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Purchasing and Supply Scheduling Decisions

Purchasing and Supply Scheduling Decisions. Press On

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Purchasing and Supply Scheduling Decisions

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  1. Purchasing and Supply 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. Geniuswill 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.

  2. Inventory Strategy Inventory Strategy • • Forecasting Forecasting Transport Strategy Transport Strategy • • Inventory decisions Inventory decisions • • Transport fundamentals Transport fundamentals Purchasing and supply Purchasing and supply • • • • Transport decisions Transport decisions Customer Customer scheduling decisions scheduling decisions service goals service goals • • Storage fundamentals Storage fundamentals • • The product The product • • Storage decisions Storage decisions ORGANIZING ORGANIZING CONTROLLING CONTROLLING PLANNING PLANNING • • Logistics service Logistics service • • Ord Ord . proc. & info. sys. . proc. & info. sys. Location Strategy Location Strategy • • Location decisions Location decisions • • The network planning process The network planning process Purchasing in Inventory Strategy CR (2004) Prentice Hall, Inc.

  3. A Typical Scheduling Diagram Build schedule Forecast Orders Bill of materials Inventory Shortages Purchase order releases The point: Supply is to inventory or to requirements To vendors Production release 10-3 CR (2004) Prentice Hall, Inc.

  4. 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. CR (2004) Prentice Hall, Inc.

  5. Supply to Requirements • The characteristics are: • Close relationship with a few suppliers and transport carriers • Information is shared between buyers and suppliers • Frequent production/purchase and transport of goods in small quantities • Minimum inventory levels • Uncertainties are to be eliminated wherever possible throughout the supply channel CR (2004) Prentice Hall, Inc.

  6. Supply to Requirements (Cont’d) Requirements planning Definition A formal, mechanical method of scheduling whereby the timing of purchases or supplies is determined by offsetting the requirements in the master production schedule. • Why requirements become lumpy for the materials manager • Setting the master schedule • through derived demand patterns and bill of materials explosion • forecasting • orders on hand 10-6 CR (2004) Prentice Hall, Inc.

  7. (a) Field inventory (Finished product in warehouse) Level Order point Order placement 0 Time (b) Factory inventory (Finished product at plant) Level Production order release Order point 0 Time Supply to Requirements (Cont’d) Why demand becomes lumpy 10-7 CR (2004) Prentice Hall, Inc.

  8. (c) Component inventory (Supply stocks at plant) Level Purchase order release Order point 0 Time Supply to Requirements (Cont’d) CR (2004) Prentice Hall, Inc.

  9. Supply to Requirements (Cont’d) • The mechanics of lot-for-lot scheduling given certain requirements and lead times • Determining lot sizes • Trading purchase price for inventory carrying cost • Handling uncertainties in the master schedule • Minimum inventory levels • Part-period cost balancing • Handling lead time uncertainties CR (2004) Prentice Hall, Inc.

  10. MRP Scheduling Example The master schedule for a particular part over the next 8 weeks shows requirements of: 1 2 3 4 5 6 7 8 150 500 350 300 1000 800 700 500 The average lead-time to receive these parts from a vendor is 2 weeks. A previous order for 800 units has been placed with the vendor and will arrive by week 2. An inventory of 200 units is currently on hand. Lot-for-lot scheduling Purchase orders are matched on a one-for-one basis with requirements. CR (2004) Prentice Hall, Inc.

  11. MRP Example (Cont’d) Lot-for-lot scheduling (Cont’d) Week 1 2 3 4 5 6 7 8 Require- ments 150 500 350 300 1000 800 700 500 Scheduled receipts 800 300 1000 800 700 500 Quantity on hand 200 50 350 0 0 0 0 0 0 Purchase releases 300 1000 800 700 500 10-11 CR (2004) Prentice Hall, Inc.

  12. MRP Example (Cont’d) Purchase order minimums Vendors can set order minimum quantities to avoid the high cost of handling small orders. This will usually force some inventory into the system. Part period cost balancing The economically best order quantities can be set by balancing the cost of processing an order with the cost of carrying the inventory associated with ordering more than what is immediately needed. Suppose it costs $120 to process and deliver each order. Inventory carrying costs are 25% per year, or $0.07 per unit per week on parts valued at $15. 10-12 CR (2004) Prentice Hall, Inc.

  13. MRP Example (Cont’d) Order minimums Suppose the vendor has an order minimum of 500 units. Week 1 2 3 4 5 6 7 8 Require- ments 150 500 350 300 1000 800 700 500 Scheduled receipts 800 300 800 800 700 500 Quantity on hand 200 50 350 0 200 0 0 0 0 Purchase releases 500 800 800 700 500 Order min. qty. 10-13 CR (2004) Prentice Hall, Inc.

