MATERIAL

MANAGEMENT
 Definition
It is concerned with planning, organizing and
controlling the flow of materials from their
initial purchase through internal operations to
the service point through distribution.
OR

Material management is a scientific

technique, concerned with Planning,
Organizing &Control of flow of materials, from
their initial purchase to destination.
 AIM OF MATERIAL MANAGEMENT

To get
1. The Right quality
2. Right quantity of supplies
3. At the Right time
4. At the Right place
5. For the Right cost
PURPOSE OF MATERIAL MANAGEMENT
To gain economy in purchasing
To satisfy the demand during period of
replenishment
To carry reserve stock to avoid stock out
To stabilize fluctuations in consumption
To provide reasonable level of client services
 Objective of material management
Primary
Right price Secondary
High turnover Forecasting
Low procurement Inter-departmental
& storage cost harmony
Continuity of supply Product improvement
Consistency in quality Standardization
Good supplier Make or buy decision
relations New materials & products
Development of Favorable reciprocal
personnel relationships
Good information
system
 Economy in material
management

Containing the costs

Instilling efficiency in all activities

 Four basic needs of Material
management
1. To have adequate materials on hand when
needed
2. To pay the lowest possible prices,
consistent with quality and value
requirement for purchases materials
3. To minimize the inventory investment
4. To operate efficiently
Basic principles of material management
1. Effective management & supervision
It depends on managerial functions of
Planning
Organizing
Staffing
Directing
Controlling
Reporting
Budgeting
2. Sound purchasing methods
3.Skillful & hard poised negotiations
4.Effective purchase system
5.Should be simple
6.Must not increase other costs
7.Simple inventory control programme
Elements of material management
1.Demand estimation
2.Identify the needed items
3.Calculate from the trends in
Consumption during last 2 years.
4.Review with resource constraints
Functional areas of material
management
1. Purchasing
2. Central service supply
3. Central stores
4. The print shops
5. The pharmacy
6. Dietary
& Linen services
PROCUREMENT
1. Directorate general of supply &
disposal (DGS & D, Govt. Of India]
2. Medical stores depot (M. S.D.
Government of India, Ministry of H &
FW]
3. Private or public sector
undertakings.
4. Receiving donations.
 Procurement cycle
Review selection
Determine needed quantities
Reconcile needs & funds
Choose procurement method
Select suppliers
Specify contract terms
Monitor order status
Receipt & inspection
Objectives of procurement system
Acquire needed supplies as inexpensively as
possible
Obtain high quality supplies
Assure prompt & dependable delivery
Distribute the procurement workload to avoid
period of idleness & overwork
Optimize inventory management through
scientific procurement procedures
 Open tender
Public bidding, resulting in low prices
Published in newspapers
Term - 4 weeks
Quotations must be sent in the specific forms
that are sold, before the time &date mentioned in
the tender form
In technical items, two packets or two bins
system is followed. Offers are given in two
separate packets.
Technical bid
Financial bid
Cont
First technical bid is opened & short listed
Then financial bid of selected companies are
opened & lowest is selected
Delayed tenders & late tenders are not accepted.
But if, in case of delayed tenders, if the rate quoted
is very less, then it can be accepted.
Quotations are opened in presence of indenting
department, accounts & authorized persons of party
Validity of tenders generally 90 days
Earnest money
2 % of the tender amount or as decided has to be paid
along with all quotations. In case of default 1/5 is withheld
Restricted or limited tender
From limited suppliers (about 10)
Lead-time is reduced
Better quality
Negotiated procurement
Buyer approaches selected potential Suppliers & bargain
directly
Used in long time supply contracts
Direct procurement
Purchased from single supplier, at his quoted price
Prices may be high
Reserved for proprietary materials, or low priced, small
quantity & emergency purchases
Rate contract
Firms are asked to supply stores at specified
Rates during the period covered by the
Contract

Spot purchase
It is done by a committee, which includes an
officer from stores, accounts & purchasing
departments

Risk purchase
If supplier fails, the item is purchased from
other agencies & the difference in cost is
recovered from the first supplier
Points to remember while purchasing
Proper specification
Invite quotations from reputed firms
Comparison of offers based on basic price, freight & insurance,
taxes and levies
Quantity & payment discounts
Payment terms
Delivery period, guarantee
Vendor reputation
(reliability, technical capabilities, Convenience, Availability, after-
sales service, sales assistance)
Short listing for better negotiation terms
Seek order acknowledgement
Storage
Store must be of adequate space
Materials must be stored in an appropriate place
in a correct way
Group wise & alphabetical arrangement helps in
identification & retrieval
First-in, first-out principle to be followed
Monitor expiry date
Follow two bin or double shelf system, to avoid
Stock outs
Reserve bin should contain stock that will cover
lead time and a small safety stock
Issue & use
Can be centralized or decentralized
 Materials Management
Importance
Component of cost of goods sold (COGS)
Labor component of COGS declining
Significant increase in cost of materials
Direct
Indirect (overhead)

21
 Materials Management
Enterprise

Finished-goods
Orders
Purchasing

Storage
Raw-material

Customers
Suppliers

Storage

Transformation

Distribution
Receiving

Processes

In-process
Storage

22
 Inventory control

It means stocking adequate

number and kind of stores, so that
the materials are available
whenever required and wherever
required. Scientific inventory
control results in optimal balance
 Inventory
One of the most expensive assets of many
companies representing as much as 50% of
total invested capital
Operations managers must balance
inventory investment and customer service

24
 Inventory
What is inventory?
Stock of materials
Stored Capacity
Examples:

25
 Inventory
Functions of inventory:
To meet anticipated customer demand
To decouple suppliers production distribution
To take advantage of quantity discounts
To hedge against inflation & price increases
To protect against delivery variations
To avoid production disruptions through use of
Work-In-Process (WIP)

26
 Inventory
Negative aspects of inventory:
Large inventories hide operational
problems
Financial cost in carrying excess inventories
Risk of damage to goods held in inventory
Risk of product obsolescence
27
 Inventory
Types of Inventory:
Raw material
Purchased but not processed
Work-in-process
Undergone some change but not completed
A function of cycle time for a product
Maintenance/repair/operating (MRO)
Necessary to keep machinery and processes productive
Finished goods
Completed product awaiting shipment

28
 Inventory
Examples:
Raw material
Iron ore steel mill
Flour bakery
Work-in-process
Radiator auto manufacturer
Draft contract attorney
29
 Inventory

Examples:
Maintenance / repair / operating
supplies (MRO)
Lubricatingoil machine shop
Soap and shampoo hotel

Finished goods
Candy bar confectioner
Policy insurance company
30
 Inventory
Transformation Process

Raw Finished
Materials goods
Vendors Work in Customers
process

31
 Water Tank Analogy

Inventory Level
Supply Rate

Inventory Level

Demand Rate
32
 ABC Analysis
How inventory items can be
classified
How accurate inventory records
can be maintained

33
 ABC Analysis
Divides inventory into three classes based on
annual rupee volume
Class A - high annual rupee volume
Class B - medium annual rupee volume
Class C - low annual rupee volume

Used to establish policies that focus on the few

critical parts and not the many trivial ones

34
 ABC Analysis
% Annual $ Usage Class % $ Vol % Items
100 A 80 15
B 15 30
80
C 5 55
60
40
A
B
20 C
0
0 50 100
% of Inventory Items
35
 ABC Analysis
Percent of Percent of
Item Number Annual Annual Annual
Stock of Items Volume Unit Dollar Dollar
Number Stocked (units) x Cost = Volume Volume Class

#10286 20% 1,000 $ 90.00 $ 90,000 38.8% 72% A

#11526 500 154.00 77,000 33.2% A

#12760 1,550 17.00 26,350 11.3% B

#10867 30% 350 42.86 15,001 6.4% 23% B

#10500 1,000 12.50 12,500 5.4% B

36
 ABC Analysis
Percent of Percent of
Item Number Annual Annual Annual
Stock of Items Volume Unit Dollar Dollar
Number Stocked (units) x Cost = Volume Volume Class

#12572 600 $ 14.17 $ 8,502 3.7% C

#14075 2,000 .60 1,200 .5% C

#01036 50% 100 8.50 850 .4% 5% C

#01307 1,200 .42 504 .2% C

#10572 250 .60 150 .1% C

37
Percent of annual dollar usage
ABC Analysis
A Items
80
70
60
50
40
30
20 B Items
10 C Items
0 | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100

Percent of inventory items

38
 ABC Analysis
Other criteria than annual dollar volume
may be used
Key accounts
Anticipated engineering changes
Delivery problems
Quality problems
High unit cost
39
 ABC Analysis
Policies employed may include
More emphasis on supplier development for A
items
Tighter physical inventory control for A items
More care in forecasting A items

40
 Cycle Counting
Items are counted and records updated on a
periodic basis
Often used with ABC analysis to determine
cycle

41
 Cycle Counting
Has several advantages
Eliminates shutdowns and interruptions
Eliminates annual inventory adjustment
Trained personnel audit inventory accuracy
Allows causes of errors to be identified and
corrected
Maintains accurate inventory records

42
 Cycle Counting
5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C
items
Policy is to count A items every month (20 working days), B
items every quarter (60 days), and C items every six months
(120 days)

Item Number of Items

Class Quantity Cycle Counting Policy Counted per Day
A 500 Each month 500/20 = 25/day
B 1,750 Each quarter 1,750/60 = 29/day

C 2,750 Every 6 months 2,750/120 = 23/day

77/day

43
 Control of Service Inventories
Can be a critical component of profitability
Losses may come from shrinkage or pilferage
Applicable techniques include
Good personnel selection, training, and discipline
Tight control on incoming shipments
Effective control on all goods leaving facility

44
 Control of Service Inventories
Shrinkage
Unaccounted retail inventory between receipt
and sale
Due to damage, theft and sloppy paperwork
Theft also known as pilferage
Accounts for 1% to 3% of sales

45
 Control of Service Inventories
Controls
Good personnel selection, training, and
discipline
Tight control of incoming shipments
Effective control of all goods leaving the facility

46
 Types of Demand
Independent demand - the demand
for item is independent of the
demand for any other item in
inventory
Refrigerator goods
Hamburger services

47
 Types of Demand
Dependent demand - the demand
for item is dependent upon the
demand for some other item in the
inventory
Ice maker goods
Ketchup services

48
 Materials Costs
Holding costs - associated with holding
or carrying inventory over time
Setup costs - associated with costs of
placing order and receiving goods
Out-of-stock costs - cost of back order
and cost of lost sales

49
 Holding Costs
Obsolescence
Insurance
Extra staffing
Cost of money (opportunity costs)
Pilferage
Damage
Warehousing
50
 Holding Costs
Cost (and Range) as a
Percent of Inventory
Category Value
Housing costs (including rent or depreciation, 6% (3 - 10%)
operating costs, taxes, insurance)

Material handling costs (equipment lease or 3% (1 - 3.5%)

depreciation, power, operating cost)
Labor cost 3% (3 - 5%)
Investment costs (borrowing costs, taxes, and 11% (6 - 24%)
insurance on inventory)
Pilferage, space, and obsolescence 3% (2 - 5%)
Overall carrying cost 26%

51
 Setup Cost
Supplies
Forms
Order processing
Clerical support

52
 Independent Demand Models
Fixed order-quantity models
Economic order quantity (EOQ)
Production order quantity (POQ)
Quantity discount
Probabilistic models
Fixed order-period models

53
 EOQ Model
EOQ assumptions:
Known and constant demand
Known and constant lead time
Instantaneous receipt of material
No quantity discounts
Only order (setup) cost and holding cost
No stockouts
54
 EOQ Model
EOQ inventory over time:
Order quantity = Usage Rate
Q (maximum Average
inventory level) Inventory
(Q*/2)
Inventory Level

Minimum
inventory 0
Time

55
 EOQ Model
EOQ Order Quantity:
Annual Cost

urv e
os t C
l C ur ve
Tot a s t C
Minimum C o
i n g
total cost Ho ld

Order (Setup) Cost Curve

Optimal Order quantity

Order Quantity (Q*)

56
 EOQ Model
D
Annual setup cost = S
Q

Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year

Annual setup cost = (Number of orders placed per year)

x (Setup or order cost per order)

Annual demand Setup or order

= Number of units in each order
cost per order

D (S)
=
Q
57
 EOQ Model
D
Annual setup cost = S
Q
Q
Annual holding cost = H
2

Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year

Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)
Order quantity
= (Holding cost per unit per year)
2

Q (H)
=
2
58
 EOQ Model
Q = Number of pieces per order
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the Inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Optimal order quantity is found when annual setup cost
equals annual holding cost
D Q
S = H
Q 2
Solving for Q* 2DS = Q2H
Q2 = 2DS/H
Q* = 2DS/H
59
 EOQ Model - Example
Determine optimal number of needles to order
D = 1,000 units
S = $10 per order
H = $.50 per unit per year

2DS
Q* =
H
2(1,000)(10)
Q* = = 40,000 = 200 units
0.50
60
 EOQ Model - Example

Determine optimal number of needles to order

D = 1,000 units Q* = 200 units
S = $10 per order
H = $.50 per unit per year

Expected Demand D
number of = N = Order quantity = Q*
orders
1,000
N= = 5 orders per year
200

61
EOQ Model - Example

62
EOQ Model - Example

63
 POQ Model
Answers how much to order and when to
order
Allows partial receipt of material
Other EOQ assumptions apply
Suited for production environment
Material produced, used immediately
Provides production lot size
Lower holding cost than EOQ model
64
 Quantity Discount Model
Answers how much to order & when to order
Allows quantity discounts
Reduced price when item is purchased in larger
quantities
Other EOQ assumptions apply

Trade-off is between lower price & increased

holding cost

65
 Probabilistic Model
Answer how much & when to order
Allow demand to vary
Follows normal distribution
Other EOQ assumptions apply

Consider service level & safety stock

Service level = 1 - Probability of stockout
Higher service level means more safety stock
66
 Fixed Period Model
Answers how much to order
Orders placed at fixed intervals
Inventory brought up to target amount
Amount ordered varies
No continuous inventory count
Possibility of stockout between intervals
Useful when vendors visit routinely
Example: Paul Mitchell representative calls on salon
every two weeks
67
Functions of inventory control

To provide maximum supply service,

consistent with maximum efficiency &
optimum investment.

