Movement of materials

CHAPTER 14 – MOVEMENT OF MATERIALS

AIMS OF THE CHAPTER
The last chapter discussed the structure of supply chains, and this chapter considers the flow of materials through these chains.  This flow does not just happen, but needs careful management.  The procedure for moving materials is triggered by procurement, which sends a message from one organisation backwards through the supply chain to a supplier.  The supplier’s response is to send materials forward.  When this is repeated along the chain, the result is a co-ordinated flow from initial suppliers through to final customers.  The problem, of course, is how to manage this flow.  There are frequent hiccoughs along the way, and the flow of materials is unlikely to be completely smooth.  The most common consequences of disruptions are either stocks of materials building up in the chain, or conversely shortages along it. 

The aim of the chapter is to discuss ways of controlling the movement of materials along a supply chain.  More specific aims are to:

• Describe the way that traditional planning gives a means of controlling movement in a supply chain

There must always be some mechanism for controlling the flow of materials through a supply chain.  The traditional approach uses planned operations, where managers design a detailed timetable for each activity in the chain.  By co-ordinating these timetables, managers control the flow of materials.  Requirements at each level are passed on through forecasts, probably based on historical requirements.  Effectively, managers see what materials their operations needed in the past, and then order materials likely to be needed in the future.  The orders are issued through the procurement function and give the triggers that initiate material flows.

• Appreciate the role and importance of procurement

Procurement is responsible for acquiring all the materials needed by operations.  It is easy to see why procurement is important, as it forms an essential link between adjacent organisations in a supply chain – and it gives the trigger that initiates and controls the flow of materials.  All operations need materials, so procurement is clearly an essential function in every organisation.  Not only is it essential, but it can affect broader performance.  If it is done badly, materials do not arrive, or the wrong materials are delivered, in the wrong quantities, at the wrong time, with poor quality, at too high price, low customer service, and so on. 

• Outline the activities involved in procurement

Procurement can be organised in many ways.  However, there are three main activities.  The first identifies the products wanted and features they must contain (the qualifying features).  The second identifies suppliers for the products (giving a short list of options).  Then the third compare offerings in the shortlist and choose the best (based on the order-winning features).  Each of these activities can be expanded into more details and, for example, the process to identify potential suppliers or compare alternative quotations can be long and complicated.  But these three steps still only identify the best combination of product and supplier, and more work is needed to actually make the orders.  Depending on the systems available, this can involve a sequence of routine jobs, starting with procedures for actually submitting orders and ending with payment for materials delivered. 

• Discuss the role of stock in supply chains

Stocks are supplies of materials that are held by operations until needed.  They are formed whenever materials are not used at the time they become available.  They bring the benefits of allowing for demand that are earlier or bigger than expected, allowing for deliveries that are delayed or too small, giving a buffer between adjacent parts of the supply chain, taking advantage of price discounts on large orders, allowing the purchases of materials before an expected price rise, allowing the purchase of materials that are going out of production or difficult to find, making full loads and reduce transport costs, and giving cover for emergencies.

• Understand the traditional approach to controlling stocks with dependent demand

Managers have to answer three basic questions for inventory management –what items to stock, when to place orders, and how much to order.  The traditional answers to these questions came from independent demand approaches.  These built a model of the system, substituted figures for costs and forecasts demand, and calculated optimal order quantities and timing.  The classic example of this type defines an economic order quantity.  These methods are still widely used and they give useful results in a wide variety of applications.

• Describe the distinctive approach of material requirements planning

Material requirements planning uses a master schedule, along with other relevant information, to plan the supply of materials.  Its distinctive approach is that it finds demand directly from production plans by ‘exploding’ a master schedule using a bill of materials.  This shows the gross amounts of materials needed, along with the timings.  If there are already some stocks or expected deliveries, these can be subtracted to give net requirements.  Then information about lead times and other relevant details shows when to place orders.  This basic approach can be extended in many ways, up to ERP.