  14. Part-Period Example (Cont’d) An order is to be released for a quantity to just meet requirements or for a quantity that will meet several weeks’ requirements. Find the average inventory costs for ordering 1 week’s requirements, 2 weeks’ requirements, etc. The order quantity is the one that best matches the order processing cost. Method Find the average inventory in each week. Average inventory is beginning inventory  ending inventory/2, where beginning inventory is scheduled receipts  quantity on hand. Ending inventory is beginning inventory – requirements. Therefore, CR (2004) Prentice Hall, Inc.

  15. Part-Period Example (Cont’d) Closest to $120 process cost Since the carrying cost of Q = 1,300 best matches the process/order cost of $120, then it is best to order 2 weeks ahead. After 2 weeks, compute for a new quantity. 10-15 CR (2004) Prentice Hall, Inc.

  16. Week 1 2 3 4 5 6 7 8 Require- ments 150 500 350 300 1000 800 700 500 Scheduled receipts 800 500 900 800 700 500 Quantity on hand 200 50 350 500 200 100 100 100 100 Purchase releases 500 900 800 700 500 MRP Example (Cont’d) Safety stock Uncertainties in the master schedule and in the lead times are sometimes handled by requiring a minimum quantity on hand to be maintained. Suppose a safety stock of 100 units is to be maintained with a 500-unit order-size minimum. 10-16

  17. MRP Example (Cont’d) Setting the lead-time Suppose there is a cost of delaying production when the parts do not arrive on time. A carrying cost of $5 per unit per day is incurred (cost is different from previous illustration for contrast). Lead-time averages 14 days (2 weeks) with a standard deviation of 3 days and is normally distributed. What is the proper lead-time to release orders? We are looking for T* on the lead time distribution. First, we find the probability of delaying production from CR (2004) Prentice Hall, Inc.

  18. MRP Example (Cont’d) where Pc = cost of having materials after they are needed ($/unit/day) Cc = cost of having materials before they are needed ($/unit/day) From a normal distribution table, this is a point of 2.33 standard deviations from the average lead time, or z = 2.33. Then, CR (2004) Prentice Hall, Inc.

  19. MRP Example (Cont’d) where T* = order release time LT = average lead-time sLT = standard deviation of lead-time (days) z = number of standard deviations between LT and T* Hence, T*= 14 + 2.33(3) = 21 days Lead-time should be considered 3 weeks instead of 2 weeks. This will force some inventory into the system. CR (2004) Prentice Hall, Inc.

  20. sLT=3 LT=14 T* MRP Example (Cont’d) Lead time distribution with order release point P CR (2004) Prentice Hall, Inc.

  21. Supply to Requirements (Cont’d) KANBAN Definition A method of scheduling using the order point inventory control procedure, but with very low setup costs and very short lead-times. • Characteristics of the scheduling method are: • Models are repeated frequently in the master schedule. A typical master schedule for economies of scale might look like. • AAAAAABBBBBBAAAAAABBBBBB • but a KANBAN schedule would approach • ABABABABABABABABABABABAB CR (2004) Prentice Hall, Inc.

  22. Kanban (Cont’d) • Lead-times are predictable because they are short and because suppliers are located near the site of operations • Order quantities are small because setup or procurement costs are kept low • Few vendors are used with high expectations of vendors and high level of cooperation with them • Classic reorder point inventory control is used to determine reorder quantities and timing of purchases CR (2004) Prentice Hall, Inc.

  23. KANBAN vs. Supply to Inventory Factors KANBAN/JIT Scheduling Supply to Inventory Inventory A liability. Every effort must An asset. It protects against forecast be expended to do away with errors, machine problems, late vendor it. deliveries. More inventory is "safer." Lot Sizes Size for immediate needs only. Formulas are used. Optimum lot A minimum replenishment sizes frequently revised based on the quantity is desired for both tradeoff between the cost of manufactured and purchased inventories and the cost of set up. goods. 10-23 CR (2004) Prentice Hall, Inc.

  24. KANBAN vs. Supply to Inventory Factors KANBAN/JIT scheduling Supply to Inventory Set Ups Make them insignificant. This Low priority. Maximum output is the usual requires either extremely rapid goal. Rarely does similar thought and effort changeover to minimize the go into achieving quick changeover. impact on operations, or the availability of extra machines already set up. Fast changeover permits small lot sizes to be practical, and allows a wide variety of parts to be made frequently. Queues Eliminate them. When Necessary investment. Queues permit problems occur, identify the succeeding operations to continue in the causes and correct them. The event of a problem with the feeding correction process is aided operation. Also, by providing a selection of when queues are small. If the jobs, the factory management has a greater queues are small, it surfaces the opportunity to match up varying operator need to identify and fix the skills and machine capabilities, combine set- cause. ups and thus contribute to the efficiency of the operation. 10-24 CR (2004) Prentice Hall, Inc.

