) Fluctuation inventory is held to cover random unpredictable fluctuations in supply and demand or lead time. the basic purpose of inventories is to decouple supply and demand. Page 18 of 30 . Inventory serves as buffers between • • • • • Supply and Demand Customer demand and finished goods Finished goods and component availability Requirements for an operation and output from the preceding operation Parts and Materials to begin production and the suppliers of materials Based on this. Good made at the same rate as demand and no inventory would build up. c) Lot – Size Inventory / Cycle Stock Items purchased or manufactured in quantities greater than needed immediately. For example. clerical. a promotion program. the demand must be predictable. and setup costs and in cases where it is impossible to make or purchase items at the same rate they will be used or sold. a) Anticipation Inventory Anticipation inventories are build up in anticipation of future demand. to reduce shipping. stable and relatively constant over a long time period. FUNCTIONS OF INVENTORIES In batch manufacturing. there would be little need for inventory. e) Hedge Inventory Some products such as minerals and commodities for example. The price of the product is fluctuates according to world supply and demand.Material Management SUPPLY AND DEMAND PATTERNS If supply met demand exactly.

3) Pilferage – Goods lost. the cost associated with placing the order are essentially same. As inventory increase. These could include such things as transportation. strayed or stolen. They can be broken down into three categories. workers and equipment. • • • • • Item Costs Carrying Costs Ordering Costs Stockout Costs Capacity – Associated costs Item Cost Item cost is price paid for a particular item. so do these costs. The cost of placing an order does not depend upon the quantity ordered. which consists of cost of the item and any other direct costs associated in getting the item into the plant. As inventory increases. 4) Deterioration – Inventory that rots or dissipates in storage or whose shelf life is limited. b) Storage Cost Storing requires space. custom duties and insurance.Material Management Objectives of Inventory Management • • • Maximum Customer Service Low cost plant operation Minimum Inventory investment Inventory Costs The following costs are used for inventory management decisions. The inclusive cost is often called the landed price. do these costs. a) Capital Cost Money invested in inventory is not available for other users and as such represents a lost opportunity cost. Carrying Costs Carrying cost include all expenses incurred by the firm because of the volume of inventory carried. Ordering Costs Ordering costs are those associated with placing an order either with factory or a supplier. c) Risk Cost The risks in carrying inventories are 1) Obsolescence – Loss of product value resulting from a model or style change or technological development. 2) Damage – Inventory damaged while being held or moved. Whether a lot of 10 or 100 is ordered. Page 19 of 30 .

and using the EOQ does not produce a minimum cost. particularly in material requirements planning. 1) Demand is relatively constant and is known. To have better control at a reasonable cost. When should an order be placed? Most companies carry a large number of items in stock. How are they to be controlled? 3. Economic – Order Quantity (EOQ) Assumptions The assumptions on which the EOQ is based are as follows. A stockout can potentially be expensive because of back – order costs. extra shifts. Order Quantities Stock Keeping Unit (SKU) Control is exercised through individual items in a particular inventory. Two white shirts in the same inventory but of different sizes or styles would be two different SKUs. Page 20 of 30 . 2) The item is produced and purchased lot or batches and not continuously. 1. it is helpful to classify the items according to their importance. Capacity – Associated Costs When output levels must be changed.Material Management Stockout Costs If demand during the lead time exceeds forecast. 3) Order preparation costs and inventory – carry costs are constant and know. How much should be ordered at one time? 4. 4) Replacement occurs all at once. Usually this is based on annual dollar usage. Period – Order Quantity (POQ) The EOQ attempts to minimize the total cost of ordering and carrying inventory and is based on the assumption that demand is uniform. four questions must be answered. lost sales. but other criteria may be used. Often demand is not uniform. ABC Inventory Control Control of inventory is exercised by controlling individual items called stock keeping units (SKUs). we can expect a stockout. In controlling inventory. The same shirt in two different inventories would be two different SKUs. there may be costs for overtime. These are called stock keeping unit. and possibly lost customer. What is the importance of the inventory item? 2. training. hiring. and layoffs.

