CHAPTER 4

CONTROLLING MATERIAL
FLOW

To synchronize all information and goods flows so that parts are at disposal at the
right time in the right place, in the desired quality and quantity.

DR. NGUYEN HANG GIANG ANH

 LEARNING OBJECTIVES
• Describe the hierarchical operations planning process in terms of materials
planning (APP, MPS, MRP).
• Understand the use of BOM, Inventory status and MRP computation.
• Describe the limitations of MRP systems, and why organizations are migrating
to integrated ERP systems.
• Understand JIT systems.
• Know how to achieve JIT operations – KANBANS.
• Understand what Lean and Six Sigma are in SCM.

2
 MAIN CONTENT

1. Material Requirements Planning (MRP)

2. Just In Time (JIT)

3. Lean and Six-Sigma

3
 1. MATERIAL
REQUIREMENTS
PLANNING (MRP)

4
 INTRODUCTION
❖ One drawback for planning logistics → slow to react to changing
conditions. Ex: If a customer urgently wants a delivery, we cannot tell
them to wait until we fit them in to the next planning cycle.

❖ Thus, planners need to take forecasts of demand for logistics, and then
plan the supply to meet this → But forecasts are often wrong.

❖ To solve these problems: Matching the supply of logistics to actual

demand rather than using unreliable forecasts.

→ Material Requirements Planning (MRP) uses the master schedule to

plan the supply of materials.

5
OPERATIONS PLANNING

6
 MRP COMPONENTS

❖ MRP comes from three main sources:

▪ Master production schedule, giving the number of every
product to be made in every period.
▪ Bill of materials, listing the materials needed for every
product.
▪ Inventory records, showing the materials available.

7
 INDEPENDENT VS. DEPENDENT DEMAND
• Independent Demand
o Final products: automobiles,
televisions, tables.
o Demand occurs at constant rate.
• Dependent Demand
o Raw materials, components, and
subassemblies.
o Demand occurs in lumps.

→ MRP is designed when lumps in demand are known.

8
 MASTER PRODUCTION SCHEDULE (MPS)
• Based on the Aggregate Production Plan (APP).
• Indicates When and How many exact end items will be produced.
• Example: The ATV Corporation makes three models: Model A, Model B, and Model C.
ATV’s MPS for January and February is as follows

9
 BILL OF MATERIALS (BOM)
• It is an ordered list of all the parts (i.e., raw materials, components, and
assemblies) needed to produce a product.
• Shows way a final product/parent item putting together from individual
components.
• Final product is at level zero. Subsequent levels are parent components, then
components.
• Production planners explode BOM for level zero item to determine the number,
due dates, and order dates of subcomponents.

10
PART OF A BOM FOR AN ATV

11
 INVENTORY RECORDS
❖ It shows the materials available with:
On-hand inventory: the inventory at the end of the period.
On-hand inventory (period 𝒕) = Max{0, On-hand inventory (period 𝒕 − 𝟏)
+ Scheduled/Planned receipts (period 𝒕)
– Gross requirement (period 𝒕)}

where:
o Scheduled/Planned receipts: a committed order awaiting delivery for a specific period.
o Gross requirement: a time-phased requirement prior to considering on-hand inventory and lead
time to obtain the product.

Gross requirement (period 𝒕) = Customer demand (period 𝒕) + Backlog (period 𝒕 − 𝟏)

❖ MRP system use inventory records to determine the quantity available for use in
a given period.

12
 MRP COMPUTATION
❖ To compute a dependent demand, it requires:
o independent demand information (the demand of the final product) from the
MPS.
o parent–component relationships from the BOM.
o inventory records of the final product and all of its components.
❖ Based on the information, the net requirements of the final product and
components are computed as follows:
Net requirements (period 𝒕) = Gross requirements (period 𝒕)
– On-hand invnetory (period 𝒕 − 𝟏)
– Scheduled/Planned receipts (periods  𝒕)

❖ The net requirements are offset with appropriate lead times to ensure orders
are released on time, called planned order releases, the most important
output of the MRP.

13
 MRP COMPUTATION PROCEDURE
Step 1: Use the MPS to find the Gross requirements for all time periods of level 0 items.

Step 2: Compute the On-hand inventory, Net requirement (materials needed to order),
and Planned order receipt for level 0 items. If there is a Planned order receipt, use
the Lead time and any other relevant information to offset Planned order release.

Step 3: Take the next level. Use the BOM to translate the Net requirements from the
previous level into Gross requirements for this level.

Step 4: Take each material in turn and compute On-hand inventory, Net requirement, and
Planned order receipt for the level. Then if there are more levels of materials, go
back to step 3.

Step 5: Finalise the timetable, adding any specific adjustments.

