Supply Chain Supply Chain Management : Management :

BackgroundBackground

Production & Production & Operation Operation

ManagementManagement

By By

Prof Srikanth VenkataswamyProf Srikanth Venkataswamy

PurchasingPurchasing

What is Purchasing ?What is Purchasing ?

Purchasing is an “Act” Of Purchasing is an “Act” Of Buying an item at a price.Buying an item at a price.

Objective Of PurchasingObjective Of Purchasing

The Basic objective of Purchasing The Basic objective of Purchasing Is Is

To procure : 5 R’sTo procure : 5 R’s

1.1. The right material The right material

2.2. With the right quality and Along With the right quality and Along With the right quantityWith the right quantity

3.3. At the right TimeAt the right Time

4.4. For the right PriceFor the right Price

5.5. From the right sourceFrom the right source

Goals of PurchasingGoals of Purchasing

1.1. Uninterrupted Flow Of MaterialUninterrupted Flow Of Material2.2. Manage InventoryManage Inventory3.3. Improve qualityImprove quality4.4. Developing and managing Developing and managing

suppliers relationshipsuppliers relationship5.5. Achieve Lowest Total costsAchieve Lowest Total costs6.6. Reduce administrative costsReduce administrative costs7.7. Advance firm’s competitive Advance firm’s competitive

PositionPosition

ImportanceImportance Of Purchasing Of Purchasing1.1. Purchase function provides material and Purchase function provides material and

flow of materials to the Organization.flow of materials to the Organization.

2.2. Provides Effective Buying Provides Effective Buying

3.3. As purchase Of material Contributes As purchase Of material Contributes almost 50% to 60% of the organizational almost 50% to 60% of the organizational spending budget led to efficient buying spending budget led to efficient buying and cost saving structure.and cost saving structure.

4.4. Helps in proper Planning and control of Helps in proper Planning and control of materials.materials.

5.5. Helps in better forecast , scheduling, Helps in better forecast , scheduling, capacity planning to the top management.capacity planning to the top management.

Centralized & decentralized Centralized & decentralized PurchasingPurchasing

Centralized & decentralized Purchasing is Centralized & decentralized Purchasing is the matter of discretion and policy.the matter of discretion and policy.

Centralized Purchasing:Centralized Purchasing:

Is the policy of the Management Is the policy of the Management where all purchases of the entire where all purchases of the entire organistion is made by a single organistion is made by a single purchase department.purchase department.

Merits of Centralized Merits of Centralized PurchasingPurchasing

1.1. Uniform purchasing policy/Duplicacy Uniform purchasing policy/Duplicacy avoided:avoided:

2.2. Better cost (economics of large scale Better cost (economics of large scale buying)& quality control: buying)& quality control:

3.3. Control on Multiple buying:Control on Multiple buying:4.4. Healthy Supplier buyer relationship:Healthy Supplier buyer relationship:5.5. Effective Flow of materials/Supplies:Effective Flow of materials/Supplies:6.6. Efficient Departmental line of controlEfficient Departmental line of control7.7. Better cash Flow/working capital or Better cash Flow/working capital or

Financial management:Financial management:

Demerits of Centralized Demerits of Centralized PurchasingPurchasing

1.1. Efficiency of other related departments Efficiency of other related departments depends On the efficiency of the depends On the efficiency of the purchase department.purchase department.

2.2. No localized Purchase advantages:No localized Purchase advantages:3.3. Delay in supply & Receipt Of materials:Delay in supply & Receipt Of materials:4.4. Room for Miscommunication/ gaps in line Room for Miscommunication/ gaps in line

of authority.of authority.5.5. Unsuitable for small buys or for Unsuitable for small buys or for

perishable goods or distance between perishable goods or distance between the purchase & production been very the purchase & production been very Large :Large :

6.6. Huge Transitional procedures, systems, Huge Transitional procedures, systems, Paperwork, approvals & costsPaperwork, approvals & costs

Decentralized PurchasingDecentralized Purchasing

Decentralized Purchasing:Decentralized Purchasing:

Stands for extended line of Stands for extended line of authority to make independent decision authority to make independent decision and act up them.and act up them.

