COMPONENTS OF THE LOGISTICS FUNCTION (STUDY OBJECTIVE 2)
The major function within the conversion process is the logistics function. Logistics is the logical, systematic flow of resources throughout the organization. It involves the well-planned and coordinated efforts of many departments. Its goal is to make the most efficient use of the resources available in order to support the organization.
The logistics function has three primary components: planning, resource management, and operations. Exhibit 11-3 presents these components and their subcomponents.
PLANNING
The planning component of the logistics function directs the focus of operations. It is concerned with determining what products should be produced, how many products should be produced, what resources should be available, and what timing is needed. It is supported by the efforts of research and development, capital budgeting, engineering, and scheduling.
Exhibit 11-3 Components of the Logistics Function
Research and development focuses on product improvement. Its efforts involve investigating and developing new, innovative products and methods of producing those products. The research and development department may also conduct studies to determine which parts should be manufactured and which will be purchased, considering the most efficient manner of conducting operations. This department is also responsible for researching and testing new or improved products and processes before they are put into practice.
Capital budgeting plans the capital resources needed to support production. It is concerned primarily with fixed assets, including the facilities and equipment needed to conduct operations as planned. Since capital resources typically involve the outlay of large sums of cash, it is essential that they be planned in advance so that securing the necessary approvals and financing arrangements does not delay their implementation. The fixed assets acquisition processes were discussed in Chapter 10.
Engineering is responsible for planning the specifications for products that will be manufactured. This department prepares the detailed design of each product, identifying the component parts and methods of production. Engineers also prepare the following two important documents used in the conversion process:
- A bill of materials is the form that specifies the components of a product, including descriptions and quantities of materials and parts needed.
- An operations list describes the chain of events that constitute a product's production. It includes all the necessary operations to be performed, identifying the locations, resources used, and standard timing for each phase.
Exhibit 11-4 Preparing a Bill of Materials in Microsoft Dynamics®
Engineering's role in the planning process is essentially similar to writing a recipe for a product. The bill of materials details all the required ingredients and amounts, and the operations list provides the instructions for preparation. Exhibit 11-4 is a screen shot of the bill of materials form prepared in Microsoft Dynamics® accounting software. The bill of materials shown relates to a desktop fax system that includes six component parts: a data card, fax machine package, and various hardware.
Scheduling plans the timing for production activities, taking into consideration all the open sales orders, inventory needs, and the resources available. It uses the operations lists to determine how the timing for particular products will fit in with other demands on production resources. Its dual goal is to meet the customer's needs while making the most efficient use of the company's resources. Accordingly, the scheduling department must plan the production process so that idle time is minimized, since idle time is unproductive time. Although idle time may be the result of factors (such as machine breakdowns or power failures) that are beyond the control of those in a planning role, its impact may be minimized by the use of proper planning and control.
Scheduling personnel prepare important documentation used in the conversion process. Production orders authorize production activities for a particular sales order or forecasted need. A production schedule outlines the specific timing required for a sales order, including the dates and times designated for the production run. These documents combine information from the sales order (or forecast), bill of materials, and operations list. The goal is to plan the production schedule so that there is no idle time between production activities.
RESOURCE MANAGEMENT
There are many resources that feed the conversion process. Although the specific resources vary greatly from company to company, they tend to fall into three broad categories: maintenance and control, human resources, and inventory control.
In a manufacturing environment, it is important to designate responsibility for maintenance and control to a person or department that can devote sufficient attention to these matters. Maintenance and control is concerned with maintaining the capital resources used to support production, including production facilities and other fixed assets such as machinery, equipment, computers, and vehicles. The maintenance of these fixed assets includes all of the activities necessary to keep them in good working condition, such as scheduling tune-ups and other preventative maintenance procedures. It also requires timely repair in the case of breakdowns or other interruptions. Control of fixed assets includes the ongoing monitoring necessary to support production in the most effective and efficient manner. In this role, employees in the maintenance and control department often work closely with those in the various planning functions. For example, they may interact with personnel responsible for capital budgeting in order to determine asset replacement schedules or additions to production facilities. Or they may work with engineers and schedulers to consider product design specifications, the layout of the production stations, and other potential enhancements to the production processes.
The human resources department is responsible for managing the placement and development of sufficient qualified personnel. This includes hiring and training workers, as well as maintaining records of their performance. Chapter 10 discussed this function in more detail, but the focus here is the optimal use of human resources to support production. Plant managers and supervisors must be placed in order to oversee production in the various work stations, plants, or locations. Line workers must be placed effectively to handle production in these various areas. Human resources personnel must often work with those responsible for scheduling to ensure that adequate human resources are available to sustain the company's planned course of action. Care must also be taken to prepare and accumulate job time tickets or time sheets for all production employees so that actual labor costs are included in the cost of products.
The inventory control department is responsible for managing and recording the movement of inventory in the many different directions that it may go throughout the conversion process. Exhibit 11-3 lists the many departments or groups within the company that are involved with these functions. Some of these functions have been introduced in previous chapters. For instance, the purchasing and receiving functions are discussed in Chapter 9, and the shipping function is discussed in Chapter 8. This chapter will focus on the activities comprising the stores, routing, and warehousing functions, as they are not discussed elsewhere in this text.
