zTeaching Slides 11 Purchasing and Inventory Mgt

8/4/2019 zTeaching Slides 11 Purchasing and Inventory Mgt

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purchasing


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PURCHASING and MATERIALS MGT

Receiving

and

Inspection

Raw

Materials,

Parts, and

In-process

Ware-

Housing

Production

Finished

Goods

Ware-

housing

Inspection,

Packaging,

And

ShippingSuppliers

Customers

Materials Management

Purchasing

Production

Control

Warehousing and

Inventory ControlShipping

and Traffic

Physical materials flow

Information flow


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Purchasing

Management Maintain data base of available,

qualified suppliers

Select suppliers to supply eachmaterial

Negotiate contracts with suppliers

Act as interface between company andsuppliers

Provide training to suppliers on latesttechnologies


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Mission of Purchasing

Develop purchasing plans for each major productor service that are consistent with operationsstrategies:

Low production costs

Fast and on-time deliveries

High quality products and services

Flexibility


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purchasing & ITSOBJECTIVES

Purchasing is the activity that decides which suppliers touse, negotiates contracts and determines whether to buylocally

Objectives of Purchasing

Support the operational needs and requirements ofpurchasing customers

Manage the purchasing function efficiently and effectively

Select, develop and maintain sources of supply


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OBJECTIVES OF purchasing

Objectives of Purchasing

Develop strong relationships and interact closely with otherfunctional groups

Support a companys goals and objectives

Develop integrated purchasing strategies that enhancecompany strategies


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Purchasing Process

Material Requisition

Request for Quotations

Select Best Supplier

Purchase Order

Receive and Inspect Goods

From purchasing,

to potential suppliers

From any department,

to purchasing

Based on quality, price,

lead time, dependability

From purchasing,

to selected supplier

From supplier, to receiving,quality control, warehouse


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purchasing stages

1. Materials Need

Identification

2. Evaluate Potential

Supply Sources

3. Source Selection

4. Release & Receiptof Material

5. Supplier PerformanceMeasurement &Continuous Management


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Need identification

Purchase Requisition & Traveling Purchase Requisition

Re-order Point System

Stock Checks

Cross-Functional Teams

Reducing the time for need identification


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purchase requisition


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Supply source evaluation

Routine purchases and new purchases

Source evaluation begins with list of suppliers

For new items, Preferred list of suppliers would be better

Preferred list of suppliers have exhibited capabilities inproduct design, commitment to quality, cost, management

commitment, technical ability, delivery performance

Final evaluation might require a visit to suppliers plant andfacilities


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source selection

After supplier evaluation, supplier has to be selected

Two selection methods - Competitive bidding & Negotiation


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Competitive bidding

Competitive bidding is effective under followingcircumstances

Volume is high enough to justify this method of businessSpecifications are very clear to seller i.e. they are notcomplex to understand

Adequate number of qualified sellers exist in the market

Adequate time is given and available to suppliers toevaluate the requests for bids

Buyer doesnt have preferred supplier for that item


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negotiation

Face-to-face negotiation is best under these circumstances

When any of the criteria mentioned for bidding is missing.

Ex. when the specifications are very complex or when theitem is new

When the buyer requires early supplier involvement

When the supplier requires long period of time to develop

and produce the items.

When the purchase is being done on multiple performancefactors like price, quality, delivery, product support


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Release & receipt of materialrequirements

This involves physical transmittance of purchaserequirements to the supplier.

PURCHASE ORDER (PO) is the most common form

EDI is the highly used mode of transmitting the PO


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purchase order


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Supplier performancemeasurement

This is necessary in order to

improve buyer-seller relationships

give supplier, feedback, so that performance improves

have quantitative data collected which comes in handy at

timescollect data even if it is one time purchase from a supplier


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INVENTORY MANAGEMENTTECHNIQUES


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Strategic Role of Inventory

1. Organisation Goals and Customers Needs2. Measure of Organisation Performance3. Impact of Inventory on Organisation

Performance4. Conflicting Goals of Inventory5. Inventory Strategy in Support of

Organisation Performance

6. Measurement of Inventory Costs


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Supplier Company Co.W/house DistributorCO

NSUMPTIO

N

RMInventory

WIPInventory

FGInventory

(Stores)

FGInventory

(Warehouse)

FGChannel

Inventory

FGRetail

Inventory

Forecast

Chain Mgt.

