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8/4/2019 zTeaching Slides 11 Purchasing and Inventory Mgt
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purchasing
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PURCHASING and MATERIALS MGT
Receiving
and
Inspection
Raw
Materials,
Parts, and
In-process
Ware-
Housing
Production
Finished
Goods
Ware-
housing
Inspection,
Packaging,
And
ShippingSuppliers
Customers
Materials Management
Purchasing
Production
Control
Warehousing and
Inventory ControlShipping
and Traffic
Physical materials flow
Information flow
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Purchasing
Management Maintain data base of available,
qualified suppliers
Select suppliers to supply eachmaterial
Negotiate contracts with suppliers
Act as interface between company andsuppliers
Provide training to suppliers on latesttechnologies
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Mission of Purchasing
Develop purchasing plans for each major productor service that are consistent with operationsstrategies:
Low production costs
Fast and on-time deliveries
High quality products and services
Flexibility
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purchasing & ITSOBJECTIVES
Purchasing is the activity that decides which suppliers touse, negotiates contracts and determines whether to buylocally
Objectives of Purchasing
Support the operational needs and requirements ofpurchasing customers
Manage the purchasing function efficiently and effectively
Select, develop and maintain sources of supply
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OBJECTIVES OF purchasing
Objectives of Purchasing
Develop strong relationships and interact closely with otherfunctional groups
Support a companys goals and objectives
Develop integrated purchasing strategies that enhancecompany strategies
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Purchasing Process
Material Requisition
Request for Quotations
Select Best Supplier
Purchase Order
Receive and Inspect Goods
From purchasing,
to potential suppliers
From any department,
to purchasing
Based on quality, price,
lead time, dependability
From purchasing,
to selected supplier
From supplier, to receiving,quality control, warehouse
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purchasing stages
1. Materials Need
Identification
2. Evaluate Potential
Supply Sources
3. Source Selection
4. Release & Receiptof Material
5. Supplier PerformanceMeasurement &Continuous Management
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Need identification
Purchase Requisition & Traveling Purchase Requisition
Re-order Point System
Stock Checks
Cross-Functional Teams
Reducing the time for need identification
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purchase requisition
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Supply source evaluation
Routine purchases and new purchases
Source evaluation begins with list of suppliers
For new items, Preferred list of suppliers would be better
Preferred list of suppliers have exhibited capabilities inproduct design, commitment to quality, cost, management
commitment, technical ability, delivery performance
Final evaluation might require a visit to suppliers plant andfacilities
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source selection
After supplier evaluation, supplier has to be selected
Two selection methods - Competitive bidding & Negotiation
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Competitive bidding
Competitive bidding is effective under followingcircumstances
Volume is high enough to justify this method of businessSpecifications are very clear to seller i.e. they are notcomplex to understand
Adequate number of qualified sellers exist in the market
Adequate time is given and available to suppliers toevaluate the requests for bids
Buyer doesnt have preferred supplier for that item
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negotiation
Face-to-face negotiation is best under these circumstances
When any of the criteria mentioned for bidding is missing.
Ex. when the specifications are very complex or when theitem is new
When the buyer requires early supplier involvement
When the supplier requires long period of time to develop
and produce the items.
When the purchase is being done on multiple performancefactors like price, quality, delivery, product support
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Release & receipt of materialrequirements
This involves physical transmittance of purchaserequirements to the supplier.
PURCHASE ORDER (PO) is the most common form
EDI is the highly used mode of transmitting the PO
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purchase order
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Supplier performancemeasurement
This is necessary in order to
improve buyer-seller relationships
give supplier, feedback, so that performance improves
have quantitative data collected which comes in handy at
timescollect data even if it is one time purchase from a supplier
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INVENTORY MANAGEMENTTECHNIQUES
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Strategic Role of Inventory
1. Organisation Goals and Customers Needs2. Measure of Organisation Performance3. Impact of Inventory on Organisation
Performance4. Conflicting Goals of Inventory5. Inventory Strategy in Support of
Organisation Performance
6. Measurement of Inventory Costs
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Supplier Company Co.W/house DistributorCO
NSUMPTIO
N
RMInventory
WIPInventory
FGInventory
(Stores)
FGInventory
(Warehouse)
FGChannel
Inventory
FGRetail
Inventory
Forecast
Chain Mgt.