A customer or supplier may change the delivery date. There are variations on this system. It uses the EOQ formula to calculate an economic time between orders. A tag or card is placed in a book that is in a stack in a position equivalent to the order point. an order is placed. the production control or purchasing department is notified and a replenishment order is placed. Determining Safety Stock Safety stock is intended to protect against uncertainty in supply and demand. orders are placed to satisfy the requirements for the calculated time interval. but the amount ordered each time varies. The quantity ordered is usually pre calculated and based on economic – order – quantity concepts. The two – bin system is simple way of keeping control of C items. Book stores frequently use this system. Two – Bin System A quantity of an item equal to order point quantity is set aside (frequently in a separate or second bin) and not touched until all the main stock is used up. At any instant. Instead of placing same order quantity. an order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed unit the new stock arrives ( called lead time). Periodic Review System Page 21 of 30 . Using this system. the carrying cost is reduced. The number of order placed is same as for an economic order quantity. Thus. order cost is same but order quantities are determined by actual demand. One is quantity uncertainty and time uncertainty. When this order need to be used. Uncertainty may occur in two ways. Timing uncertainty occurs when the time of receipt of supply or demand differs than expected. Quantity uncertainty occurs when the amount of supply or demand varies. Determining When the Order Point is Reached There must be some method to show when the quantity of an item on hand has reached the order point. This is calculated by dividing the EOQ by the demand rate. where a tag is placed in the stock at a point equal to the order point.Material Management The period order quantity lot size rule is based on the same theory as the EOQ. Independent Demand Ordering Systems Order Point System When the quantity of an item on hand in inventory falls to a predetermined level. called an Order point. Perpetual Inventory Record System A perpetual inventory record is a continual account of inventory transactions as they occur. such as the red-tag system. it holds an up-to-date record of transactions. Two methods to determine the order point. This produces the time interval for which orders are placed.

In some cases. The advantage of these systems is the coordination between factory. demand on central supply is created by the distribution centers. all forecasting and order decisions are made centrally. The purpose of holding inventory in distribution centers is to improve the customer service by locating stock near the customer and to reduce transportation cost by allowing the manufacturing to ship full loads rather than partial loads over long distance. fixed-time intervals. The disadvantage is the inability to react to local demand. the physical management of inventory and warehousing are intimately connected. The objective of distribution inventory management are to provide the required level of customer service. demand on the factory is created by central supply. it operates on its own and reduces communication and coordination expenses. Centralized System In a centralized system. the demand on the factory depends on when central supply system places order. Each center orders on it own without regard to other centers. Distribution Inventory Distribution inventory includes all the finished goods held anywhere in the distribution system. In turn. Distribution centers have no say about what they receive. Physical Inventory and Warehouse Management Because inventory is stored in warehouse. This can have severe repercussions on the pattern of demand on central supply and the factory. to minimize the cost of transportation and handling and to be able to interact with factories to minimize the scheduling programs.Material Management Using this periodic review system. Although demand from customer is uniform. In other situations. the demand from central supply is not uniform because it depends on when distribution center places replenishment orders. the quantity of on hand of a particular item is determined at specified. The disadvantage is lack of coordination and the effect this may have on inventories. The advantage of decentralized system is. available inventory at central supply or the production schedule of the factory. each distribution center first determines what needs and when the orders to be placed on central supply. a number of distribution centers and finally customers. inventory may be stored for an extended time. Page 22 of 30 . In turn. and an order is placed. Decentralized System In a decentralized system. inventory is turned over rapidly and warehouse function as a distribution center. central supply and distribution center needs. Unless firm delivers directly from factory to consumer. thus lowering customer service level. Distribution system varies considerably. Stock is pushed out from central supply. but in general they have a central supply facility that is supported by a factory. and factory schedules. customer service.

A record must be maintained for each item in stock showing quantity on hand. Order records are updated. Cube utilization and Accessibility Page 23 of 30 . they treated alike same. 3) Dispatch goods to storage. The warehouse accepts goods from outside transportation. quantity received. b) Check the quantities. Since both warehouse and store perform same functions. work in process inventory.Material Management In a factory. Goods are kept in storage and under proper protection until needed. 2) Identify the goods Items are identified with the appropriate stock keeping unit (SKU) number (part number) and the quantity received recorded. a) Check the goods against an order and the bill of lading. quantity issued and location in the warehouse. 3) Minimize the total physical effort and thus the cost of moving goods into and out of storage. 5) Pick goods Item required from stock must selected from storage and brought to marshalling area. Warehousing Management 1) Provide timely customer service 2) Keep track of items so they can be found readily and correctly. shipping documents prepared and goods loaded on the right vehicle. finished goods. 6) Marshal the shipment Goods making up a single order are brought together and checked for omissions or errors. 4) Provide communication links with customer. 4) Hold goods. 8) Operate on information system. supplies and possibly repair parts. Goods sorted out and put away. 7) Dispatch the shipment Orders are packaged. Warehouse Activities 1) Receive goods. d) Inspect goods if required. c) Check for damage and fill out damage reports if necessary. store perform the same functions as warehouses and contain raw materisl.

