Managing Materials Flow

1. 1 Managing Materials Flow 13 May 2007 Kong Ming Siem mskong@oum.edu.my / mskong@mysoho.net

2. 2 Recap [Forecasting] What is forecasting? Predicting the future (through quantitative or qualitative methods) Why forecasting? (9) ? Customer satisfaction, manage shipping, schedule production efficiently, pricing & promotion management, informed pricing decisions ? Stock outs, safety stock requirements, product obsolescence costs Negotiate superior terms with suppliers

3. 3 Recap [Forecasting] Types of forecasting Demand-Supply-Price Forecasting Time Frames Short-Midrange-Long term Forecasting techniques General market info computer algorithms specific technique/approach

4. 4 Recap [TQM] �TQM integrates fundamental techniques, existing improvement efforts, and technical tools under a disciplined approach focused on continuous improvement.�

5. 5 Recap [Traditional Management vs TQM]

6. 6 Recap [Traditional Management vs TQM]

7. 7 Recap [TQM Approach] Stresses long-term benefits resulting from continuous improvements to systems, programs, products, and people.

8. 8 Recap [Reengineering & TQM] Deals with �starting with a clean state� Taking systems and processes, rethinking and redesigning to create significant improvements in quality, cost, speed and service.

9. 9 Administration & Control of Materials Flow

10. 10 Measuring the performance of Materials Flow Service level Supplier service levels Order cycle time Fill rate for each supplier Number of production delays cause by materials out of stock

11. 11 MMF Performance Measures Inventory An important aspect Considering the amount of slow-moving inventory Comparing actual inventory levels Turnover with targeted and historical levels

12. 12 MMF Performance Measures Price level Prices paid for materials Gains and losses resulting from forward buying A comparison of prices paid for major items over several time periods A comparison of actual prices paid for materials with targeted prices.

13. 13 MMF Performance Measures Quality control The number of products failures caused by defects in materials The percentage of materials rejected from each shipment from each supplier

14. 14 MMF Performance Measures Overall measure of performance Operating costs Management compare the actual budget consumed by materials management to the targeted budget determined at the beginning of the operating period.

15. 15 MMF Major operating reports Market & economic conditions and price performance Inventory investment changes Purchasing operations and effectiveness Operations affecting administration and financial activities (refer to Table 6-4)

16. 16 Kanban

17. 17 Kanban Also known as Toyota Production System (TPS), developed by Toyota 1950-1960 The philosophy is that parts and materials should be supplied at the very moment they are needed in the factory production process.

18. 18 Kanban Optimal strategy, from both a cost and service perspective Can apply to any manufacturing process involving repetitive operations

19. 19 Kanban Card Procedure (refer Textbook p202, Box 6-2)

20. 20 Just-in-Time (JIT) Extension of Kanban, by linking purchasing, manufacturing and logistics. Basically a philosophy of doing business.

21. 21 Just-in-Time (JIT) Primary goal To minimize inventories Improve product quality Maximize production efficiency Provide optimal customer service levels

22. 22 JIT [Harley-Davidson] (refer Textbook p198, Box 6-1)

23. 23 Just-in-Time Not every component can be handled by Kanban or JIT approaches, but the systems work very well for items that are used repetitively.

24. 24 Just-in-Time Successfully adopted JIT are companies in industries of:- Metal products Automobile manufacturing Electronics Food and beverage

25. 25 JIT benefits in 4 major areas Improved inventory turns Better customer service Decreased warehouse space Improved response time

26. 26 JIT also benefits�. Reduced distribution costs Lower transportation costs Improved quality of supplier products Reduced number of transportation carriers and suppliers

27. 27 JIT [Rank Xerox] Rank Xerox Manufacturing (Netherlands), largest Xerox company outside US. Produces and refurbished mid-volume copier equipment for distribution throughout the world. Implemented JIT ~1980s.

28. 28 JIT [Rank Xerox] Part of JIT program:- Installed an automated materials handling system and information processing system Production procedures were modified

29. 29 JIT [Rank Xerox] Result:- Supplier base 3000 ? 300 98% on-time inbound delivery, 70% materials arriving within an hour Warehouse stock 3-month ? � month supply Overall material costs reduce 40% Most inbound product inspection stations were eliminated because of higher-quality materials from suppliers.

30. 30 JIT [Rank Xerox] Result:- Reject levels for defective or inferior materials 17% ? 0.8% Positions for 40 repack people were eliminated because of standardized shipment-packaging criteria Inbound transportation costs were reduced 40% On-time inbound delivery performance improved 28%

31. 31 JIT � Problems Inherent problems fall into 3 categories: Production scheduling (plant) Supplier production schedules Supplier locations

32. 32 JIT � Problems 1 Leveling production schedule due to uneven demand, firms require higher levels of inventory. Items produced during slack periods (may not be demanded until later time) Finished goods inventory has higher value because of its form utility Greater financial risk resulting from product obsolescence, damage, or loss.