To provide cushion between forecasted &

actual demand for a material
 Economic order of quantity
EOQ = Average Monthly Consumption X Lead Time [in
months] + Buffer Stock Stock on hand
Re-order level: stock level at which fresh
order is placed.
Average consumption per day x lead time +
buffer stock
Lead time: Duration time between placing
an order & receipt of material
Ideal 2 to 6 weeks.
 ABC ANALYSIS
(ABC = Always Better Control)
This is based on cost criteria.
It helps to exercise selective control when confronted
with large number of items it rationalizes the number of
orders, number of items & reduce the inventory.
About 10 % of materials consume 70 % of resources
About 20 % of materials consume 20 % of resources
About 70 % of materials consume 10 % of resources
 A ITEMS
Small in number, but consume large
amount of resources
Must have:
Tight control
Rigid estimate of requirements
Strict & closer watch
Low safety stocks
Managed by top management
 B ITEM
Intermediate
Must have:
Moderate control
Purchase based on rigid requirements
Reasonably strict watch & control
Moderate safety stocks
Managed by middle level management
 C ITEMS
Larger in number, but consume lesser
amount of resources
Must have:
Ordinary control measures
Purchase based on usage estimates
High safety stocks
ABC analysis does not stress on
items those are less costly but may
be vital
 VED ANALYSIS
Based on critical value & shortage cost of an item
It is a subjective analysis.
Items are classified into:
Vital:
Shortage cannot be tolerated.
Essential:
Shortage can be tolerated for a short period.
Desirable:
Shortage will not adversely affect, but may be using more
resources. These must be strictly Scrutinized

V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL

CATEGORY 2 - MODERATE CONTROL.
CATEGORY 3 - NO NEED FOR CONTROL
SDE ANALYIS
Based on availability
Scarce
Managed by top level management
Maintain big safety stocks
Difficult
Maintain sufficient safety stocks
Easily available
Minimum safety stocks
FSN ANALYSIS
Based on utilization.
Fast moving.
Slow moving.
Non-moving.
Non-moving items must be periodically reviewed to prevent
expiry
& obsolescence
HML ANALYSIS
Based on cost per unit
Highest
Medium
Low
This is used to keep control over consumption
at departmental level for deciding the frequency of physical verification.
 PROCURMENT OF EQUIPMENT
Points to be noted before purchase of an
equipment:
Latest technology
Availability of maintenance & repair facility,
with minimum down time
Post warranty repair at reasonable cost
Upgradeability
Reputed manufacturer
Availability of consumables
Low operating costs
Installation
Proper installation as per guidelines
 HISTORY SHEET OF EQUIPMENT :

History sheet

Name of equipment After sales arrangement

Code number Guarantee period
Date of purchase Warranty period
Name of supplier Life of equipment
Name of manufacturer Down time / up time
Date of installation Cost of maintenance
Place of installation Unserviceable date
Date of commissioning Date of condemnation
Environmental control Date of replacement
Spare parts inventory
Techn. Manual / circuit
diagrams / literatures
Maintenance sheet:
Annual maintenance contract
[AMC]
Starting date
Expiry date
Service / repair description
Materials / spares used
Cost of repairs
In-house
Outside agency
EQUIPMENT MAINTENANCE &
CONDEMNATION

Maintenance & repairs:

Preventive maintenance
Master maintenance plan
Repair of equipment
PREVENTIVE MAINTENANCE
Purchase with warranty & spares.
Safeguard the electronic equipments with: (as per
guidelines)
Voltage stabilizer, UPS
Automatic switch over generator
Requirement of electricity, water, space, atmospheric
conditions, etc. Must be taken into consideration
Well equipped maintenance cell must be available
All equipment must be operated as per instructions with
trained staff
Monitoring annual maintenance contracts. (AMC)
Maintenance cell
Communications between maintenance cell & suppliers of
the equipment.
Follow-up of maintenance & repair services
Repair of equipment
Outside agencies
In-house facility
CONDEMNATION & DISPOSAL
Criteria for condemnation:
The equipment has become:
1. Non-functional & beyond
economical repair
2. Non-functional & obsolete
3. Functional, but obsolete
4. Functional, but hazardous
5. Functional, but no longer
required
PROCEDURE FOR CONDEMNATION
1. Verify records.
2. History sheet of equipment
3. Log book of maintenance &
repairs
4. Performance record of equipment
5. Put up in proper form & to the
proper authority
DISPOSAL
1. Circulate to other units, where it is
needed
2. Return to the vendor, if willing to
accept
3. Sell to agencies, scrap dealers,
etc
4. Auction
5. Local destruction
CONCLUSION

Material management is an important management tool

which will be very useful in getting the right quality &
right quantity of supplies at right time, having good
inventory control & adopting sound methods of
condemnation & disposal will improve the efficiency of
the organization & also make the working atmosphere
healthy any type of organization, whether it is Private,
Government ,Small organization, Big organization and
Household.

Even a common man must know the basics of material

management so that he can get the best of the available
resources and make it a habit to adopt the principles of
material management in all our daily activities
 Material management
It is the planning ,directing, controlling &
coordinating those activities which are
concerned with materials & inventory
requirements, from the point of their
inception to their introduction into the
manufacturing process. It begins with the
determination of materials quality & quantity
& ends with its issuance to production to
meet the customers demand as per the
schedule & at the lowest cost.
 Objectives of material management
1. Material selection
2. Low operating costs
3. Receiving material safely & in good condition
4. Issue material upon receipt of appropriate authority
5. Identification of surplus stocks & taking appropriate
measures to reduce it.
6. Regular uninterrupted supply of raw materials to
ensure continuity of production
7. Providing economy in purchasing & minimizing
waste
8. To minimize storage & stock control costs
9. To minimize cost of production to increase profits
10. To purchase items of best quality at the most
competitive prices.
Functions of material management
1. Material planning
2. Purchasing
3. Receiving
4. Stores
5. Inventory control
6. Waste management
 Material purchase planning
It consists of following steps-
Processing the requisition
The dept. of co. communicate to the purchase dept. their
requirements for various items by requisition form
which contains the details of quality & other
necessary info. About items & is to be signed by
competent authority. It is prepared in duplicate &
original copy is sent to the purchase dept .
2. Location & choice of suppliers
Potential vendors are contacted by authorized
representatives, their sample of items are inspected
& examined. on the basis of findings from inspection,
suppliers are approved for placing orders.
Criterion for choice of vendor-
Reliability of vendor
Assurance of timely delivery
After sale service
3. Placing the orders-Purchase dept. try to purchase
required items at most advantageous terms. all
purchase must be made by purchase order in a
specified form duly signed by authorized person. it
must contains detail abt supplier, description of items
, their prices & amounts
4. Follow up- Late deliveries can close the co. so it is
necessary to review the outstanding orders at
regular intervals.
5. Invoices received from suppliers are checked
with order specifications
 Inventory management
Inventory means stock of raw material, semi finished
& finished goods maintained by co.
Inventory control-the tool of maintaining the size of
inventory at some desired level keeping in view the
best economic interest of org.
 Objectives of inventory control
1. Protection against fluctuation in demand
2. Better use of 5 Ms
3. Protection against fluctuation in output
4. Control of stock volume
5. Protecting against quality problems
6. To ensure reliable delivery to customers
7. Smoothing production flows
8. Reducing input costs (purchase in advance of price increases)
 Inventory Costs
Costs associated with ordering too much
(represented by carrying costs)
Costs associated with ordering too little
(represented by ordering costs)
These costs are opposing costs, i.e., as
one increases the other decreases
The sum of the two costs is the total
stocking cost (TSC)
 Inventory Costs (continued)
Carrying (or holding) costs: sum of all costs
that are proportional to the amount of
inventory physically on hand at any point in
time
Cost of capital (opportunity cost)
Breakage, spoilage, deterioration, obsolescence,
loss, insurance etc.
Physical storage, handling, book-keeping,
refrigeration, utility etc.
 Inventory Costs (continued)
Ordering cost: Sum of all costs related to the
amount of inventory that is ordered for
replenishment.
Fixed cost: incurred independently of the size of
the order as long as it is not zero, e.g. book-
keeping and paper work, mailing, etc., associated
with the order
Variable cost: incurred on a per unit basis
 Inventory Costs (continued)
Penalty cost (or stockout or shortage costs): cost of
not having sufficient stock on hand to meet demand
when it occurs
Loss of good will
Loss of profit
Extra costs of emergency measures
Delay cost (including book-keeping) in case of backorder
set-up costs-
When the part or component is being made in-house these may
be called set-up costs which refer to the cost of preparing the
production order, and any other costs associated with obtaining
the materials, changing the production process or setting up
equipment.
 Model I: Basic EOQ
Typical assumptions made
annual demand (D), carrying cost (C) and
ordering cost (S) can be estimated
average inventory level is the fixed order
quantity (Q) divided by 2 which implies
no safety stock
orders are received all at once
demand occurs at a uniform rate
no inventory when an order arrives
 Model I: Basic EOQ
Assumptions (continued)
Stockout, customer responsiveness, and other
costs are inconsequential
acquisition cost is fixed, i.e., no quantity discounts
Annual carrying cost =
average inventory level X carrying cost = (Q/2)C
Annual ordering cost =
average number of orders per year X ordering cost
= (D/Q)S
 Model I: Basic EOQ
Total annual stocking cost (TSC) = annual
carrying cost + annual ordering cost =
(Q/2)C + (D/Q)S
The order quantity where the TSC is at a
minimum (EOQ) can be found using
calculus (take the first derivative, set it
equal to zero and solve for Q)
EOQ = 2 DS / C
 Inventory decisions
ABC (ALWAYS BETTER CONTROL) analysis-
Class A constitutes 10% of total items &
accounts for 75% of total money spend on
inventories.
Class B constitutes 15% of total items &
accounts for 15% of total money spend on
inventories
Class C - constitutes 75% of total items &
accounts for 10% of total money spend on
inventories
Above rule is called as PARETOS law-
States that a few high usage value items constitute a major pat of
the capital invested in inventories whereas bulk of inventories
having low usage value constitute insignificant part of capital.
Percent of annual dollar usage
ABC Analysis

A Items
80
70
60
50
40
30
20 B Items
10 C Items
0 | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100

Percent of inventory items

 ABC Classification System

Classifying inventory according to some

measure of importance and allocating
control efforts accordingly.
A - very important
B - mod. important High
A
Annual
C - least important $ value B
of items

Low C
Few Many
Number of Items
 ABC Classification Solution

Stock # Vol. Cost $ Vol. % ABC

206 26,000 $ 36 $936,000
105 200 600 120,000
019 2,000 55 110,000
144 20,000 4 80,000
207 7,000 10 70,000
Total 1,316,000
 ABC Classification Solution

Stock # Vol. Cost $ Vol. % ABC

206 26,000 $ 36 $936,000 71.1 A
105 200 600 120,000 9.1 A
019 2,000 55 110,000 8.4 B
144 20,000 4 80,000 6.1 B
207 7,000 10 70,000 5.3 C
Total 1,316,000 100.0
 VED analysis
This analysis represents the classification of
items based on the criticality. The analysis
classifies the items in 3 groups called vital,
essential & desirable.
1. Vital items are those items the unavailability of
which will stop the production
2. Essential items are those items whose stock
out costs are very high.
3. Desirable items will not cause any immediate
production stoppage & their stock out costs
are nominal.
So this analysis is mainly carried out to identify
critical items.
 Buffer stock
The min. level of inventory to cover some
unforeseen & uncalled for situations is called
safety or buffer stock
Factors affecting choice of buffer stocks-
1. Uncertainty in demand
2. Degree of insurance for any item
3. Uncertainty in lead time
4. Size of batch
Larger the uncertainty associated with any factor,
larger should be the buffer stock.
 Determination of buffer stocks
Its size depends both on lead time & variation
in demand.
1. Situation where demand rate varies-
B.S=(L.T)*(Max. demand rate-Av. Demand rate)
2. When both L.T & D.R varies-
B.S=(M.L.T*M.D.R)-(A.L.T*A.D.R)
3. When only L.T varies-
B.S=(M.L.T-A.L.T)*D.R
Lead time is the time gap between placement of
an order & the time of actual supply.
L.T=servicing time+ delivery time+ receiving time
1

Inventory
Management
Inventory: a stock or store of goods Independent Demand

A Dependent Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

Independent demand is uncertain.

Dependent demand is certain.
 Types of Inventories
Raw materials & purchased parts
Partially completed goods called
work in progress
Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)
Types of Inventories (Contd)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or
customers
 Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple operations
To protect against stock-outs
Functions of Inventory (Contd)

To take advantage of order cycles

To help hedge against price
increases
To permit operations
To take advantage of quantity
discounts
Objective of Inventory Control
To achieve satisfactory levels of
customer service while keeping
inventory costs within reasonable
bounds
Level of customer service
Costs of ordering and carrying
inventory
Effective Inventory Management
A system to keep track of inventory
A reliable forecast of demand
Knowledge of lead times
Reasonable estimates of
Holding costs
Ordering costs
Shortage costs

A classification system
Inventory Counting Systems
Periodic System
Physical count of items made at periodic
intervals
Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus
monitoring
current levels of
each item
Inventory Counting Systems
(Contd)

Two-Bin System - Two containers of

inventory; reorder when the first is
empty
Universal Bar Code - Bar code
printed on a label that has
information about the item
0
to which it is attached
214800 232087768
 Key Inventory Terms
Lead time: time interval between
ordering and receiving the order
Holding (carrying) costs: cost to carry
an item in inventory for a length of time,
usually a year
Ordering costs: costs of ordering and
receiving inventory
Shortage costs: costs when demand
exceeds supply
 ABC Classification System

Classifying inventory according to some

measure of importance and allocating
control efforts accordingly.
A - very important
B - mod. important High
A
Annual
C - least important $ value B
of items

Low C
Few Many
Number of Items
 Cycle Counting

A physical count of items in inventory

Cycle counting management
How much accuracy is needed?
When should cycle counting be
performed?
Who should do it?
 Economic Order Quantity
Models
Economic order quantity model
Economic production model
Quantity discount model
Assumptions of EOQ Model
Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts
Figure 11.2 The Inventory Cycle
Profile of Inventory Level Over Time
Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time
 Total Cost

Annual Annual
Total cost = carrying + ordering
cost cost
Q DS
TC = H +
2 Q
Figure 11.4C Cost Minimization Goal
The Total-Cost Curve is U-Shaped
Q D
TC H S
Annual Cost

2 Q

Ordering Costs

Order Quantity
QO (optimal order quantity)
(Q)
 Deriving the EOQ

Using calculus, we take the derivative

of the total cost function and set the
derivative (slope) equal to zero and
solve for Q.
2DS 2(Annual Demand)(Order or Setup Cost )
Q OPT = =
H Annual Holding Cost
 Minimum Total Cost

The total cost curve reaches its

minimum where the carrying and
ordering costs are equal.
2DS 2(Annual Demand)(Order or Setup Cost )
Q OPT = =
H Annual Holding Cost
Economic Production Quantity
(EPQ)
Production done in batches or lots
Capacity to produce a part exceeds
the parts usage or demand rate
Assumptions of EPQ are similar to
EOQ except orders are received
incrementally during production
Economic Production Quantity
Assumptions

Only one item is involved

Annual demand is known
Usage rate is constant
Usage occurs continually
Production rate is constant
Lead time does not vary
No quantity discounts
 Economic Run Size