Merits of Decentralized Merits of Decentralized PurchasingPurchasing

1.1. Better decision freedom /cut on In Efficiency & Better decision freedom /cut on In Efficiency & short comings of the centralised department:short comings of the centralised department:

2.2. Close Vendor – vendee relationship directly Close Vendor – vendee relationship directly with the user departments:with the user departments:

3.3. Hands on to tap local Advantage: Hands on to tap local Advantage:

4.4. Effective follow up/Better interdepartmental Effective follow up/Better interdepartmental co-ordination:co-ordination:

5.5. Reduce in Transitional procedures, systems, Reduce in Transitional procedures, systems, Paperwork, approvals & costs:Paperwork, approvals & costs:

6.6. Reduction of overloading of centralized Reduction of overloading of centralized Purchase DepartmentsPurchase Departments

7.7. Streamlined & better Control on the Streamlined & better Control on the decentralized units for the top management.decentralized units for the top management.

Demerits of Decentralized Demerits of Decentralized PurchasingPurchasing

1.1. Lack of uniform or standard Practices Lack of uniform or standard Practices with the different units of the with the different units of the organistion:organistion:

2.2. Underutilization of services of Experts:Underutilization of services of Experts:

3.3. Absent of Economics of Large Scale Absent of Economics of Large Scale Buying:Buying:

4.4. Sometimes Maintaining Decentralized Sometimes Maintaining Decentralized department may be costlier.department may be costlier.

5.5. May lack centralized coordination May lack centralized coordination between different departments and between different departments and may lead to conflicts.may lead to conflicts.

Steps Involved In Steps Involved In PurchasingPurchasing

1.1. Need recognitionNeed recognition

2.2. Description of the need/ Description of the need/ Specification of the requirementsSpecification of the requirements

3.3. Suitable source selectionSuitable source selection

4.4. Determination of price & Determination of price & availabilityavailability

Industrial Buying- Decision Industrial Buying- Decision ProcessProcess

Phases In Buying Decision Process :Phases In Buying Decision Process :1.1. Recognition Of problem or needRecognition Of problem or need2.2. Description of the need/ Description of the need/

Specification of the Specification of the requirements/requirements/ Determination of the Determination of the application or Characteristics and Quantity application or Characteristics and Quantity of needed product /Development of of needed product /Development of specifications or description of Needspecifications or description of Need

3.3. Search for source and Search for source and Qualification of Potential Qualification of Potential supplierssuppliers

Industrial Buying- Decision Industrial Buying- Decision Process Cont…Process Cont…

5.5. Obtaining and analyzing supplier Obtaining and analyzing supplier proposal and selection of suppliers/ proposal and selection of suppliers/ Determination of price & availabilityDetermination of price & availability

6.6. Selection of an order Selection of an order Routine/Placing purchase ordersRoutine/Placing purchase orders

7.7. Performance feedback/Delivery Of Performance feedback/Delivery Of material :material :

8.8. Post Purchase evaluation:Post Purchase evaluation: Checking Invoice/approval quality & Checking Invoice/approval quality &

Quantity/Making paymentQuantity/Making payment

Recognition Recognition Of problem Of problem

or needor need

Description Description Specification Specification

of the Needof the Need

Search for sourceSearch for source & Qualification & Qualification

of Potential suppliersof Potential suppliers

selection of selection of supplierssuppliers

PostPost Purchase Purchase evaluationevaluation

FeedbackFeedbackDelivery Delivery

Of materialOf material

Routine/Routine/Placing Placing

PO PO

Purchasing cycle

Phases In Buying Decision Process Phases In Buying Decision Process : :

Phase-1 Phase-1

Recognition Of problem or needRecognition Of problem or need : :

The Recognition of a The Recognition of a problem or need May originate problem or need May originate within the Buying firm or may within the Buying firm or may also be recognized By a Smart also be recognized By a Smart Marketer.Marketer.

Determination of the characteristics Determination of the characteristics and Quantity of needed product :and Quantity of needed product :

Once The problem is recognized Once The problem is recognized within or outside the organization, within or outside the organization, The next Phase Is How To resolve The next Phase Is How To resolve the problem.the problem.

Questions : What Type of products Questions : What Type of products or services to be considered ? or services to be considered ? What quantity of product needed? What quantity of product needed?

Phase-2Phase-2

Phase –2 contd….Phase –2 contd….

For technical Products: For technical Products: The technical depts like R&D , The technical depts like R&D ,

industrial engineering, production or industrial engineering, production or Quality control Will suggest general Quality control Will suggest general Solutions of The needed Product.Solutions of The needed Product.

For Non-technical Products & services:For Non-technical Products & services: Either the User dept or the Either the User dept or the

Purchase dept May suggest products & Purchase dept May suggest products & services Based On experience and also services Based On experience and also the quantity required to solve the the quantity required to solve the problem or by any external source as problem or by any external source as well.well.

