The Material Management Accounting System. Presented by Dr. Douglas N. Goetz, CPPM, CF For the Nti National lproperty Management tassociation HISTORY

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1 The Material Management Accounting System Presented by Dr. Douglas N. Goetz, CPPM, CF For the Nti National lproperty Management tassociation HISTORY Material Requirements Planning (MRP) JoeOrlicky (1975), one ofthe seminal theorists in MRP, provides two definitions of an MRP system. The first states, A material requirements planning system, narrowly defined, consists of a set of logically related procedures, decision rules, and records (alternatively, records may be viewed as inputs to the system) designed to translate a master production schedule into time phased net requirements, and the planned coverage of such requirements, for each component inventory item needed to implement this schedule. An MRP system replans net requirements and coverage as a result of changes in either the master production schedule, or inventory status, or product composition. (p. 21)

2 HISTORY Manufacturing Resource Planning (MRPII) Oliver Wight (1982), whom many consider the father of MRPII, puts it most simply in his description of MRPII. MRPII is a total company wide system. It is a way to get all the people in the company working to the same game plan; to the same set of numbers. A company can now plan material, capacity, finance, marketing strategy, etc. all with the same system. In addition, all these things can be simulated to provide the management of the company with real planning capability (p. 81). HISTORY DOD Concerns with MRP/MRPII Garrett (1989) discusses someoftheseof problem areas stating, Due to the successes of MRP, and MRPII, and JIT [Just in Time another material control methodology] in reducing costs within commercial industry, many defense contractors failed to look before the leaped into these worlds of material management. In so doing, numerous defense manufacturers did not recognize the inherent difficulties of successfully implementing MRP and MRPII on Government contracts. Specifically, many Defense contractors did not adequately assess the impacts to successfully implementing MRPII caused by Government Contracting requirements including: cost accounting standards, various types of Government contracts, Government financing, title provisions... (p.3 4)

3 HISTORY Creation of Department of Defense (DOD) ApplicationofMRP of THE MMAS On October 28th, 1988 the proposed rules for the DOD's Contractor Material Management Accounting System were published in the Federal Register and, in Defense Acquisition Circular Number 88 7, dated 31 May 1989, the final rules for the MMAS were published. Well, Ladies and Gentlemen, after all of that, we have finally reached our goal the Material Management Accounting System or MMAS. The Material Management Accounting System Policy DFARS ALL contractors t have an MMAS that t reasonably forecasts material requirements ensures costs of purchased & fabricated MATERIAL charged or allocated to a contract are based on Valid time phased requirements & maintains a consistent, equitable & unbiased logic for costing of material transactions.

4 The Material Management Accounting System DFARS Use of MMAS Clause Use the clause at , Material Management and Accounting System, in ALL solicitations and contracts exceeding the simplified acquisition threshold that are not for the acquisition of commercial items and (a) Are not awarded to small businesses, educational institutions, or nonprofit organizations; and (b) Are either (1) Cost-reimbursement contracts; or (2) Fixed-price contracts with progress payments made on the basis of costs incurred by the contractor as work progresses under the contract. The Material Management Accounting System WHAT DOES IT APPLY TO? costs of purchased & fabricated MATERIAL charged or allocated... Contractor Progress Acquired Payments Contractor Property Inventory Property

5 The Material Management Accounting System WHAT DOES IT APPLY TO? costs of purchased & fabricated material charged or allocated... THEREFORE Government Furnished Property (GFP) is NOT included in the MMAS!!! The Material Management Accounting System DFARS TEN KEY ELEMENTS (STANDARDS) System description Valid Time Phased Requirements Bill of Material (BOM), Master Production Schedule (MPS) Accuracy System Control Weaknesses Audit Trails & Records Record Accuracy

6 The Material Management Accounting System TEN KEY ELEMENTS (Continued) Transfer description Costing of Material Common Inventory Allocations Commingling Periodic Internal Audits DFARS MMAS Ten Key Elements Element #1: Have an adequate system description -- including policies, procedures, operating instructions compliant with FAR & DFARS FAR & DFARS Policies and Procedures

7 MMAS Ten Key Elements Element #2: Assure costs of purchased & fabricated MATERIAL charged or allocated to a contract are based on valid TIME-PHASED REQUIREMENTS! Requirements: Accuracy may be lower if: 98% BOM 1. No material harm to the Gov t. 95% MPS 2. Cost is excessive. are desirable. MMAS Ten Key Elements Element #3: System to identify report & resolve System Control Weaknesses. System should identify exceptions such as excess/residual.

