Introduction to Materials Management SIXTH EDITION J. R. Tony Arnold, P.E., CFPIM, CIRM Fleming College, Emeritus Stephen N. Chapman, Ph.D., CFPIM North Carolina State University Lloyd M. Clive, P.E., CFPIM Fleming College Upper Saddle River, New Jersey Columbus, Ohio Editor in Chief:Vernon R. Anthony Acquisitions Editor:Eric Krassow Editorial Assistant:Nancy Kesterson Production Editor:Louise N. Sette Production Supervision:GGS Book Services Design Coordinator:Diane Ernsberger Cover Designer:Jeff Vanik Production Manager:Deidra M. Schwartz Director of Marketing:David Gesell Marketing Manager:Jimmy Stephens Marketing Assistant:Alicia Dysert This book was set by GGS Book Services. It was printed and bound by R. R. Donnelley & Sons Company. The cover was printed by Phoenix Color Corp. Copyright © 2008, 2004, 2001, 1998, 1996, 1991 by Pearson Education, Inc., Upper Saddle River, New Jersey 07458.Pearson Prentice Hall. All rights reserved. Printed in the United States of America. 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Ltd. 10 9 8 7 6 5 4 3 2 1 ISBN-13: 978-0-13-233761-8 ISBN-10: 0-13-233761-4 PREFACE Introduction to Materials Management is an introductory text written for students in community colleges and universities. It is used in technical programs, such as indus- trial engineering and manufacturing engineering; in business programs; and by those already in industry, whether or not they are working in materials management. This text has been widely adopted by colleges and universities not only in North America but also in other parts of the world. APICS—The Association for Operations Management recommends this text as the reference for certification preparation for various CPIM examinations. In addition, the text is used by produc- tion and inventory control societies around the world, including South Africa, Australia, New Zealand, Germany, France, and Brazil, and by consultants who pre- sent in-house courses to their customers. Introduction to Materials Managementcovers all the basics of supply chain man- agement, manufacturing planning and control systems, purchasing, and physical dis- tribution. The material, examples, questions, and problems lead the student logically through the text. The writing style is simple and user-friendly—both instructors and students who have used the book attest to this. In the sixth edition, we have added the following: • More content on Theory of Constraints (Chapter 6) • More content on supply chains (Chapter 7) • More content on lean production (Chapter 15) • Content on the use of technology in purchasing and warehousing (Chapters 7, 12) • The effect of global logistics and reverse logistics (Chapter 13) • Six Sigma and QFD (Chapter 16) • Small case studies at the end of several chapters • PowerPoint slides to accompany all the chapters (an online resource for instructors) iii iv Preface In addition, we have retained several features from previous editions: • Margin icons to note key concepts • Key terms listed at the end of each chapter • Example problems within the chapters • Chapter summaries • Questions and problems at the end of each chapter APPROACH AND ORGANIZATION Materials management means different things to different people. In this textbook, materials management includes all activities in the flow of materials from the supplier to the consumer. Such activities include physical supply, operations planning and con- trol, and physical distribution. Other terms sometimes used in this area are business logisticsandsupply chain management. Often, the emphasis in business logistics is on transportation and distribution systems with little concern for what occurs in the fac- tory. Whereas some chapters in this text are devoted to transportation and distribu- tion, emphasis is placed on operations planning and control. Distribution and operations are managed by planning and controlling the flow of materials through them and by using the system’s resources to achieve a desired customer service level. These activities are the responsibility of materials manage- ment and affect every department in a manufacturing business. If the materials management system is not well designed and managed, the distribution and manufac- turing system will be less effective and more costly. Anyone working in manufacturing or distribution should have a good basic understanding of the factors influencing materials flow. This text aims to provide that understanding. APICS defines the body of knowledge, concepts, and vocabulary used in pro- duction and inventory control. Establishing standard knowledge, concepts, and vocabulary is essential both for developing an understanding of production and inventory control and for making clear communication possible. Where applicable, the definitions and concepts in this text subscribe to APICS vocabulary and concepts. The first six chapters of Introduction to Materials Managementcover the basics of production planning and control. Chapter 7 discusses important factors in purchasing and supply chain; Chapter 8discusses forecasting. Chapters 9, 10, and 11 look at the fundamentals of inventory management. Chapter 12 discusses physical inventory and