ConsumptionUncertainty

ProcessingUncertainty


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Inventory

Processstage

Demand Type

Number& Value

Other

Raw Material

WIPFinishedGoods

IndependentDependent

A Items

B ItemsC Items

SPARES

MaintenanceRepair

Operating

Inventory Classifications


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TYPES DEFINITION

1. Production Inventories:These are of 2 types

a) those purchased from the market like rawmaterials, spare parts and components; and

b) special parts or components manufactured inones own company and kept in stock for use.

2. MRO Inventories or Maintenance, Repairsand Operating Supplies:Bought-out materials required for maintenance ofthe production process but which do not form partof the finished product.


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3. Work-in-progress or In-process Inventories:

Semi-finished products usually found on the

factory floor in various stages of production.

4. Finished Goods:

End product for sales to customers.


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PRIMARY CAUSES OF INVENTORIES

1. Faulty Sales Forecasting

2. Rigid Production Batch Quantities

3. Bureaucratic Time-consuming Purchase

Procedures

4. Orders on Unreliable Suppliers

5. Delays in Imports and Clearance of ImportedCargoes

6. Wrong Transportation Modes

7. Poor Coordination between Sales, Productionand Materials Departments


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PURPOSE & FUNCTION OF INVENTORY

Inventory is created for two general purposes,i.e. Protection and Economy.

Inventory has four basic functions:

1. The Lot-size Inventory

2. Fluctuation Inventory

3. Anticipation Inventory4. Transportation Inventory


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The Functions of Inventory

Provide a stock of goods to meetanticipated customer demand and

provide a selection of goods Decouple suppliers from production and

production from distribution

Allow one to take advantage of quantitydiscounts


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To provide a hedge against inflation

To protect against shortages due todelivery variation

To permit operations to continuesmoothly with the use of work-in-

process

The Functions of Inventory

(Continued)


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Higher costs Item cost (if purchased)

Ordering (or setup) cost Costs of forms, clerks wages etc.

Holding (or carrying) cost Building lease, insurance, taxes etc.

Difficult to control Hides production problems

Disadvantages of Inventory


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IMPACT ON PROFITABILITY

Holding inventories is often very expensive. Moreinventories mean more costs and this has a directimpact on the profitability of any organisation.

Inventory turnover:If a company keeps inventories equal to one monthsconsumption, it means that the inventory turnover is 12times, i.e. the entire inventory is being used up and

replaced 12 times a year. If it keeps inventories equalto six months consumption, on an average, it meansthat the total inventory turnover is two times.


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The inventory turnover rate is a quick guide tothe mileage obtained from money, tied up ininventories. The method to calculate it issimple:

1. Annual accounts shows inventories -(i) at the beginning of the year Rs. 6.20 lakhs(ii) at the close of the year Rs. 5.80 lakhs

2. Average inventory holding Rs. 6.00 lakhs

3. Material consumed during the year Rs. 24.00 lakhs

4. Average inventory as number ofmonths consumption = 624x12 3 months

5. Inventory turnover rate 4 months

INVENTORY TURNOVER


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DETERMINING STOCK LEVELS

There are various levels of stocks:

1. Deficiency Level: Stock in hand isinadequate to meet needs.

2. Exhaust Bin Level: Stocks are exhausted.

3. Buffer Stock or Minimum Stock Level

4. Danger Warning Level

5. Re-order Level or Provisioning Level: Thepoint at which the order has to be placed.

6. Maximum Stock Level: Maximum quantityto be stocked at any one time.


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METHODS OF CONTROLLING STOCK LEVELS

1. FIXED QUANTITY SYSTEM: Order areplaced at fixed stock level.

2. FIXED TIME SYSTEM: Order are placed at

constant intervals of time.