  25. KANBAN vs. Supply to Inventory Factors KANBAN/JIT Scheduling Supply to Inventory Vendors Co-workers. They're part of the team. Adversaries. Multiple sources Multiple deliveries for all active items are the rule, and it's typical to are expected daily. The vendor takes play them against each other. care of the needs of the customer, and the customer treats the vendor as an extension of his factory. Quality Zero defects. If quality is not 100%, Tolerate some scrap. Scrap is production is in jeopardy. tracked and formulas are developed for predicting it. Equipment Constant and effective. Machine As required. But not critical mainten- breakdowns must be minimal. because of queues available. ance Lead times Keep them short. This simplifies the The longer the better. Most job of marketing, purchasing, and foremen and purchasing agents manufacturing as it reduces the need want more lead time, not less. for expediting. 10-25 CR (2004) Prentice Hall, Inc.

  26. KANBAN vs. Supply to Inventory Factors KANBAN/JIT Scheduling Supply to Inventory Workers Management by consensus. Changes Management by edict. New are not made until consensus is systems are installed in spite of reached, whether or not a bit of arm the workers. The concentration twisting is involved. The vital is on measurements to determine ingredient of "ownership" is achieved. whether or not they're doing it. 10-26 CR (2004) Prentice Hall, Inc.

  27. Supply Chain Dynamics “Bullwhip Effect” Supply channel Customer Customer Firm A Firm C Demand Firm B Firm A Firm C Demand on upstream firms varies greatly with small changes in downstream demand Time 10-27 CR (2004) Prentice Hall, Inc.

  28. Bullwhip Effect (Cont’d) • Reasons for the effect • Internal • Demand shifts • Product/service changes • Late deliveries • Incomplete shipments • External • Supply shortages • Engineering changes • New product/service introductions • Product/service promotions • Information errors Remedies • Centralize demand forecasting • Improve forecasting accuracy • Reduce lead-time uncertainties throughout the channel • Smooth response to change 10-28 CR (2004) Prentice Hall, Inc.

  29. 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.

  30. Purchasing What is purchasing? • Primarily a buying activity • A decision area to be integrated with overall materials management and logistics • At times, an area to be used to the firm’s strategic advantage Mission Securing the products, raw materials, and services needed by production, distribution, and service organizations at the right time, the right price, the right place, the right quality, and in the right quantity. CR (2004) Prentice Hall, Inc.

  31. Purchasing (Cont’d) What is purchased? • 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.

  32. Purchasing (Cont’d) Importance of purchasing management • Decisions impact on 40 to 60% of sales dollar • Decisions are highly leveraged • Sets terms of sale • Evaluates the value received • Measures inbound quality if not a responsibility of quality control • Predicts price, service, and sometimes demand changes • Specifies form in which goods are to be received Activities of purchasing • Selects and qualifies suppliers • Rates supplier performance • Negotiates contracts • Compares price, quality, and service • Sources goods • Times purchases 10-32 CR (2004) Prentice Hall, Inc.

  33. Importance of Purchasing Leverage principlecosts A company with $100 million in sales wishes to double profits. How to do it? ConclusionReducing purchase prices requires the least change 10-33 CR (2004) Prentice Hall, Inc.

  34. Sales $10 million Profit Less $500,000 Profit a Total cost Divided ($750,000) margin $9.5 million by 5% Sales (9.25 million) b (7.5%) $10 million Return on Multiplied assets by 10% Sales (15.3%) $10 million Investment Divided turnover by 2 times Total c Inventory assets (2.04) $2 million $5 million ($1.9 million) ($4.9 million) a Purchases are 50% of total sales. b Figures in parentheses assume a 5% reduction in purchase prices. c Inventory is 40% of total assets. Importance of Purchasing Leverage principlereturn on assets A 5% reduction in purchase price can lead to a 15% increase in return on assets 10-34 CR (2004) Prentice Hall, Inc.

  35. Supplier Selection Criteria for selecting suppliers • Past or anticipated relations • Honesty • Financial viability • Reciprocity • Measured performance • Price • Responsiveness to change or requests • On-time delivery • Product or service backup • Meeting quality goals CR (2004) Prentice Hall, Inc.