ConsumptionUncertainty
ProcessingUncertainty
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Inventory
Processstage
Demand Type
Number& Value
Other
Raw Material
WIPFinishedGoods
IndependentDependent
A Items
B ItemsC Items
SPARES
MaintenanceRepair
Operating
Inventory Classifications
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TYPES DEFINITION
1. Production Inventories:These are of 2 types
a) those purchased from the market like rawmaterials, spare parts and components; and
b) special parts or components manufactured inones own company and kept in stock for use.
2. MRO Inventories or Maintenance, Repairsand Operating Supplies:Bought-out materials required for maintenance ofthe production process but which do not form partof the finished product.
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3. Work-in-progress or In-process Inventories:
Semi-finished products usually found on the
factory floor in various stages of production.
4. Finished Goods:
End product for sales to customers.
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PRIMARY CAUSES OF INVENTORIES
1. Faulty Sales Forecasting
2. Rigid Production Batch Quantities
3. Bureaucratic Time-consuming Purchase
Procedures
4. Orders on Unreliable Suppliers
5. Delays in Imports and Clearance of ImportedCargoes
6. Wrong Transportation Modes
7. Poor Coordination between Sales, Productionand Materials Departments
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PURPOSE & FUNCTION OF INVENTORY
Inventory is created for two general purposes,i.e. Protection and Economy.
Inventory has four basic functions:
1. The Lot-size Inventory
2. Fluctuation Inventory
3. Anticipation Inventory4. Transportation Inventory
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The Functions of Inventory
Provide a stock of goods to meetanticipated customer demand and
provide a selection of goods Decouple suppliers from production and
production from distribution
Allow one to take advantage of quantitydiscounts
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To provide a hedge against inflation
To protect against shortages due todelivery variation
To permit operations to continuesmoothly with the use of work-in-
process
The Functions of Inventory
(Continued)
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Higher costs Item cost (if purchased)
Ordering (or setup) cost Costs of forms, clerks wages etc.
Holding (or carrying) cost Building lease, insurance, taxes etc.
Difficult to control Hides production problems
Disadvantages of Inventory
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IMPACT ON PROFITABILITY
Holding inventories is often very expensive. Moreinventories mean more costs and this has a directimpact on the profitability of any organisation.
Inventory turnover:If a company keeps inventories equal to one monthsconsumption, it means that the inventory turnover is 12times, i.e. the entire inventory is being used up and
replaced 12 times a year. If it keeps inventories equalto six months consumption, on an average, it meansthat the total inventory turnover is two times.
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The inventory turnover rate is a quick guide tothe mileage obtained from money, tied up ininventories. The method to calculate it issimple:
1. Annual accounts shows inventories -(i) at the beginning of the year Rs. 6.20 lakhs(ii) at the close of the year Rs. 5.80 lakhs
2. Average inventory holding Rs. 6.00 lakhs
3. Material consumed during the year Rs. 24.00 lakhs
4. Average inventory as number ofmonths consumption = 624x12 3 months
5. Inventory turnover rate 4 months
INVENTORY TURNOVER
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DETERMINING STOCK LEVELS
There are various levels of stocks:
1. Deficiency Level: Stock in hand isinadequate to meet needs.
2. Exhaust Bin Level: Stocks are exhausted.
3. Buffer Stock or Minimum Stock Level
4. Danger Warning Level
5. Re-order Level or Provisioning Level: Thepoint at which the order has to be placed.
6. Maximum Stock Level: Maximum quantityto be stocked at any one time.
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METHODS OF CONTROLLING STOCK LEVELS
1. FIXED QUANTITY SYSTEM: Order areplaced at fixed stock level.
2. FIXED TIME SYSTEM: Order are placed at
constant intervals of time.
3. IMPREST STOCK CONTROL: Involves thedetermination of a maximum level for the
bin and a periodical inspection, but notfixed, of stock levels in the bin. The bin isthen topped up to the maximum level.
