• Material Requirement Planning and Capacity Requirement • Thought put Time • Order Cycle Time • Customer Satisfaction • Quality • Specifying Materials • Maintenance Repair and Operating (MRO) Supplies • Tooling

1. Purchasing and Supply Chain Management
by W.C. Benton
Chapter Four
Materials Management

2. Learning Objectives
1. To identify the activities of materials management.
2. To identify the four functions of inventory.
3. To understand the relationship between
purchasing and materials management.
4. To determine how the materials management
concept makes a contribution to profitability.
5. To understand why firms are moving toward
materials management.
4-2

3. Materials Management
• The purpose of materials management is to support
the transformation of raw materials and component
parts into shipped or finished goods
4-3

4. Five Functions of Inventory
• The five functions of inventory are
1. Pipeline inventories (raw materials/in process)
2. Cycle inventories
3. Buffer stock
4. Seasonal
5. Decoupling
• These five basic functions of inventory are
fundamental to achieving smooth flow, reasonable
equipment utilization and materials handling costs,
and maintenance of good customer service.
4-4

5. Suppliers
• The supplier is the source of raw materials and
component part inventories. Customer service is a
concept that applies to all suppliers whether they are
external to the company or internal
4-5

6. Production Planning
• When planning to acquire materials, whether raw
materials, component parts, or finished goods, the
capacity must be considered for both the buyer and
seller.
• Each materials acquisition must be translated into a
capacity requirement by the supplier.
• For example, suppose we have a scenario as shown
on the next slide
4-6

7. (Purchasing) (Purchasing) (Demand
management)
Information flows - - -
Physical flows 
4-7

8. Capacity Planning
• Say capacity is the potential to produce 50 assemblies an
hour. Although the short-term capacity may be higher,
effective capacity is a range of substantial output under
normal conditions, that is, a rate.
• A manufacturing plant is designed to produce 1,000 units of
product a day. Is it possible for the plant to operate at a rate
of 10, 50, or 120 units a day? There is a lower limit beyond
which it is not economical to run.
• At some point, management will decide to shut down rather
than produce indefinitely at a rate that does not generate
revenues to cover fixed and variable costs.
4-8

9. Capacity Planning
• The upper level of production is limited by the
process technology and/or the disposition of the
workforce.
• Can a plant manager exhort workers to produce, in
the short run, at very high levels of production to
satisfy a very important customer? Probably yes,
but not very often.
• Pushing the plant (equipment, people, and suppliers)
to produce at very high levels of output accelerates
wear and tear on machines and people. Machine
maintenance, quality, and morale suffer
4-9

10. Capacity and Inventory
• In general, inventory is stored capacity.
• If capacity is insufficient to satisfy peak demand for a
product with seasonal sales, finished goods inventory
can be accumulated during periods of low demand.
4-10

11. Throughput Time
• The delay between receipt of raw materials and the
availability of the finished goods produced from them is
throughput time (TPT). The concept applies also to single
components of the supply chain; for example, we speak of the
TPT for the plant or distribution center.
• For the whole system, TPT should be as short as possible.
Consumers prefer to obtain goods or services in the shortest
possible time. If TPTs are long, it is more likely that the
customer’s requirements will change
• The longer an order for material stays in the plant, the larger
the work-in-process inventory will be, the larger the storage
area required, and the more likely the material will be
damaged, lost, or stolen
4-11

12. Order Cycle
• The order cycle is both a link and a set of activities. As a
link, the order cycle facilitates the flow of information and
materials
4-12

13. Pipeline
The pipeline is the means by which
various resources flow
1. Information (orders, billings, inquiries)
2. Material
3. Money (credit)
4. Title
4-13

14. Integrated Materials System
• It is not necessary that all resource flows between
components occur at the same time or in the same
manner.
• This idea is called channel separation and is useful
when designing supply-distribution systems. It really
isn’t accurate to say that components are joined by a
single link.
4-14

15. Integrated Materials System
• The order cycle has some important characteristics. First,
an order cycle has “length.” The distance between
supplier and customer determines, in part, how long it
takes to transmit data and transport materials
• A customer may elect to have an order moved by
various transportation technologies (modes):
1. Air
2. Rail
3. Truck
4. Water
5. Pipeline
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16. Speed, Reliability, Inventory,
and Cost Tradeoff
Customer orders also may be transmitted by
alternative technologies:
1. Telephone
2. Postal service
3. Internet
4. Fax
5. EDI
The prices of these modes vary; although more rapid
service usually implies a higher price, technologies
such as the Internet have somewhat changed that
paradigm.
4-16