• Discuss the features of just-in-time operations

Just-in-time organises all activities to occur at exactly the time they are needed.  It does not do operations too early (which would leave materials hanging around until they were actually needed) and it does not do them too late (which would give poor customer service) – but at exactly the right time.  This seems obvious and easy to introduce, but JIT is neither of these.  It was introduced as a way of reducing stock by pulling materials through the supply chain, but has now grown into a broad management philosophy which its supporters describe as ‘a way of eliminating waste’, or ‘a way of enforced problem solving’.  In this wider sense, JIT sees an organisation as having a series of problems that hinder efficient operations.  These problems are often hidden, but managers should remove all buffers like stock, identify the underlying problems, and solve them. 

• Appreciate the role of transport  in a supply chain

Transport is responsible for the physical movement of materials through the supply chain.  Perhaps the main decision here is either to use private transport or third party carriers.  The general trend is toward third party carriers, as part of the movement towards outsourced logistics and other non-core functions.

DISCUSSION QUESTIONS

• How can the flow of materials be controlled in a supply chain?

This is the major question of the chapter.  There must always be some mechanism for controlling the flow of materials, and the chapter described the two main approaches.  The traditional approach uses a hierarchy of planned operations – with managers moving progressively through capacity plans, aggregate plans, master schedules and short-term schedules to design a detailed timetable for each activity in the chain.  By co-ordinating the most detailed level of timetables, managers control the flow of materials.  The basic ‘push’ approach relies on forecasts to define the requirements for materials.  An alternative approach of MRP replaces the forecasts by known demand found by exploding a master schedule.  This links all requirements back to broad production plans and shows exactly when materials are needed.  JIT gives a fundamentally different approach, where messages for demand are passed backwards, puling materials through a supply chain when they are needed.  

• Why is procurement considered a strategic issue, when it is clearly a routine administrative job?

Until recently procurement has been considered a routine job – production managers decide what they want and when they want it, then procurement people go through the routine procedures for buying it.  But now people recognise the importance of procurement.  It forms an essential link between adjacent organisations in a supply chain and it gives the mechanism for co-ordinating the flow of materials.  As well as being essential, procurement can affect broader performance.  If it is done badly, materials do not arrive, or the wrong materials are delivered, in the wrong quantities, at the wrong time, with poor quality, at too high price, low customer service, and so on.  This lower performance has a long term effect on an organisation’s ability to achieve its goals, and even survive.

• What are the benefits of using e-procurement?  How will this affect wider operations? 

Potential benefits include instant access at any time to suppliers anywhere in the world, a transparent market where products and terms are readily available, opportunity to buy directly from manufacturers or earlier tiers of suppliers, increasing number of specialised Web retailers, automated procurement  using standard EDI procedures, greatly reducing the time needed for transactions, lower costs (typically 12-15 percent), outsourcing some procurement activities to suppliers or third parties, and integrating seamlessly with suppliers’ information systems.  In contrast to these benefits there are relatively few disadvantages, apart from concerns over security.

There can be no significant effects on broader operations (beyond the benefits listed) – or e-procurement might open opportunities for more e-business, and even moving towards a virtual organisation.

• MRP was developed to plan the supply of parts at manufacturers, so it cannot really be used in other types of organisation.  Do you think this is true? 

No.  MRP certainly originated as a way of co-ordinating the movement of materials in manufacturing, but it has now moved into many other types of operations.  Provided the basic information is available, MRP can be used any type of process, perhaps with some adjustment for specific conditions.  However, it does depend on a master schedule and this is most likely to exist in a manufacturer.

• MRP II seems a good idea in theory, but the systems would be so unwieldy that they could never work properly.  Even if they did work, operations would be too inflexible to cope with agile competitors.  What do you think of this view? 

There is a lot of truth in this view.  Many organisations report very efficient operations with MRP II, but there can be serious practical difficulties.  The main one is the complexity of the systems needed to integrate all functions and activities.  As they struggle to get schedules that everyone accepts as being good and workable, many people ask if the rewards from such close integration are worth the effort of achieving them.  And MRP II is so inflexible that the whole organisation becomes cumbersome, unwieldy, and slow to respond to changing conditions.  Because of these difficulties, even organisations that have moved towards MRP II, have tended to stop short of complete systems.  Extending the ideas along the supply chain to ERP introduces another level of complexity.