warehouse management, and Chapter 13examines the elements of dis- tribution systems, including transportation, packaging, and material handling. Chapter 14 covers factors influencing product and process design. Chapter 15 looks at the philosophy and environment of just-in-time and lean production and explains how operations planning and control systems relate to just-in-time and lean production. Chapter 16examines the elements of total quality management and Six Sigma quality approaches. Preface v ONLINE INSTRUCTOR RESOURCES To access supplementary materials online, instructors need to request an instructor access code. Go to www.prenhall.com, click the Instructor Resource Centerlink, and then click Register Today for an instructor access code. Within 48 hours after regis- tering you will receive a confirming e-mail including an instructor access code. Once you have received your code, go to the site and log on for full instructions on down- loading the materials you wish to use. ACKNOWLEDGMENTS Help and encouragement have come from a number of valued sources, among them friends, colleagues, and students. We thank the faculty of other colleges and the many members of APICS chapters who continue to offer their support and helpful advice. Many thanks to those who reviewed the fifth edition and provided suggestions for the sixth edition, including members of the APICS Basics of Supply Chain Management Certification Committee: Jim Caruso (Chair) of Tyco Healthcare; Carol Bulfer, Parker Hanninfin Corp.; William Leedale, IFS; and Angel Sosa, University of Puerto Rico at Bayamon. Academic reviewers included Sheila E. Rowe, North Carolina A&T State University; David Lucero, Greenville Technical College; Floyd Olson, Utah Valley State College; Ralph G. Kauffman, University of Houston—Downtown; Ronald J. Baker, Shoreline Community College; and Richard E. Crandall,Appalachian State University. Tony Arnold thanks his wife, Vicky Arnold, for her assistance throughout the years of writing and revising this text, and Steve Chapman thanks his wife, Jeannine, for her support as well. Lloyd Clive thanks his wife, Kathleen, for her continued support. Overall, this book is dedicated to those who have taught us the most—our students. J. R. Tony Arnold, Professor Emeritus, CFPIM, CIRM Fleming College Peterborough, Ontario Stephen N. Chapman, Ph.D., CFPIM, Associate Professor Department of Business Management, College of Management North Carolina State University Raleigh, North Carolina Lloyd M. Clive, CFPIM Coordinator Materials Management and Distribution School of Business Fleming College Petersborough, Ontario This page intentionally left blank CONTENTS CHAPTER 1 Introduction to Materials Management 1 Introduction 1 Operating Environment 2 The Supply Chain Concept 5 What Is Materials Management? 10 Supply Chain Metrics 15 Summary 17 Key Terms 17 Questions 17 Problems 18 CHAPTER 2 Production Planning System 20 Introduction 20 Manufacturing Planning and Control System 21 Sales and Operations Planning 26 Manufacturing Resource Planning 28 Enterprise Resource Planning 29 Making the Production Plan 30 Summary 42 Key Terms 42 Questions 43 Problems 44 CHAPTER 3 Master Scheduling 49 Introduction 49 Relationship to Production Plan 50 vii viii Contents Developing a Master Production Schedule 53 Production Planning, Master Scheduling, and Sales 60 Summary 67 Key Terms 67 Questions 68 Problems 68 Case Study: Acme Water Pumps 76 CHAPTER 4 Material Requirements Planning 77 Introduction 77 Bills of Material 81 Material Requirements Planning Process 89 Using the Material Requirements Plan 102 Summary 107 Key Terms 108 Questions 108 Problems 109 Case Study: Apix Polybob Company 123 CHAPTER 5 Capacity Management 125 Introduction 125 Definition of Capacity 125 Capacity Planning 127 Capacity Requirements Planning (CRP) 128 Capacity Available 130 Capacity Required (Load) 135 Scheduling Orders 138 Making the Plan 141 Summary 142 Key Terms 143 Questions 144 Problems 144 Case Study: Wescott Products 149 CHAPTER 6 Production Activity Control 153 Introduction 153 Data Requirements 157 Order Preparation 159 Scheduling 159 Load Leveling 166 Scheduling Bottlenecks 167 Contents ix Theory of Constraints and Drum-Buffer-Rope 170 Implementation 172 Control 174 Production Reporting 180 Summary 181 Key Terms 181 Questions 181 Problems 183 Case Study: Johnston Products 189 CHAPTER 7 Purchasing 191 Introduction 191 Establishing Specifications 195 Functional Specification Description 198 Selecting Suppliers 200 Price Determination 204 Impact of Material Requirements Planning on Purchasing 207 Expansion of Purchasing Into Supply Chain Management 209 Some Organizational Implications of Supply Chain Management 211 Key Terms 212 Questions 212 Problems 213 Case Study: Let’s Party! 214 CHAPTER 8 Forecasting 216 Introduction 216 Demand Management 217 Demand Forecasting 218 Characteristics of Demand 218 Principles of Forecasting 221 Collection and Preparation of Data 222 Forecasting Techniques 223 Some Important Intrinsic Techniques 224 Seasonality 229 Tracking the Forecast 233 Summary 241 Key Terms 241 Questions 242 Problems 242 Case Study: Northcutt Bikes: The Forecasting Problem 251