2DS p
Q0
H p u
 Total Costs with Purchasing
Cost

Annual Annual Purchasing

+
TC = carrying + ordering cost
cost cost
Q DS PD
TC = H + +
2 Q
 Total Costs with PD
Cost

Adding Purchasing cost TC with PD

doesnt change EOQ

TC without PD

PD

0 EOQ Quantity
 Total Cost with Constant
Figure 11.9 Carrying Costs

TCa
Total Cost

TCb
Decreasing
TCc Price

CC a,b,c

OC

EOQ Quantity
 When to Reorder with EOQ
Ordering

Reorder Point - When the quantity on

hand of an item drops to this amount,
the item is reordered
Safety Stock - Stock that is held in
excess of expected demand due to
variable demand rate and/or lead time.
Service Level - Probability that demand
will not exceed supply during lead time.
Determinants of the Reorder
Point
The rate of demand
The lead time
Demand and/or lead time
variability
Stockout risk (safety stock)
Figure 11.12 Safety Stock
Quantity

Maximum probable demand

during lead time

Expected demand
during lead time

ROP

Safety stock reduces risk of Safety stock

stockout during lead time LT Time
 Reorder Point
The ROP based on a normal
Distribution of lead time demand

Service level
Risk of
a stockout
Probability of
no stockout

ROP Quantity
Expected
demand
Safety
stock
0 z z-scale
 Fixed-Order-Interval Model
Orders are placed at fixed time intervals
Order quantity for next interval?
Suppliers might encourage fixed intervals
May require only periodic checks of
inventory levels
Risk of stockout
 Fixed-Interval Benefits

Tight control of inventory items

Items from same supplier may yield
savings in:
Ordering
Packing
Shipping costs
May be practical when inventories
cannot be closely monitored
Fixed-Interval Disadvantages

Requires a larger safety stock

Increases carrying cost
Costs of periodic reviews
 Single Period Model

Single period model: model for ordering

of perishables and other items with
limited useful lives
Shortage cost: generally the unrealized
profits per unit
Excess cost: difference between
purchase cost and salvage value of items
left over at the end of a period
 Single Period Model
Continuous stocking levels
Identifies optimal stocking levels
Optimal stocking level balances unit
shortage and excess cost

Discrete stocking levels

Service levels are discrete rather than
continuous
Desired service level is equaled or exceeded
 Operations Strategy
Too much inventory
Tends to hide problems
Easier to live with problems than to
eliminate them
Costly to maintain
Wise strategy
Reduce lot sizes
Reduce safety stock
Economic Production Quantity

Production
Production

& Usage
& Usage
Usage Usage

In
ve
nt
o ry
Le
ve
l
 What is inventory (or stock)?
The stored accumulation of
material resources to be used
in a transformation process.

What is inventory management?

The way that the accumulation
of these materials is optimised
so that the business can satisfy
its customers demands for the
delivery of a required quantity
and quality of products at the
right time and at the minimum
cost to the business.
ITC M11:U1:1.1-1
 Efficient inventory management is important to a
company because of its position in the working capital
cycle... Cash
received
Debtors or Purchase
receivables orders

Distribution
& retail
Inventories of
raw materials
Inventories of
finished goods

Other Other production

production resources
resources RIP

Work-in-process
inventories

Money tied up in inventory is costly dead money. It

cannot be used for other more productive purposes...
ITC but the need to hold inventory is often unavoidable! M11:U1:1.2-1
 Demand forecast Consignment
error stocking
Unpredictable or late Minimisation of
deliveries from suppliers delivery costs
Minimum supplier order Pipeline inventory
quantity
Anticipation or
Supplier delivery interval precautionary stocks
Stocking methodology
MEETING CHANGING DEMAND
Reorder interval & quantity WITH FLAT CAPACITY
DEMAND
Strategic stocking SUPPLIER
CAPACITY
Purchase price advantage STOCK
BUILD PULL
FORWARD
Lead-times offered
to customers are shorter
than supplier lead-times
ITC M11:U1:1.3-1
 How much inventory to hold?
Rate of supply of inputs
The water tank
model of inventory

Rate of demand
of outputs
Inventory

Input Output
process process
Inventory
Keep inventory (water in the tank) lower, by:
Keeping the person controlling the input pipe in contact with
the person controlling the output pipe...
and with the persons knowing the demand for water.
ITC M11:U1:1.4-1
 Loss of sales from delay in supply
Loss of goodwill and delayed payment from
customers if orders are not delivered in full
Higher transportation costs to fill rush orders
Disruption of the production process
Inefficient production scheduling
Purchasing of small volume supplies at high prices to
meet shortages
Quality or specification differences due to the need
to call upon other sources
Optimise service levels: the number of orders or
requisitions that are satisfied on time and in full (OTIF)
ITC M11:U1:1.5-1
 The cost of money tied up in stock

Fixed storage costs

Variable storage costs

Inventory management costs

Stock deterioration,
loss and obsolescence

ITC M11:U1:1.6-1
 What type of inventory to keep? -
the importance of reducing
variety
The variety-pipeline funnel
Materials in

Variety
Pipeline

Finished goods out

A B
A B
M11:U1:1.7-1
ITC
 Optimising inventory levels
Reducing holding costs and parts variety
Reaching or surpassing international quality
and traceability standards
Maximising service levels and inventory
turnover while minimising error rates

ITC M11:U1:1.8-1
 Director of Supply Chain
Operations

Inventory Manager
Internal
External relations integration:
Objectives of inventory
with supply chain interaction with
management
partners other
Unit 1 departments

Warehouse & Managing & Warehouse

Inventory
inventory forecasting planning &
planning
operations inventory systems
Unit 2 Unit 3 Unit 4 Unit 5

Workforce Training
Short term operational Time Horizon Long term planning
ITC M11:U1:1.8-2
 Records should reflect what is actually in inventory
The types of inventory transactions
Improving the timeliness of inventory transactions
Where materials can be found:
Goods reception areas
Inspection areas
Reject material space for damaged inventory
Warehouse shelf space (storage areas)
Kitting or order compilation spaces
Workbench bins & around machines
Work-in-progress holding areas
Assembly lines
Dispatch & loading areas
ITC M11:U2:2.2-1
 Received Received Issued In Stock
Date Quantity Quantity
Unit Price Quantity
(Units) (Units)
1 July $100 200 200
1 August 100 100
1 September 60 40
1 October $150 200 240
1 November 100 140

Method 1 - First In First Out (FIFO) How to value

this issue?
Issues are valued
based on the cost of No. of units issued Total value of
the earliest arrivals and unit value units issued
40 units at $100 each $4,000
The value of stock is calculated from the 60 units at $150 each $9,000
unit values of the items remaining in stock 100 units $13,000
No. of units in stock Total value of
and unit value units in stock
ITC
140 units at $150 each $21,000 M11:U2:2.3-1
 Received Received Issued In Stock
Date Quantity Quantity
Unit Price Quantity
(Units) (Units)
1 July $100 200 200
1 August 100 100
1 September 60 40
1 October $150 200 240
1 November 100 140

Method 2 - Last In First Out (LIFO) How to value

Issues are valued this issue?
based on the cost of
the latest arrivals No. of units issued Total value of
and unit value units issued
100 units at $150 each $15,000

The value of stock is calculated from the No. of units in stock Total value of
unit values of the items remaining in stock and unit value units in stock
40 units at $100 each $4,000
100 units at $150 each $15,000
ITC 140 units $19,000 M11:U2:2.3-2
 Received Received Issued In Stock
Date Quantity Quantity
Unit Price Quantity
(Units) (Units)
1 July $100 200 200
1 August 100 100
1 September 60 40
1 October $150 200 240
1 November 100 140

Method 3 - Weighted Average Costing (WAC) How to value

The value of stock is calculated from weighting
this issue?
the average values of the items in stock
Before issue: Issues are valued based on the cost of
this weighted average value
No. of units in stock Total value of
and unit value units in stock No. of units issued Total value of
40 units at $100 each $4,000 and unit value units issued
200 units at $150 each $30,000 100 units at $141.67 $14,167
Weighted average After issue:
unit value No. of units in stock Total value of
$34,000
= $34,000 / 240 units and unit value units in stock
ITC = $141.67 140 units at $141.67 $19,834 M11:U2:2.3-3
 Received Received Issued In Stock
Date Quantity Quantity
Unit Price Quantity
(Units) (Units)
1 July $100 200 200
1 August 100 100
1 September 60 40
1 October $150 200 240
1 November 100 140

Method 4 - Standard Costing How to value

The value of stock is calculated from applying a this issue?
standard cost to the item (e.g., in our example: $130)
Issues are valued based on
No. of units in stock Total value of the same unit standard cost
and standard value units in stock
No. of units issued Total value of
140 units at $130 each $18,200 and standard value units issued
100 units at $130 each $13,000
Method 5 - Replacement Costing
Similar to above, but uses replacement cost instead of standard
cost to better reflect the market value (e.g., $160)
ITC M11:U2:2.3-4
 The inventory value will affect the
companys profit & loss account
Turnover (sales): $10,000

Cost of sales:
Opening inventory $3,000
If prices are rising or
falling over time, each + Net purchased $5,000
method will calculate the $8,000
values of inventory issued Closing inventory $2,000
and in store differently
$6,000 ($6,000)

Operating profit: $4,000

You should verify that the same valuation method

has been employed before comparing unit costs or
inventory values
ITC M11:U2:2.3-5
 ActionPoint 2.31

Applying the different methods of inventory valuation

Based on the following table (assuming inventory on 31 December of
the previous year was zero)...
Received Issued
Received In Stock
Date Quantity Quantity
Unit Price Quantity
(Units) (Units)
January $90 300 50 250
February 100 150
March $80 600 110 640
April 90 550
May 80 470
June $120 200 170 500
July 160 340
Value of the Unit value of
Inventory valuation method issue in the remaining
July stock in July
1. First in First out (FIFO)
2. Last in First out (LIFO)
3. Weighted Average Costing (WAC)
4. Standard Costing ($100)
5. Replacement Costing ($110) M11:U2:2.3-6
ITC
 Receipt of stock
Notification
of goods receipt

Storage/ Receipt of copy

put away of purchase order

Inspection Acknowledgement

Unloading Schedule/plan
delivery

Delivery

ITC M11:U2:2.4-1
 Issue of stock
jk d
ljdj
j
Cost
allocation
jkdsl
ljkd jj
sljsd sljkdljd
jkd ljdj
j
ljkd jk d
sljsd
kdsl
dlj kd j
35 0
sljs

14,
Adjustment of User determines
stock records requirement

Delivery/ Requisition
collection authorised

Picking Presented to
stores

Identification
of the goods AZ-053.28

ITC M11:U2:2.4-3
 Re-order level systems
Periodic review systems
Demand-driven lean supply
systems (e.g., Just-in-time):
Thefrequency & quantity of orders is driven by demand
data passed on directly to suppliers
Very small or non-existent inbound inventory stores
Requires smooth production process, short lead-times
and supplier-guaranteed quality

ITC M11:U2:2.5-1
 Simplified inventory profile:
charting the variations in inventory levels
over time
Demand (D) over period

Slope = demand rate

(steady & predictable)
Average
Order inventory = Q/2
quantit
y Q

Time interval = Q/D

Time t

Instantaneous deliveries at a rate of D/Q per period

ITC M11:U2:2.6-3
 Re-order level systems - formula:

ROL = (R d x L) + S
Where...

Demand in the lead-time + Safety stock (S)

Demand in the lead-time =

Rate of demand/usage (Rd) (e.g., per week)

x Lead-time (L) (e.g., in weeks)

ITC M11:U2:2.5-2
 Basic re-order level stock replenishment system
Quantity (fixed quantity, variable interval)

Fixed order
quantity
Slope = Rd

Re-order Re-order Re-order Re-order

level

Safety
stock { Lead-time

Time

ITC M11:U2:2.5-3
 Periodic review stock replenishment system
(fixed interval, variable quantity)

Periodic reviews Variable order

quantities
B
A C D
Quantity

Lead-time Lead-time Lead-time

Safety
stock {
Z Time
Fixed
Lead-time
review
interval

ITC M11:U2:2.5-5
 Periodic review systems
- formula to calculate the order
size:

(Demand over the review interval + the lead-time)

- (Actual stock) - (Pipeline stock)
+(Safety stock)

In a periodic review system, the basis for

determining the order size (which varies each
time) is therefore the (fixed) review interval.
ITC M11:U2:2.5-6
 ActionPoint 2.52

Re-order quantity
Given the following data, what quantity should be re-ordered?
Expected demand per week = 100
Lead time = 3 weeks
Review interval = 4 weeks
Safety stock = 300
Physical stock = 450
On order (pipeline) = 200
ORDER QUANTITY =

Periodic reviews

Lead-time Lead-time Lead-time

What should the next order quantity be?

Safety
Stock
Review Lead-time
ITC interval M11:U2:2.5-7
 Periodic review
Re-order level system
system
1. Determine broadly the
1. Determine the (fixed) overall level of the
most economic order most economic order
quantity (EOQ) quantity
2. Determine when to 2. Based on this,fix the
place the fixed order review interval,
each time (i.e., the
re-order level), 3. Then, for each order,
based on your desired determine the specific
level of safety stock order quantity, based
on your desired levels
of maximum & safety
ITC
stock M11:U2:2.6-2
 Cost of placing the order

Price discount costs

Stock-out costs

Working capital costs of inventory

Storage costs

Obsolescence costs

Production inefficiency costs

ITC M11:U2:2.6-1
 l d in gcosts Ordering
v en toryho costs
In

Two alternative inventory plans

with different order quantities (Q)

Plan A Demand (D) = 1000 items per year

400 Q = 400 Average
inventory for
Inventory

Plan A = 200
level

Average
Plan B inventory for
Q = 100
100 Plan B = 50

Time
0.1 yr 0.4 yr
ITC M11:U2:2.6-4
 di n gcosts
tor yhol
Inven

Working capital costs: The cost of borrowing

the money needed to pay for one unit of stock.
Storage costs: Rent, heat, light per m2
occupied by one unit of stock.
Obsolescence risk costs: Cost of the stock
disposed of in a period, apportioned over each unit stored in the period.

Holding costs (H) = (P) x (i) x (Q/2)

In
which:
P = Unit purchase costs (i.e., price plus transport and other
delivery costs)
i = Inventory carrying cost (expressed as a percentage of P)
Q/2 = Average inventory (the order quantity divided by 2)
ITC M11:U2:2.6-5
 Ordering
costs

Administrative costs of placing the order

Communications costs (with suppliers,
transporters, etc.)