• If you were in hospital and needing a blood transfusion, would you rather the transfusion service used a traditional system of holding stocks of blood, or a just-in-time system?  What does your answer tell you about JIT in other organisations?

Most of us would prefer to see a bottle of blood sitting on the shelf before our operation started, rather than have assurances that one would arrive just before we need it.  This highlights the fact that JIT can bring considerable benefits – but it also increases risk in the supply chain; conversely methods based on higher stock levels have higher costs, but correspondingly lower risks.  Managers have to find the best balance between risk and costs.  If they can guarantee that the supply chain will always work efficiently without problems, there is little risk and they can use JIT; if there is a possibility of disruption, it is worth holding some stock.

• What are the most significant changes that JIT brings to the operations in an organisation? 

JIT was introduced as a way of reducing stock, but – like TQM – it has grown into a management philosophy.  This involves a change in the way that managers view their operations, which its supporters describe as ‘a way of eliminating waste’, or ‘a way of enforced problem solving’.  In this wider sense, JIT sees an organisation as having a series of problems that hinder efficient operations.  These problems are often hidden, but managers should remove all buffers like stock, identify the underlying problems, and solve them.  So the most significant change that JIT brings is probably a culture of identifying and eliminating waste – perhaps summarised as lean operations.  This gives more immediate effects illustrated by the elimination of stock, introduction ot TQM, partnerships with suppliers, partnerships with employees, smaller batch sizes, shorter lead times, more reliable operations, and so on. 

• What are the problems of using ECR?  How can these problems be overcome?

Some specific problems identified by JIT users include the high risks of introducing completely new systems and operations, high initial investment and cost of implementation, long time needed to get significant improvements, inability of suppliers to adapt to JIT requirements and methods, need for stable production when demand is highly variable or seasonal, reduced flexibility to meet changing customer demands, assumption of standardisation and lack of customisation, difficulty of reducing set-up times, lack of co-operation and trust within the organisation, problems linking JIT to other information systems such as accounts, and increased stress in workforce and inability of people to accept devolved responsibilities.  ECR is an extension to JIT, so it starts with these problems – but they are made much worse by the need to co-ordinate activities across different organisations that have different aims, types of operations, systems, culture, and so on.  The way to overcome such problems is for organisations to work very closely together, developing the theme of strategic alliances. 

• Outsourcing passes a problem to another organisation that is less familiar with the context and is not ultimately responsible for the results.  And there is no inherent reason why third parties can give better or cheaper results.  So why would organisations use outsourcing?

This can be true.  Outsourcing is often seen as a way of passing a problem to somebody else, and this is simply avoiding responsibility for a difficult job.  Certainly a third party cannot know as much about an organisation’s operations as its own managers – but they might know more about the function being outsourced.  Most people see outsourcing as a way of using specialised knowledge and facilities.  The benefits include lower fixed costs with customers only paying for services they use, specialist suppliers who have expertise and use the best systems and practices, suppliers can combine work from several customers to get economies of scale, guaranteed levels of customer service, flexible capacity to deal with peaks and troughs in demand, lower exposure to risk from varying demand, increased geographical cover and local knowledge, and a convenient way of entering new markets.

IDEAS IN PRACTICE
Capital Air Service
Aim: to illustrate different levels of plans in a company

This case mentions some of the plans made at different levels – capacity, aggregate, master, and short-term – and the way these fit together.  This seems a traditional approach, with some elements of MRP.

Nautilus Software
 Aim: to suggest the scale of cost savings from using e-procurement

Years ago, supermarkets started linking the cash registers at their check-outs to their suppliers, and automatically sending orders to replace goods that were sold.  Such systems are now widespread.  This case shows the cost reductions that were achieved in one organisation.  It also gives an idea of the costs for each activity in routine purchasing.