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METHODS OF CONTROLLING STOCK LEVELS
4. OPEN ACCESS BINSThe operators help themselves to thestocks without having to make records.
5. TWO BIN SYSTEMIn this system, two bins are kept havingdifferent levels. When the first bin isexhausted, it means that it is time for
replenishment. The second bin is reservestock.
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SELECTIVE INVENTORY CONTROL
Classification Criteria
1. A-B-C (Sometimes nick-named : Annual value of consumption of theAlways Better Control). items concerned. (It has nothing to do
with the unit of value of the item.)
2. H-M-L (High Medium Low) Unit price of material. (This is the
opposite of A-B-C and does not takeconsumption into account.)
3. V-E-D (vital, Essential and By the critical nature of the componentDesirable) or material with respect to production.
4. S-D-E (Scarce, Difficult to obtain Purchasing problems in regard toEasy to obtain) availability.
5. G-O-L-F (Government, Ordinary, Source of material.Local, Foreign)
6. F-S-N (Fast moving, Slow moving Issues from storesand Non-moving)
7. S-O-S (Seasonal, Off-seasonal) Seasonality. This applies especially tocommodities.
8. X-Y-Z The inventory value of items stored.
Selective Inventory Control can be divided into eight types. They are :
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0
20
4060
80
100
0 50 100 150% of Inventory Items
% Annual $ Usage
A
B C
Class % $ Vol % ItemsA 80 15B 15 30C 5 55
Classifying Items as ABC
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SELECTIVE INVENTORY CONTROL
Annual Classifi- No. Items Total value PercentConsumption cation of per cent of items valuelimits items Rs. million
Above Rs. 5,000 A 77 4.2 2.57 82.2
Between Rs.1,000 - - - - -
and Rs. 4,999 B 194 10.5 0.38 12.2
Below Rs. 1,000 C 1571 8.53 0.17 5.6
1842 100.00 3.12 100.00
A-B-C ANALYSIS
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SELECTIVE INVENTORY CONTROL
A B C
1. Tight control on stock levels Moderate control Loose control.
2. Only exact requirement to be More or less on On estimated usage.procured. Always have more exact requirement.than one source. Centralise Reduce lead times.
procurement.
3. Individual postings in stores Individual postings. Collective postingscard and in terms of charging or preferably noneout cost to consumption. at all.
4. Continuous check on Broad check on Hardly any check
schedules and revision schedule revisions. required.where called for.
5. Very low buffer stock or if Exact requirements No restriction orpossible, none at all. To be worked out. fairly large safety
stocks.
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A B C
6. Regular expediting Some follow-up No follow-upand follow-up. necessary.
7. Very strict consumption Consumption control Though consumption
control by laying down is highly desirable. control is desirable,standards and norms. Much attention need
not be bestowed.
8. Material planning should Past consumption Rough estimatesbe very accurate especially may be taken as would be satisfactoryin regard to forecasts. Basis
9. Concerted effort at cost Moderate attempts An annual review.reduction through modern would be sufficient.techniques like valueanalysis. Efforts should bemore at import substitution
if the item is an imported one.
SELECTIVE INVENTORY CONTROLContinued
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SELECTIVE INVENTORY CONTROL
Classes V items E items D items
A items Constant control Moderate stocks Nil stocksand regular follow up
B items Moderate stocks Moderate stocks Very low stocks
C items High stocks Moderate stocks Low stocks
Procedure of using A-B-C and V-E-D
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SELECTIVE INVENTORY CONTROL
Class X items Y items Z itemsof items
A items A critical analysis must Attempts must be Items arebe done in an effort to made to convert within controlreduce stocks Z category
B items Consumption and stock Further action in Can beshould be reviewed control may not reviewed twicefrequently be necessary a year
C items Steps should be Controls should Can betaken to dispose of be tightened reviewedsurplus stocks annually
XYZ and ABC can be used in conjunction and the method ofcontrol will be as follows:
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SELECTIVE INVENTORY CONTROL
Class F items S items N itemsof items
X items Tight inventory Reduction of stock Quick disposal ofcontrol to very low level items at optimum
price.