Ordering costs (O) = (C0 ) x (D/Q)

In
which:
Co = Cost per order
D/Q = The number of orders in the period (i.e., the demand
divided by the order quantity)

ITC M11:U2:2.6-6
 So... Total cost = Pi Q + Co D
2 Q
Costs of adopting plans with different order quantities
Order quantity Holding costs Ordering costs Total costs
(Q) Pi Q/2 + Co D/Q =
50 25 400 425
100 50 200 250
150 75 134 209
200 100 100 200*
250 125 80 205
300 150 66 216
350 175 58 233
400 200 50 250

Demand (D) = 1,000 units * Minimum

Unit purchase cost (P) = $5 total cost
Inventory carrying cost (i) = 20%
Cost per order (Co) = $20
ITC M11:U2:2.6-7
 Graphical representation of
the Economic Order Quantity (EOQ)
400

350

300
Cost ($)

Total cost
250

200
Holding
150 costs

100

50 Ordering costs
0 200 400

Order quantity
Co = Cost per order
2 Co D D = Demand over the period
EOQ P = Purchase cost per unit
ITC
Pi i = Inventory carrying cost M11:U2:2.6-8
 Some assumptions of the EOQ
Demand over the period (e.g., a year) is given,
and remains unchanged

Price, including transport cost, does not change

with order size and remains constant throughout
the year

Order processing costs and

stock holding costs are
traceable,and remain constant

Lead-time is zero, or accurately

predictable, and does not vary
(there are no delays)
ITC M11:U2:2.6-9
 Action Point 2.61

A companyCalculating
purchasesthematerial
EOQ for
its production line at $650 per MT.
Its yearly requirement is 288 MT.
Inventory carrying costs are
calculated at 25% of the average
value of inventory, and the cost of
placing each order has been set at
$50.
Calculate the EOQ

ITC M11:U2:2.6-10
 Inventory profile for
gradual replacement of inventory
Q
M
Slope =
-
Rs Rd Slope = Rd
Extreme case: Just-in-time deliveries,
where Rs = Rd and no inventory accumulates

Q/Rs
Time

Rd = The rate of demand (e.g., in units per week)

Q = The order quantity
Rs = The rate of supply under the order (e.g., in units per week)
Q/R s = The period over which each order is delivered
Rs - R d = The rate at which inventory build-up takes place while
supplies are being delivered
M = The maximum level of inventory reached
ITC M11:U2:2.6-13
 EOQ under conditions of continuous
replenishment of inventory
2 Co D
EOQ Rd
Pi (1 )
Rs
As before...

Co = Cost per order

D = Demand over the period
P = Purchase cost per unit
i = Inventory carrying cost
ITC M11:U2:2.6-14
 Action Point 2.63

Calculating the EOQ when inventory is replaced

gradually
The same company that we looked at in Action Point
2.-1 has now arranged for its supplier to deliver the
orders it places at a rate of 8 MT per week, rather
than in single lots. As before the purchase cost is
$650 per MT and the companys yearly requirement is
288MT. Inventory carrying costs each year ar 25% of
the average value of inventory, and the cost of placing
each order is $50.
Calculate the EOQ under these new circumstances.

ITC M11:U2:2.6-15
 Composite lead-time
Buyers internal Suppliers Logistics delivery
lead-time lead-time lead-time

Lead-time can be managed - a crucial,

Long lead-
times but often neglected aspect of inventory
control
Direct and frank communications with

?
increase supplier/customer production managers
supply
uncertainty Resource planning systems integrated
throughout the supply chain across a
communications network like the Internet
and cause Not reactive, but Proactive lead-time
high safety monitoring & reduction techniques
stock costs
ITC M11:U3:3.2-1
 The Supply Chain ORDERS
GOODS

FACTORY
CONSUMERS RETAILER DISTRIBUTOR FACTORY
WAREHOUSE

The Forrester effect

M11:U3:3.2-1M11:U3:3.2-1

ORDERS
2. Orders from
retailers to 3. Orders from
distributors distributors to 4. Orders
factory from factory
1. Increase of 10%
warehouse warehouse to
in orders from
consumers to factory
retailers

TIME
ITC M11:U3:3.2-2
 Explaining the Forrester effect
Forrester showed how this lagged or delayed response leads to
an amplification in response magnitude, resulting in supply chain
instability and increased inventory levels.

ORDERS Lagged (delayed) response

Amplification of response
System instability

TIME
ITC M11:U3:3.2-3
 Line of balance (LOB) supplier monitoring
Vendor managed inventory (VMI)
EDI (Electronic Data Interchange)
Business process re-engineering (BPR)
Industry & government initiatives

ITC M11:U3:3.2-10
 Example of Line of Balance (LOB):
the suit manufacturer
Delivery schedule
Week 6 400
Receive 3 Week 8 300
Stages buttons Week 12 200

1 Lead-time = 3 wks
2 4 5 6
1 wk 1 wk 1 wk
Order Receive Cut & Dispatch Suits
fabric fabric stitch delivered

ITC M11:U3:3.2-11
 Example of Line of Balance (LOB)
LOB to end of Week 6 Delivery schedule
Week 6 400
3 Week 8 300
Stages Week 12 200

1 Lead-time = 3 wks
2 4 5 6
1 wk 1 wk 1 wk
400 400 400 400 400
0 0 0 0
300 300 300
0 0
0
0
200 LOB
1000 900
900 = actual accumulated
800 700 quantity by end of
700 Week 6
600
500 400
400
300
200
100
0
ITC M11:U3:3.2-12
 Inventory Categorisation Techniques

A powerful tool for maximising order

service levels and for optimising safety
stocks and normal inventory levels is
essential to prioritise management time,
disaster recovery plans and calculate
insurance cover requirements

ITC M11:U4:4.3-1
 The technique enables
individual minimum/maximum
levels of inventory to be
easily determined by
classifying inventory into
three categories

ITC M11:U4:4.3-2
 Calculating the average usage value
of purchased items

Item. Average usage X Unit value = Average usage

No per week (price) value per week

1 3 $ 2.5 $ 7.5

2 2.5 $ 1 $ 2.5

3 20 $ 5 $ 100

4 175 $ 2 $ 350

5 1 $ 10 $ 10

6 15 $ 2 $ 30

ITC M11:U4:4.3-3
 Ranking and ABC classification of purchase items

Cumulative
Percentage
Weekly Total Cumulative percentage
Item of total ABC
Usage value Usage of total
No. usage classification
Value ranking Value usage
value
value
4 $ 350 1 $ 350 70 % 70 % A
3 $ 100 2 $ 450 20 % 90 % B
6 $ 30 3 $ 480 6% 96 % C
5 $ 10 4 $ 490 2% 98 % C
1 $ 7.5 5 $ 497.5 1.5 % 99.5 % C
2 $ 2.5 6 $ 500 0.5 % 100 % C

ITC M11:U4:4.3-4
 Paretos 80/20 rule
100%

80%
Vilfredo Pareto

Cumulative
annual
purchase
expenditure

20% 100%

ITC No.of purchased items M11:U4:4.3-5

 A Class parts are the significant few 60-
70% of your companies total purchasing
spend but only around 10-15% of the
total number of items in stock. Critical
items that need tight control

Valuable Class A parts are reviewed frequently

because inventory cover is low due to their high
individual part value
ITC M11:U4:4.3-6
 C Class parts are the trivial
many 10-15% of your
companies total purchasing
spend but more than 60-70%
of the total number of items in
stock. Higher volume deliveries
reduce administrative costs.
Often stock control is limited
to bin systems.
ITC M11:U4:4.3-7
 A
B Class parts fall between
A and C class parts in
C terms of both inventory levels
and effort/systems used to
manage the parts. They
usually range from 20-30% of
both expenditure and the
number of items in stock.
ITC M11:U4:4.3-8
 Action Point 4.3-1

A-B-C Analysis
Complete the table showing the average (weekly) usage values.
Average usage
Item No. Average usage per week Unit value (price)
value per week
1 3 $3
2 90 $4
3 2 $4
4 1 $ 10
5 1 $2
6 20 $4
7 6 $5
8 14 $5
9 150 $2
10 2 $3
11 2 $1
12 15 $6
13 1 $2
ITC M11:U4:4.3-9
 Action Point 4.3-1 (Contd)

A-B-C Analysis Now rank these items and complete the table, classifying them
as class A, B or C.
Cumulative
Percentage
Weekly Total Cumulative percentage
Item of total ABC
Usage value Usage of total
No. usage classification
Value ranking Value usage
value
value
1
2
3
4
5
6
7
8
9
10
11
12
ITC 13 M11:U4:4.3-10
 A-B-C revision
A Class parts will have the lowest level of inventory cover

These tend to be important parts

Very tight controls need to be in place

Parts are reviewed very regularly

Ensure that potential stock-outs are avoided

For A class parts we maintain high service levels

by allocating more effort and better systems,
rather than high inventory levels M11:U4:4.3-11
ITC
 A-B-C revision

C Class parts are the opposite of

A Class parts

Trivial parts

High levels of inventory cover

Enables reductions to be made to the

time spent managing these parts
Large delivery quantities
C
ITC M11:U4:4.3-12
 Example of ABC rules

Delivery
Class Safety stock
interval
A 4 weeks 3 weeks
B 8 weeks 4 weeks
C 12 weeks 8 weeks

ITC M11:U4:4.3-13
Competitive Advantage
The basis for successes in the marketplace
are numerous, but a simple model has
been based around the three Cs
Customer, Company & Competitor.
The source of competitive advantage is
found firstly in the ability of the organization
to differentiate itself, in the eyes of the
customer, from its competition and secondly
by operating at a lower cost and hence at
greater profit.
 Physical distribution
It concerns with movement of a finished
product to the customers.
In physical distribution the customer is the
final destination of the marketing channel.
Unless the products are delivered where
and when needed, a great deal of
marketing effort can be wasted.
All physical distribution systems have one
feature in common: they link manufacturers,
wholesalers and retailers and ensure that
the product is available.
 Operational flows
The second aspect of information requirements is
concerned with directing operations to receive,
process, and ship inventory as required
supporting customer and purchasing orders.
Operational requirements deal with
Order management
Order processing
Distribution operations
Inventory management
Transportation and shipping
Procurement
 Traditional Perspective
Traditionally most organizations have
viewed themselves as entities that exist
independently from others and indeed
need to compete with them in order to
survive. However such a philosophy
can be self-defeating if it leads to
unwillingness to co-oporate in order to
compete. Behind this seemingly
paradoxical concept is the idea of
supply chain integration.
 Transportation uses environment resources both
directly and indirectly.
In direct terms, it is one of the largest consumers of
energy (fuel and oil) in the domestic economy. In fact,
it accounts for close to 67% of all domestic oil use.
Indirectly, transportation creates environmental
expense through congestion, air pollution and noise
pollution.
The major objective is to move product from an origin
location to a prescribed destination while minimizing
temporal, financial and environmental resource costs &
loss and damage expenses must be minimized.
The movement must take place in such a manner that
meets customer demands regarding delivery,
performance and shipment information availability.
 Principles
There are two fundamental principles guiding
transportation management and operations.
They are economy of scale and economy of distance.
Economy of scale refers to the characteristic that
transportation cost per unit of weight decreases when the
size of the shipment increases.
E.g. truckload shipments cost less per Kg than less-than-
truckload shipments. It is also generally true that larger
capacity transportation vehicles such as rail or water are
less expensive per unit of weight than smaller capacity
vehicles.
Transportation economies of scale exist because fixed
expenses associated with moving a load can be spread
over the loads weight. The fixed expenses include
administrative costs of order; time to position the vehicle
for loading or unloading, invoicing and equipment cost.
These costs are fixed because they do not vary with
shipment volume.
 Transport Infrastructure
Transportation infrastructure consists of
the rights-of-ways, vehicles, and carrier
organizations that offer transportation
services on a for-hire or internal basis.
The nature of the infrastructure also
determines a variety of legal and
economic characteristics for each mode
or multimodal system. A mode identifies
the basic transportation method or form.
 Economy of distance refers to the characteristic that
transportation cost per unit of distance decreases as
distance increases.
Transportation economy of distance is also referred to
as tapering principle since rates or charges taper with
distance. The rationale of distance economies is
similar to that for economies of scale.
Longer distances allow the fixed expenses to be
spread over more miles, resulting in lower overall per
mile charge.
These principles are important considerations when
evaluating alternative transportation strategies or
operating practices.
The objective is to maximize the size of the load and
the distance that is shipped while still meeting
customer service expectations.
 Terminal Facilities:
Any in convenience caused to truck operators is not a loss
to the project. It is treated as a loss to the carrier..
Often extreme stinginess is expressed in planning for
these facilities, which include storage space, and loading
and unloading arrangements in a suitable area.
Storage, loading and unloading facilities, good quality
roads, usable throughout the whole year, and suitably,
designed yard for railway wagons have to be planned as a
part of terminal facilities.
It is also essential to pay special attention to the
maintenance of loading and unloading equipment, the
design, location, length, height and other features of
loading and unloading platforms, etc., and the
maintenance of circulating area and roads where heavy
vehicles ply.
The overall savings in transport rates would more than
justify the expenditure incurred on the provision of
additional facilities.
 Nature of product
Another aspect, which is often disregarded
by project managements as well as common
carrier, is the variability arising out of the
specialized nature of products to be moved.
The generally low level of sophistication in
transport planning in the country had made it
difficult for the planners to appreciate the
fact that transport capacity is influenced by
the nature of goods, their packing and other
specialized requirements, such as special
handling equipment etc.
 Problems in Road Transport:
There is an occasional problem of diesel fuel in the country.
Vehicle availability in the country has been problematic.
The cost of components and accessories, such as tires and
batteries, has escalated tremendously.
The entry tax and police check posts are too many, resulting in
heavy detention to road vehicles.
The present Motor Vehicle Act regulating the issue of licenses
and permits and movement of vehicles is very restrictive.
There are persistent demands from various transport
associations for suitable amendments of the Motor Vehicle Act.
Conditions of roads are very bad and hazardous. They tend to
reduce speed. Roadside maintenance and service facilities
have not developed sufficiently.
The system of national, zonal and state permits restricts free
growth of road transport.
 Product recall involves the following process.
The firm first constitutes a dedicated cross functional team to
deal with the product recall and oversee the smooth functioning
of the process.
The firm decides upon the course of action, depending upon the
impact of the defect or contamination of the product on the
consumer. If the defect possess a risk to consumer safety or
health, then the product recall process needs to be expedited.
The firm has to decide whether to replace the defective part or
replace the product itself. The next step is to transmit the recall
information to the retailers, service centers and end consumers.
This comprises product information i.e. name of the product,
model and year of manufacture, problem that is associated with
the product, degree of risk or danger to the consumer and how
to proceed with the product recall process.
The final step is the actual recovery of the product. The product
needs to be completely removed from circulation in the market
place. While the product can be recovered fully from a
distributor and to a larger extent from the retail outlets, the
product that is in the hands of the consumer cannot be
recovered completely. For this, they offer incentives like
discount on other products, extended warranty, freebies, etc.
 Returns Management
Returns management deals with efficient handling and
disposition of returns. Returns management is a broad concept
which includes informational support for the entire process,
arrangements for transportation, and physical handling. In
other words returns management can be defined as the
management of returns across the supply chain that includes
return approval, transportation coordination, tracking the returns
receipt and disposition of the return, and crediting the customer
account.
Returns management is the more complex and key process
form the supply chain point of view. Product recall is a one time
or a short-term process. Packaging returns can be managed
more easily as they are limited and can be tracked and
controlled. Returns management is a continuous and more
complex process as it involves many steps and players in a
supply chain. Complexity of the process is due to volumes and
volatility in the returns from customers and supply chain
partners. The returns cannot be tracked easily as the firm is
not in full control of the process. Returns can originate from
customers as well as supply chain partners and can be of
various types.
 What are returns?
Returns can be defined as those goods which are unwanted or damaged
and are sent back to the manufacturer or retailer for repair/ replacement, or
a refund. Returns originate from two sources-from the end consumers or
from the supply chain partners.
Returns can be categorized in the following manner:
Close-Outs: First quality product that the retailer wants to stop carrying in its
stores. These goods are sold to outside firms.
Buy-Outs: To gain shelf space, a supplier or manufacturer may buy-out a
competitors products from the retailers shelves. This is also beneficial for
the retailer when it wants to dispose of slow moving products and stock fast
moving goods.
Seasonal items: These are left over items at the end of the season. For
example woolen clothes that are unsold at the end of winter. These
products are either returned to the manufacturer or sold to firms specialized
in dealing with such products.
Surplus: These are items of first quality which exist due to an inaccurate
sale forecast or because the retailer has bought a product in excess to take
advantage of special promotions.
Defectives: These are items which customers or retailers detect as
defective. They are replaced with new items or compensated for by the
manufacturer.
Salvage: These are items that are used or damaged either in transit or at
retailer/customer location. This category of returns are disposed to salvage
the value of a product.
 NEED FOR RETURNS MANAGEMENT
Returns management is practiced by firms for three reasons
Legislative factors:
Concern for environmental matters and sustainable
development has been on rise among consumers and
Governments have passed stringent legislation regarding the
disposal of residual products and discarded products.
Economic factors:
Companies are realizing that proper returns management not
only reduces costs but helps the firm in recovering investment
and generating revenue. Firms can recover investment through
proper recycling and reuse of the returned products.
Competitive factors:
A customer-friendly returns policy, with faster and easy returns
processing increases customer satisfaction, thus giving it a
competitive advantage.. Effective returns management is
especially important for online retailers. Online buyers have
often cited a customer-friendly returns policy as a motivating
factor for purchasing a product.
 RETURNS MANAGEMENT PROCESSES
Returns management involves various
processes. These processes can be
classified under two heads strategic
returns process and operational returns
process. The strategic returns process
deals with developing an overall
framework so that returns management
can be performed smoothly can cost
effectively. The operational returns
process deals with the actual
management of returns.
 Components of cost per
unit of material stored

