Module Overview

By now, you must be aware of the role played by the four levels that anchor a good supply
chain strategy. This includes strategic business planning, design structure, operations
strategy, and process execution management. The stage of process execution management
illustrates the entire value stream and order fulfillment. Process execution management starts
with acquiring or supply management and moves on to converting or production
management. Post that it proceeds to delivering our logistics management, then supporting
our service management, and finally ends with committing order fulfillment in the first two
stages, that is, acquiring or supply management and converting or production management.
Sourcing and managing materials and the production process play a crucial role in moving
process execution to the third stage of delivering the finished products to the customers. The
process of acquiring or sourcing, as it is commonly known, refers to ensuring that the
materials needed to produce goods are available to the relevant stakeholders. Think of
acquiring and converting as being analogous to making your dinner. To eat dinner, you need
to perform two key actions acquire or buy the ingredients needed to make dinner, such as
vegetables, bread, spices, condiments, and more. Convert or make the ingredients into a
healthy meal. This involves topping vegetables, toasting bread, marinating chicken, and
similar tasks.

Keeping that analogy in mind, let's now take a look at what this module and the sessions
entail.

Global Sourcing and Procurement

Consider the example of an automobile company. An average car has 30,000 parts. Needless to say,
different materials are involved in the automotive manufacturing process. One major material is
rubber, which is used to make tires. If a company decides to make tires in a house, it will definitely
have control over their quality, but is likely to incur quite a lot of expenses in the process. As a result,
automobile companies buy tires from brands like MRF or Ceat instead of manufacturing them in
house. Brands such as MRF and Ceat have built this expertise by supplying not only to a single
company, but to multiple manufacturers, capitalizing on the concept of economics of scale. Another
example of a product for which components are sourced internationally is Apple's iPhone. The
iPhone is assembled in China, and various components are sourced from suppliers located in
countries such as Japan, South Korea, Taiwan and the United States. For example, the processor in
an iPhone is supplied by companies such as Samsung and Taiwan Semiconductor Manufacturing
Company, which are based in South Korea and Taiwan, respectively. The displays used in the iPhone
are supplied by companies such as Japan Display and LG Display, which are based in Japan and South
Korea. The other components, such as the batteries, cameras, and memory chips, are sourced from
suppliers and countries around the world. Decisions like make first buy or global verse local sourcing
are common in supply chain management. If we take the standard definition, sourcing is a process of
assessing, selecting, and managing suppliers to acquire the desired goods and services from them.
Along similar lines, strategic sourcing refers to adopting various sourcing strategies and models to
minimize risk and cost while increasing the purchase value of the source goods and services. Now,
what are the essential stages in an effective sourcing and procurement process? Let's do an in depth
analysis of all the stages. The first stage is purchase requisition. In this stage, a company identifies its
requirements. Consider an automobile company sourcing its tires. The company will decide if it
requires the tires to be procured from a single supplier or a group of suppliers. It will also consider
the material quality, length, width, and breadth of the tires that are to be outsourced. All these
requirements are shared in a document known as the Purchase requisition, or PR. A purchase
requisition document contains the necessary information concerning not only the technical details
of a product, but also any other type of information that needs to be highlighted. For example, what
will the product's technical specifications be? Will it be a 32 inch tire or a 25 inch one? And how
much of each of them will be procured? Based on the purchase requisition document, a tender will
then be floated in the market, inviting various suppliers to bid for it. After this comes the most
important step selecting the right suppliers. Market vendors analyze the tender and then submit
their quotations to the company based on the technical and commercial requirements. Once the
offers are received, the company scrutinizes them to check for technical eligibility and correctness.
The vendors meeting the technical requirements are moved to the next stage. The next stage is
determining the right price. So once the technical configuration is confirmed, the purchasing
department comes into the picture. The purchasing department determines the right price for the
buying the product or service based on various vendors offers. These offers contain various
commercial terms such as payments, quality and post purchase services. All of this goes into
determining that the total cost of ownership, or TCO. TCO considers the total cost of the resources
from the suppliers. This includes the quota, price, logistics cost, product maintenance cost, quality
and inspection cost rework costs in case of inspection flagging, the product or service quality,
inventory holding cost, innovation, cost recycling cost, costs related to waste and penalty cost,
among others. In most cases, the supplier with the lowest cost is typically selected. Once a supplier
is selected, the company sends them an official purchase order. A purchase order is a contract
between a supplier and a manufacturer. It consists of all the necessary information relating to
quality, quantity, terms of payment, date of delivery, mode of delivery, and every other term and
condition as agreed on by both parties. Before accepting the goods, the organization checks the
goods and assesses quality discrepancies in relation to the contract. The company revisits the
purchase order or takes action against the supplier as per the contract. If product quality is
compromised, the last stage is paying the supplier. Once the company receives the goods, conducts
a quality check, and ensures that the specifications in the contract are met, the supplier raises an
invoice, which means that they will receive the money for the goods supplied. If something doesn't
go right in terms of quality or quantity, the payment can be deferred or canceled. You will often
notice that organizations aim to provide products or services at a lower price than the competitors
do. However, there is a limit to which the cost can be lowered, given the price of raw materials or
services required to make the product available to the customer. To stay competitive and improve
profit margins, companies get into strategic partnerships or strategic sourcing with their suppliers.
It's a win win situation for both parties. The manufacturer gets an assurance of uninterrupted and
continuous supply, thereby reducing the uncertainty and supply. The manufacturer has a majority,
say, in the final quality of the product.