17. Speed, Reliability, Inventory,
and Cost Tradeoff
• The more rapid, the higher the price. The trade-
off considerations are similar to those for
transportation.
• The shorter the order cycle, the quicker the
customer is served and the less inventory the
customer needs
4-17

18. Order Cycle—Activities
• The order cycle is not only a link, but a set of activities.
The principal activities and the locus of responsibility
are
_______________________________
Activity Responsibility
Order preparation Customer
Order transmission Customer
Order processing Supplier
Order transportation Supplier
Order receipt Customer
4-18

19. • Each activity is in turn a bundle of tasks.
For example, the receipt of materials by
the customer involves
1. Physical receipt
2. Unloading
3. Inspection
4. Storage location decision
5. Move to storage
6. Documentation
4-19

20. Lead Time
• If we represent the order cycle as a set of activities,
we can identify an important property of the order
cycle—lead time.
• Some may argue that lead time begins when the
order is transmitted.
• We'll go a step earlier include order preparation,
which begins when the need for material is
recognized.
4-20

21. Customer Satisfaction
• The managers of integrated materials systems have
two objectives:
• Customer satisfaction
• Minimum total materials costs
4-21

22. Material Availability
• Two cases must be distinguished. If a firm makes
products to order, customer service is measured by the
degree to which products are completed and shipped
as promised.
4-22

23. Material Availability
• Conceivably, an order may be rescheduled at the
request of the customer, in which case the revised
date is used to determine whether the order was
shipped on time, early, or late
• Many make-to-order (MTO) firms faithfully calculate
the ratio of on-time to total shipments.
• When customer service is measured this way, we
speak of a firm’s delivery performance
4-23

24. Service Level
• High delivery performance may only indicate
scheduling inflexibility on the part of the supplier.
• The second case is the firm that produces standard
products in anticipation of demand for them—a
make-to-stock (MTS) firm.
4-24

25. Service Level
• If all customer orders are processed without delay, the
level of service is 100 percent. Service level (SL) for an
MTS firm is the ratio
SL = (Orders shipped/Orders received) × 100
Unfilled orders are processed in one of three ways:
1. Backorder
2. Substitution
3. Cancellation
4-25

26. On-Time Shipment On-Time Receipt
• This element of customer • Customers place orders
service is a variation on the based on need dates. The
notion of availability. On-time more imminent the
shipment has to do with the calendar date, the more
delivery promises made, and urgently material is
the ratio of orders shipped as needed.
promised to total orders. • To say an item is needed
• If an order is shipped on time, on the 10th of the month
it is presumed that the means that, if the item is
customer is well served. not actually in hand on
Realistically, customers are that date, dire
more concerned about when consequences ensue.
the materials are received. • Sometimes the need date
is called the “drop dead
date.”
4-26

27. Complete Shipment Quality of Receipt
• Orders commonly call for • The quality of material can
numerous items, deteriorate between the
sometimes in matched time it leaves the
sets. production floor and the
• A manufacturer of office time it arrives at the
furniture receives orders customer’s storeroom.
for matched desks, chairs,
tables, and file cabinets. Packaging, loading,
• An order probably transport, and unloading
contains the requirements can all take a toll.
to furnish one particular • Although damages can be
office. The customer claimed, materials
expects to receive all received in poor condition
items at the same time. are unsuitable for
processing.
4-27

28. Flexibility Responsiveness to
Inquiry
• Flexibility is the extent to • Customers want assurances
which a supplier can that their orders are on
accommodate a customer’s schedule, especially as the
requests. Perhaps the request shipping date nears.
is for special processing,
packaging, or shipment. • This element of customer
service is the timeliness and
• The name of the game, accuracy of the information
whatever the firm’s a supplier provides a
classification, is customer customer.
satisfaction.
• Suppliers who can’t locate
• Note that the costs of these an order on the shop floor,
extras are borne by the or in the warehouse, or
customer. The question is not who answer all inquires
who pays, but the willingness with, “It just went out on
and ability of suppliers to cost- the truck,” inspire little
effectively perform confidence.
nonstandard tasks for the
customer.
4-28

29. Customer Satisfaction—
The Balance
• To summarize, customers want
1. Short lead time
2. Good quality
3. High value
4. Customized products
5. Post-sale service
• The cost of satisfying a customer’s delivery time
needs may not be entirely known, but we can
argue that none of these elements of customer
satisfaction are realized without cost.
4-29

30. Customer Satisfaction—
The Balance
• If poor quality is produced, goes undetected, and is shipped,
the costs to both supplier and customer are substantial.
• There are direct and measurable costs associated with poor
quality.
• Yet the more important and difficult-to-measure costs are
those associated with the damage to a supplier’s reputation,
the loss of a customer’s capacity, and the dissatisfaction if
the customer in the field vows never again to buy the
product.
4-30

