Chapter 6

QUANTITY & DELIVERY

CLASSIFICATION OF PURCHASES
Type of Purchases
Energy Raw Materials MRO Resale Items Parts and Subassemblies Packaging Services or tools Capital Goods

CLASSIFICATION OF PURCHASES
Frequency of Purchases Stock items Physical or Chemical Nature Transport Type

ABC CLASSIFICATION OF PURCHASES

Based on Monetary Value Pareto 80-30 Rule

EXAMPLE OF ABC ANALYSIS

PURCHASE VALUE IS A COMBINATION OF PRICE AND QUANTITY

FORECASTING

Responsibility for Forecasting.

Unreliable Nature of Forecasts .

FORECASTS SHOWING UNCERTAINTY

FORECASTING PROCESS

FORECASTING TECHNIQUES
Qualitative Delphi Method Quantitative Techniques
Causal Models Statistical tools Linear regression etc. Time Series Forecasting

INVENTORIES
Efforts to reduce inventories
Inventories hold a significant position in balance sheet Involves a lot of costs Can bring in competitive advantage Working capital Order fulfillment Turnover

KANBAN JIT

MRP

ABC CLASSIFICATION OF INVENTORY

INVENTORY COSTS
Purpose of Inventory
Provide and maintain customer care Smooth flow of goods through productive process Protection against uncertainties Reasonable utilization of people and equipment

Carrying, Holding or Possession costs

Handling charges, operating costs, pilferage, breakage Cost of storage facilities, storage, labor, insurance Warehouse rentals, cost of equipment, obsolesces.

INVENTORY COSTS
Types of Carrying Costs
Capital Costs , Inventory Services Costs, Storage space costs, Inventory risk costs

Types of Ordering Costs

Ordering or Purchasing costs
Managerial, clerical, email, fax, accounting, transportation, inspection,

Types of Setup Costs

Production Run

Stock out Costs

THE FORMS AND FUNCTIONS OF INVENTORY

Functions of Inventories 1. Transit or pipeline inventories (JIT) 2. Cycle inventories (lots) 3. Buffer or uncertainty inventories or safety stock (WIP) 4. Anticipation or certainty inventories (Strikes, weather, price changes etc.) 5. Decoupling inventories
Process Linkage

1.

2. 3. 4. 5.

Forms of Inventories Raw materials, purchased parts and packaging Work-in-progress Finished goods MRO items Resale items

INVENTORY: TYPES, FUNCTIONS, OBJECTIVES

TYPE Transit or Pipeline Cycle Buffer or Safety FUNCTION
It takes time to move products (transit time, handling time, delays)
Demand pattern does not equal supply pattern (goods produced in lot sizes) Demand pattern varies. Customer service levels must be maintained.

OBJECTIVE
Balance in-transit inventory costs against cost of reducing delays Balance cost of ordering (or setup) and cost of carrying inventory Balance cost of carrying extra inventory against cost of stocking out

Anticipation

Variations in demand relative to productive capacity or significant cost advantages to holding supply in anticipation of demand Distribution and production efficiency gained from independence between stages of production and distribution

Balance inventory costs against production costs, transportation costs, purchase discounts, and costs of avoiding price changes
Balance efficiency of production distribution activities against costs

Decoupling

EXAMPLES OF INVENTORY FUNCTIONS

TYPE Transit or Pipeline Cycle EXAMPLE parts on trains, forklifts, etc. paper forms being moved between departments a retail store that orders furniture by the truckload to save ordering and shipping (set-up) costs student buys $25 of credit instead of $10 for a photocopy card to reduce trips for extra credit

Buffer or Safety extra shirts ordered for unanticipated demand by a retailer extra bottles ordered by a brewery to allow for unexpected breakage Anticipation Decoupling air conditioners produced and stored during winter sandwiches assembled during the morning and stored for lunch plastic moulding machine produces at 100 parts/hr, assemblers work at 50 parts/hr, parts are held in operations to balance production rates ( and moulding is shutdown periodically).