14
EXAMPLE OF MRP
COMPUTATION

15
A CLOSE-LOOP MRP
SYSTEM

16
 BENEFITS OF MRP
• Higher inventory turnover.
• Better customer service – limit delays caused by shortages of materials.
• More reliable and faster delivery times.
• Less time spent on expediting and emergency orders.
• Ability to track material requirements.
• Ability to evaluate capacity requirements.
• Ability to plan other logistics activities.
• Availability of production information providing visibility for schedulers to plan ahead.

17
 ISSUES OF MRP
• Reduces the flexibility to deal with changes.
• Needs a lot of detailed and reliable information.
• Becomes very complex.
• Does not recognize capacity and other constraints.
• Be expensive and time consuming to implement.
• Risks: quantity and lead time.
• Capacity limit.

18
ENTERPRISE RESOURCE PLANNING SYSTEMS
• By the end of the 20th century, the
global business environment has
changed.
• Additional tasks are required and the
existing MRP systems could not handle
these added tasks.
• To deal with the tasks, ERP systems
that operated from a single, centralized
database were engineered to replace
the existing MRP systems.

19
2. JUST IN TIME
(JIT)

21
 PRINCIPLES OF JUST-IN-TIME
• Just-in-time (JIT) systems organize materials to arrive just as they are needed.
• By coordinating supply and demand, they eliminate stocks/inventory of raw materials
and work in progress.
• JIT’s view of stock:
o Stocks are held to cover short-term mismatches between supply and demand.
o These stocks serve no useful purpose – they only exist because poor co-ordination
does not match the supply of materials to the demand.
o To improve operations, the reasons for differences between supply and demand are
needed to be found, and the differences are needed to be solved 🡪 No stock is
needed at all

22
INVENTORY HIDES PROBLEMS

23
STOCK LEVELS
WITH
DIFFERENT
TYPES OF
CONTROL

24
 WIDER EFFECTS OF JIT
• Quality: Organizations have defined some arbitrary level of acceptable quality.

o JIT recognizes that all defects have costs 🡪 find the cause and make sure that no
defects are produced 🡪 support the total quality management.

• Suppliers: JIT relies totally on its suppliers 🡪 supports the view of customers and
suppliers working closely together in long-term partnerships.

• Batch size: Operations use large batch sizes to reduce set-up costs and disruptions.

o But if demand is low 🡪 the products made in large batches sit in stock for a long time.

o JIT looks for ways of reducing the batch size so that it more closely matches demand.

25
 WIDER EFFECTS OF JIT
• Lead times: Long lead times → high stocks to cover uncertainty until the next delivery.
o JIT aims for small, frequent deliveries with short lead times.

• Reliability: JIT bases on continuous, uninterrupted production → all operations must be reliable.
o If equipment breaks down → managers must find the reasons and make sure it does not
happen again.

• Employees: organizations still have a friction between ‘managers’ and ‘workers’.

o JIT argues that the welfare of everyone depends on the success of the organization → all
employees should be treated fairly and equitably.

→ JIT is not just a way of minimizing stocks. By coordinating all activities, it increases efficiency
and eliminates waste.

26
 ACHIEVING JUST-IN-TIME OPERATIONS
• Push and pull systems

• Kanbans

• Benefits and disadvantages of JIT

27
 PUSH AND PULL SYSTEMS
• In a traditional process,
o each operation has a timetable of work that must be finished in a given time.
o Finished items are then ‘pushed’ through to form a stock of work in progress in front of the next
operation 🡪 this ignores what the next operation is actually doing.
o The result is delays and increased stock of work in progress.
• JIT uses another approach to ‘Pull’ work through the process.
o When one operation finishes work on a unit 🡪 it passes a message back to the preceding
operation to say that it needs another unit to work on.
o The preceding operation only passes materials forward when it gets this request.
o This process does not have earlier operations pushing work through, but has a later operation
pulling it through.
 KANBANS (看板) (1/2)
• JIT needs ways of organizing the flow of materials pulled through the process.
• The simplest system moves materials between two stages in containers.
o When the second stage needs some materials, it simply passes the empty
container back to the previous stage as a signal to fill it.
 KANBANS (看板) (2/2)
KANBANS are cards that control the flow of materials through JIT operations.
o Kanban is the Japanese for a card, or some form of visible record.
o They arrange the ‘pull’ of materials through a process.
o There are several ways of using Kanbans. The most common system uses two types of card:
▪ Production Kanban,
▪ Conveyance/Movement Kanban.