Semple Retail
Aim: to illustrate some standard calculations for independent demand methods

This case outlines some results when one company looked at a traditional independent demand model for one of its products.  Managers in Semple Retail estimated reorder and holding costs and used these to define an economic order quantity.  When the size of order is fixed, this shows the frequency of orders, average stock level, costs, and other features of the system.  The calculation of EOQ is based on a series of assumptions, and adjustments are often needed to allow for real conditions.  These calculations are then repeated for all items held.

SAP AG  
Aim: to show the scale of activities in a large supplier or MRP systems

SAP is probably the world’s largest supplier of MRP based systems.  It is best known for its ERP systems, with 20,000 installed around the world.  Despite major practical difficulties with implementation, ERP systems are increasingly popular and the world demand is continuing to rise.

Christian Salvesen
Aim: to illustrate operations in a major transport company

Most people imagine transport companies as just driving lorries between warehouses.  As Christian Salvesen illustrate, major companies provide a complete logistics service, including transport, warehousing, inventory control, transhipment, information processing, and any other required service.

CASE STUDY – OUTSOURCING
This case introduces the idea of outsourcing.  The principle behind outsourcing is that non-core activities are passed to specialised third parties who have expertise and experience in the area, and this leaves the organisation free to concentrate on its core activities.  Critics of outsourcing say that weak managers use it as a way of avoiding their responsibilities and passing on a problem to someone else, who may not be in the best position to solve it. 

For many years there has been a continuing growth in the number of organisations using outsourcing, and the functions they outsource.  Transport is a traditional area for outsourcing, and this is now being linked to other aspects of logistics. 

• Why do companies use outsourcing, and what benefits can they expect?

The benefits from outsourcing include lower fixed costs with customers only paying for services they use, specialist suppliers who have expertise and use the best systems and practices, suppliers can combine work from several customers to get economies of scale, guaranteed high, and agreed, levels of customer service, flexible capacity deals effectively with peaks and troughs in demand, lower exposure to risk from varying demand, increased geographical cover and local knowledge, and a convenient way of entering new markets

• What activities are outsourced now, and which are likely to be outsourced in the future?

All organisations routinely use outsourcing of non-core functions.  They use postal services to deliver mail, telephone companies to organise communications, caterers to provide meals, accountants to audit their books, and so on.  Over time, organisations have become more willing to outsource more central functions.  Logistics is prominent here, with most companies using third party suppliers, particularly for transport and warehouse.  Other activities that are routinely outsourced include legal services, printing, security and advertising.  The trend is to move ever closer to the core activities, outsourcing research, product design, information processing, IT services, pension funding, public relations, accounting and human resources.  This is collectively known as ‘business process outsourcing’.  Of course, there is no reason why organisations could not go even further and outsource all of their operations, becoming virtual organisations.  Here a shell company co-ordinates the activities of third party suppliers who actually do all the operations. 

• The British government’s record of outsourcing IT development has been very poor, with most systems seeming to be expensive and work badly.  What can the do about this?

Although most organisations have good experiences with outsourcing, some have very poor experiences.  The British government – along with most other governments – has a history of major IT projects that have hit serious problems, typically not working properly and costing many times the initial estimates.  There are many reasons for this.  The systems themselves are very large and complex (far more demanding than systems set-up for individual companies), they are unique (so few lessons can be learnt from other projects), they have to meet competing demands from different users, work within the government bureaucracy, have a lot of publicity, are prone to political pressures, have requirements that can change rapidly, and so on.  Despite these major problems, their own lack of expertise and resources in the area mean that the government has no option but to outsource major projects.  Whether their experience has been a success or failure is open to debate.  Most people feel that a lot of work could have been done better.  Whether this is the fault of the government or third party suppliers is also open to debate – though the government runs the projects and clearly has overall responsibility.  And, not surprisingly, the way to avoid more problems is also open to debate – with options ranging from changing the third party suppliers to changing the government.