3. IMPREST STOCK CONTROL: Involves thedetermination of a maximum level for the

bin and a periodical inspection, but notfixed, of stock levels in the bin. The bin isthen topped up to the maximum level.


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METHODS OF CONTROLLING STOCK LEVELS

4. OPEN ACCESS BINSThe operators help themselves to thestocks without having to make records.

5. TWO BIN SYSTEMIn this system, two bins are kept havingdifferent levels. When the first bin isexhausted, it means that it is time for

replenishment. The second bin is reservestock.


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SELECTIVE INVENTORY CONTROL

Classification Criteria

1. A-B-C (Sometimes nick-named : Annual value of consumption of theAlways Better Control). items concerned. (It has nothing to do

with the unit of value of the item.)

2. H-M-L (High Medium Low) Unit price of material. (This is the

opposite of A-B-C and does not takeconsumption into account.)

3. V-E-D (vital, Essential and By the critical nature of the componentDesirable) or material with respect to production.

4. S-D-E (Scarce, Difficult to obtain Purchasing problems in regard toEasy to obtain) availability.

5. G-O-L-F (Government, Ordinary, Source of material.Local, Foreign)

6. F-S-N (Fast moving, Slow moving Issues from storesand Non-moving)

7. S-O-S (Seasonal, Off-seasonal) Seasonality. This applies especially tocommodities.

8. X-Y-Z The inventory value of items stored.

Selective Inventory Control can be divided into eight types. They are :


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0

20

4060

80

100

0 50 100 150% of Inventory Items

% Annual $ Usage

A

B C

Class % $ Vol % ItemsA 80 15B 15 30C 5 55

Classifying Items as ABC


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Annual Classifi- No. Items Total value PercentConsumption cation of per cent of items valuelimits items Rs. million

Above Rs. 5,000 A 77 4.2 2.57 82.2

Between Rs.1,000 - - - - -

and Rs. 4,999 B 194 10.5 0.38 12.2

Below Rs. 1,000 C 1571 8.53 0.17 5.6

1842 100.00 3.12 100.00

A-B-C ANALYSIS


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A B C

1. Tight control on stock levels Moderate control Loose control.

2. Only exact requirement to be More or less on On estimated usage.procured. Always have more exact requirement.than one source. Centralise Reduce lead times.

procurement.

3. Individual postings in stores Individual postings. Collective postingscard and in terms of charging or preferably noneout cost to consumption. at all.

4. Continuous check on Broad check on Hardly any check

schedules and revision schedule revisions. required.where called for.

5. Very low buffer stock or if Exact requirements No restriction orpossible, none at all. To be worked out. fairly large safety

stocks.


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A B C

6. Regular expediting Some follow-up No follow-upand follow-up. necessary.

7. Very strict consumption Consumption control Though consumption

control by laying down is highly desirable. control is desirable,standards and norms. Much attention need

not be bestowed.

8. Material planning should Past consumption Rough estimatesbe very accurate especially may be taken as would be satisfactoryin regard to forecasts. Basis

9. Concerted effort at cost Moderate attempts An annual review.reduction through modern would be sufficient.techniques like valueanalysis. Efforts should bemore at import substitution

if the item is an imported one.

SELECTIVE INVENTORY CONTROLContinued


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Classes V items E items D items

A items Constant control Moderate stocks Nil stocksand regular follow up

B items Moderate stocks Moderate stocks Very low stocks

C items High stocks Moderate stocks Low stocks

Procedure of using A-B-C and V-E-D


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Class X items Y items Z itemsof items

A items A critical analysis must Attempts must be Items arebe done in an effort to made to convert within controlreduce stocks Z category

B items Consumption and stock Further action in Can beshould be reviewed control may not reviewed twicefrequently be necessary a year

C items Steps should be Controls should Can betaken to dispose of be tightened reviewedsurplus stocks annually

XYZ and ABC can be used in conjunction and the method ofcontrol will be as follows:


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Class F items S items N itemsof items

X items Tight inventory Reduction of stock Quick disposal ofcontrol to very low level items at optimum

price.