Phase-3Phase-3

Development of Specifications Of Development of Specifications Of Needed Product :Needed Product :

Phase 2 & 3 are Closely related, Phase 2 & 3 are Closely related, once the problem is Recognized once the problem is Recognized

and determined,and determined, in this Phase development Of a in this Phase development Of a

precise statement of specifications precise statement of specifications and Characteristics are taken up . and Characteristics are taken up .

Outside sources Such as suppliers & Outside sources Such as suppliers & Consultants may also be contacted Consultants may also be contacted ..

Search phaseSearch phasePhase 4- Phase 4- Search & Qualification Of Search & Qualification Of

potential supplierpotential supplier

In the Phase the Buying organization In the Phase the Buying organization Searches for acceptable suppliers or Searches for acceptable suppliers or vendors. vendors.

The search for potential buyer is based on The search for potential buyer is based on various sources of information like trade various sources of information like trade journals, sales calls, word- of –journals, sales calls, word- of –Mouth,catalogues,trade shows,industrial Mouth,catalogues,trade shows,industrial directories, associations, approved list directories, associations, approved list from approval agencies,web sites and from approval agencies,web sites and other media.other media.

Phase-5Phase-5Obtaining and Analyzing Obtaining and Analyzing

supplier Proposalsupplier Proposal

Once the qualified suppliers are Once the qualified suppliers are decideddecided

Float enquiries (RFQ)Float enquiries (RFQ) Obtain proposal- In form of a Obtain proposal- In form of a

formal bid, quotation or written formal bid, quotation or written e-mail e-mail

The proposal should Include-The proposal should Include-1.1.Product Specification DetailsProduct Specification Details2.2.PricePrice3.3.Delivery PeriodDelivery Period4.4.Payment termsPayment terms5.5.Taxes & leviesTaxes & levies6.6.Transportation Type & costTransportation Type & cost7.7. Insurance-transit , product etc.Insurance-transit , product etc.8.8.Any other Costs , discounts (if Any other Costs , discounts (if

any),Delivery schedule,(Quantity )any),Delivery schedule,(Quantity )9.9.Other detailsOther details

Selection of Selection of supplier/Sourcesupplier/Source

1.1. General soundness of the supplier in General soundness of the supplier in Consideration.Consideration.

2.2. Financial strengthsFinancial strengths3.3. Technical Proficiency/manufacture or Technical Proficiency/manufacture or

supplying abilitiessupplying abilities4.4. Flexibility and cooperative abilityFlexibility and cooperative ability5.5. Special consideration influencing the Special consideration influencing the

choicechoice6.6. Size of the supplier/SWOT AnalysisSize of the supplier/SWOT Analysis7.7. Supplier’s client List / List Of clients/ Supplier’s client List / List Of clients/

backgroundbackground8.8. Delivery adherence : Delivery adherence :

confirmation/Analysis.confirmation/Analysis.

Purchasing policyPurchasing policy TendersTenders Make or BuyMake or Buy Vendor analysis and vendor ratingVendor analysis and vendor rating AncillarisationAncillarisation EthicsEthics Purchasing For the benefits Purchasing For the benefits

OrganisationOrganisation GiftsGifts

Modes of TenderingModes of Tendering

Open tenderingOpen tendering Global tenderingGlobal tendering Limited TenderingLimited Tendering Single tenderSingle tender Spot tender.Spot tender.

Make or Buy DecisionMake or Buy Decision

Making or Buying an itemMaking or Buying an item Making the item now bought Making the item now bought

outout Buying the item now madeBuying the item now made

The Two Factors to be consider in The Two Factors to be consider in Make Or Buy Decision are:Make Or Buy Decision are:

1.1. CostCost2.2. Production CapacityProduction Capacity

Factors1. Less expenses In making the part2. Secrecy to be maintained3. Optimum utilization of the plant capacity4. Suppliers are not up to the expectations5. Production & Quality are Of Prime

importance/need direct supervision6. Small quantity required7. Less expensive than manufacturing8. Govt Policies Favors Ancillarisation.