On the other hand, the supplier has a clear mandate of producing or delivering a certain quantity
and can therefore plan the production process not only efficiently, but also effectively.

Understanding Material Requirements Planning

Jacob, the owner of a clothing store, created and sold a wide range of clothes in a short period. His
shop became popular in his locality and he started to take online orders. However, with a sudden
increase in demand, he could not deliver the products on time. In a hasty move, he produced more
and more clothes, resulting in excess production and further losses. His friend Laura suggested using
the material requirements planning system. Jacob did so and inputed data into the system about the
type, quantity and delivery time of close. The computer race system performed various
computations and determine how to maintain the demand and supply chain. This is the power of
materials requirement planning. By definition, Materials Requirement Planning is a computer based
inventory management system designed to assist production managers in scheduling and placing
orders for items of dependent demand. Dependent demand items are components of finished goods
such as raw materials, component parts and subassemblies, for which the amount of inventory
needed depends on the level of production of the final product. For example, in a plant that
manufactures bicycles, dependent demand inventory items might include aluminum, tires, seats,
and bike chains. MRP follows a structure that begins with determining the demand for items that are
to be produced. It is the process of forecasting the future demand for a product using various
methods. The most common method is understanding historical data. For instance, consider an
electronic gadget manufacturer that produces a specific model of headphones. The manufacturer
uses historical sales data to forecast the demand for the headphones over the next several months.
This forecast takes into account factors such as seasonal trends, promotions and marketing
campaigns, and competitor activity. Next in the MRP system structure is the Bill of Materials. It is a
list of all the materials, components and subassemblies required to manufacture a specific product.
A BOM is used to track the inventory levels of all the materials and components required to produce
a specific product. For instance, the BOM for this smartphone would include a list of all the materials
and components required to produce the device, such as the display, battery, camera, processor and
other electronic components. The BOM helps identify any interdependencies between the materials
and components, allowing the MRP system to determine how the delay in receiving one component
may affect the production of the final product. Then come inventory records, which involve
maintaining an inventory transactions file. This file is used to track all the movements of the
inventory and materials, such as receipts, issues, and transfers to multiple departments. The file
includes information such as the date of a transaction, the item involved, the quantity of the item,
the unit of measure, and the source or destination of the item. This information is used to update
the inventory records and ensure that they accurately reflect the current levels of materials and
components. For example, an example of the automotive company producing a specific car. The
inventory transaction file would include information on the date on which the steel, aluminum,
rubber and electronics are received, the quantity received and the supplier from whom the materials
were obtained.

If the inventory records indicated that the company was running low on steel, the MRP system
would generate a purchase order for steel and send it to the selected supplier.

