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Order Management

Order Management. Procurement in Industrial Management BPT3133. Chapter Outline. Order Processing Ordering Process Flow Document Involved Order Quantities Independent Demand Order System Economic Order Quantity (EOQ) Reorder Point System (ROP) Computer Information System.

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Order Management

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  1. Order Management Procurement in Industrial Management BPT3133

  2. Chapter Outline • Order Processing • Ordering Process Flow • Document Involved • Order Quantities • Independent Demand Order System • Economic Order Quantity (EOQ) • Reorder Point System (ROP) • Computer Information System

  3. Learning Objectives • Identify methods of stock control and their application • Examine positive and negative reasons for holding stock and approaches to reducing inventories • Explain the Economic Order Quantity (EOQ) concept

  4. Order Processing • Order processing is a key element of order fulfillment. Order processing operations or facilities are commonly called "distribution centers". • Order processing is the term generally used to describe the process or the work flow associated with the picking, packing and delivery of the packed item(s) to a shipping carrier. • The specific order fulfillment process or the operational procedures of distribution centers are determined by many factors. Each distribution center has its own unique requirements or priorities. There is no "one size fits all" process that universally provides the most efficient operation

  5. Order Processing Tactics and tools that can help manage the order fulfillment processes involving material flows between the firm and its external customers: • Inventory Placement • Vendor-managed inventories • Continuous replenishment program • Radio frequency identification • Distribution processes

  6. Shop Floor Control System Implemented by a combination of computer systems and human resources

  7. Order Release • Generates the documents needed to process a production order through the factory • The documents are sometimes called the shop packet, which consists of: • Route sheet • Requisitions to obtain starting materials • Job cards to report direct labor time • Move tickets to transport parts • Parts list for assembly jobs

  8. Order Scheduling • Assigns the production orders to work centers in the factory • A dispatch list is prepared indicating which orders should be accomplished at each work center • Also provides relative priorities for the jobs, e.g.: by showing due dates for each job • Dispatch list helps the department foreman assign work and allocate resources to achieve the master schedule

  9. Order Progress • Monitors the status of the orders, work‑in‑process and other parameters in the plant that indicate progress and production performance • Various techniques are available to collect data from factory operations • Called the factory data collection system, the techniques range from requiring workers to submit paper forms that are later compiled, to fully automated techniques with no human participation

  10. Inventory • Every organization holds some things in stock (inventory) • Inventory is an important element in operational effectiveness and often appears on the balance sheet as the biggest of current assets • Inventory is created when the receipt of materials, parts or finished goods exceeds their disbursement

  11. Types of Inventory Different inventory control procedures are appropriate, according to which type is managed

  12. Functions of Inventory • Provide a stock of goods to meet anticipated customer demand and provide a “selection” of goods • Provision for fluctuations in sales or production • Mistakes in planning • Allow one to take advantage of quantity discounts • To provide a hedge against inflation • To protect against shortages due to delivery variation • To permit operations to continue smoothly with the use of “work-in-process”

  13. High Inventory – HidesProblems

  14. Less Inventory – Exposes Problems

  15. Identifying Critical Inventory • Divides on-hand inventory into 3 classes • A class, B class, C class • Basis is usually annual $ volume • $ volume = Annual demand x Unit cost • Policies based on ABC analysis • Develop class A suppliers more • Give tighter physical control of A items • Forecast A items more carefully

  16. % Annual $ Usage Class % $ Vol % Items A 80 15 100 B 15 30 80 C 5 55 60 A 40 B 20 C 0 0 50 100 150 % of Inventory Items ABC Analysis

  17. Inventory Control • Concerned with achieving a balance between two competing objectives: • Minimizing the cost of maintaining inventory • Maximizing service to customers • Two different inventory control systems are required: • Order point systems – for independent demand items • Material requirements planning – for dependent demand items

  18. Types of Demand • Independent Demand • Demand or consumption of the item is unrelated to demand for other items • Eg.: end products and spare parts • Dependent Demand • Demand for the item is directly related to demand for something else, usually because it is a component of a product subject to independent demand • Eg.: automobile – it’s an end product, its demand is independent • However, tires on new automobiles are examples of dependent demand

  19. Order Point Systems • Two related issues encountered when controlling inventories of independent demand items: • How much to order - often decided by means of economic order quantity (EOQ) formula • When to order - accomplished using reorder points (ROP) Model of inventory level over time in the typical make to stock situation

  20. EOQ Assumptions • Demand rate is constant • Known and constant lead time • Instantaneous receipt of material • No quantity discounts • Only relevant costs are set-up (ordering) and holding • No constraints on lot size • Decisions for items are independent from other items

