Procurement in Industrial Management BPT3133 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

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

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

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

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

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

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

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

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

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

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”

High Inventory – Hides Problems

Less Inventory – Exposes Problems

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 13

ABC Analysis A B C % of Inventory Items % Annual $ Usage Class % $ Vol 20 40 60 80 100 50 150 % of Inventory Items % Annual $ Usage A B C Class % $ Vol % Items 15 30 5 55 14

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

Types of Demand Independent Demand Dependent 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

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

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 25

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

Why Holding Costs Increase More units must be stored if more ordered Purchase Order Description Qty. Microwave 1000 Order quantity Purchase Order Description Qty. Microwave 1 Order quantity 27

Why Order Costs Decrease Cost is spread over more units Example: You need 1000 microwave ovens Purchase Order Description Qty. Microwave 1 1 Order (Postage $ 0.32) 1000 Orders (Postage $320) Order quantity 1000 28

EOQ Cost Model + S - set-up (ordering) cost D - annual demand H – holding (carrying) cost Q - order quantity 1. Total annual cycle-inventory cost = Holding Cost + Set-up Cost SD Q HQ 2 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

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

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

Operation of a reorder point inventory system 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

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

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

MRP Example

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

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.

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

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

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.