The next step is determining the lot sizes. It refers to the process of determining the optimal
quantity of materials or components to be ordered or produced in order to minimize costs and
optimize inventory levels. There are different methods for lot sizing, but the most commonly used
ones are the economic order quantity and lease unit cost methods. Economic order quantity (EOQ)
is a method used to determine the optimal order quantity of a material or component that
minimizes the total cost of inventory, including both the cost of holding the inventory in warehouses
or storage units and the cost of ordering new materials and components. The EOQ formula is
presented on the screen where D equals annual demand for the material or component. S equals
ordering cost, h equals holding cost. For example, consider a small bakery that produces cakes and
pastries. The bakery uses butter as an ingredient to make its products. Using the EOQ formula, the
bakery would calculate the eoq like this the EOQ or economic order quantity for this bakery would
be under root two into annual demand for the butter, which is £10,000 in this case, into the ordering
cost, which is $50 per order divided by the holding cost, which is $0.5 per pound per year. With the
formula, the resultant EOQ would be £1000. This means that the bakery should order £1000 of
butter at a time to minimize the total cost of inventory. By ordering butter in its quantity, the bakery
can minimize the total cost of ordering and holding butter and optimize its inventory levels. It is
important to note that the EOQ model is based on some assumptions like constant demand, no
shortage, and no quantity discounts. In reality, these assumptions might not be met and other
methods or tools should be used to optimize inventory levels. On the other hand, the lease unit or
the LUC method determines the optimal order quantity of a material or component that minimizes
the unit cost of the item. For example, consider a manufacturing company that produces a specific
model of a computer. The company uses memory chips as a component to produce its computer.
The company has an annual demand of 10,000 memory chips, an ordering cost of $50 per order and
a unit cost of $5 per memory chip. Using the Luc method, the company would calculate the Luc like
this where S equals the ordering cost h equals holding cost, which is the unit cost multiplied by the
annual demand. Q equals order quantity. The lease unit cost is displayed on the screen. As a
company wants to minimize the unit cost, it should try to maximize the order quantity donated by Q.
When the order quantity is increased, the unit cost will decrease. For example, if the company
orders 5000 units of memory chips, the lease unit cost would be equal to $50 plus the holding cost,
which is the unit cost $5 multiplied by the annual demand, which is 10,000 units. All of this is divided
by the total order quantity of 5000 memory chips. The lease unit cost would then be $1.5. But say
the company orders 8000 units then the lease unit cost will be equal to $50 plus the holding cost
which is the unit cost $5 multiplied by the annual demand which is 10,000 units. All of this is divided
by the total order quantity of 8000 units of memory chips. The least unit cost would then be $1.06.

The company could try different order quantities to find the best unit cost but the optimal order
quantity that minimizes the unit cost in example above would be 8000 units of memory chips.

Creating a Material Requirements Plan

So MRP stands for Master Production Schedule. So it is a plan for manufacturing products in a
company which details the production schedule for different products over a specific period of time.
So three tables which is very important for this master production schedule is inventory record File
which you are seeing here. The first table, inventory record file table second is BOM which is bill of
material and third is

the MRP table which is the Master Production schedule. So when we say Inventory record file what
that means? Basically inventory record file consists of the products and the inventory that is there
on the end. What is the lead time to get that inventory from the source what is the safety stock that
we should handle and what is the reordering quantity? So when I say the product, that is the
product name. So here as an example, we are seeing bicycle as an end product so what is required
for making a bicycle? For manufacturing a bicycle which you are able to see here, the parts of
mountain bike. So you want frame, you want wheel. So within wheel you want spokes, hub, rim, you
want tire valve. So all this makes into a wheel. And same to make a frame, you want top tube, down
tube, seat tube. You want a seat, you want a tube, you want chain, chain state. So here we have
given you a sample examples like let's say bicycle. That is there in the inventory record file. So we
have right now 40 bicycles in the inventory. And wheels, we have 60 wheels in the inventory frame,
when I say frame, which is the body of the bicycle. So we have ten frames in the inventory and we
have spokes. So, as I shown here, the spokes, as you all know what are the spokes, right? So we have
5000 spokes that is there in the inventory so one wheel will have 60 spokes right? So to make one
bicycle we need two wheels which required 120 spokes so right now in the inventory we have 5000
spokes. We are having 20 seats in the inventory so basically this first column that is there in the B,
the B column is the product that is there in the inventory second is lead time so when we say lead
time we are ordering a parts right? We are ordering a part and what is the time taken from the
placement of the order and the time taken to deliver that order to the destination? That is the lead
time we are seeing that for bicycle it is taking two weeks lead time that is when once all these parts
that you are seeing here right once all these parts are ready for the assembly then it will take two
weeks to deliver the bicycle to the final destination or to the final customer. That is the lead time for
bicycle then for wheels when you order a wheel then it will take three week lead time. So for frame
it is two week lead time, for spokes it is two week lead time, for seat it is two week lead time. Why
these different different parts are having different lead time is like they might be getting
manufactured at different different sources. Like wheels might be getting manufactured at different
manufacturing plant at different location. Frame might be getting manufactured at different places
at different locations. So this all individual parts will take their own lead time. Third item which we
are seeing is safety stock. So to give you a basic definition of safety stock so, safety stock is an simply
extra inventory held by a retail or a manufacturer. In case demand increases unexpectedly, that
means the additional stock above the desired inventory level. So let's say your inventory level is
always 40. But suddenly your sales is getting picked up, your demand is getting picked up, right? So
there should not be a stock out situation. So you always have a safety stock. Let's say you always
have 80 bicycles in the inventory. So that in case a demand is picking up or the sales is picking up,
you doesn't go on stock of situation. So this should be always there in your inventory record file.
What is the safety stock then the reordering quantity. So at what time, at what level you are
ordering the