INVENTORY FORMS AND INVENTORY FUNCTIONS

Figure 6-5 Page 209

INVENTORY FORMS AND FUNCTIONS

FUNCTION Transit Cycle Buffer Anticipation WHY move speed/distance make/use batch cope with variability smooth peak demand ELIMINATE REASON BY make moves faster/shorter reduce onetime batch costs reduce variability increase volume flexibility

Decoupling

reduce dependence

coordinate/schedule

MANAGING SUPPLY CHAIN INVENTORIES

Information Technology issues Operational Design issues
Production and fulfillment rate
Lead times, Quality and lot size

Stockless Purchasing (Sy stems Contracting)

Supplies Takes over Purchaser s stock

DEPENDENT & INDEPENDENT DEMAND

Refer to Another slide

THE EOQ MODEL FIXED QUANTITY MODEL

where: R = annual demand S = set-up or order cost per order C = delivered purchase cost K = carrying cost percentage Therefore: KC = unit holding cost

2 RS EOQ KC

ECONOMIC ORDER QUANTITY MODEL

CTmin total cost

carrying costs

ordering costs

EOQ Quantity Ordered

FIXED ORDER QUANTITY SYSTEM

Perpetual inventory system Event triggered: Initiates order when stock depleted to a specific level.
Reorder point

Inventory replaced in fixed amounts

Economic order quantities

Issues
visual signals, IT applications

FIXED ORDER QUANTITY SYSTEM

INVENTORY

cycle stock ROP ROP = L d lead time (L)

TIME

SAFETY STOCK
Safety stock is held because of uncertainty in supply and/or demand
The trade-off is the cost of stocking out versus the cost of holding inventory Safety stock levels can be calculated using statistical techniques.
e.g., Take into account standard deviation of demand

FIXED ORDER QUANTITY SYSTEM: CYCLE STOCK, SAFETY STOCK AND LEAD TIME
INVENTORY cycle stock (Q)

ROP Safety Stock TIME

lead time

FIXED TIME PERIOD SYSTEMS

Inventory on-hand counted at specific time intervals and replenished to a desired level Only the passage of time triggers the model .

FIXED TIME PERIOD SYSTEM: CYCLE STOCK, SAFETY STOCK AND LEAD TIME
INVENTORY

Safety Stock lead time TIME review period

WHICH SYSTEM IS BETTER?

Fixed order quantity system
Higher maintenance costs Every transaction logged Inventory controlled precisely

Fixed time period

Minimal record keeping Higher average inventories to protect against stock-outs Higher stock-out rates Different order quantities for each cycle Ability to batch orders to suppliers

MATERIALS REQUIREMENT PLANNING (MRP)

Based on a master production schedule, a material requirements planning system:
Creates schedules identifying the specific parts and materials required to produce end items Determines exact numbers needed Determines the dates when orders for those materials should be released, based on lead times.

Get the right materials to the right place at the right time .

KEY INPUTS TO MRP

Master production schedule (when do we need it) Inventory record file (what do we have and what do we need) Bill of material (how does it get made)

DISTRIBUTION RESOURCES PLANNING (DRP)

DRP developed after MRP
Applies the same concepts to meeting a market demand for various products Started with a basic model and has become more sophisticated

Goal: Plan and monitor the resources required to meet anticipated market demands
Leading DRP and MRP systems are integrated but the two terms are still found

DISTRIBUTION REQUIREMENT PLANNING

MRP IMPLICATIONS FOR PURCHASING

Accurate records for quantities, lead times, bills of material, and specifications
Tight control of inventory Cooperation from suppliers for on -time delivery, proper quantities and batch sizes, exacting quality (zero defects)
May need to re-evaluate existing contracts

Long-term planning horizon

Less slack in the system

WHAT IS JIT?
JIT is characterized by providing the exact quantity needed at the precise moment it is required
However, to be able to support JIT firms require certain capabilities
short production lead times economical small batch production flexible resources (labor, material and equipment) exacting quality

WHAT IS JIT?
True JIT production systems strive to eliminate waste Waste includes: inefficient set-up procedures, inventories Focus on all aspects of the production system: human resources, supply, technology, and inventories
JIT is based on the logic that nothing will be produced until it is needed When a unit is sold, the system pulls a replacement unit from the last position in the system This process continues throughout the system

JIT

KANBAN
Kanban means sign or instruction card in Japanese
A number of visual methods can be used

Authority to produce come from downstream operations Kanban cards represent the number of containers used in the system
Dictates the lot size production levels and inventory

JIT IMPOSED SUPPLIER ACTIVITIES

Frequent deliveries
Small lot sizes Exacting quality Long-term relationships/contract s Reduced number of suppliers

SUPPLY MANAGERS JIT EXPECTATIONS

Reduction in number of suppliers Reduction in supplier lead time Improvement in supplier quality

Improvement in supplier delivery

Increased inventory turnover

Inventory reduction in total dollars