  21. Annual cost ($) Total Cost Slope = 0 Holding Cost = Minimum total cost HQ 2 SD Q Set-up Cost = Optimal order Qopt Order Quantity, Q EOQ Cost Model (Carrying) (Ordering)

  22. Purchase Order Purchase Order Description Qty. Description Qty. Microwave 1 Microwave 1000 Order quantity Order quantity Why Holding Costs Increase • More units must be stored if more ordered

  23. 1 Order (Postage $ 0.32) 1000 Orders (Postage $320) Purchase Order Purchase Order Purchase Order Purchase Order Description Qty. Purchase Order Description Qty. Description Qty. Description Qty. Microwave 1 Description Qty. Microwave 1000 Microwave 1 Microwave 1 Microwave 1 Order quantity Why Order Costs Decrease • Cost is spread over more units • Example: You need 1000 microwave ovens

  24. S - set-up (ordering) cost D - annual demand H – holding (carrying) cost Q - order quantity HQ 2 1. Total annual cycle-inventory cost = Holding Cost + Set-up Cost SD Q EOQ Cost Model TIC = + 2 × D × S 2. Economic (Optimal) Order Quantity, EOQ = H D 3. Expected Number of Orders, N = EOQ Working Days / Year 4. Expected Time Between Orders, T = N

  25. H = $0.75 per yard S = $150 D = 10,000 yards SD Q HQ 2 TIC = + Qopt = 2(150)(10,000) (0.75) (150)(10,000) 2,000 (0.75)(2,000) 2 Qopt = TIC = + 2SD H Qopt = 2,000 yards TIC = $750 + $750 = $1,500 EOQ Calculation Example Order Cycle Time,T = 311 days/ N = 311/5 = 62.2 store days No. of orders,N = D/Qopt = 10,000/2,000 = 5 orders/year

  26. Reorder Point System • When the inventory level for a given stock item declines to some point defined as the reorder point, this is the signal to place an order to restock the item • Reorder point is set at a high enough level so as to minimize the probability that a stock out will occur during the period between when the reorder point is reached and a new batch is received • Reorder point policies can be implemented using computerized inventory control systems

  27. Reorder Point System Operation of a reorder point inventory system D = d = × ROP d L Working Days Year / D = Demand per year ; d = Demand per day ; L = Lead time in days

  28. EOQ and ROP

  29. Material Requirements Planning • Computational procedure to convert the master production schedule for end products into a detailed schedule for raw materials and components used in the end products • The detailed schedule indicates the quantities of each item, when it must be ordered and when it must be delivered to achieve the master schedule • Most appropriate for job shop and batch production of a variety of products consisting of multiple components, each of which must be purchased and/or fabricated • It is the proper technique for determining quantities of dependent demand items that is raw materials, purchased parts and WIP which are used to manufacture independent demand products

  30. Lead Times in MRP • The lead time for a job is the time that must be allowed to complete the job from start to finish • Two kinds of lead times in MRP: • Ordering lead time - time required from initiation of the purchase requisition to receipt of the item from the vendor • Manufacturing lead time - time required to produce the item in the company's own plant, from order release to completion

  31. MRP Example

  32. Inputs to the MRP System • For the MRP processor to function properly, it must receive inputs from several files: • Master production schedule • Product design data as a bill of materials file • Inventory records • Capacity requirements planning

  33. MRP Output Reports • Order releases - authorize placement of orders planned by MRP system • Planned order releases in future periods • Rescheduling notices - indicating changes in due dates for open orders • Cancellation notices - indicate that certain orders are canceled due to changes in the master schedule • Inventory status reports • Exception reports, showing deviations from schedule, overdue orders, scrap, etc.

  34. Benefits of MRP • Inventory reductions • Faster response to changes in demand • Reduced setup and changeover costs • Better machine utilization • Improved ability to respond to changes in the master schedule • Helpful in developing the master schedule

  35. E-Commerce or CIS • Internet enables firms to reengineer their order placement process to benefit both the customer and the firm itself. Advantages include: • Cost Reduction • Allows greater participation by the customer • Reduce the need for call centers – labor intensive • Revenue Flow Increase • Reduces the time lags often associated with billing the customer • Global Access • Accept orders 24 hours a day – reduce the time it takes to satisfy customers • A competitive advantage over brick and mortar firms • Pricing Flexibility • Change prices as the needs arises – avoiding the cost and delay publishing new catalogs

  36. Summary • The method of ordering used depends upon the industry, the usage, the production technique and the cost of ordering • Stock is expensive to hold, therefore it is advantageous to reduce levels • EOQ technique works well for minor items used on a variety of products but makes limiting assumptions that price is stable and usage steady. It ignores lead time.

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