ITC M11:U5:5.5-16
 Action Point 5.5-3

Reviewing the cost per unit stored (CPUS) of a

warehouse
Look at the factors that influence CPUS, in the context of
a warehouse that you know well. In the table below, write
down some factors that could be managed differently in
that warehouse to reduce the CPUS. In each case,
indicate what you think you could do to reduce the cost.
Factor influencing Advantages and
the CPUS disadvantages

ITC M11:U5:5.5-17
 Materials, unit loads and quantities handled

Vehicle types and sizes, and vehicle movements

Site access, and site roads and flows

Areas for vehicle maneuver and parking

Loading dock types

Environment

Control and security

Loading by equipment, and

Separate or combined goods-in and dispatch areas

ITC M11:U5:5.6-1
 Impact of the type of materials handled
on the layout of the warehouse

The type of handling equipment needed

Space needed for consolidation/deconsolidation

of loads (kitting/breaking bulk)

Space required for marshalling or collecting full

vehicle loads prior to dispatch

Quality/certification waiting areas and control

requirements

ITC M11:U5:5.6-2
 Vehicle types, sizes and movements
Affect loading dock layout and capacity
Loading-dock levelling device in operation
Loading-doc levelling device in operation

Hydraulic dock-
leveller

ITC M11:U5:5.6-3
Types of docks
a) Ninety degrees raised docks:
Reversed vehicles are parked at 90 degrees to the loading docks,
with sufficient room left in front of the cab for turning
draw forward 6 m before turning

front axles

3.7 m

3.7 m

13.4 m
radius
15 m

ITC M11:U5:5.6-4
 b) Raised docks
In conditions of limited space, angled parking is used with
with saw-tooth dock configuration

3.7 m
Also...
15 m
5.3 m

3.7 m draw forward 7.7 m

5.3 m before turning

13.4 m c) Level docks

radius
10.6 m
d) Sunken
45 vehicle
12.4 m access docks
21.3 m
ITC M11:U5:5.6-5
 Loading bay arrangements and
equipment

Canopied loading bays

Dock shelters

Other dock fittings

ITC M11:U5:5.6-6
 Action Point 5.6-1

Reconsidering a warehouses loading bay areas

Look at a warehouse operated by your company or by one
that you know well.
What new features would you build into the loading bay
areas, and why?
Do you think that the cost of these new features would
justify their advantages?

ITC M11:U5:5.6-7
 The Design of stockyards
Surface
Drainage
Security
Artificial Lighting
Control Point/Office
Stockyard layout and access
requirements
ITC M11:U5:5.6-8
 Warehouse operations - Principles of order
picking and dispatch

At least one location for every product line handled

within the smallest possible area
Movement of picking staff and replenishment staff
kept to a minimum
Congestion should be minimized
Picking and replenishment operations should be
separated to minimize congestion
There should be no stock-outs
Required service levels should be achieved
ITC M11:U5:5.6-9
 Popularity storage
Fast-moving stock is placed nearest to the
order marshalling and despatch areas

Order picking stock Order

Reserve marshalling
stock slow medium fast and
movers movers movers despatch
area

ITC M11:U5:5.6-10
 Vertical separation of reserve stock
and order-picking stock

Reserve stock

Reserve stock

Reserve stock

Picking stock

ITC M11:U5:5.6-11
Horizontal separation of reserve stock
and order-picking stock
Above view of pallet racking

Reserve stock Picking stock

ITC M11:U5:5.6-12
 Duplicate order-picking locations
Congestion can be reduced by using multiple-pick locations
and by duplicating access for popular products

Multiple non-adjacent pick locations

Product
bins A B C D E F E F

Product
A B C D E F E F
bins
Duplicating access

ITC M11:U5:5.6-13
 Separation, by aisle, of order-picking and
replenishment operations to minimize congestion

Replenish

Pick

Replenish

Pick

Replenish
ITC M11:U5:5.6-14
 ?

Picking stock location

The quantity of each product to be picked
The destination of the picked goods
Action in the event of shortage/stock-out
The next location to visit

ITC M11:U5:5.6-15
 The pick rate - the number of picks per hour
Order throughput/case throughput/pallet throughput
Service levels
Error rates
The number of stocks-outs in a given period

ITC M11:U5:5.6-16
 Why Have Stores?
To ensure a balanced flow of materials
needed to keep the business running.

To organise and account for the

receipt and issue of materials.

To accept and store materials until these

are needed or can be disposed of.

ITC M11:U5:5.1-1
 Maximise completion of orders on time and in full.

Minimise the cost of warehouse operations.

Maximise inventory turnover (i.e., minimise the

time that materials stay in the warehouse).

Minimise response time to demand and errors in

despatches.

At the same time, preserve the quality, value and

security of the stored items.

ITC M11:U5:5.1-2
 Action Point 5.1-1

Your supply chain

For your own enterprise or one that you know well write
down the three main reasons why it is necessary to have a
warehouse. Draw your supply chain in blocks, like the
example below, to represent each link from raw materials to
final consumer showing where warehouses and inventories are
located:

ITC M11:U5:5.1-3
 Warehouse location and acquisition considerations

Proximity to suppliers Drainage and

and customers security

Availability of Clear and certain

essential services road or rail access

Capacity of the site Taxes and

for future expansion investment incentives

Acquisition
Acquisition options
options
Purchase
Purchase of
of existing
existing warehouse
warehouse
Self
Self build
build -- land
land purchase
purchase
Leasing
Leasing
Outsourced
Outsourced warehouse
warehouse services
services
Build,
Build, Own,
Own, Operate
Operate or
or Tax-free
Tax-free zone
zone
ITC M11:U5:5.2-1
 Information required

Daily throughput, volumes & weights of minimum

and maximum inventory movements.

Sizes and gross axle weights of vehicles

Packaging sizes and stacking restrictions.

Sizes, weights and load-bearing data for storage

racking, pallet trucks and other equipment.

Safe limits for moisture content, temperature and

dust particles

Forecast power consumption requirements for

equipment
ITC M11:U5:5.3-1
 Basic information needed to design a warehouse

Number of
movements
Weight
Volume

Equipment
Staff

Handling Capacity M11:U5:5.3-2

ITC
 Storage warehouses

Building design determined mainly by packaging

sizes and materials handling equipment

Very narrow aisle (VNA) widths

Fully automated 5,000 m2 to 10,000 m2 storage

buildings now operated with only five or six
people on site at any one time

ITC M11:U5:5.3-3
 Warehouse design and efficiency
Design parameters Traditional warehouses Automated warehouses
Height of eaves 10 metres 18 to 32 metres
Storage Pallets in lanes Fully automated storage
& retrieval
The goods dictate Storage height
stacking height the independent of goods
Wide aisles for forklift Very narrow aisles for
turning circle picker-stackers

Equipment Pallet racking Multi-depth and purpose -

built
Interior space Standard box according Operations dictate the
to site design
Store space
50% to 75% Above 95%
utilisation

ITC M11:U5:5.3-4
 The application of Just-in-time (JIT) techniques to
distribution logistics pipelines

Nothing is allowed into the warehouse unless it has been

scheduled for dispatch

Uses mathematical modelling and simulations to reduce pipeline

inventory to the absolute minimum

Ensures very short supply response times to demand

Maximises vehicle utilisation for economic load transportation

The goal is to minimise the resting time of any merchandise

put down on the floor
ITC M11:U5:5.3-6
 Using cross-docking centres
Supplier Supplier Supplier

End-point End-point End-point End-point End-point End-point

delivery delivery delivery delivery delivery delivery

ITC M11:U5:5.3-7
 Fully integrated cross-docking centre (CDC)
and enterprise resource planning system
CDC

WMS

HQ
Warehouse Materials Purchasing Marketing Financial
& logistics & resource system & sales reporting &
system planning system control

Customer order
Truck route
Advance data
communication Data warehouse and system backups
ITC M11:U5:5.3-8
 Transshipment
bay
Dock Storage locations Dock
levellers levellers
ADMIN.
UNPACKING &
INSPECTION

DISPATCH
FLOW

ITC M11:U5:5.4-1
 Dock levellers

Transhipment
bay UNPACKING & DISPATCH
INSPECTION

Storage locations
Administration

FLO W

ITC M11:U5:5.4-2
 STORES / STOCKYARD LENGTH OF FLOW

SLOW MOVING
ITEMS

MEDIUM RATE
MOVING ITEMS

FAST MOVING
ITEMS

ENTRANCE EXIT

ITC M11:U5:5.4-3
 A number of distinct areas

Receiving bay Marshalling area

Dispatch bay Fast moving pallet area
Control point/office Slow moving parts
Area for materials Heavy goods area
handling equipment
Bin area (used to hold
Unpacking area small items)
Inspection area High value items security
cage
ITC M11:U5:5.4-4
 Which other factors to consider?
!
Inherent safety
Clearly marked signs
Staff comfort
Good communication
Accessibility
Use of space
Long term flexibility
ITC M11:U5:5.4-6
 Part description: AZ Item ID code
and cost category Thrust bearing grease -
05
Type HM-3598 3. Safety
28 stock point st st st stock sts stst

Part supplier code Cost Cat: 1 bear bear bear bear bear
bear

& usual lead-time xxx.xxx.xxxxx 15 days ABC category

ing ing ing ing ing
ing

B 2 2 grea
2 grea
2 grea
2 2 grea grea
grea

Padim Greases Co. 0 0 0

se 0
se se0 0 se se
se

Store location &

0 0 0 Typ
Typ 0 Typ
0 0 Typ Typ
Typ
Avoid contamination Code 378, Store location 4.1.2 0 0 e0 e0 e0 0 e ee

instructions c c Out of
c HM-
HM- c HM-
c c HM- HM-
HM-
2000 cans 4,000 cans a a stock
a 359
359 a 359
a a 359 359
359
n n n 8n 8an 8an na 8 88 a a

Usual re-order
units & quantity
Date Receipts Issues Balance From / To / Code
2000 Pink rear
turned to
Movement 10.3.00 4000 6000 Ret. fm Job 23.12345 front shows
records 15.3.00 1500 4500 To Job 51.23456 item is out
of stock

ITC M11:U5:5.7-2
 Computer-based systems

There are several different standard bar-codes.

These systems use machine reading of a unique item

identification code instead of manual keying or hand-
written code entry.

Bar coding systems dramatically speed-up data

collection and reduce errors.
ITC M11:U5:5.7-3
 Automatic data collection
a) Computerised bar coding
This PD147 symbol can contain more than
one kilobyte of information
An example of an EAN 39
bar code

3 068320 055008

Laser scanner
WMS scanner and reader

b) Computerised radio-frequency tagging

c) Integration - the real challenge

ITC M11:U5:5.7-4
 Action Point 5.7-2

Identifying bar-codes for yourself

List at least four items in your inventory with bar codes that
appear on them. Try to identify which bar codes are being used,
based on the descriptions. You may notice that some items will
have more than one type of bar code on the external packaging.
Why do you think that this is so? What impact do you think this
has on systems designed to manage international packet
shipments?

Item 1:

ITC M11:U5:5.7-5
 Action Point 5.7-2 (Contd)

Item 2:

Item 3:

Item 4:

ITC M11:U5:5.7-6
 Full ISO 9000 series of standards
ISO 9000 QMS - Fundamentals and vocabulary
ISO 9001 QMS - Requirements
ISO 9004 QMS - Guidelines for performance improvements
ISO 19011 Guidelines on quality and/or environmental auditing
(under preparation)

Generic in nature
Applicable to all sectors (manufacturing and service) and organizations of
all sizes including the single entrepreneur

Specifies WHAT is to be done Documented procedures reduced

not HOW it should be done
- Control of documents
- Control of records
- Internal audits
- Control of nonconforming product
- Corrective action
- Preventive action

ITC M11:U5:5.8-1
 ISO 9001, Clause 4.15.1

The
The supplier
supplier shall
shall establish
establish and
and
maintain
maintain documented
documented procedures
procedures
for
for handling,
handling, storage,
storage, packaging,
packaging,
preservation
preservation and
and delivery
delivery of
of
product.
product.