Make Buy

Factors9. Suppliers cannot quote10. Different operations Integration11. Type of the product12. Company attained Decline stage13. Industry ageless14. Suppliers Specialized know-how available15. Production facilities not much16. To Maintain constant work force17. Multiple source policy18. Monopoly items and buyer no option19. Temporary Ramp up

Make Buy

Inventory ManagementInventory Management

The central focus of most The central focus of most manufacturing layouts is to manufacturing layouts is to minimize the cost of processing, minimize the cost of processing, transporting, and storing transporting, and storing materials throughout the materials throughout the production system.production system.Materials used in manufacturing Materials used in manufacturing include:include:

Raw materialRaw materialPurchased componentsPurchased componentsWork-in-progressWork-in-progressFinished goodsFinished goodsPackaging materialPackaging materialMaintenance, repair, and Maintenance, repair, and operating suppliesoperating supplies

What are Inventories ?What are Inventories ? Inventories are the stocks Of Inventories are the stocks Of

materials Of any Kind stored for future materials Of any Kind stored for future operations.operations.

Inventories Includes materials Inventories Includes materials like :like :

Raw materialsRaw materials Semi Finished goodsSemi Finished goods Work-in-process Work-in-process Finished GoodsFinished Goods ConsumablesConsumables Maintenance Spare PartsMaintenance Spare Parts

Objective Of InventoriesObjective Of InventoriesObjective Of Inventory Management are:Objective Of Inventory Management are:1.1. To facilitate smooth Operations of the To facilitate smooth Operations of the

manufacturing process Or Balance Demand manufacturing process Or Balance Demand to Supply.to Supply.

2.2. To run the operations economically To run the operations economically 3.3. TToo minimize investment on inventory. minimize investment on inventory.4.4. To reduce material Handling costs and other To reduce material Handling costs and other

Costs.Costs.5.5. To eliminate Uncertainties-To eliminate Uncertainties-

Uncertainties in demand from customersUncertainties in demand from customers Uncertainties in Procuring the material.Uncertainties in Procuring the material.

6.6. Reasonable utilization of manpower and Reasonable utilization of manpower and Other resources.Other resources.

7.7. Contribute to the efficient and effective Contribute to the efficient and effective operation of the production system.operation of the production system.

Inventory CostsInventory CostsFour types of Inventory costs:Four types of Inventory costs:

1.1. Ordering CostsOrdering Costs

2.2. Inventory Carrying CostsInventory Carrying Costs

3.3. Out -Of-stock or stock out CostsOut -Of-stock or stock out Costs

4.4. Capacity costsCapacity costs

Inventory Costs

1.Ordering Costs

2.InventoryCarrying Costs

3.Out-Of-StockCosts

4.Capacity Costs

Inventory costs:Inventory costs: 1.Ordering 1.Ordering costscosts

1.Ordering costs:1.Ordering costs:

Cost Of Placing an order –Cost Of Placing an order –a)a) Preparing a purchase order. Preparing a purchase order.

b)b) Processing Payments.Processing Payments.

c)c) Receiving & inspecting the material. Receiving & inspecting the material.

Inventory costs:Inventory costs: 2.Inventory 2.Inventory carrying costscarrying costs

A.A. Costs connected directly with the Costs connected directly with the Materials Materials

1.1. ObsolescenceObsolescence2.2. DeteriorationDeterioration3.3. PilferagePilferage

B.B. Costs connected to finance.Costs connected to finance.1.1. TaxesTaxes2.2. InsuranceInsurance3.3. StorageStorage4.4. Interest On CapitalInterest On Capital5.5. Interest On inventoryInterest On inventory

Inventory costs:Inventory costs: 2.Inventory 2.Inventory carrying costs contd…carrying costs contd…

Details Of Carrying costs-Details Of Carrying costs-Capital Goods:Capital Goods: Interest On Capital Invested In inventory.Interest On Capital Invested In inventory. Interest On Capital Invested on land & Interest On Capital Invested on land &

building to hold the inventory. Rent On building to hold the inventory. Rent On Building Taxes & insurance on Building Building Taxes & insurance on Building /inventory ,Depreciation ,Cost of /inventory ,Depreciation ,Cost of maintenance & repairs, Utility Charges, maintenance & repairs, Utility Charges, Salaries Of security, maintenance Salaries Of security, maintenance personnelpersonnel

Interest On Capital Invested In inventory Interest On Capital Invested In inventory Holding and control equipmentHolding and control equipment..