Y items Normal inventory Low level of Should becontrol stocks disposed as early

as possible

Z items Can reduce Clerical Low level of Can afford tolabour by increasing stocks dispose at lowerstocks prices

We can also merge FSN and XYZ classifications as givenbelow:


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OPTIONAL

Or

COVERED BY EA

Holding Ordering and Setup


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Holding, Ordering, and SetupCosts

Ordering costs - associated with costs ofplacing order and receiving goods

Holding costs - associated with holdingor carrying inventory over time

Setup costs - cost to prepare a machine

or process for manufacturing an order Stock Out CostsCost of not meeting

Demand


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COST OF INVENTORY

1. Purchasing or Ordering Cost

i) Total number of purchase orders issued.

ii) Payroll costs of the entire purchase

department, inventory control sectionand the receiving and inspection section.

iii) Stationery and supplies

iv) Rents and office maintenanceexpenditure and overheads liketelephone, telegrams, etc.

v) Receiving and inspection costs.


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COST OF INVENTORY

2. Inventory Carrying or Holding Cost

i) Interest on the capital locked up on thematerials stocked.

ii) Rentals for space occupied by thestores and taxes payable.

iii) Insurance premia on the goods

iv) Obsolescence

v) Shrinkage

vi) Evaporation


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COST OF INVENTORY

vii) Deterioration or spoilage

viii) Personal, Payroll costs involved in the

functioning of the stores-department.ix) Overheads like electricity, water,

maintenance, costs, etc., incurred inthe functioning of the stores

department.


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Cost of Inventory

3) Set-up Cost

Clean-up costs

Re-tooling costs

Adjustment costs


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Cost of Inventory

4) Stock Out Cost

Lost Sale

Lost Customer

Lost Opportunities


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INDICATORS OF EFFICIENT PERFORMANCE

1. Inventory Turnover Ratioa) Overall: Sales to inventory ratio

Sales at sales value= ----------------------------

Total average inventory

The average inventory is obtained by adding up all the month-end inventory figures and dividing the total by 12. The totalinventory means raw materials, stores etc., WIP and finishedgoods.

b) Manufacturing materials:

Inventory as number of days of consumptionActual inventory of mfg. materials

= ---------------------------------------- x 365Total consumption for the year

This can be separately calculated for raw materials, spare

parts, components, etc.


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c) Work-in-process:Inventory in terms of days of production at production cost

Actual WIP inventory= ----------------------------------------------

Production at product cost for the year

b) Finished goods:Inventory in days of sales at cost

Actual finished goods inventory= -------------------------------------- x 365

Total yearly sales at cost


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2. Other Management Ratios

a) Service level ratio

No. of demands met in time= ----------------------------------- x 100

Total no. of demands received

b) Stock out index

No. of items not met in time= ------------------------------------ x 100

Total no. of demands received


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c) Inventory carrying cost index

Total cost of holding inventories= -------------------------------------- x 100

Average value of inventory

d) Spare parts index

Value of spare parts inventory= ------------------------------------

Value of capital goods


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TYPES OF SPARE PARTS

1. Maintenance SparesThese are required for a regular replacement of partswhich wear out or those which are to be replaced afterspecific periods of service.

2. Insurance SparesThese are also called emergency spares or capitalspares.

3. Repairable or Rotable partsThe word rotablehas originated from the air force. Thepart is removed from the aircraft after a specifiednumber of hours of use or on its failure. It is sent to therepair workshop where it is tested and repaired oroverhauled. After it is certified as okay, it is broughtback into stock to be again reused on the aircraft.


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Overall Generic Strategies

1. Low Cost Operations

2. Quick Response

3. Differentiation

Inventory Support for


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Inventory Support forOverall Strategy

Low Cost Response

Inventory

Characteristics

Minimizeinventory

throughoutthe chain tohold down

costs

Developresponsivesystem,

with bufferstocks

positioned

to ensuresupply

Minimizeinventory inthe chain to

avoidobsolescenc

e

Differentiation

zTeaching Slides 11 Purchasing and Inventory Mgt

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