ITC M11:U5:5.8-2
 ISO 9001, Clause 4.15.2, Handling

The
The supplier
supplier shall
shall provide
provide methods
methods
of
of handling
handling product
product that
that prevent
prevent
damage
damage or
or deterioration.
deterioration.

ITC M11:U5:5.8-3
 ISO 9001, Clause 4.15.3, Storage

The
The supplier
supplier shall
shall use
use designated
designated
storage
storage areas
areas or
or stock
stock rooms
rooms to
to
prevent
prevent damage
damage oror deterioration
deterioration ofof
product,
product, pending
pending use
use or
or delivery.
delivery.
Appropriate
Appropriate methods
methods for
for authorising
authorising
receipt
receipt to
to and
and dispatch
dispatch from
from such
such
areas
areas shall
shall be
be stipulated.
stipulated.
In
In order
order to
to detect
detect deterioration,
deterioration, thethe
condition
condition of
of product
product in
in stock
stock shall
shall be
be
assessed
assessed at
at appropriate
appropriate intervals.
intervals.
ITC M11:U5:5.8-4
 ISO 9001, Clause 4.15.5, Preservation

The
The supplier
supplier shall
shall apply
apply
appropriate
appropriate methods
methods forfor
preservation
preservation and
and segregation
segregation of
of
product
product when
when thethe product
product is
is under
under
the
the suppliers
suppliers control.
control.

ITC M11:U5:5.8-5
 ISO 9001, Clause 4.15.6, Delivery

The
The supplier
supplier shall
shall arrange
arrange for
for the
the
protection
protection of
of the
the quality
quality of
of
product
product after
after final
final inspection
inspection and
and
test.
test. Where
Where contractually
contractually
specified,
specified, this
this protection
protection shall
shall be
be
extended
extended toto include
include delivery
delivery to
to
destination.
destination.

ITC M11:U5:5.8-6
 Obtaining information about quality
standards for your products
ISO
ISO National
National enquiry
enquiry points
points
ITC
ITC web
web site:
site:
http://www.intracen.org/menus/busserv.htm
http://www.intracen.org/menus/busserv.htm
Look
Look under
under Quality
Quality Management
Management --
Publilcations
Publilcations -- Handbooks
Handbooks and
and Export
Export
Quality
Quality Bulletins,
Bulletins, or:
or:
Useful
Useful Addresses
Addresses -- World
World Directory
Directory

ITC M11:U5:5.8-7
 Establish & maintain documented procedures for the following:

Handling, storage, packaging, preservation and delivery

Preventing damage or deterioration
Storage, stipulating appropriate receipt and dispatch methods
Control of packaging, packing and marking processes
Methods of preserving and segregating products when they are
under the suppliers control
Transportation techniques and carrier selection
Inventory/stock management
In-process handling
Procedures for protecting final quality after final inspection and
test, including protection during the stages from delivery to
distribution
ITC M11:U5:5.8-8
 CONTENTS FRAGILE, handle with care.

USE NO HOOKS in lifting the case/crate (the

design of packages for heavy goods cannot
always support top lifting by grab hooks).

THIS WAY UP: Certain designs of small

cases make it impossible to distinguish top
from bottom.

SLING HERE: Many failures of large

cases in transit are due to wrong sling
positioning.

PROTECT FROM HEAT AND

RADIOACTIVE SOURCES or deterioration
may result.
ITC M11:U5:5.8-10
 CENTRE OF GRAVITY: This will be stencilled
on at least the two longest case sides (this
information will normally be supplied by the
manufacturer of the item being packed).

KEEP DRY: Not all cases have

waterproof internal liners; plywood used
in construction may not have a
waterproof glue line.

KEEP PACKAGE AWAY FROM HEAT:

Protect under shade.

STACKING LOAD LIMITATION: The

maximum load in kg just above the arrow
should also be marked.
CLAMP HERE: This is marked at the top
of each long side where crush battens
are inserted into the case.
ITC M11:U5:5.8-11
 Advantages of a fixed stock location system

Warehouse staff can quickly familiarise

themselves with the layout and location

If stored in code order, similar items will be

stored together

This may prompt suggestion of alternatives

It may also prompt variety reduction

It does not require a sophisticated system to

keep track of which items are currently in store

ITC M11:U5:5.4-9
 Advantages of a random stock location system

Most economical in terms of use of space

Quick receipt, handling and put-away of goods

Gives storekeeper greater flexibility

Copes better with changing space requirements

Can reduce storage costs

ITC M11:U5:5.4-10
 Action Point 5.4-3

Comparing fixed and random stock location systems

Choose two different types of materials stored in your
company. Select one material that you think should be
stored at a fixed location and another that you would
prefer to keep at random locations. For each one, write
down three reasons for your choice of storage location.
Reasons for choosing a fixed stock location for:

(type of materials)

ITC M11:U5:5.4-11
 There are four main goals for warehouse management
operations, they are to maximise completion of orders on
time-in-full and to minimise:

The cost of warehouse activities

The time that materials stay in the warehouse

Response time to demand from the next stage in

the supply chain and errors in dispatched loads

Whilst preserving the quality, value and security of the

stored items.
ITC M11:U5:5.5-1
 Forklift
truck
Hand trolley

Pallet
truck

ITC M11:U5:5.5-2
 The principles of efficient materials
handling

Removing unnecessary movement

Plan layout and handling simultaneously to reduce

handling time and costs

Arrange handling/movement to minimize the

number of pick-up and put-down movements

Use sealed unit loads, pallets or containers

wherever possible

ITC M11:U5:5.5-3
 Space utilisation and racking design
2 back-to-back 2 back-to-back 2 back-to-back
double depth racks double depth racks double depth racks

Aisle Aisle

2 back-to-back 2 back-to-back 2 back-to-back

single depth single depth single
racks racks depth racks

Aisle Aisle

Pallet racks
Access space <Storage space>
Double depth
Access space >Storage<
Single depth space
ITC M11:U5:5.5-5
 Pallets

ITC M11:U5:5.5-6
 Post pallets

Shelving

ITC M11:U5:5.5-7
 Compactor
shelving

ITC M11:U5:5.5-8
 Mezzanine Storage

ITC M11:U5:5.5-9
 Steel or
plastic
storage bins

First In First Out

(FIFO) type
racking

Carousel
storage
unit
ITC M11:U5:5.5-10
 Semi-automated handling equipment:
conveyor systems

ITC M11:U5:5.5-11
 Unloading, putting away and picking
equipment
Picker-stacker truck
Forklift trucks

Maximum
height
15m.

Pantograph

Reach truck
ITC M11:U5:5.5-12
 Comparing space requirements for picker-
stackers and standard forklift trucks
Picker-stackers Forklift trucks

Guide rails for

automatic steering

Access Storage
Picker-stacker:

Access Storage
Forklift: Single depth pallet racks

ITC M11:U5:5.5-13
 Highly-automated fixed handling
equipment

Maximum
height: 40 m.

Picker-
stacker
crane

Automatically
guided vehicle

ITC M11:U5:5.5-14
 Why Have Stores?
To ensure a balanced flow of materials
needed to keep the business running.

To organise and account for the

receipt and issue of materials.

To accept and store materials until these

are needed or can be disposed of.

ITC M11:U5:5.1-1
 Maximise completion of orders on time and in full.

Minimise the cost of warehouse operations.

Maximise inventory turnover (i.e., minimise the

time that materials stay in the warehouse).

Minimise response time to demand and errors in

despatches.

At the same time, preserve the quality, value and

security of the stored items.

ITC M11:U5:5.1-2
 Warehouse location and acquisition considerations

Proximity to suppliers Drainage and

and customers security

Availability of Clear and certain

essential services road or rail access

Capacity of the site Taxes and

for future expansion investment incentives

Acquisition
Acquisition options
options
Purchase
Purchase of
of existing
existing warehouse
warehouse
Self
Self build
build -- land
land purchase
purchase
Leasing
Leasing
Outsourced
Outsourced warehouse
warehouse services
services
Build,
Build, Own,
Own, Operate
Operate or
or Tax-free
Tax-free zone
zone
ITC M11:U5:5.2-1
 Information required

Daily throughput, volumes & weights of minimum

and maximum inventory movements.

Sizes and gross axle weights of vehicles

Packaging sizes and stacking restrictions.

Sizes, weights and load-bearing data for storage

racking, pallet trucks and other equipment.

Safe limits for moisture content, temperature and

dust particles

Forecast power consumption requirements for

equipment
ITC M11:U5:5.3-1
 Basic information needed to design a warehouse

Number of
movements
Weight
Volume

Equipment
Staff

Handling Capacity M11:U5:5.3-2

ITC
 Storage warehouses

Building design determined mainly by packaging

sizes and materials handling equipment

Very narrow aisle (VNA) widths

Fully automated 5,000 m2 to 10,000 m2 storage

buildings now operated with only five or six
people on site at any one time

ITC M11:U5:5.3-3
 Warehouse design and efficiency
Design parameters Traditional warehouses Automated warehouses
Height of eaves 10 metres 18 to 32 metres
Storage Pallets in lanes Fully automated storage
& retrieval
The goods dictate Storage height
stacking height the independent of goods
Wide aisles for forklift Very narrow aisles for
turning circle picker-stackers

Equipment Pallet racking Multi-depth and purpose -

built
Interior space Standard box according Operations dictate the
to site design
Store space
50% to 75% Above 95%
utilisation

ITC M11:U5:5.3-4
 Action Point 5.3-1

Choice of warehouse design features

Consider the storage requirements of your company - or one
that you know well. Which design features would you
consider necessary, and why?

ITC M11:U5:5.3-5
 The application of Just-in-time (JIT) techniques to
distribution logistics pipelines

Nothing is allowed into the warehouse unless it has been

scheduled for dispatch

Uses mathematical modelling and simulations to reduce pipeline

inventory to the absolute minimum

Ensures very short supply response times to demand

Maximises vehicle utilisation for economic load transportation

The goal is to minimise the resting time of any merchandise

put down on the floor
ITC M11:U5:5.3-6
 Using cross-docking centres
Supplier Supplier Supplier

End-point End-point End-point End-point End-point End-point

delivery delivery delivery delivery delivery delivery

ITC M11:U5:5.3-7
 Fully integrated cross-docking centre (CDC)
and enterprise resource planning system
CDC

WMS

HQ
Warehouse Materials Purchasing Marketing Financial
& logistics & resource system & sales reporting &
system planning system control

Customer order
Truck route
Advance data
communication Data warehouse and system backups
ITC M11:U5:5.3-8
 Transshipment
bay
Dock Storage locations Dock
levellers levellers
ADMIN.
UNPACKING &
INSPECTION

DISPATCH
FLOW

ITC M11:U5:5.4-1
 Dock levellers

Transhipment
bay UNPACKING & DISPATCH
INSPECTION

Storage locations
Administration

FLO W

ITC M11:U5:5.4-2
 STORES / STOCKYARD LENGTH OF FLOW

SLOW MOVING
ITEMS

MEDIUM RATE
MOVING ITEMS

FAST MOVING
ITEMS

ENTRANCE EXIT

ITC M11:U5:5.4-3
 A number of distinct areas

Receiving bay Marshalling area

Dispatch bay Fast moving pallet area
Control point/office Slow moving parts
Area for materials Heavy goods area
handling equipment
Bin area (used to hold
Unpacking area small items)
Inspection area High value items security
cage
ITC M11:U5:5.4-4
 Action Point 5.4-1

Your own warehouse design

For one that you know well that requires a
warehouse, design a warehouse layout that
includes all of the areas described earlier.
Indicate the access points that you would choose.
Explain the reasons for your layout design, which
should be based on the principles outlined .

ITC M11:U5:5.4-5
 Which other factors to consider?
!
Inherent safety
Clearly marked signs
Staff comfort
Good communication
Accessibility
Use of space
Long term flexibility
ITC M11:U5:5.4-6
 Outline
Global Company Profile: Volkswagen
The Strategic Importance of the Supply-
Chain
Global Supply-Chain Issues
Purchasing
Manufacturing Environments
Service Environment
Make-or-Buy Decisions
 Outline - continued
Supply-Chain Strategies
Many Suppliers
Few Suppliers
Vertical Integration
Keiretsu Networks
Virtual Companies
Vendor Selection
Vendor Evaluation
Vendor Development
Negotiations
 Outline - continued
Managing the Supply-Chain
Materials Management
Distribution Systems
Benchmarking Supply-Chain
Management
 Learning Objectives
When you complete this chapter, you should be able to
:
Identify or Define:
Supply chain management
Purchasing
E-procurement
Materials management
Keiretsu
Virtual companies
Describe or Explain:
Purchasing strategies
Approaches to negotiations
 Volkswagen
Brazilian plant employs 1000 workers
200 work for VW
800 work for other contractors :
Rockwell International, Cummins Engines, Deluge Automotiva,
MWM, Remon and VDO, etc.