but often it uses other companies or individuals to distribute some or all of its products to the final consumer. transportation companies. and retailers – is called the channel of distribution. and warehouses. The particular path in which the goods move – through distribution centers. warehouse capacity depends on how high goods can be stored. It is the responsibility of the distribution department. Depending on the conditions. Space is needed for 3000 pallets. Page 24 of 30 . Suppose that maximum of 9000 cartons are to be inventoried and 30 cartons fit on a pallet. Physical supply is movement and storage of goods from suppliers to manufacturing.Material Management Goods are stored not on the floor but in the cubic space of the warehouse. Physical Distribution Physical distribution is movement of materials from producer to consumer. but it is ultimately passed on to the customer. agents. offices and order picking and assembly. Space is also required for aisles. receiving and shipping docks. The movement of material is divided into two. Examples of intermediaries are wholesalers. A) Physical Supply B) Physical distribution. These companies or individuals are called intermediaries. Supplier Manufacturer Distribution System Customer Physical Supply MF Planning And Control Physical Distribution Channels of Distribution: A channel of distribution is one or more companies or individuals who participate in the flow of goods and or services from the producer to the final user or consumer. Physical distribution is the movement and storage of finished goods from end of production to the customer. Sometimes a company delivers directly to its customer. cost may be paid by supplier or customer. wholesalers. which is part of integrated materials management or logistics system. Although the size of a warehouse can be described as so many square feet.

Distribution Channel Factory Warehouse Transaction Channel General Sales Office Company C Truck Regional Warehouse District Sales Office Common Carrier Public Warehouse Distributor Local Delivery Retailer CONSUMER The specific way in which materials move depends upon many factors.Material Management There are two related channels involved. Page 25 of 30 . producer to wholesaler to retailer to consumer b) The types of markets served. the number of customers and the size of orders. 2) The distribution channel is concerned with transfers or delivery of goods or services. Its function is to negotiate. For example. Market characteristics such as geographic dispersion of the market. 1) Transaction Channel is concerned with the transfer of ownership. sell and contract. For example: a) The channels of distribution that the firm is using.

Pipeline Transportation Cost Elements Page 26 of 30 . Physical Distribution System Physical distribution is responsible for delivering to the customer what is wanted on time and at minimum cost. Transportation Transportation is an essential ingredient in the economic development of any area. Order processing represents a time element in delivery and is an important part of customer service. 5) Protective packaging: Goods moving in a distribution system must be contained. 3) Warehouses (distribution centers). 1) 2) 3) 4) 5) Rail Road. storing and retrieving goods. The management of warehouse makes decision on site selection. The objective of distribution management is to design and operate a distribution system that attains the required level of customer service and does so at least cost. inland and costal ships.Material Management c) The characteristics of the product. goods are moved and stored in packages and must fit into the distribution of the storage spaces and transportation vehicles. For example. 2) Distribution Inventory: Distribution inventory includes all finished goods inventory at any point in the distribution system. In addition. density. fragility. Many intermediaries involved in the distribution system. 6) Order Processing and Communication: Order processing includes all activities needed to fill customer orders. 4) Materials Handling: Materials handling is the movement and storage of goods inside the distribution center. weight. number of distribution centers in the system and methods of receiving. It is 25 to 30% of the cost of the distribution. protected and identified. and automobiles Air Water. including ocean-going. and good communication is essential to a successful distribution system. including trucks. The type of material handling equipment used affects the efficiency and cost of operating the distribution center. buses. and perishablity. usually accounting for 30 to 60 % of distribution costs. Warehouses are used to store inventory. Activities in the Physical Distribution System 1) Transportation: It is single highest cost in distribution.