31. Customer Satisfaction
• We could describe the costs of providing the other
elements of customer dissatisfaction similarly. The
balance that management seeks is between
1. Cost of customer satisfaction—A
2. Cost of dissatisfied customer—B
4-31

32. Quality
• We hear so much about quality that it may come as a surprise
that even experts don’t agree about how to achieve it. Fortune
recently asked the gurus of industrial quality to define it and to
assign responsibility for quality.
• To some, quality is a technical matter. It has to do with
engineering—both the process technology and product design.
• To others, quality is a statistical measure that utilizes sampling to
achieve process control and make certain that inferior quality
material isn’t shipped from the plant.
• There is a third view—that quality depends upon motivation. This
means making a slogan a rallying cry—“Zero Defects” or “Quality
is Free.”
4-32

33. Quality
• Quality is neither good nor bad until consumers cast
their ballots in the marketplace.
• Even though the technology of quality is steeped in
statistics and manufacturing engineering, materials
managers first need to consider quality as part of the
expectations of customers, whether intermediate or
final.
4-33

34. Quality
• Quality is a strategic decision. What should the
quality of a product or material be?
• How do we compete with off-shore manufacturers
who enjoy reputations for leadership in quality?
• What’s the quality level of domestic producers in our
industry?
• Top management must decide the quality level of
materials—high, low, or in between.
4-34

35. Quality
• Quality, in large part, is what people perceive it to
be.
• Once formed, perceptions about the quality of a
supplier’s materials are slow to change.
4-35

36. Quality
To qualitatively evaluate consumer products and
services, Consumers Union first identifies the
relevant characteristics of a product. It then tests
comparable products of various manufacturers and
classifies products as
• Best buy
• Acceptable
• Not acceptable
• “Best buy” implies a product with high value. Value,
in turn, is the ratio of quality and price.
• Value = Quality/Price
4-36

37. Lawn Mower Quality Example
• In a recent issue of Consumer Reports, low-price
lawn mowers were evaluated.
• The quality-defining product characteristics were
1. Evenness of cut
2. Dispersal of clippings
3. Freedom from clumping
4. Handling
4-37

38. The Owners View
• The quality-defining characteristics of products are
those that are important to the end user of the
product.
• Owners of lawn mowers are not primarily concerned
with detailed mechanical or electrical specifications.
They want a product that leaves a good-looking lawn
and provides relatively trouble-free operation.
• Owners look first at the way a product serves the
purpose for which it was acquired. The perceptions of
quality held by the consumer and the producer are
both important.
4-38

39. Specifications
• Design means setting the specifications for a material
or product.
• Specifications result in the functional and aesthetic
characteristics of the product.
• The job of the materials manager is to ensure that
products are made in the least-costly way so that the
item qualifies as a best buy.
4-39

40. The Quality Level
• The process technology and experience of a supplier limits the
range of quality possible. We wouldn’t expect a general
machine shop to produce high-quality integrated circuit chips.
• The design of a product must “be producible” given the process
capability of the supplier. Within that range, top management
sets the quality level—the degree to which the product
functionally satisfies customers.
4-40

41. Conformance to Specifications
• This is the degree to which material conforms to
specifications.
• If conformance is high, the company can claim that
product quality is high. Lawn mower specifications are
complex. Hundreds of parts are produced and
assembled.
• Each part has numerous dimensions and properties.
Surfaces of mating parts are finished to extremely small
tolerances to ensure proper assembly.
• Overall product specifications are fixed—engine size,
weight, blade length, and so forth.
4-41

42. Objective Quality
• Is it possible that objectively a product is high quality
but subjectively low quality?
• Too often the answer is yes. High-quality products
must both
1. Conform closely to specifications.
2. Satisfy consumer expectations.
4-42

43. Can Quality Be Too High?
• Can a product’s quality be too high? Again, the answer is
yes, but in this case we mean that objective quality can be
too high.
• Tolerances are closer than need be, finishes are smoother
than necessary—“the bottoms of the drawers are painted.”
• Customers have little difficulty accepting the product, but
it’s much better than it needs to be, and very few customers
would be willing to buy so high a quality item. It does in fact
cost more to produce a Rolex watch than to produce a
Timex.
4-43

44. Rolex Vs. Timex
• If accuracy, durability, and appearance are the
quality-defining properties of wristwatches,
the Rolex should meet the customer
expectations better.
4-44

45. • We should now be able to understand that conformance
isn’t a sufficient test of quality. The design of the product
must be satisfactory. We also can understand why two
customers appraising the quality of the same item can have
very different opinions about its quality. In Figure 4.3 below
only one of four outcomes results in a high-quality product.
4-45

