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McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


CHAPTER SIX

Quantity and Delivery

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6-3

Classification of Purchases

• Type of Purchases –
– Energy
– Raw Materials
– MRO
– Resale Items
– Parts and Subassemblies
– Packaging
– Services or tools
– Capital Goods

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6-4

Classification of Purchases

• Frequency of Purchases
• Stock items
• Physical or Chemical Nature
• Transport Type

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6-5

ABC Classification of Purchases

Based on Monetary Value – Pareto 80-30 Rule

Percentage of Total Percentage of Total


Class
Items Purchased Purchase Dollars

A 10 70-80

B 10-20 10-15

C 70-80 10-20

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6-6

Example of ABC Analysis

Number of Percentage Percentage


Annual
Annual Purchase Class
Items of Items Purchase Value
Volume

1,095 10.0% $21,600,000 71.1% A

2,168 19.9 5,900,000 19.4 B

7,660 70.1 2,900,000 9.5 C

10,923 100% $30,400,000 100%

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6-7

Purchase Value is a Combination of


Price and Quantity

Category Unit Value Annual Volume Annual Value


A high high high
A medium high high
A low very high high
B high low medium
B medium medium medium
B low high medium
C medium low low
C low medium low
C low low low
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6-8

Forecasting

• Responsibility for Forecasting


• Unreliable Nature of Forecasts

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6-9

Forecasts Showing Uncertainty

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6-10

Forecasting Techniques

• Qualitative – Delphi Method


• Quantitative Techniques
– Causal Models – Statistical tools – Linear regression etc.
– Time Series Forecasting

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6-11

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

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6-12

ABC Classification of Inventory

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6-13

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, obsolences

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6-14

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
• Stockout Costs

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6-15

The Forms and Functions of Inventory

Functions of Inventories Forms of Inventories


1. Transit or pipeline 1. Raw materials, purchased
inventories (JIT) parts and packaging
2. Cycle inventories (lots) 2. Work-in-progress
3. Buffer or uncertainty 3. Finished goods
inventories or safety stock 4. MRO items
(WIP) 5. Resale items
4. Anticipation or certainty
inventories (Strikes,
weather, price changes etc.)
5. Decoupling inventories
– Process Linkage
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6-16

Inventory: Types, Functions, Objectives


TYPE FUNCTION OBJECTIVE
Transit or It takes time to move products (transit Balance in-transit inventory costs
Pipeline time, handling time, delays) against cost of reducing delays

Cycle Demand pattern does not equal supply Balance cost of ordering (or setup)
pattern (goods produced in lot sizes) and cost of carrying inventory

Buffer or Demand pattern varies. Customer Balance cost of carrying extra


Safety service levels must be maintained. inventory against cost of stocking
out

Anticipation Variations in demand relative to Balance inventory costs against


productive capacity or significant cost production costs, transportation
advantages to holding supply in costs, purchase discounts, and
anticipation of demand costs of avoiding price changes

Decoupling Distribution and production efficiency Balance efficiency of production -


gained from independence between distribution activities against costs
stages of production and distribution
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6-17

Examples of Inventory Functions

TYPE EXAMPLE
Transit or  parts on trains, forklifts, etc.
Pipeline  paper forms being moved between departments
Cycle  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  air conditioners produced and stored during winter


 sandwiches assembled during the morning and stored for lunch
Decoupling  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).

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6-18

Inventory Forms and Inventory Functions

• Figure 6-5 Page 209

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Inventory Forms and Functions

FUNCTION WHY ELIMINATE REASON BY

Transit move speed/distance make moves faster/shorter

Cycle make/use batch reduce onetime batch costs

Buffer cope with variability reduce variability

Anticipation smooth peak demand increase volume flexibility

Decoupling reduce dependence coordinate/schedule

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6-20

Managing Supply Chain Inventories

• Information Technology issues


• Operational Design issues
– Production and fulfillment rate
• Lead times, Quality and lot size

• Stockless Purchasing (Systems Contracting)


– Supplies Takes over Purchaser’s stock

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6-21

Dependent & Independent Demand

• Refer to Another slide

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6-22

The EOQ Model – Fixed Quantity Model

2 RS
EOQ 
KC
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


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6-23

Economic Order Quantity Model

CTmin

total cost

carrying costs

ordering costs

EOQ

Quantity Ordered

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6-24

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

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6-25

Fixed Order Quantity System

INVENTORY

cycle
stock
ROP

ROP = L × d TIME
lead time (L)
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6-26

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

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6-27

Fixed Order Quantity System:


Cycle Stock, Safety Stock and Lead Time

cycle
INVENTORY stock
(Q)

ROP

Safety
Stock

TIME
lead time
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6-28

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

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6-29

Fixed Time Period System:


Cycle Stock, Safety Stock and Lead Time
INVENTORY

Safety
Stock

lead TIME
time review
period
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6-30

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

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6-31

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.”

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6-32

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)

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6-33

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

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6-34

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

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6-35

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 (labour, material and equipment)
– exacting quality

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6-36

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

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6-37

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
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6-38

JIT Imposed Supplier Activities

• Frequent deliveries

• Small lot sizes

• Exacting quality

• Long-term relationships/contracts

• Reduced number of suppliers

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6-39

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

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