Chapter 6 Handling

6.5 Material Flow Management

6.5.1 Importance of Materials Management

Theimportance of materials management to the total logistics process cannot beoverstated. Although materials management does not directly interface with thefinal customer, the degree to which raw materials, component parts, andsubassemblies are made available to the production process ultimatelydetermines the availability of products to the customer. The decisions, good orbad, made in the materials management portion of the logistics process willhave a direct effect on the level of customer service offered, the ability ofthe firm to compete with other companies, and the level of sales and profitsachieved in the marketplace. Without efficient and effective management ofinbound materials flow, the manufacturing process cannot produce products atthe desired price and at the time they are required for distribution to thefirm’s customers. It is essential that the logistics executive understand therole of materials management and its impact on the company’s cost/service mix.

Materials management is typically comprisedof four basic activities:

·          Anticipatingmaterials requirements

·          Sourcingand obtaining materials

·          Introducingmaterials into the organization

·          Monitoringthe status of materials as a current asset.

The specific objectives of materialsmanagement will tie in very closely to the firm’s main objectives of achievingan acceptable level of profitability and/or return on investment, and to remaincompetitive in a marketplace characterized by increasing competition.

6.5.2 Aspects of Materials Management

Integral aspects of materials managementinclude purchasing and procurement,production control, inbound traffic and transportation, warehousing andstorage, MIS control, inventory planning and control, and salvage and scrap disposal.

(1) Purchasing and procurement

The acquisition of materials has long been animportant aspect of materials management and will continue to be in the future.The terms purchasing and procurement are often used interchangeably, althoughthey do differ in scope. Purchasing generally refers to the actual buying ofmaterials and those activities associated with the buying process. Procurementis broader in scope and includes purchasing, traffic, warehousing, andreceiving inbound materials.

(2) Production control

Production control is an activitytraditionally positioned under manufacturing, although a few firms place itunder logistics. Its position in the firm’s organizational chart is probablynot crucial, so long as both manufacturing and logistics have an input into theproduction control activity.

The role of production or manufacturing inthe logistics process is twofold. First, the production activity determines howmuch and what kinds of finished products are produced. This, in turn,influences when and how the products are distributed to the firm’s customers.Second, production directly determines the company’s need for raw materials,subassemblies, and component parts that are used in the manufacturing process.Therefore, it is axiomatic that production control decisions be jointly sharedby manufacturing and logistics.

(3) Inbound logistics

One of the most important activitiesadministered by materials management is the inbound traffic and transportationfunction. Like their counterparts who are responsible for finished goodsmovement, materials managers must be aware of the various transport modes andmodal combinations available to their companies, any regulations that mightaffect the transportation carriers their firm uses, the private versus for-hiredecision, leasing, evaluating mode/carrier performance, and the cost/servicetradeoffs involved in the inbound movement of product.

There are basically three major differencesbetween the administration of inbound transportation and outboundtransportation.

First,the market demand that generates the need for outbound movement is generallyconsidered to be uncertain and fluctuating. The demand that the materialsmanager is concerned with originates with the production activity and is muchmore predictable and stable. Therefore, transportation decisions made by thematerials manager are not subject to the same types of problems encountered byhis or her counterpart in the outbound traffic area.

Second,the materials manager is more likely to be concerned with bulk movements of rawmaterials or large shipments of parts and subassemblies. In addition, rawmaterials and parts have different handling and loss and/or damagecharacteristics, which will affect the entire mode/carrier selection andevaluation process.

Third,firms generally exercise less control over their inbound transportation becausepurchasing procedures tend to look at “total delivered cost.” A separateanalysis of inbound costs is not performed as often or in as much depth. Thus,significant cost savings are possible.

(4) Warehousing and storage

Firms must place raw materials, componentsparts, and subassemblies in storage until they need those items in themanufacturing process. Unlike the warehousing of finished goods, which oftenoccurs in the field, items awaiting use in the production process are usuallystored on-site, that is, at the point of manufacture; or else they aredelivered on an “as needed” basis by a Just-in-Time (JIT) supplier. If a JITdelivery system is utilized, the need for inbound warehousing is greatlyminimized or eliminated altogether. If not, and warehouses are used extensivelyfor the storage of inbound materials, the materials manager is usually muchmore concerned with warehousing and inventory costs because they account for alarger percentage of product value. Generally, finished goods are valuedsignificantly higher than goods-in-process, raw materials, parts, orsubassemblies. As a result, warehousing and storage costs are not as important,on a comparative basis, as they would be to the materials manager.

In addition, the warehousing requirements forraw materials and other items are usually quite different. For example, open oroutside storage is possible with many raw materials, such as iron ore, sand andgravel, coal, and other unprocessed materials. Also, damage and/or loss due toweather, spoilage, or theft is minimal with raw materials because of theirunprocessed state and/or low value per pound.

(5) Data and information systems

The materials manager needs direct access tothe firm’s information system in order to properly administer materials flowinto and within the organization. The types of information often needed by thematerials manager include demand forecasts for production, names of suppliersand supplier characteristics, pricing data, inventory levels, productionschedules, transportation routing and. scheduling data, and various otherfinancial and marketing facts. Additionally, materials management suppliesinput into the firm’s management information system. Data on inventory levelsfor materials, delivery schedules, pricing, forward buys, and supplier informationare examples of some of the inputs provided by materials management.

(6) Inventory planning and control

Inventory planning and control of rawmaterials, component parts, subassemblies, and goods-in-process are just asimportant as the management of finished goods inventory. Many of the concepts,such as ABC analysis, inventory carrying costs, and economic order quantity(EOQ), are directly applicable to materials management.

One aspect of inventory planning and controlthat requires further emphasis within the context of materials management isforecasting. Effective and efficient materials management requires three typesof forecasts:

Demand forecast. Investigation of the firm’sdemand for the item, to include current and projected demand, inventory status,and lead times. Also considered are competing demands, current and projected,by industry and end product use.

Supply forecast. Collection of data about currentproducers and suppliers, the aggregate current projected supply situation, andtechnological and political trends that might affect supply.

Price forecast. Based on information gatheredand analyzed about demand and supply.

(7) Materials disposal

One of the most important areas of materialsmanagement that a firm often overlooks or considers minor is the disposal ofscrap, surplus, recyclable, or obsolete materials. “Originally, disposal was ascarcely recognized incidental task. During the last few years, it has gainedsubstantial importance through several factors such as increased publicawareness of the environment and more stringent government legislation, butalso due to better recognition of the opportunities it offers in return.”