Y items Normal inventory Low level of Should becontrol stocks disposed as early
as possible
Z items Can reduce Clerical Low level of Can afford tolabour by increasing stocks dispose at lowerstocks prices
We can also merge FSN and XYZ classifications as givenbelow:
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OPTIONAL
Or
COVERED BY EA
Holding Ordering and Setup
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Holding, Ordering, and SetupCosts
Ordering costs - associated with costs ofplacing order and receiving goods
Holding costs - associated with holdingor carrying inventory over time
Setup costs - cost to prepare a machine
or process for manufacturing an order Stock Out CostsCost of not meeting
Demand
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COST OF INVENTORY
1. Purchasing or Ordering Cost
i) Total number of purchase orders issued.
ii) Payroll costs of the entire purchase
department, inventory control sectionand the receiving and inspection section.
iii) Stationery and supplies
iv) Rents and office maintenanceexpenditure and overheads liketelephone, telegrams, etc.
v) Receiving and inspection costs.
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COST OF INVENTORY
2. Inventory Carrying or Holding Cost
i) Interest on the capital locked up on thematerials stocked.
ii) Rentals for space occupied by thestores and taxes payable.
iii) Insurance premia on the goods
iv) Obsolescence
v) Shrinkage
vi) Evaporation
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COST OF INVENTORY
vii) Deterioration or spoilage
viii) Personal, Payroll costs involved in the
functioning of the stores-department.ix) Overheads like electricity, water,
maintenance, costs, etc., incurred inthe functioning of the stores
department.
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Cost of Inventory
3) Set-up Cost
Clean-up costs
Re-tooling costs
Adjustment costs
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Cost of Inventory
4) Stock Out Cost
Lost Sale
Lost Customer
Lost Opportunities
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INDICATORS OF EFFICIENT PERFORMANCE
1. Inventory Turnover Ratioa) Overall: Sales to inventory ratio
Sales at sales value= ----------------------------
Total average inventory
The average inventory is obtained by adding up all the month-end inventory figures and dividing the total by 12. The totalinventory means raw materials, stores etc., WIP and finishedgoods.
b) Manufacturing materials:
Inventory as number of days of consumptionActual inventory of mfg. materials
= ---------------------------------------- x 365Total consumption for the year
This can be separately calculated for raw materials, spare
parts, components, etc.
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INDICATORS OF EFFICIENT PERFORMANCE
c) Work-in-process:Inventory in terms of days of production at production cost
Actual WIP inventory= ----------------------------------------------
Production at product cost for the year
b) Finished goods:Inventory in days of sales at cost
Actual finished goods inventory= -------------------------------------- x 365
Total yearly sales at cost
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INDICATORS OF EFFICIENT PERFORMANCE
2. Other Management Ratios
a) Service level ratio
No. of demands met in time= ----------------------------------- x 100
Total no. of demands received
b) Stock out index
No. of items not met in time= ------------------------------------ x 100
Total no. of demands received
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INDICATORS OF EFFICIENT PERFORMANCE
c) Inventory carrying cost index
Total cost of holding inventories= -------------------------------------- x 100
Average value of inventory
d) Spare parts index
Value of spare parts inventory= ------------------------------------
Value of capital goods
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TYPES OF SPARE PARTS
1. Maintenance SparesThese are required for a regular replacement of partswhich wear out or those which are to be replaced afterspecific periods of service.
2. Insurance SparesThese are also called emergency spares or capitalspares.
3. Repairable or Rotable partsThe word rotablehas originated from the air force. Thepart is removed from the aircraft after a specifiednumber of hours of use or on its failure. It is sent to therepair workshop where it is tested and repaired oroverhauled. After it is certified as okay, it is broughtback into stock to be again reused on the aircraft.
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Overall Generic Strategies
1. Low Cost Operations
2. Quick Response
3. Differentiation
Inventory Support for
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Inventory Support forOverall Strategy
Low Cost Response
Inventory
Characteristics
Minimizeinventory
throughoutthe chain tohold down
costs
Developresponsivesystem,
with bufferstocks
positioned
to ensuresupply
Minimizeinventory inthe chain to
avoidobsolescenc
e
Differentiation