VW responsible for overall quality,

marketing, research and design
VW looks to innovative supply chain to
improve quality and drive down costs
 Volkswagen
Unusual elements:
VW is buying not only materials, but also the
labor and related services
Suppliers are integrated tightly into VWs own
network, right down to assembly work in the
plant
 Supply-Chain Management
Planning, organizing, directing, &
controlling flows of materials
Begins with raw materials
Continues through internal operations
Ends with distribution of finished goods
Involves everyone in supply-chain
Example: Your suppliers supplier
Objective: Maximize value & lower waste
 The Supply-Chain
VISA

Material Flow Credit Flow

Supplier Manufacturing Retailer Consumer

Supplier Wholesaler Retailer

Schedules Order Cash

Flow Flow
 The Supply Chain
Market research data
scheduling information
Engineering and design data
Supplier Order flow and cash flow Customer
Ideas and design to
Inventory satisfy end customer
Material flow
Supplier Credit flow

Manufacturer Customer
Inventory Inventory
Supplier

Distributor Customer
Inventory
 Material Costs in
Supply-Chain
Wholesale
8% 9%
COGS
Manufacturing
Payroll
31% Material 83%
Other
11% Dir Wages
58% Retail
Other
16% COGS
13%
Source: U.S. Department of Commerce, Bureau of Census, Payroll
1987 Census of Manufacturers: General Summary of Retail 71%
Trade (Washington, D.C.: Government Printing Office, 1991)
Other
 Supply-Chain Support for
Overall Strategy
Low Cost Response Differentiation
Suppliers Supply demand Respond Share market
goal at lowest quickly to research;
possible cost changing jointly develop
requirements products and
and demand options
to minimize
stockouts

Primary Select Select Select

Selection primarily for primarily for primarily for
Criteria cost capacity, product
speed, and development
flexibility skills
 Supply-Chain Support for
Overall Strategy - continued
Low Cost Response Differentiation
Process Maintain high Invest in Modular
Characteristics average excess processes to
utilization capacity and lend themselves
flexible to mass
processes customization

Inventory Minimize Develop Minimize

Characteristics inventory responsive inventory in the
throughout system, with chain to avoid
the chain to buffer stocks obsolescence
hold down positioned to
costs ensure supply
 Supply-Chain Support for
Overall Strategy - continued
Low Cost Response Differentiation
Lead-time Shorten lead- Invest Invest
Characteristics time as long as aggressively aggressively to
it does not to reduce reduce
increase costs production development
lead-time lead-time

Product-design Maximize Use product Use modular

Characteristics performance designs that design to
and minimize lead to low postpone
cost set-up time product
and rapid differentiation
production for as long as
ramp-up possible
 Global Supply-Chain Issues
Supply chains in a global environment must be:
flexible enough to react to sudden changes in parts
availability, distribution, or shipping channels, import
duties, and currency rates
able to use the latest computer and transmission
technologies to manage the shipment of parts in and
finished products out
staffed with local specialists to handle duties, trade,
freight, customs and political issues
 Purchasing
Acquisition of goods & services
Activities
Help decide whether to make or buy
Identify sources of supply
Select suppliers & negotiate contracts
Control vendor performance
Importance
Major cost center
Affects quality of final product
Purchasing Costs as a Percent
of Sales
Industry Percent of Sales
All industry 52%
Automobile 61%
Food 60%
Lumber 61%
Paper 55%
Petroleum 74%
Transportation 63%
Dollars of Additional Sales Needed
to Equal 1$ Saved Through
Purchasing
Percent of Sales Spent for Purchases
Firm's 30% 40% 50% 60% 70% 80% 90%
Percent
Net
Profit
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.11
 Objectives of the Purchasing
Function
Help identify the products and services
that can be best obtained externally;
and
Develop, evaluate, and determine the
best supplier, price, and delivery for
those products and services
The Purchasing Focus
Materials Management Supply Management
-High transportation cost -High costs
-High inventory costs -Scarcity: national or
international
Purchasing
Management
-Commodity items
-Standard products

Source Management
-Unique items
-Custom-made items
-High technology items
Traditional Purchasing Process
Customer Supplier
Purchase Mail Order
Order Processing
Receiving
Receivables Dock
Report Packing
List

Accounts Mail Invoice

Payable

Check Mail Accounts

Reconcile
Receivable
 Purchasing Techniques
Drop shipping and special packaging
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Stockless purchasing
Standardization
 Make/Buy Considerations
Reasons for Making
lower production cost
unsuitable suppliers
assure adequate supply
utilize surplus labor and make obtain technical or
a marginal contribution
obtain desired quantity
remove supplier collusion
obtain a unique item that
would entail a prohibitive
commitment from the supplier
Reasons for Buying
lower acquisition cost
preserve supplier
commitment
management ability
inadequate capacity
reduce inventory costs
ensure flexibility and
alternate source of supply
reciprocity
 Make/Buy Considerations
Reasons for Making Reasons for Buying
maintain organizational talent item is protected by patent
protect proprietary design or or trade secret
quality frees management to deal
increase/maintain size of with its primary business
company
 Purchasing Strategies
Plans to help achieve company mission
Affect long-term competitive position
Strategic options
Many suppliers
Few suppliers
Keiretsu network
Vertical integration
Plan
Virtual company
1995 Corel Corp.
 Supply-Chain Strategies
Negotiate with many suppliers; play one supplier against
another
Develop long-term partnering arrangements with a
few suppliers who will work with you to satisfy the end
customer
Vertically integrate; buy the actual supplier
Keiretsu - have your suppliers become part of a
company coalition
Create a virtual company that uses suppliers on an as-
needed basis.
 Many Suppliers Strategy
Many sources per item
Adversarial relationship
Short-term
Little openness
Negotiated, sporadic POs
High prices
Infrequent, large lots
1995 Corel Corp.

Delivery to receiving dock

 Few Suppliers Strategy
1 or few sources per item
Partnership (JIT)
Long-term, stable
On-site audits & visits
Exclusive contracts
Low prices (large orders) 1995
Corel
Corp.

Frequent, small lots

Delivery to point of use
 Daimler Chryslers Supplier Cost Reduction
Effort
Supplier Suggestion Model Savings
Rockwell Use passenger car door Dodge $280,000
locks on trucks trucks
Rockwell Simplify design/substitute Various $300,000
materials on manual
window system
3M Change tooling for wood- Caravan, $1,500,000
grain panels to allow three Voyager
from one die instead of two
Trico Change wiper-blade Various $140,000
formulation
Leslie Metal Exterior lighting suggestions Various $1,500,000
Arts
Purchasers Ties Themselves to
Tactic Suppliers Results
1. Reduce total number Average 20% reduction in 5 years
of suppliers
Certify suppliers
Ask for JIT delivery from
key suppliers
Involve key suppliers in
new product design
Develop software
linkages to suppliers
Almost 40% of all companies
surveyed were themselves
currently certified
About 60% ask for this
About 54% do this
Almost 80% claim to do this
About 50% claim this
about 15% have EDI links to
suppliers
 Vertical Integration Strategy
Ability to produce goods Raw Material
previously purchased (Suppliers)
Setup operations
Buy supplier
Backward
Integration
Make-buy issue
Current
Major financial Transformation
commitment
Forward
Hard to do all things well Integration
Finished Goods
(Customers)
Forms of Vertical Integration
Iron Ore Silicon Farming Raw Material
(Suppliers)

Steel Flour Milling Backward

Integration

Integrated Current
Automobiles
Circuits Transformation

Distribution Forward
Circuit Boards
System Integration

Computers
Finished Goods
Dealers Watches Baked Goods
(Customers)
Calculators
 Keiretsu Network Strategy
Japanese word for affiliated chain
System of mutual alliances and
cross-ownership
Company stock is held by allied firms
Lowers need for short-term profits
Links manufacturers, suppliers,
distributors, & lenders
Partnerships extend across entire supply chain
 Virtual Company Strategy

Network of independent companies

Linked by technology
PCs, faxes, Internet etc.
Each contributes core competencies
Typically provide services
Payroll, editing, designing
May be long or short-term
Usually, only until opportunity is met 1995 Corel Corp.
 Vendor Selection Steps

Vendor evaluation
Identifying & selecting potential vendors
Vendor development
Integrating buyer & supplier
Example: Electronic data exchange
Negotiations
Results in contract
Specifies period of agreement, price, delivery
terms etc.
Vendor Selection Rating Form
 Supplier Selection Criteria

Company Service
Financial stability Delivery on time
Management Condition on arrival
Location Technical support
Product Training
Quality
Price
 Negotiation Strategies
Three types:
cost-based price model - supplier opens its
books to purchaser; price based upon fixed
cost plus escalation clause for materials and
labor
market-based price model - published price or
index
competitive bidding - potential suppliers bid for
contract
 Managing the Supply-Chain
Options:
Postponement
Channel assembly
Drop shipping
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Stockless purchasing
Standardization
Internet purchasing (e-procurement)
 Managing the Supply-Chain -
Other Options
Establishing lines of credit for suppliers
Reducing bank float
Coordinating production and shipping
schedules with suppliers and distributors
Sharing market research
Making optimal use of warehouse space
 Materials Management
Integrates all materials functions
Purchasing
Inventory management
Production control
Inbound traffic
Warehousing and stores
Incoming quality control
Objective: Efficient, low cost operations
 Goods Movement Options
Trucking
Railways
Airfreight
Waterways
Pipelines
 Supply-Chain Performance
Compared Benchmark
Typical Firms Firms
Number of suppliers per 34 5
purchasing agent
Purchasing costs as percent of 3.3% 0.8%
purchases
Lead time (weeks) 15 8
Time spent in placing order 42 minutes 15 minutes
Percentage of late deliveries 33% 2%
Percentage of rejected material 1.5% .0001%
Number of shortages per year 400 4
 OVERVIEW

ALL ORGANISATIONS NEED INPUTS OF GOODS AND SERVICES FROM EXTERNAL

SUPPLIERS OR PROVIDERS.

SAVINGS IN MATERIAL COSTS MEAN SIGNIFICANT OPPORTUNITIES FOR IMPROVING

CORPORATE PROFITABILITY AND RETURN ON INVESTMENT.

QUALITY OF INPUT MATERIALS AFFECTS FINAL PRODUCT QUALITY IN A MAJOR WAY.

IN MOST CONCERNS, LARGE OR SMALL, PURCHASING IS FAST ACQUIRING WIDER
RECOGNITION AND A MORE STRATEGIC ROLE, DAY BY DAY, DUE TO:

a) ADVANCING TECHNOLOGIES
b) LIMITED RESOURCES
c) INCREASING PROPORTION OF REVENUE SPENT ON PURCHASED GOODS AND SERVICES.
d) OPPORTUNITIES IN OUTSOURCING
e) FEWER AND LARGER SUPPLIERS/CONGLOMERATES .
f) INCREASING ENVIRONMENTAL CONCERNS.
g) SUCCESSFUL ADOPTION OF WORLD CLASS IDEAS (TQM, JIT ETC.,) AND CUTTING EDGE
TECHNOLOGIES BY LEADING CONCERNS.
 OVERVIEW ( CONTD)
FOR ALL THE ABOVE REASONS, BUYERS ROLE IS BECOMING MORE STRATEGIC IN
NATURE. IT INCLUDES, AMONG OTHERS.

1) ADVISING TOP MANAGEMENT ON MARKET TRENDS SHORT TERM AND

LONG TERM
2) NEGOTIATING LONG TERM RELATIONSHIPS WITH CRITICAL SUPPLIERS
3) BUILDING STRATEGIC LINKAGES WITH KEY SUPPLIER UNITS
4) VENDOR DEVELOPMENT
5) QUALITY THRUST
6) SUPPLY CHAIN MANAGEMENT
7) TOTAL COST REDUCTION
8) PURCHASE RESEARCH
9) VALUE ADDITION THROUGH CREATIVE PURCHASING ROUTE AND
WORKING MORE TOWARDS TOTAL COST CONCEPT AND VALUE
ADDITION WITH CONTINUOUS IMPROVEMENT PERSPEC TIVE.
 The Leverage
Strategic Sourcing can have a significant
impact on the financial performance and
shareholder value of a Company.
When the goal is boosting profits by
dramatically lowering costs, a business
should look first at what it buys.
Fortune, 1995
 Illustrative Example
Percentage Cost Reduction in Direct Materials

Baseline 5 % 10 % 15 %

Revenue 100 100 100 100

COGS Material 60 57 54 51

Labour & Var OH 20 20 20 20

Gross Margin 20 23 26 29
Fixed OH Expenses 10 10 10 10
Net Income ( pretax ) 10 13 16 19

% Improvement 30 60 90
 PROCUREMENT

A. TRADITIONAL VIEW OF PURCHASING

B. TODAYS BUSINESS NEEDS

C. PROCUREMENT AND CHANGE MANAGEMENT

D. VISION AND MISSION

E. COMPETITIVE STRATEGY

F. ROLE OF STRATEGIC PROCUREMENT

 PROCUREMENT - STEPS
1. RECOGNISE AND DESCRIBE THE NEED
2. TRANSMIT THE NEED
3. SELECT THE VENDOR
4. PREPARE AND ISSUE PURCHASE ORDER
5. FOLLOW UP THE ORDER
6. RECEIVE AND INSPECT THE MATERIAL

7 A) AUDIT THE INVOICE

B) SETTLE THE PAYMENT

8. CLOSE THE ORDER

9. AFTER SALES/WARRANTY OBLIGATIONS
 PROCUREMENT OBJECTIVES:

RIGHT QUALITY

RIGHT TIME

RIGHT QUANTITY

RIGHT SOURCE

RIGHT PRICE
 QUALITY
1) QUALITY- FITNESS FOR USE
2) CONFORMANCE TO SPECS TO BE ENSURED AT SOURCE
3) REJECTION NO SOLUTION
4) MINIMAL CHECKING AT RECEIVER END
5) RELIABILITY / REPEATABILITY
6) CREATION OF COST EFFECTIVE SPECIFICATIONS;
CHANGES, IF ANY, FOR CONSIDERATION;
BOTH SUPPLIER AND USER HAVE TO CONTRIBUTE
7) SAFETY AND ENVIRONMENT MAJOR THRUST AREAS
8) QUALITY TO BE CREATED IN A PRODUCT, CANNOT BE INSPECTED INTO A PRODUCT

RELATED ISSUES
STANDARDISATION
TQM / ISO 9000 / 14000
QUALITY CIRCLES
VALUE ENGINEERING / VALUE ANALYSIS
SUPPLIER ASSESSMENT / VENDOR DEVELOPMENT
 TIME

LEAD TIME ANALYSIS

FOLLOW UP SYSTEM
EXPEDITING
NETWORK ANALYSIS/CRITICAL PATH ANALYSIS
LIQUIDATED DAMAGES
FORCE MAJEURE CONDITIONS
LOGISTICS

RELATED ISSUES
EFFECT OF TIME OVER-RUN FOR PROJECTS/CRITICAL SPARES

BONUS/PENALTY/COST OF EXPEDITING
 TIME ( CONTD.)