  36. Supplier Selection (Cont’d) Single vendors • Allows for economies of scale • Consistent with the just-in-time philosophy • Builds loyalty and trust • May be only source for unique product or service Multiple vendors • Encourages price competition • Diffuses risk • May disturb supplier relations, reduce loyalty, reduce responsiveness, and cause variations in product quality and service CR (2004) Prentice Hall, Inc.

  37. Supplier Selection (Cont’d) Finding suppliers • Personal contacts • Trade publications • Web sites, catalogs, and directories • Advertisements and solicitations Qualifying suppliers • Previous experiences and formal rating schemes • Word of mouth • Samples of product • Reputation • Site visits and demonstrations CR (2004) Prentice Hall, Inc.

  38. Supplier Selection (Cont’d) Criteria for selecting suppliers (Cont’d) • 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.

  39. Supplier Rating Example of weighted checklist method for supplier evaluation Weight Factor Formula 50% Quality 100% - % rejects 25% Service 100% - 7% for each failure 25% Price Lowest price offered Price actually paid Scoring actual performance Factor Weight Performance Evaluation Quality 50 5% rejects 50x(1-.05) = 47.50 Service 25 3 failures 25x[1-(.07x3)] = 19.75 Price 25 $100 25x($90/$100) = 22.50 Overall 89.75 Compare to best score of 100 and to scores for other suppliers. 10-39 CR (2004) Prentice Hall, Inc.

  40. 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.

  41. 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: Shipping Kansas Avail- point Cleveland Atlanta City ability Philadelphia 2 3 5 5,000 Houston 6 4 3 15,000 St Louis 3 3 1 4,000 Los Angeles 8 9 7 15,000 Requirements 4,000 2,000 7,000 Each part weighs 100 lb. (1 cwt.) and rates are in $/cwt. CR (2004) Prentice Hall, Inc. 10-41

  42. Allocation (Cont’d) Current purchase: Buy from supplier with lowest price. Thus, all purchases from LA Tool for a total cost of: Purchase costs 13,000 x 96 = $1,248,000 Transport to CLE 4,000 x 8 = 32,000 Transport to ATL 2,000 x 9 = 18,000 Transport to KC 7,000 x 7 = 49,000 Total $1,347,000 Is buying based on lowest price a good strategy? CR (2004) Prentice Hall, Inc. 10-42

  43. Allocation (Cont’d) Purchase price plus transport Allocate using linear programming 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 10-43 CR (2004) Prentice Hall, Inc.

  44. Allocation (Cont’d) Revised plan PHI to CLE 102 x 4000 = $408,000 PHI to ATL 103 x 1000 = 103,000 STL to KC 100 x 4000 = 400,000 LAX to ATL 103 x 1000 = 103,000 LAX to KC 103 x 3000 = 309,000 Total $1,325,000 This allocation saves $22,000 per purchase Now, asking “what if” questions can provide insight into good allocation plans. CR (2004) Prentice Hall, Inc. 10-44

  45. Allocation (Cont’d) Problem What if CLE and KC markets are increased by 20% and ATL market is increased by 50%. Solution CLE ATL KC PHI 4800200 HOU STL 28001200 LAX 7200 Total cost = $1,657,400 CR (2004) Prentice Hall, Inc. 10-45

  46. Allocation (Cont’d) Problem What if Philadelphia price is increased by 10%? Solution CLE ATL KC PHI HOU STL 20002000 LAX 40005000 Total cost = $1,335,000 CR (2004) Prentice Hall, Inc. 10-46

  47. Allocation (Cont’d) Problem What if STL is no longer a supplier? Solution CLE ATL KC PHI 4000 1000 HOU STL LAX 10007000 Total cost = $1,337,000 CR (2004) Prentice Hall, Inc. 10-47

  48. CLE ATL KC PHI 4000 1000 HOU STL 1000 7000 LAX Total cost = $1,313,000 Allocation (Cont’d) Problem What if STL’s capacity is doubled? Solution ObservationsHouston is a weak supplier. Perhaps some price concessions can be negotiated? Philadelphia is price sensitive and cannot withstand much of a price increase. St Louis is a valuable supplier and more capacity should be sought. CR (2004) Prentice Hall, Inc. 10-48

  49. Timing of Purchases Methods • Through just-in-time planning • Material requirements planning for continuous work • Gantt charts and CPM/PERT for project work • Through inventory management • Push methods • Pull methods • According to market conditions • Speculative buying • Forward buying • Hand-to-mouth buying, or buying to current requirements 10-49

  50. Timing of Purchases (Cont’d) Speculative buying Buying more than the foreseeable requirements at current prices in the hope of reselling later at higher prices. Some of the purchased quantities may be used in production and some simply resold. Generally a financial activity, not a materials management one. 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 10-50 CR (2004) Prentice Hall, Inc.

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