One inventory control function that is important to the conversion process is the determination of economic order quantities (EOQ), or the most efficient quantity of products to purchase. This determination is based on the relative costs of maintaining inventory and ordering materials. Many companies rely on their inventory managers to notify the purchasing function about the number of units needed to replenish inventories to their desired levels. This activity is closely related to the purchasing function. Although details of the purchasing function are presented in Chapter 9, there is no previous coverage of EOQ.
The EOQ can be calculated by the formula
where
R = the number of units of this item required for the year
S = the cost of placing an order to purchase this item
A = the cost of holding a unit of this item in inventory for the year
The inventory stores function concerns the control of raw materials inventory held in storage or in holding areas, waiting for processing. Raw materials include the basic components of the company's products, including anything from wood, metal, and nails to finished parts purchased as subassemblies. The storage of these materials is necessary when they are purchased in large quantities or in order to maintain designated levels of stock in anticipation of future sales. After the items are received, they are usually moved to a storeroom. The storeroom should be organized in a manner that makes it easy to locate the items when they are needed in production.
Routing is the issuance and movement of materials into the various production phases. When items are removed from the storeroom and taken into production, a routing slip is prepared to indicate the movement of inventory. A routing slip documents the descriptions and quantities of materials taken into production for a specified sale or other authorized production activity. It should also be prepared whenever purchased materials are taken directly into production from the receiving area. The routing slip is also sometimes called a materials issuance form, or move ticket. It is important in tracking the physical movement of inventory items. Accordingly, it should be updated when the items are subsequently moved from one production station to another. Some companies use routing slips with multiple removable stubs so that a record of the materials movement can be retained in each production station.
When inventory is routed out of the receiving or storage area, it is no longer considered raw materials inventory; rather, it becomes work-in-process inventory. Likewise, when production is completed and inventory is prepared for disposition to the warehouse or to the customer, it becomes finished goods inventory. These three classifications of inventory—raw materials, work-in-process, and finished goods—are important in the accounting processes.
Inventory status reports are prepared at various stages of production in order to document the extent of work completed and the resulting level of inventory. Inventory status reports provide detail on the resources used in production to-date, as well as the resources available to complete production of the goods. These reports should be monitored regularly so that the scheduling department can be notified if changes need to be made.
Inventory warehousing involves managing the holding area for finished goods awaiting sale. Companies maintain inventories of finished goods when they produce fairly homogeneous products or when it is important for them to be able to fill sales orders quickly. Accordingly, an inventory warehouse should be well organized so that the items can be located and moved into the shipping department as quickly as possible. Likewise, it should be controlled in order to prevent theft, loss, or damage.
The goal of inventory control is to minimize the cost of maintaining inventories. Whether inventory is maintained in the form of raw materials, work-in-process, or finished goods, most companies weigh the costs and benefits of carrying inventories. The costs are generally incurred in the areas of stores and warehousing, whereas the benefits tend to be more difficult to measure because they relate to keeping customers satisfied. Ideally, the elimination of inventories is desirable, except in cases where inventory is needed immediately due to sales that may result from unexpected changes in production scheduling or increased demand for the company's products.
OPERATIONS
Operations is the term commonly used to refer to the major business activity in which a company engages. It is often synonymous with the terms “production” and “manufacturing.” This function involves the day-to-day performance of production activities, including monitoring the related costs, time, and quality.
Depending on the size of the company and the diversity of its product offerings, operations may be performed by a variety of methods, including the following:
- Continuous processing of homogeneous products
- Batch processing, where each batch contains homogeneous products, but each batch is not necessarily the same type of product
- Custom, made-to-order processing, where each order may be unique
A company's production process may be conducted in a single operating facility or multiple locations and stations. Regardless of its production complexity as determined by the method of production and the number of locations, each scheduled production order follows a designated physical flow through the production process. The production process generally involves a systematic flow similar to that described in Exhibit 11-5. The documents used in this process are presented in a document flow chart in Exhibit 11-6. Exhibit 11-7 shows a data flow diagram of the conversion process.
Except for the preparation of the documents that initiate the production planning process and the general ledger accounting that finalizes this process, all of the other processes depicted in Exhibit 11-5 are components of the logistics function. These activities and the related documentation were described earlier in this chapter.
Exhibit 11-5 Production Process Map
Exhibit 11-6 Document Flowchart of the Production Process
Exhibit 11-7 Conversion Process Data Flow Diagram
The final hub in the logistics function is quality control. This is a follow-up to production, where the products are inspected for quality before they are moved to the warehouse or shipping area. The company may have a policy of inspecting every item produced (especially if the items are made to order), or they may be inspected arbitrarily or in specific intervals (more likely for batch production runs or with homogeneous products). The nature of a company's products may also require that they be tested in order to determine that they are top quality. The frequency of inspections or product testing should be based on the likelihood of finding defects. The more problems a company has with defective products, the more extensive its quality control processes should become. It is often the case that quality control problems are the result of unfavorable materials usage or labor efficiency variances. For this reason, quality control personnel often work closely with cost accountants and resource managers to solve production problems.
Defective products may be returned to the production floor for rework. Rework refers to the additional procedures necessary to bring a product up to its required specifications. In some cases, the extent of a product's defect may be so great that it is not cost-effective for it to be reworked. When this occurs, the product may be scrapped or discarded. The costs of rework and scrap must be taken into account when accounting for the production process.