inventory and what is the quantity that you are ordering? That is called reordering quantity. So let's
say your safety stock is 80 and you want additional 40 bicycles. So you want to order the reordering
quantities. 40 bicycles. So that is put here but we will see in detail what is this reordering quantity,
how to calculate this reorder quantity, how to calculate this safety stock in another module. So,
these are the basic important item or data that should be maintained in the inventory record file.
The second is Bom which is bill of material. So it is a comprehensive list of all components, sub
assemblies, parts and raw materials that are required to manufacture a product. So when we see
parts of mountain bike as an example, these are the assemblies and parts which is required to make
a complete mountain bike, right? Basically, this BOM is represented through a diagrams which you
are seeing here. Or it is represented through hierarchy which is there in the second image. Or it is
represented through a table also, right? So these are the three kind of representation like which you
can have it for BOM. In BOM you will have comprehensive list of all the components that is required
to make one part of one unit. That is if you want to make a bicycle, then what all materials, what are
raw materials, what are components, parts is required to make that one bicycle is maintained in
BOM for example, to manufacture one bicycle, we want wheels, we want a frame. So in wheels we
want spokes tire rim in frame, we want seat and mainframe. And within tire, you want bolt, nut and
cap. So the complete comprehensive list of the parts to make that product is maintained in BOM. So
that is all about BOM. Then basically, in the table, we will have the part name. That is, if you say
wheels as a part, then you have a part number assigned for it. And what is the unit that is required?
Let's say for one bicycle, you want two wheels, right? For one bicycle, you want one frame. For one
bicycle and you have two wheels. Basically, one wheels as 60 spokes. That's what we saw. So
basically, for two wheels, you want 120. So for one bicycle, you want 120 spokes. And for one
bicycle, you want one seat, right? The requirement is to make 100 bicycle, right? So here I have
given you only few parts. Similarly, you can make for all other parts, like, let's say, how many wheels
is required to make 100 bicycle, right? So for one bicycle, if two wheels is required, then for 100
bicycle, you require 200 wheels, right? Again, for 100 bicycle, you require 100 frames. For 100
bicycle, you require 12,000 spokes. And for 100 bicycle, you need 100 seats, because each bicycle
has one seat.
So this is how the BOM, the bill of material, is maintained.
Let's go in directly into the master production schedule, right? So the requirement is the customer
require or the manufacturer want to manufacture 100 units of bicycle in 10th week by 10th week.
Now let us see what is this activity. So these are the standard activity that is there in the master
production schedule. So one is gross requirements, that means so what is the gross requirements
here? The manufacturer wants to manufacture 100 bicycle, that is the gross requirements. Second is
scheduled increase. Let's say today is Monday, right? And like last Saturday or last Friday, you have
ordered some products, some other bicycles, so that will reach maybe Tuesday or Wednesday. So
you have already placed an order that is last week or last before week and which will get delivered
the next week. So right now we have not placed any orders. So all the scheduled entries of all the
products is empty. So basically the scheduled entries are if the any orders that has been placed at
the previous week. And third is projected available balance. So this is the balance, the inventory that
is on. And this data is what we have seen as IRF to give you glance like for bicycle, right? What is the
available inventory which we saw here? So the inventory on hand for bicycle is 40. So that is getting
reflected, that is getting reflected here. So the projected available balance is 40. What is net
requirement? So the gross requirement is 100. At the 10th week you have 40 bicycles at the
inventory. So the net is 100 -40 which is 60, right? And planned incoming orders. So you already
have 40 bicycles in the hand, the net requirement is 60. So the planned incoming orders is also 60.
That is planned incoming orders, that is what is the planned orders that you will receive. So that will
be always equal to the net requirements. And the last is dispatch of planned orders. So here I have
given the lead time for all the products which we saw in the inventory record file the lead time of all
these products. So for bicycle the lead time is two weeks, right? So once all the products, all these
parts, which is like wheels, frame, spokes, tires, once all these parts are ready to get assembled, then
from there it will take two weeks to be delivered to the customer or to be manufactured, right? So
that is the dispatch of planned order. So you want 100 bicycles in the 10th week you have 40 bicycle.
In the end, the net requirement is 60. To get the 60 bicycles in the 10th week, the lead time is two
weeks, right? So you want to order or place the order at the 8th week. So this is how the master
requirements schedule will work or the material requirements planning will work. So let's order
quick three, four parts, how the schedule will work. Let's see what is the wheels that is required
what is the frame that is required, what is the spokes that is required and what is the seat that is
required? So we already saw what is this wheels, what is the frame, what is the spokes and what is
the seat and how much that is required. So from where it is coming,
the gross requirement is coming from BOM. Now, to make 100 bicycle, what is required, you want
200 wheels, right? Which we saw already in BOM. Let us again go back into BOM, see what is the
total quantity required for making 100 bicycles. So you need 200 wheels. So for wheels,