30
 Example: Kanban Cards
Production Kanban: Production Kanban card
signals the need to
produce more parts.

Conveyance Kanban: Conveyance Kanban card

signals the need to
withdraw parts from one
work center and deliver
them to the next work
center.
EXAMPLE:
CONVEYANCE KANBAN CARD

Part number to produce: M471-36 Part description: Valve Housing

Lot size needed: 40 Container type: RED Crate

Card number: 2 of 5 Retrieval storage location: NW53D

From work center: 22 To work center: 35

EXAMPLE:
PRODUCTION KANBAN CARD
Part number to produce: M471-36 Part description: Valve Housing

Lot size needed: 40 Container type: RED crate

Card number: 4 of 5 Completed storage location: NW53D

From work center: 22 To work center: 35

Materials required:
Material no. 744B Storage location: NW48C
Part no. B238-5 Storage location: NW47B
 SINGLE-CARD KANBAN SYSTEM (1/8)
• Each container must have a card.
• Assembly always withdraws from fabrication (Pull system).
• Containers cannot be moved without a Kanban.
• Containers should contain the same number of parts.
• Only good parts are passed along.
• Production should not exceed authorization.

35
SINGLE-CARD KANBAN SYSTEM (2/8)
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM (3/8)
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM (4/8)
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM (5/8)
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM (6/8)
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM (7/8)
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
SINGLE-CARD KANBAN SYSTEM (8/8)
Receiving post
Kanban card for Storage
product 1 area
Kanban card for
product 2

Empty containers

Assembly line 1

O2

Fabrication
cell
O1 O3
Assembly line 2

Full containers
O2
 ADVANTAGES OF JIT
• Lower stocks of raw materials and work in progress.
• Shorter lead times.
• Shorter time needed to make a product.
• Higher productivity.
• Higher equipment capacity and utilization.
• Less paperwork.
• Higher quality of materials and products.
• Less scrap and wastage.
• Better relations with suppliers.

43
 DISADVANTAGES OF JIT
• High risks of introducing completely new systems and operations.
• Initial investment and cost of implementation.
• Long time needed to get significant improvements.
• Reliance on perfect quality of materials from suppliers.
• Reduced flexibility to meet specific, or changing, customer demands.
• Difficulty of reducing set-up times and associated costs.
• Lack of commitment within the organization.
• Lack of co-operation and trust between employees.
• Need to change layout of facilities.

44
3. LEAN AND SIX-
SIGMA

45
 LEAN
• Lean has today replaced the use of the term JIT.
• Lean emphasizes the minimization of the amount of all the resources used in the
operations of a company.
• The principle of lean is the elimination of “waste”.
o by eliminating wastes of all sorts in the system,
o the lean approach lowers labor, materials, and energy costs of production.
• Lean also emphasizes building exactly the products customers want, exactly
when they need them.

46
 PRIMARY OBJECTIVES OF LEAN SYSTEMS
• Produce only the products that customers want.
• Produce products only as quickly as customers want to use them.
• Produce products with perfect quality.
• Produce in the minimum possible lead times.
• Produce with no waste of labor, materials, or equipment; designate a purpose for
every movement to leave zero idle inventory.
• Produce with methods that reinforce the occupational development of workers.

47
 SIX-SIGMA
• From statistics, the term “sigma” refers to
o standard deviation of values for the output of a process.
o an indicator of variability.
• The six-sigma approach is
o to achieve a process standard deviation that is six times smaller than the range of
outputs allowed by the product’s design specification.
o to design and improve products and processes so that variability is reduced 🡪 first
identifying sources of variability and then reducing them.
• Six Sigma (also Six Sigma Quality) is all about pleasing customers 🡪 A customer-
oriented definition of quality is the ability to satisfy customer expectations.

48
SIX-SIGMA METRIC

49
 COMPARING LEAN AND SIX-SIGMA
• Similarity of Six Sigma and Lean:
o For lean practices to be successful, purchased parts and assemblies, work-in-process,
and finished goods must all meet or exceed quality requirements.
o One of the elements of lean is continuous improvement and these are the areas where
the practice of Six-Sigma can be put to good use in a lean system.
• Difference between Six Sigma and Lean:
o Lean production is all about reducing waste, while
o Six-Sigma is all about solving problems and improving quality.
🡪 the two concepts can work together to achieve better overall firm performance.

50
 REFERENCES
• What is Just In Time (JIT):
https://www.youtube.com/watch?v=OXVi7dOF3jU
• How Toyota Changed The Way We Make Things:
https://www.youtube.com/watch?v=F5vtCRFRAK0
• What is Kanban? Kanban Explained with a Coffee Cup:
https://www.youtube.com/watch?v=Lib1vFmfCng&ab_channel=DevelopmentThatPays
• What is Lean Six Sigma:
https://www.youtube.com/watch?v=s2HCrhNVfak&ab_channel=Simplilearn

51