Inventory costs:Inventory costs: 2.Inventory 2.Inventory carrying costs contd…carrying costs contd…

Handling –Equipment costsHandling –Equipment costs:: Cost of Capital on equipmentCost of Capital on equipment Taxes & insurances On Taxes & insurances On

equipmentequipment DepreciationDepreciation Fuel expenseFuel expense Cost Of maintenance and repairsCost Of maintenance and repairs

Inventory costs:Inventory costs: 3. 3. Out-Of-Stock Out-Of-Stock costscosts

Back orderingBack ordering Lost salesLost sales

Inventory costs:Inventory costs: 4. 4. Capacity Capacity costscosts

1.1. Overtime payments when Overtime payments when capacity is too smallcapacity is too small

2.2. Layoffs and idle time when Layoffs and idle time when capacity is too large.capacity is too large.

Different costs InvolvedDifferent costs Involved The cost of holding the stock (e.g., The cost of holding the stock (e.g.,

based on the interest rate). based on the interest rate). The cost of placing an order (e.g., for The cost of placing an order (e.g., for

row material stocks) or the set-up cost row material stocks) or the set-up cost of production. of production.

The cost of shortage, i.e., what is lost if The cost of shortage, i.e., what is lost if the stock is insufficient to meet all the stock is insufficient to meet all demand. demand.

The third element is the most difficult to The third element is the most difficult to measure and is often handled by measure and is often handled by establishing a "service level" policy, e. establishing a "service level" policy, e. g, certain percentage of demand will be g, certain percentage of demand will be met from stock without delay. met from stock without delay.

Costs & EOQCosts & EOQC

ost/

Peri

od

Total costs

Carrying costs

Order costs

Min EOQ

Factors Affecting Inventory Factors Affecting Inventory CostsCosts

Factors Affecting Inventory costs

Sales Characteristics

ProductionCharacteristics

MarketCharacteristics

Factors Affecting Inventory Factors Affecting Inventory CostsCosts

1.1. Sales Characteristics-Sales Characteristics- Size & frequency of the orderSize & frequency of the order Uniformity Or Probability of SalesUniformity Or Probability of Sales Service RequirementsService Requirements Distribution PatternDistribution Pattern Accuracy, Frequency & Details Of Accuracy, Frequency & Details Of

sales forecasts sales forecasts

Factors Affecting Inventory Factors Affecting Inventory CostsCosts

2. 2. Production Characteristics:Production Characteristics: Types Of productionTypes Of production No Of Manufacturing StagesNo Of Manufacturing Stages Degree of specification Of the Product at Degree of specification Of the Product at

specific Stagesspecific Stages Processing Time At Each StageProcessing Time At Each Stage Production FlexibilityProduction Flexibility Capacity Of production & Warehousing Capacity Of production & Warehousing

StagesStages Kind Of ProcessingKind Of Processing

Factors Affecting Inventory Factors Affecting Inventory CostsCosts

3.3. Market Characteristic:Market Characteristic:– Procurement CycleProcurement Cycle– Internal Lead TimeInternal Lead Time– Frequency Of Cancellation of the Frequency Of Cancellation of the

Purchase OrdersPurchase Orders– Terms Of PaymentsTerms Of Payments– DiscountsDiscounts– SpeculationSpeculation– ImportsImports– Govt/Organisational PolicesGovt/Organisational Polices– Shortages/Rising PricesShortages/Rising Prices– Other Marketing Forces.Other Marketing Forces.

Process Of Inventory Process Of Inventory Management & controlManagement & control

1.1. Determination of optimum Determination of optimum inventory Analysisinventory Analysis

2.2. Determination The Optimize Determination The Optimize degree of stock control required.degree of stock control required.

3.3. Planning and design of the Planning and design of the inventory control systeminventory control system

4.4. Planning Of the inventory control Planning Of the inventory control MissionMission

Why We Want to Hold Why We Want to Hold InventoriesInventories

Improve customer serviceImprove customer service Reduce certain costs such asReduce certain costs such as

– ordering costsordering costs– stock out costsstock out costs– acquisition costsacquisition costs– start-up quality costsstart-up quality costs

Contribute to the efficient and Contribute to the efficient and effective operation of the effective operation of the production systemproduction system

Why We Want to Hold InventoriesWhy We Want to Hold Inventories Contd…Contd…

Finished GoodsFinished Goods– Essential in produce-to-stock positioning Essential in produce-to-stock positioning

strategiesstrategies– Necessary in level aggregate capacity plansNecessary in level aggregate capacity plans– Products can be displayed to customersProducts can be displayed to customers

Work-in-ProcessWork-in-Process– Necessary in process-focused productionNecessary in process-focused production– May reduce material-handling & production May reduce material-handling & production

costscosts Raw MaterialRaw Material

– Suppliers may produce/ship materials in Suppliers may produce/ship materials in batchesbatches

