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Scheduling Decisions
Press On
Nothing in the world can take the place of persistence.
Talent will not. Nothing is more common than
unsuccessful men with talent. Genius will not.
Unrewarded genius is almost a proverb. Education will
not. The world is full of educated derelicts. Persistence
and determination alone are omnipotent.
Chapter 10
CR (2004) Prentice Hall, Inc.
10-1
Purchasing in Inventory
Strategy
Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals
CONTROLLING
ORGANIZING
• Purchasing and supply • Transport decisions
Customer
PLANNING
scheduling decisions
• Storage fundamentals service goals
• Storage decisions • The product
• Logistics service
• Ord. proc. & info. sys.
Location Strategy
• Location decisions
• The network planning process
Purchase
order The point: Supply
releases is to inventory or
to requirements
Production To vendors
release
CR (2004) Prentice Hall, Inc. 10-3
Supply to Requirements
Methods of scheduling
•Just-in-time concept
•Requirements planning
•KANBAN
Just-in-time
A philosophy of scheduling where the entire supply
channel is synchronized to respond, in as short a time
as possible, to the requirements of operations.
Level
Why demand becomes lumpy
Order
point
Order
placement
0 Time
(b) Factory inventory (Finished product at plant)
Level
Production order
Order release
point
0 10-7
CR (2004) Prentice Hall, Inc. Time
Supply to Requirements (Cont’d)
Purchase order
release
Order
point
0
Time
Firm A Firm C
Firm B Demand
Firm A
Firm C
Demand on upstream firms varies
greatly with small changes in
downstream demand
Time 10-27
CR (2004) Prentice Hall, Inc.
Bullwhip Effect (Cont’d)
Reasons for the effect
Internal External
•Demand shifts •Supply shortages
•Product/service •Engineering changes
changes •New product/service
•Late deliveries introductions
•Incomplete shipments •Product/service promotions
•Information errors
Remedies
•Centralize demand forecasting
•Improve forecasting accuracy
•Reduce lead-time uncertainties throughout the channel
•Smooth response to change
CR (2004) Prentice Hall, Inc. 10-28
Vendor Managed Inventory
•The supplier usually owns the inventory at the
customer’s location
•The supplier manages the inventory by any means
appropriate and plans shipment sizes and delivery
frequency
•The buyer provides point of sale information to the
supplier
•The buyer pays for the merchandise at the time of sale
•The buyer dictates the level of stock availability
required
CR (2004) Prentice Hall, Inc.
10-18
Purchasing
What is purchasing?
•Price
-Cost of goods
-Terms of sale
-Discounts
•Quality
-Meeting specifications
-Conformance to quality standards
•Service
-On-time and damage-free delivery, order-filling
accuracy, product availability
-Product support
CR (2004) Prentice Hall, Inc.
10-20
Purchasing (Cont’d)
Importance of purchasing management
•Decisions impact on 40 to 60% of sales dollar
•Decisions are highly leveraged
•Sets terms of sale
Activities of purchasing •Evaluates the value
received
•Selects and qualifies • Measures inbound quality if
suppliers not a responsibility of
•Rates supplier performance quality control
•Negotiates contracts • Predicts price, service, and
•Compares price, quality, and sometimes demand
service changes
•Sources goods • Specifies form in which
•Times purchases goods are to be received
CR (2004) Prentice Hall, Inc. 10-32
Importance of Purchasing
Leverage principlecosts
A company with $100 million in sales wishes to double
profits. How to do it?
Labor and
Salaries
Sales Price -50% Overhead Purchases
Current +17% +5% -20% +8%
Sales $100 $117 $105 $100 $100 $100
Purchased 60 70 60 60 60 55
goods and
services
Labor and 10 12 10 5 10 10
salaries
Overhead 25 25 25 25 25 25
Profit $5 $10 $10 $10 $10 $10
•Personal contacts
•Trade publications
•Web sites, catalogs, and directories
•Advertisements and solicitations
Qualifying suppliers
•Operational compatibility
-Informational compatibility
-Physical compatibility
•Ethical and moral issues
-Minority vendors
-Lowest price bidding
-Patriotic purchasing
-Open bidding but a pre-selected vendor
CR (2004) Prentice Hall, Inc.
10-27
Allocation to Suppliers
Allocation methods
•Company policy considering risk, fairness, ethics, etc.
•Definitive methods
Example of a definitive method
The Acme Company has received quotes for a component
(X-16) that is part of a larger assembly (industrial motors).
The prices are as follows:
Shipping
Supplier location FOB price
Philadelphia Tool Philadelphia $100 ea
Houston Tool & Die Houston 101
Chicago-Argo St Louis 99
LA Tool Works Los Angeles 96
10-40
CR (2004) Prentice Hall, Inc.
Allocation (Cont’d)
The company has 3 plants to be supplied at Cleveland,
Atlanta, Kansas City. The transportation rates, plant
requirements (cwt.), and available supply limits (cwt.) are:
Each part weighs 100 lb. (1 cwt.) and rates are in $/cwt.
Shipping Avail-
point CLE ATL KC Dummy ability
Phila- 102 103 105 0
delphia 4,000 1,000 5,000
Houston 107 105 104 0
15,000 15,000
Saint 102 102 100 0
Louis 4,000 4,000
Los 104 105 103 0
Angeles 1,000 3,000 11,000 15,000
Require-
ments 4,000 2,000 7,000 26,000
CR (2004) Prentice Hall, Inc. 10-43
Allocation (Cont’d)
Revised plan
CLE ATL KC
PHI
HOU
STL 2000 2000
LAX 4000 5000
CLE ATL KC
PHI 4000 1000
HOU
STL
LAX 1000 7000
Total cost = $1,337,000
CR (2004) Prentice Hall, Inc. 10-47
Allocation (Cont’d)
Problem
What if STL’s capacity is doubled?
Solution
Observations Houston is a
CLE ATL KC weak supplier. Perhaps some
PHI 4000 1000 price concessions can be
HOU negotiated? Philadelphia is
price sensitive and cannot
STL 1000 7000 withstand much of a price
LAX increase. St Louis is a valuable
supplier and more capacity
Total cost = $1,313,000 should be sought.
Forward buying
Buying in quantities exceeding current requirements,
but not beyond foreseeable needs.
- Takes advantage of favorable prices in an unstable
market, or takes advantage of volume transportation
rates
- Reduces risk of inadequate delivery
CR (2004) Prentice Hall, Inc. 10-50
Timing of Purchases (Cont’d)
Hand-to-mouth buying
Buying to satisfy immediate needs such as those
generated through MRP.
- Advantageous when prices are dropping
- May improve cash flow by temporarily reducing
expenses of carrying inventory
No of Cost Total
Date units per unit cost
Jan 75,000 2.00 $150,000
Apr 66,667 2.25 150,000
Jul 58,824 2.55 150,000
Oct _______
53,571 2.80 150,000
_______
254,062 600,000
CC = 0.25(2.36)(21,575) = $12,729
So, the net savings are (2.47 – 2.36)x254,062 – 12,729
= $15,218 per year for this single item