46. Specifying Materials
• Disagreements between supplier and customer
about quality often stem from misunderstandings
about material specifications.
• Suppliers frequently interpret specifications in ways
customers never intended. Qualified suppliers, given
identical specifications, may come to quite different
conclusions about what a customer wants.
• If one definition of quality is conformance to specs,
the specifications must be unambiguous. The
manner of specifying materials depends on the kinds
of material ordered.
4-46

47. Raw Materials
• These are semi-processed materials intended for
further processing—raw stock, crude oil, bituminous
coal, paperboard, paper, lumber, copper, wheat,
cotton, for example.
• The materials listed are called commodities. Their
specifications result from agreements on standards,
as, for example, the U.S. Department of Agriculture’s
specifications for meat and grains.
• By definition, commodities are homogeneous.
4-47

48. Specification Examples
• Even though specifications are known, judgment is still a
factor.
• For example, the beef buyer for a fast-food restaurant
chain may specify “USDA prime beef.” The grade, priori,
implies age, appearance, weight, and so on
• Recall the umpire calling balls and strikes. The strike
zone is defined for each player. It can be measured. But
once play begins, umpires rely on judgment to decide
the location of a ball traveling 90 miles an hour as it
passes in front of a batter.
4-48

49. Specification Examples
• Materials such as steel are specified by process (e.g.,
“hot rolled”), physical properties (hardness,
strength), and dimension.
• Note that while specs are unambiguous, the quality
of the material produced may fail to conform to the
specifications.
• It’s the same problem we discussed earlier—poor
execution of a good design.
4-49

50. Purchased Parts
• Purchased parts include semi finished items that will be
further processed and finished materials that will
become components of finished end items.
• The usual way of specifying purchased parts in a made-
to-order environment is with a graphic description, that
is, engineering drawings.
4-50

51. Purchased Parts
• Many parts can be purchased off the shelf. They are like
commodities in the sense that they are standardized. In
effect, they are made to stock according to specifications
established by an industry, professional association, or
independent testing organization.
• Many small mechanical parts, for example, fasteners, are
manufactured to standards established by the Society of
Automotive Engineers, SAE. The specifications for parts such
as fixtures and wire are concerned with the satisfaction of
safety standards.
• The buyer is assured that the part is safe to use in a particular
application and that its correct installation complies with
standards, for example, building construction.
4-51

52. Maintenance, Repair, and
Operating (MRO) Supplies
• MRO materials are quite diverse; they are
specified in various ways. The keys are quality
and uniqueness.
4-52

53. Maintenance
• These are items that we expect to periodically replace
in a piece of equipment. Over time, machine parts are
subject to wear and are replaced.
• The original equipment manufacturer expects to re
supply these parts during the life of the equipment.
• Maintenance also means the application or renewal of
materials such as lubricants and coolants. Periodic
maintenance (labor and materials) ensures longevity
and satisfactory machine operation
4-53

54. Repair
• The distinction between maintenance and repair materials is
not always clear. In theory, if good maintenance is practiced,
events requiring repair will occur infrequently.
• Repair suggests the unexpected, which means the need to
patch up or replace equipment components that we don’t
expect to fail. Usually the parts are not carried as inventory by
the equipment manufacturer.
• The more common event is repair of equipment failure in
which the services of skilled craftsman are more important
than specific materials.
4-54

55. Operating Supplies
• These supplies, also called “indirect materials,” become part of
the end item and are essential for its production, but their unit
value or size is too small to plan or control usage unit by unit.
• A good example is rivets used in airframe construction. Rivets are
“counted” by weighing them. Bins of rivets are located
throughout the plant and available to anyone on a “help
yourself” basis.
• Generally speaking, operating supplies are standard items and
are specified by manufacturer or industry codes. Nonstandard
items should be questioned by the purchasing manager.
4-55

56. Tooling
• There are two kinds of tooling with respect to their specifications.
• The first kind is standard tooling. Various holding devices,
partitioners, material cutting, and forming tools are standard with
respect to their size and capacity. As with standard materials,
tools are specified by the manufacturer’s part or model number,
or by an industry code.
• The second, nonstandard kinds of tooling require elaborate
specification. Tooling in this class is one of a kind and highly
engineered. It is a make-to-order item. Detailed drawings of the
tooling are necessary.
4-56

57. Tooling
• Whether the tooling is designed to position or hold
material during processing, or to modify or extend
the operation of processing equipment, the tooling
must be built to specifications; otherwise, the quality
of the material produced is unacceptable.
4-57