Introduction to Materials ManagementIntroduction to Materials ManagementChapter 1WealthWhat is it?Where does it come from?Adding valueDesigning the processManaging the processWealthNatural resourcesTransformationConversionManaging the processServicesOperating EnvironmentGovernmentregulationssafetyEconomyeffects demandshortages and surplusesCompetition is now globalreduced costs of transportationcommunications, reduced costs and increased speedOperating Environment continuedCustomers demandLower pricesImproved qualityReduced lead timeImproved pre-sale and after-sale serviceProduct and volume flexibilityQualityOrder Qualifiers:customer requirements for price, quality, delivery, etcOrder Winners:those characteristics that persuade customers to select a product or service“Todays order winners are tomorrows order qualifiers”Manufacturing StrategyFigure 1.1 Manufacturing strategy and lead timeEngineer-to-OrderManufacturer does not start until the order is receivedCustom designsUnique productsLong lead timeInventory purchased after order is receivedMake-to-OrderManufacturer does not start until the order is receivedOften uses standard componentsLittle design timeLead time is reducedInventory held as raw materialsAssemble-to-OrderManufacturer inventories standard componentsNo design time requiredAssembly only requiredShorter lead timeInventory held as standard componentsMake-to-StockManufacturer produces the goods in anticipation of customer demandLittle customer involvement with designShortest lead timeInventory held as finished goodsThe Supply Chain ConceptFigure 1.92 Supply-production-distribution systemThe Supply Chain ConceptIncludes all activities and processes to supply a product or service to the customerLinks many companiesHas a number of supplier/customer relationshipsMay contain intermediaries such as: wholesalers, warehouses and retailersHistorical PerspectiveIn the past there were well defined and rigid boundaries between organizationsJIT viewed suppliers as partnersmutual analysis for cost reductionmutual product designgreatly reduced inventoryimproved communications (internet, EDI)Growth of Supply Chain ConceptIntegrated systems (ERP) and the sharing of informationGlobal competition and supplyFlexible designs - reduced product life cyclesJIT approach to interorganizational relationsSubcontracting or outsourcing workCurrent Supply Chain ConceptManage the flow of materialsShare information through the internetTransfer funds electronicallyRecover, recycle or reuse materialsConflicts in Traditional SystemsCompany main objectives1. Best customer service2. Lowest production costs3. Lowest inventory investment4. Lowest distribution costsConflicts in Traditional SystemsFigure 1.3 Conflicting ObjectivesConflicts in Traditional SystemsMarketingProductionFinanceObjectiveHigh RevenueLow CostCash FlowImplicationsCustomer ServiceHighLowLowProduction DisruptionsManyFewFewInventoriesHighHighLowMaterials ManagementPlanning and controlling the flow of materialsObjectives:Maximize the use of the firms resourcesProvide the required level of customer serviceCompany ObjectivesIncome = Revenue - ExpenseNeed to increase income with:Best customer serviceLowest production costsLowest inventory investmentLowest distribution costs Materials Managementand ProfitsDirect laborDirect materialVaries with volume soldOverheadDoes not vary with volume soldMaterials Managementand Profits (continued)Dollars % of Sales Sales Revenue$1,000,000 10Cost of Goods SoldDirect Material$500,00050Direct Labour$200,00020Overhead$200,00020Total Cost of Goods Sold $900,000 90 Gross Profit $100,000 10Materials Managementand Profits (continued)Reduce Materials by 10% and Labor by 5%Dollars % of Sales Sales Revenue$1,000,000 10Cost of Goods SoldDirect Material$450,00045Direct Labour$190,00019Overhead$200,00020Total Cost of Goods Sold $840,000 84 Gross Profit $160,000 16Profit has increased 60%Materials Managementand Profits (continued)To get the same result (+ 60% profit) through SalesDollars % of Sales Sales Revenue$1,200,000 10Cost of Goods SoldDirect Material$600,00050Direct Labour$240,00020Overhead$200,00020Total Cost of Goods Sold$1,040,000 87 Gross Profit $160,000 13Sales must increase by 20%Manufacturing Planning and ControlPlanning and controlling the flow of materials through the manufacturing process through:Production PlanningImplementation and ControlInventory ManagementProdu