33. 33 JIT � Problems 1 Higher levels of inventory, coupled with a uniform production schedule, can be more advantageous than a fluctuating schedule with less inventory. When stockout costs are great because of production slowdowns or shutdowns, JIT may not be optimal system JIT reduces inventory levels to the point where there is little if any safety stock, and parts shortages can adversely affect production operations.

34. 34 JIT � Problems 2 JIT depends on supplier�s ability to provide parts in accordance with firm�s production schedule. Smaller, more frequent orders can result in higher ordering costs Must take into account when calculating any cost savings due to reduced inventory levels. Large number of small lot quantities produced, suppliers incur higher production and setup costs.

35. 35 JIT � Problems 3 Distance between firm and its suppliers increases, delivery times may become more erratic and less predictable Shipping costs increase as less-than-truckload (LTL) movements are made. Transit time variability can cause inventory stockouts that disrupt production scheduling Combined with higher delivery costs on a per unit basis, total costs may be greater than the saving in inventory carrying costs.

36. 36 JIT � Other problem areas Implementation Organizational resistance Lack of systems support Inability to define service levels Lack of planning Shift of inventory to suppliers (solution: cooperation & integration within & between companies)

37. 37 JIT � Implications for logistics executives Proper implementation of JIT Transportation becomes vital component of logistics under a JIT system Warehousing assumes the role of a consolidation facility instead of a storage facility

38. 38 JIT II (by Bose Corporations) Applies JIT concepts to purchasing function by having a representative of the supplier locate at the buying organization�s facility. Improves mutual understanding (between buyer and supplier) Reduce waste and redundancy of efforts Improves supplier responsiveness Creates a positive working environment

39. 39 MRP Systems Material Requirements Planning (MRP I) Manufacturing Resource Planning (MRP II)

40. 40 MRP I System Popular concept 1960s-1970s Components:- (from a managerial perspective) Computer system Manufacturing information system, building on inventory, production scheduling, and administering all inputs to productions Concept and philosophy of management.

41. 41 MRP I A computer-based production and inventory control system that attempts to minimize inventories while maintaining adequate materials for the production process

42. 42 MRP I � When to use MRP I systems are usually employed when 1 or more of following conditions exist: When usage (demand) of materials is discontinuous or highly unstable during a firm�s normal operating cycle (intermittent manufacturing or job shop operation as opposed to a continuous-processing or mass-production operation)

43. 43 MRP I � When to use When demand for materials depends directly on the production of other specific inventory items or finished products. When purchasing department and its suppliers & firm�s own manufacturing units, possess the flexibility to handle order placements or delivery releases on a weekly basis.

44. 44 MRP I � Advantages Improved business results (ie. Return on investment ROI, profits) improved manufacturing performance results Better manufacturing control More accurate and timely information Less inventory Time-phased ordering of materials Less material obsolescence Higher reliability More responsiveness to market demand Reduced production costs

45. 45 MRP I � Disadvantages Does not optimize materials acquisition costs Potential hazard of a production slowdown or shutdown that may arise because of factors such as unforeseen delivery problems and materials shortages The use of standardized software packages maybe difficult to accommodate within the unique operating situations of a given firm

46. 46 MRP II System From MRP I, with addition of financial, marketing, and purchasing aspects. Includes entire set of activities involved in planning and control of production operations.

47. 47 MRP II � Function Modules Consist of variety of functions of modules:- (figure 6-3) Production planning Resource requirements planning Mater production scheduling Materials requirements planning (MRP I) Shop floor control purchasing

48. 48 MRP II � advantages Inventory reductions of 1/4 to 1/3 Higher inventory turnover Improved consistency in on-time customer delivery Reduction in purchasing costs due to fewer expedited shipments Minimization of workforce overtime

49. 49 DRP Systems Distribution Requirements Planning (DRP I) Distribution Resource Planning (DRP II)

50. 50 DRP I �the application of MRP principles to the distribution environment, integrating the special needs of distribution�[it] is a dynamic model that looks at a time-phased plan of events that affect inventory.�

51. 51 DRP II �Distribution resource planning extends DRP I to include the planning of key resources in a distribution system-warehouse space, manpower levels, transport capacity (e.g., trucks, railcars) and financial flows.� Uses the needs of distribution to drive the master schedule, controlling the bill of materials, and materials requirements planning.