LEAD TIME ANALYSIS

EFFECT OF LONG LEAD TIME ON COSTS AND PROFITABILITY

ELEMENTS OF ADMINISTRATIVE LEAD TIME

MAKING A FLOW CHART SHOWING TIME FOR DIFFERENT ACTIVITIES

ANALYSIS OF FLOW CHART TO IDENTIFY DELAYS AND SHORTCOMINGS OF PROCEDURES

IMPROVEMENT OF PROCEDURES TO SHORTEN INTERNAL LEAD TIME

INTEGRATED APPROACH

SUPPLIERS LEAD TIME ANALYSIS

NEGOTIATION WITH SUPPLIERS TO REDUCE LEAD TIME AND RENDERING SUCH HELP AS
MAY BE NECESSARY AND FEASIBLE

LOGISTICS
 INTERNAL LEAD TIME TIME ( CONTD)
IMPORTANT ISSUES
PURCHASING SYSTEMS AND PROCEDURES
KNOWLEDGE BASE
INCOMPLETE SPECIFICATIONS / OVER SPECIFICATIONS

EXTERNAL LEAD TIME

INCORRECT CHOICE OF SUPPLIER

OVER OPTIMISTIC DELIVERY PROMISE
CHANGE IN BUYERS REQUIREMENT / INCOMPLETE ORDER / BUYERS FAILURE TO
KEEP HIS PART OF PROMISE
LACK OF EFFICIENCY IN SUPPLIER ORGANISATION
DELAY GENUINELY BEYOND SUPPLIERS CONTROL
LOGISTIC S
PRICE
1. CONCEPT OF PRICE
2. COST BASIS
3. VALUE / QUALITY
4. CONCEPT OF RIGHT PRICE
5. LOWEST PRICE NOT NECESSARILY RIGHT PRICE
6. TOTAL COST CONCEPT
7. PRICE TERMS
8. DISCOUNTS
9. COMMERCIAL FACTORS
10. MONOPOLY / OLIGOPOLY / PERFECT COMPETITION
11. ECONOMIC TRENDS
12. BUYER & SUPPLIER PARTERNERSHIPS - CREATING VALUE TOGETHER

KEY SUCCESS FACTORS :

1. KNOWLEDGE
2. PRODUCT & ITS ALTERNATIVES
3. MARKET TRENDS
4. COMPETITIVE FORCES
5. HEDGE / FORWARD BUYING
PRICE(CONTD)

6 RISK MANAGEMENT

7 FORWARD MARKETS - COMMODITIES

8 BUSINESS / ECONOMIC FACTORS

9 PRICE ANALYSIS AND COST ANALYSIS

10 LEARNING CURVES

11 RELATIONSHIP / INTER DEPENDENCE

12 NEGOTIATION SKILLS
QUANTITY

* ORDER QUANTITY( EOQ / BATCH LOT / MIN ORDER QUANTITY )

* INVENTORY CONTROL

* JIT SYSTEMS

* ECONOMIC LOTS

* DISCOUNTS ETC

* STAGGERD DELIVERY TERMS

RELATED ISSUES

* WORKING CAPITAL
* LOGISTICS
* WAREHOUSING
* DISTRIBUTION
* SHELF LIFE / OBSOLESCENCE
* AVAILABILITY / SHORTAGES - ( SHORT TERM / LONG TERM )
 SOURCE
DETERMINANTS OF SUPPLIER MIX

CONSISTENT QUALITY
SUPPLIER FACILITIES
COST, NOT PRICE (TOTAL COST CONCEPT)
STABLE AND COMPETITIVE
DELIVERY TIME (NORMAL, SOS)
LOCATION
SERVICE / ATTITUDE / RELIABILITY
DEVELOPMENTAL ORIENTATION / INNOVATION
FINANCIAL STRENGTH
TECHNOLOGY / QUALITY CONTROL / R&D
MARKET STANDING / REFERENCES

KEY SUCCESS FACTORS

KNOWLEDGE OF SUPPLIERS/MARKET/OWN PRODUCT
UNDERSTANDING OF ENVIRONMENT
LONG TERM PLANNING
DEVELOPING STRATEGIC LINKAGES WITH KEY SUPPLIERS
SUPPLIER DEVELOPMENT
 PURCHASING: RELATED ISSUES

PURCHASING OBJECTIVES AND STRATEGIES

PURCHASING STRUCTURE AND ORGANISATION
SYSTEMS AND PROCEDURES
MEASURING PERFORMANCE, EFFICIENCY AND
EFFECTIVENESS
BENCH MARKING - BEST PRACTICES
 IN CONCLUSION
PROCUREMENT IS ACQUIRING A MORE STRATEGIC ROLE IN BUSINESS
INTEGRATE PURCHASING INTO YOUR ORGANISATIONS STRATEGIC PLANNING
MAKE OR BUY DECISION
GAIN COMPETITIVE ADVANTAGE THROUGH EXCELLENCE IN PURCHASING
PERFORMANCE
SET AND APPLY RIGHT CRITERIA FOR SELECTION OF YOUR VENDORS
SUPPLIER DEVELOPMENT
SET RIGHT PERFORMANCE STANDARDS FOR YOUR PURCHASING FUNCTION
RE-ENGINEER YOUR PROCUREMENT PROCESS FOR BETTER USER
SATISFACTION AND ACHIEVE CONTINUOUS IMPROVEMENTS IN INVENTORY
AND PURCHASING COSTS THROUGH IMPROVEMENT IN PURCHASING CYCLE.
LOGISTICS AND SUPPLY CHAIN
BENCH MARKING THE PURCHASING FUNCTION
TOTAL QUALITY IN PURCHASING
ROLE OF PURCHASING IN THE VALUE CHAIN
Supply-Chain
Management
 Outline
Global Company Profile: Volkswagen
The Strategic Importance of the Supply-
Chain
Global Supply-Chain Issues
Purchasing
Manufacturing Environments
Service Environment
Make-or-Buy Decisions
 Outline - continued
Supply-Chain Strategies
Many Suppliers
Few Suppliers
Vertical Integration
Keiretsu Networks
Virtual Companies
Vendor Selection
Vendor Evaluation
Vendor Development
Negotiations
 Outline - continued
Managing the Supply-Chain
Materials Management
Distribution Systems
Benchmarking Supply-Chain
Management
 Learning Objectives
When you complete this chapter, you should be able to
:
Identify or Define:
Supply chain management
Purchasing
E-procurement
Materials management
Keiretsu
Virtual companies
Describe or Explain:
Purchasing strategies
Approaches to negotiations
 Volkswagen
Brazilian plant employs 1000 workers
200 work for VW
800 work for other contractors :
Rockwell International, Cummins Engines, Deluge Automotiva,
MWM, Remon and VDO, etc.

VW responsible for overall quality,

marketing, research and design
VW looks to innovative supply chain to
improve quality and drive down costs
 Volkswagen
Unusual elements:
VW is buying not only materials, but also the
labor and related services
Suppliers are integrated tightly into VWs own
network, right down to assembly work in the
plant
 Supply-Chain Management
Planning, organizing, directing, &
controlling flows of materials
Begins with raw materials
Continues through internal operations
Ends with distribution of finished goods
Involves everyone in supply-chain
Example: Your suppliers supplier
Objective: Maximize value & lower waste
 The Supply-Chain
VISA

Material Flow Credit Flow

Supplier Manufacturing Retailer Consumer

Supplier Wholesaler Retailer

Schedules Order Cash

Flow Flow
 The Supply Chain
Market research data
scheduling information
Engineering and design data
Supplier Order flow and cash flow Customer
Ideas and design to
Inventory satisfy end customer
Material flow
Supplier Credit flow

Manufacturer Customer
Inventory Inventory
Supplier

Distributor Customer
Inventory
 Material Costs in
Supply-Chain
Wholesale
8% 9%
COGS
Manufacturing
Payroll
31% Material 83%
Other
11% Dir Wages
58% Retail
Other
16% COGS
13%
Source: U.S. Department of Commerce, Bureau of Census, Payroll
1987 Census of Manufacturers: General Summary of Retail 71%
Trade (Washington, D.C.: Government Printing Office, 1991)
Other
 Supply-Chain Support for
Overall Strategy
Low Cost Response Differentiation
Suppliers Supply demand Respond Share market
goal at lowest quickly to research;
possible cost changing jointly develop
requirements products and
and demand options
to minimize
stockouts

Primary Select Select Select

Selection primarily for primarily for primarily for
Criteria cost capacity, product
speed, and development
flexibility skills
 Supply-Chain Support for
Overall Strategy - continued
Low Cost Response Differentiation
Process Maintain high Invest in Modular
Characteristics average excess processes to
utilization capacity and lend themselves
flexible to mass
processes customization

Inventory Minimize Develop Minimize

Characteristics inventory responsive inventory in the
throughout system, with chain to avoid
the chain to buffer stocks obsolescence
hold down positioned to
costs ensure supply
 Supply-Chain Support for
Overall Strategy - continued
Low Cost Response Differentiation
Lead-time Shorten lead- Invest Invest
Characteristics time as long as aggressively aggressively to
it does not to reduce reduce
increase costs production development
lead-time lead-time

Product-design Maximize Use product Use modular

Characteristics performance designs that design to
and minimize lead to low postpone
cost set-up time product
and rapid differentiation
production for as long as
ramp-up possible
 Global Supply-Chain Issues
Supply chains in a global environment must be:
flexible enough to react to sudden changes in parts
availability, distribution, or shipping channels, import
duties, and currency rates
able to use the latest computer and transmission
technologies to manage the shipment of parts in and
finished products out
staffed with local specialists to handle duties, trade,
freight, customs and political issues
 Purchasing
Acquisition of goods & services
Activities
Help decide whether to make or buy
Identify sources of supply
Select suppliers & negotiate contracts
Control vendor performance
Importance
Major cost center
Affects quality of final product
Purchasing Costs as a Percent
of Sales
Industry Percent of Sales
All industry 52%
Automobile 61%
Food 60%
Lumber 61%
Paper 55%
Petroleum 74%
Transportation 63%
Dollars of Additional Sales Needed
to Equal 1$ Saved Through
Purchasing
Percent of Sales Spent for Purchases
Firm's 30% 40% 50% 60% 70% 80% 90%
Percent
Net
Profit
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.11
 Objectives of the Purchasing
Function
Help identify the products and services
that can be best obtained externally;
and
Develop, evaluate, and determine the
best supplier, price, and delivery for
those products and services
The Purchasing Focus
Materials Management Supply Management
-High transportation cost -High costs
-High inventory costs -Scarcity: national or
international
Purchasing
Management
-Commodity items
-Standard products

Source Management
-Unique items
-Custom-made items
-High technology items
Traditional Purchasing Process
Customer Supplier
Purchase Mail Order
Order Processing
Receiving
Receivables Dock
Report Packing
List

Accounts Mail Invoice

Payable

Check Mail Accounts

Reconcile
Receivable
 Purchasing Techniques
Drop shipping and special packaging
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Stockless purchasing
Standardization
 Make/Buy Considerations
Reasons for Making
lower production cost
unsuitable suppliers
assure adequate supply
utilize surplus labor and make obtain technical or
a marginal contribution
obtain desired quantity
remove supplier collusion
obtain a unique item that
would entail a prohibitive
commitment from the supplier
Reasons for Buying
lower acquisition cost
preserve supplier
commitment
management ability
inadequate capacity
reduce inventory costs
ensure flexibility and
alternate source of supply
reciprocity
 Make/Buy Considerations
Reasons for Making Reasons for Buying
maintain organizational talent item is protected by patent
protect proprietary design or or trade secret
quality frees management to deal
increase/maintain size of with its primary business
company
 Purchasing Strategies
Plans to help achieve company mission
Affect long-term competitive position
Strategic options
Many suppliers
Few suppliers
Keiretsu network
Vertical integration
Plan
Virtual company
1995 Corel Corp.
 Supply-Chain Strategies
Negotiate with many suppliers; play one supplier against
another
Develop long-term partnering arrangements with a
few suppliers who will work with you to satisfy the end
customer
Vertically integrate; buy the actual supplier
Keiretsu - have your suppliers become part of a
company coalition
Create a virtual company that uses suppliers on an as-
needed basis.
 Many Suppliers Strategy
Many sources per item
Adversarial relationship
Short-term
Little openness
Negotiated, sporadic POs
High prices
Infrequent, large lots
1995 Corel Corp.

Delivery to receiving dock

 Few Suppliers Strategy
1 or few sources per item
Partnership (JIT)
Long-term, stable
On-site audits & visits
Exclusive contracts
Low prices (large orders) 1995
Corel
Corp.

Frequent, small lots

Delivery to point of use
Daimler Chryslers Supplier
Cost Reduction Effort
Supplier Suggestion Model Savings
Rockwell Use passenger car door Dodge $280,000
locks on trucks trucks
Rockwell Simplify design/substitute Various $300,000
materials on manual
window system
3M Change tooling for wood- Caravan, $1,500,000
grain panels to allow three Voyager
from one die instead of two
Trico Change wiper-blade Various $140,000
formulation
Leslie Metal Exterior lighting suggestions Various $1,500,000
Arts
Purchasers Ties Themselves to
Tactic Suppliers Results
1. Reduce total number Average 20% reduction in 5
of suppliers
Certify suppliers
Ask for JIT delivery from
key suppliers
Involve key suppliers in
new product design
Develop software
linkages to suppliers
years
Almost 40% of all companies
surveyed were themselves
currently certified
About 60% ask for this
About 54% do this
Almost 80% claim to do this
About 50% claim this; about
15% more than have EDI links to
suppliers
 Vertical Integration Strategy
Ability to produce goods Raw Material
previously purchased (Suppliers)
Setup operations
Buy supplier
Backward
Integration
Make-buy issue
Current
Major financial Transformation
commitment
Forward
Hard to do all things well Integration
Finished Goods
(Customers)
Forms of Vertical Integration
Iron Ore Silicon Farming Raw Material
(Suppliers)

Steel Flour Milling Backward

Integration

Integrated Current
Automobiles
Circuits Transformation

Distribution Forward
Circuit Boards
System Integration

Computers
Finished Goods
Dealers Watches Baked Goods
(Customers)
Calculators
 Keiretsu Network Strategy
Japanese word for affiliated chain
System of mutual alliances and
cross-ownership
Company stock is held by allied firms
Lowers need for short-term profits
Links manufacturers, suppliers,
distributors, & lenders
Partnerships extend across entire supply chain
 Virtual Company Strategy

Network of independent companies

Linked by technology
PCs, faxes, Internet etc.
Each contributes core competencies
Typically provide services
Payroll, editing, designing
May be long or short-term
Usually, only until opportunity is met 1995 Corel Corp.
 Vendor Selection Steps

Vendor evaluation
Identifying & selecting potential vendors
Vendor development
Integrating buyer & supplier
Example: Electronic data exchange
Negotiations
Results in contract
Specifies period of agreement, price, delivery
terms etc.
Vendor Selection Rating Form
 Supplier Selection Criteria

Company Service
Financial stability Delivery on time
Management Condition on arrival
Location Technical support
Product Training
Quality
Price
 Negotiation Strategies
Three types:
cost-based price model - supplier opens its
books to purchaser; price based upon fixed
cost plus escalation clause for materials and
labor
market-based price model - published price or
index
competitive bidding - potential suppliers bid for
contract
 Managing the Supply-Chain
Options:
Postponement
Channel assembly
Drop shipping
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Stockless purchasing
Standardization
Internet purchasing (e-procurement)
 Managing the Supply-Chain -
Other Options
Establishing lines of credit for suppliers
Reducing bank float
Coordinating production and shipping
schedules with suppliers and distributors
Sharing market research
Making optimal use of warehouse space
 Materials Management
Integrates all materials functions
Purchasing
Inventory management
Production control
Inbound traffic
Warehousing and stores
Incoming quality control
Objective: Efficient, low cost operations
 Goods Movement Options
Trucking
Railways
Airfreight
Waterways
Pipelines
 Supply-Chain Performance
Compared Benchmark
Typical Firms Firms
Number of suppliers per 34 5
purchasing agent
Purchasing costs as percent of 3.3% 0.8%
purchases
Lead time (weeks) 15 8
Time spent in placing order 42 minutes 15 minutes
Percentage of late deliveries 33% 2%
Percentage of rejected material 1.5% .0001%
Number of shortages per year 400 4