the lead time is three. Now let us go into the master production schedule. So for making 100
bicycles, what is that required? You want 200 wheels, that is 100 into two, right? But you have
already available balances 60. Now, what is the net requirements, that is 200 -60 so you want? The
net requirement of wheels is 140. And the planned incoming orders, as I said before, the planned
incoming orders is always equal to net requirements, right? So it is 140. Now, when to place this
order? As we saw, for wheels, it will take three weeks lead time, right? Then you want to place this
order at the 50 week. So automatically, when you give all these inputs, the system will place the
order at the fifth week. So how much orders? It will place 140 orders. That is the net requirement.
So now let's see frame. So how many frames is required for 100 bicycles? 100 frames is required,
right? So we have available balance of ten frames, which is there again, just to give again a recap, we
have 100 on inventory. So what is the gross requirement? 100. You have ten balance. So what is the
net requirement? It is 100 minus ten. So your planned incoming orders is as of net requirements,
which is 90. But for frame, it will take one week lead time. So you want to place this order on the 7th
week. So your frame will be ready on the 8th week. So you should always make sure that all the
parts of the bicycle is reaching at the 8th week. Because once all these parts, whatever the parts
which we saw here in the BOM, wheels, frames, pokes, tires, seat, so all these parts should reach at
the 8th week. So that from 8th week it will take two weeks to make the bicycles and give you the
complete deep end product. Then the last example which we can see is, let's see, spokes. So what is
the net requirement that we saw? 12,000, right? But the spokes is required at the week of wheels,
right? So see, wheels is the orders of four wheels. 140 is placed at the fifth week. So your spokes
should reach at the same week, so that your spokes will get assembled and then it will reach in the
8th week, right? That's why whatever the adjacent part. For example for wheels you want spokes
tire rim so when wheels is placed at the fifth week, then all these adjacent parts should reach at the
same week. So that the parts are getting assembled. And then you will make a wheel. And then you
will

give it to make a bicycle, right?

Let's go back. So now the gross requirement is 12,000. The projected available balance is 5000. So
the net requirement is again 12,000 -5000 it is 7000 so when to place that it is two week prior you
will place at the third week. Now when you place this at third week, you will receive it on the fifth
week, right? Then at the fifth week you have the wheels also. Then it will get assembled and it is
ready at the 8th week. Now at the 8th week, your wheels is ready. Your frame is also ready. So this is
how the master production schedule or the materials record and planning is planned. So you should
know what is the inventory record file. You should know the comprehensive list of parts or the
components that is required to make the final product. And what is the unit of that.

With this two tables then your master requirement planning is scheduled.