Jared Taylor has worked as a course materials manager, writer, editor and transcriptionist. He holds a master's degree in history.
In this lesson, we will use the concept of materials planning to find the information that you would need to complete a job or production process efficiently and profitably. You will learn about budgeting and inventory control.
It has started to rain and my roof is leaking! Can you take the repair job? Being a good manager, you will want to have all of the necessary materials available when you start working on the roof. Otherwise, you will have to climb down, drive to the store and back, then climb up on the roof again. Failure to plan properly will cost you time and money. For this job, your first steps will probably be to measure the roof area and calculate the amount of shingles, nails, and other materials that you will need.
You should buy enough materials to finish the job, but you also want to avoid having too much of anything. Excess materials will cost you money that you might not recover from the job. Next, you have to find a place to buy the required materials and arrange for delivery. Do you need any other items, such as ladders, a nail gun, or work gloves? How much will the materials cost, and how will you pay for everything? What we have just done is a basic example of materials planning or material requirements planning (MRP).
In our simple example, we only had to take a few measurements and check our existing equipment and supplies. However, if we tried to do materials planning for a large company, such as an auto manufacturer, it would be very complicated. We would probably use computer software called Enterprise Resource Planning (ERP) systems. For either a simple or a complex operation, the data gathering process and information sources are similar.
In any highly competitive market, manufacturers survive by operating efficiently. In the context of materials planning, efficiency involves minimizing inventories of materials, supplies, and finished products while maintaining sufficient quantities for planned production. It is also critically important that the customers receive their product on time. This means that all production, purchasing, and delivery activities must be accurately scheduled. Any unexpected delays or emergency orders to their suppliers will cost manufacturers time and money (just as it would on the roof repair). Let's take a closer look at the basic information requirements.
In general, the information flow within a company's materials planning process will be:
First, a business will need to forecast expected sales of each of its products during a given period. This information is called a sales budget. Some manufacturers work with annual budgets, and others prefer short-term budgets. Remember, this is a forecast made well in advance of the actual sale. Let's assume that we manufacture a candy bar called Yummy. The chart would go something like this:
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Now let's look at the production budget. The production budget uses the sales budget to calculate the required production in each period. You should note that throughout the planning process we would be making decisions about inventory levels. Remember that excess inventories represent idle resources (wasted money). On the other hand, inventory shortages can cause production downtime and lost customers. It is extremely important that manufacturers closely monitor their inventory levels because any undetected errors or problems can be very expensive.
For our example, let's assume that the company likes to make 100 extra cases of Yummy (safety stock) each month to cover such things as unexpected sales and rodent-damaged cases. Sometimes these cases are used, and sometimes they are not. For simplicity, we are only looking at January, but the calculations for February and March would follow the same general model. Assuming 70 cases were on hand at the beginning of January, the production budget for January would be as follows:
Sales to customers
Plus ending inventory
Less beginning inventory
To be manufactured
After we know the production budget, the next step is to calculate the materials that we must acquire. The manufacturing company will have a record (bill of materials) for each product that shows each material component and how much of it goes into the final product. Imagine all of the parts that go into a new Mustang! For our example, assume that two pounds of SuperSugar are used for each case of Yummy, no beginning or ending inventories of SuperSugar are kept, and SuperSugar is purchased from an outside supplier. So for January, this would look like this:
Cases of Yummy to be manufactured
SuperSugar required for each case
Total SuperSugar to be purchased
At this point, we know how much SuperSugar to purchase. We can now schedule the actual purchase from the supplier, arrange timely deliveries, and schedule the appropriate payments to the suppliers. We can also ensure that we have cash on hand to pay the suppliers.
Materials planning involves concepts and procedures designed to create an efficient and cost effective workflow. Our goal in a manufacturing process should be to have all materials, supplies, and finished products available when we need them. Although inventory levels should be sufficient to meet our requirements, excess inventories are expensive to maintain and should be avoided. Inventory control, along with proper planning and accurate budgeting, can minimize overall production costs and maximize profits.
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