Goods are received in large volume uniform lots. This is accomplished by consolidating small Less Than Truckload (LTL) shipments into large Truck Load (TL) shipments. It is widely used in the distribution system. Goods are positioned close to markets so the market can be served more quickly. They may be owned and operated by supplier or intermediaries such as wholesalers or may be public warehouses. There is minimal handling. movement. stored briefly and then broken down into small individual orders of different items required by the customer in the market place. When customer places an order they often want a mix of products that produced in different locations. Warehouses are classified into two types. Page 27 of 30 . regional warehouses and local warehouses.Material Management 1) 2) 3) 4) Line haul Pickup and delivery Terminal handling Billing and collecting Warehousing Warehouse includes plant warehouse. Service: Distribution centers improve customer service by providing place utility. The emphasis is on movement and handling rather than on storage. 2) The distribution warehouse has a dynamic purpose of movement and mixing. Transportation Consolidation: Transportation cost can be reduced by using warehouses. 1) The General Warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. the TL can be made to a distant warehouse and LTL shipments made to local users. Furniture storage or a depository for documents is examples of this type of storage. product mixing and service. Role of Warehouses Warehouse serve three important roles: transportation consolidation. In physical distribution. Consolidation can occur in both supply and distribution systems. LTL shipments from several suppliers can be consolidated at warehouse before being shipped TL to the factory. Product mixing: While transportation consolidation concerns with reduction of transportation costs. In physical supply. product mixing deals with the grouping of different items into an order and the economies that warehouse can providing in doing this. and relationship to transportation.


6) Overproduction 3.3) Movement 3. 1) Waste caused by poor product specification and design 2) Component standardization 3) Waste caused in Manufacturing There are seven important source of waste in manufacturing. and lead times should be minimal. a) Flow manufacturing b) Process flexibility c) Total Quality management d) Total productive maintenance e) Uninterrupted flow f) Continuous process improvement g) Supplier partnership h) Total employee involvement The Kanban System With shortened lead times a constant goal in JIT. structured system that could take Page 29 of 30 .1) The process 3. Quality is meeting and exceeding customer’s expectations.5) Waiting Time 3. Adding Value What constitutes value to the user? It is having the right parts and quantities at the right time and place.4) Product defects 3.Material Management Just In Time (JIT) JIT is defined many ways. material. a system is needed to generate the reorder point signal without having to rely on a formal. 3. but most popular is the elimination of all waste and continuous improvements of productivity. Another word for it is quality. space. and worker’s time absolutely necessary to add value to the product. no safety stock. This means there should be no surplus. Waste means anything other than the minimum amount of equipment.2) Methods 3. does it well and consistently. parts. It is having a product or service that does what the customer wants.7) Inventory Just In Time Environment Many elements are characteristics of a JIT environment. Waste Anything in the product cycle that does not add value to the product is waste. and is available when the customer wants it.

which roughly translated from Japanese means Card or ticket. The information on the Kanban will often include: • Component part number and identification • Storage location • Container size • Work center (or supplier ) of origin How it works: The following figures illustrate the use of what is often called a two card Kanban system. Kanban. there is a great opportunity for using the system to promote continual process improvement. Chapman. The water in the analogy is inventory. • There will be no partial containers stored. or in the process of being filled or emptied. The analogy is often used is a river.R. This rule makes inventory accounting easy. Using Kanban system for process improvement Because the Kanban system allows for a controlled inventory of relatively small containers. If the water level is high enough.Material Management time to react. whenever the process is working smoothly for an extended period of time. Every container will be filled. Tony Arnold. it will cover all the rocks in the river and appear to be running smoothly without any obstructions. but only one. You do not need to count parts – only containers and then multiply by the container quantity. worker skills. The system works very simply. refer the Introduction to Material Management book. and the rocks are process problems including quality problems. authors – J. • There will be no production or movement without an authorization in the form of an unattached Kanban card. Stephen N.Though there are no formal schedules in a Kanban system. equipment breakdown and so forth. Page 30 of 30 . The two types of cards are a production card (authorizing production of whatever the part number is identified on the card in the quantity specified) and a withdrawal card (authorizing the movement of the identified material) Kanban Rules:. Specifically. • Every container with parts shall have one. there is a fairly important set of rules. Conclusion These are the five major planning and processes generally used in any manufacturing company. The developers of JIT concepts utilize a simple card system called Kanban (often produced con-bon). In order to know the detail information of each planning and process. there is a possibility that there actually is too much inventory in the system. The Kanban signal (often a piece of cardboard) identifies the material to which it is attached. empty.

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