8 MMAS Ten Key Elements Element #4: Provide audit trails and maintain records. Manual records and machine readable form will be maintained. (See FAR part 4) MMAS Ten Key Elements Element #5: Establish & maintain adequate levels of INVENTORY ACCURACY Reconciliation of record balance vs. physical balance. Requirements: 95% Accuracy Level Accuracy may be lower if: 1.) No material harm to the Gov t; 2.) Cost is excessive. COMPARE to GP Physical Inventory Requirement.

9 MMAS Ten Key Elements Element #6: Detailed Description of transfer of parts including both Manual Transfers and System Generated Transfers Contract A stuff going to Contract B Contract B stuff going to Contract A MMAS Ten Key Elements Element #7: Maintain logic for the costing of material transactions. Consistent equitable and unbiased. Contractor will disclose a written policy for Transfer Methodologies. Parts & costs are to be transferred in same billing period. EXCEPT: Loan/Payback must be APPROVED by the ACO!!!

10 MMAS Ten Key Elements Element #8: Where allocations from common inventory-- an Additional Requirement: Reallocations must be processed no less frequently than a routine billing cycle. ALGORITHMS are maintained Why have algorithms? If Government property is lost, damaged, or destroyed. What the Heck is An Algorithm? MMAS Ten Key Elements Element #9: Allows COMMINGLING of: CAP (Material), PPI (Material), and Contractor Material. NOT GFP

11 MMAS Ten Key Elements Element #10: Perform Internal Audits periodically. i di ll MMAS So, it is critical that the MMAS be CAREFULLY and THOUGHTFULLY Ydiscussed, described and applied in the Contractor s Procedures My Opinion the MMAS and the Property Management System are LINKED and OVERLAP Examples: Acquisition (Critical to Both Systems) PhysicalInventories (Required by BothSystems) Commingling (Discussed by Both Systems) Liability (Impacts Both Systems) Disposition (Driven by Both Systems)

12 MMAS and the Contractor s PMS Remember Venn Diagrams from Jr. H.S. Algebra? That is what we have here PMS GFP CAP MMAS CAP PPI* Ktr Material An Overlap between the PMS and the MMAS * Progress Payments Inventory (Material) Performance Based Payments Inventory My Opinion: MMAS WEAKNESSES Application to other than Production Ks (R and D, O and M, Small Lot Production) Bill of Material Accuracy Which One? Designed to, Built to?

13 Ahhhh, but there is a NEW twist! DOD has issued NEW RULES in regard to Business Systems SUBPART CONTRACTOR BUSINESS SYSTEMS provides POLICY regarding application SIX SYSTEMS: (1) , Cost Estimating System Requirements. (2) , Earned Value Management System. (3) , Material Management and Accounting System. (4) , Accounting System Administration. (5) , Contractor Purchasing System Administration. (6) , Contractor Property Management System Administration. MMAS as a BUSINESS SYSTEM MMAS is one of those Business Systems addressed d by the NEW rules As is the Property Management System!!! DFARS Addresses the Administrative Contracting Officer s (ACO) Role in Approving the MMAS AS WELL AS DISAPPROVING THE MMAS And the Penalties of having a DISAPPROVED MMAS!

14 PENALTIES If your MMAS is DISAPPROVED by the ACO Payment withhold ihh percentage limits. i (i) The total percentage of payments withheld on amounts due under each progress payment, performance based payment, or interim cost voucher, on this contract shall not exceed (A) Fivepercent for one ormoresignificant deficiencies in any single contractor business system (B) Ten percent for significant deficiencies in multiple contractor business systems. TWO CLOSING THOUGHTS The MMAS as well as the Property Management System requirements have now moved to the forefront of Contracting within DOD. It is CRITICAL for the Property Professional to know and understand these rules and then ensure PROPER APPLICATION and COMPLIANCE. If not Well, bad things can happen to good people!

15 THANK YOU! Dr. Douglas N. Goetz, CPPM, CF PRESIDENT, GP CONSULTANTS OLD AFIT/DAU PROFESSOR Hopefully a Good Instructor. Chief cook and bottle washer at Home, responsible for all honey do requirements though my wife has told me to stay out of HER house! 233 N. Maple Ave Fairborn, OH GPCONSULTANTS@ATT.NET GP Consultants LLC