– Quantity discounts & freight/handling $$ Quantity discounts & freight/handling $$ savingssavings

Why We Do Not Want to Why We Do Not Want to Hold InventoriesHold Inventories

Certain costs increase such as: Certain costs increase such as: – carrying costscarrying costs– cost of customer responsivenesscost of customer responsiveness– cost of coordinating productioncost of coordinating production– cost of diluted return on cost of diluted return on

investmentinvestment– reduced-capacity costsreduced-capacity costs– large-lot quality costlarge-lot quality cost– cost of production problemscost of production problems

Inventory controlInventory control

Inventory Control

Inventory Analysis

Stock Control

Inventory Inventory Analysis/Techniques Analysis/Techniques ABC Analysis ( Always Better Control)ABC Analysis ( Always Better Control)

Based On The Annual Usage Value.Based On The Annual Usage Value. VED Analysis : VED Analysis : Based On criticality Of items: Based On criticality Of items:

Vital,essential,desirableVital,essential,desirable SDE Analysis (Scare, Difficult, Easily SDE Analysis (Scare, Difficult, Easily

Available) BasedAvailable) Based On Procurement aspects On Procurement aspects XYZ Analysis: Based On The value Of XYZ Analysis: Based On The value Of

Inventory HeldInventory Held HML Analysis: ( High, Medium , Low) Based HML Analysis: ( High, Medium , Low) Based

on Unit coston Unit cost FSN Analysis: (Fast Moving, Slow moving, FSN Analysis: (Fast Moving, Slow moving,

Non moving ) Based on Consumption rate.Non moving ) Based on Consumption rate. AX,BY,CZ Analysis: Combining ABC With XYZAX,BY,CZ Analysis: Combining ABC With XYZ AV,BE,CD Analysis : Combining ABC with VEDAV,BE,CD Analysis : Combining ABC with VED

Minimum –Maximum Minimum –Maximum Two Bin Two Bin S-os AnalysisS-os Analysis G-O-L-F AnalysisG-O-L-F Analysis

G Govt, O Open Market, L Local, F G Govt, O Open Market, L Local, F foreignforeign

EOC-Economic ordering QuantityEOC-Economic ordering Quantity JIT Just -IN- TimeJIT Just -IN- Time

ABC AnalysisABC Analysis The ABC classification process is an The ABC classification process is an

analysis of a range of items, such as finished analysis of a range of items, such as finished products or customers into three categories: products or customers into three categories:

A - outstandingly important;A - outstandingly important; B - of average importance; B - of average importance; C - relatively unimportant as a basis for a C - relatively unimportant as a basis for a

control scheme. control scheme.

Each category can and sometimes should be Each category can and sometimes should be handled in a different way, with more attention handled in a different way, with more attention being devoted to category A, less to B, and being devoted to category A, less to B, and less to C. less to C.

The ABC ClassificationThe ABC Classification

The ABC ClassificationThe ABC Classification The ABC classification The ABC classification

system is to grouping items system is to grouping items according to according to Annual sales Annual sales volumevolume, in an attempt to identify , in an attempt to identify the small number of items that the small number of items that will account for most of the sales will account for most of the sales volume and that are the most volume and that are the most important ones to control for important ones to control for effective inventory management. effective inventory management.

ABC Analysis ABC Analysis (Pareto’s (Pareto’s Principle)Principle)

%

Tota

l A

nn

ual U

sag

e v

alu

e R

s

% OF Items

80

A

95

I00

B

C

EOQ Economic Order EOQ Economic Order QuantityQuantity

EOQ Or Best Quantity Technique Or EOQ Or Best Quantity Technique Or Economic lot Size Economic lot Size

EOQ Is That Quantity to be bought EOQ Is That Quantity to be bought at a time where the over cost is at a time where the over cost is the leastthe least

EOQ Is the technique of determining EOQ Is the technique of determining that quantity where the two sets that quantity where the two sets of costs are minimum or equated. of costs are minimum or equated.

TWO Sets Of costs: TWO Sets Of costs: 1.1. Inventory procurement costsInventory procurement costs2.2. Inventory carrying costs.Inventory carrying costs.

EOQ EOQ Q

uan

tity

TIME

Ordering Point

Safety STOCK

Reserve STOCK

Bu

ffer

STO

CK

Reorder Point

EOQEOQ Meanings Meanings Re-Order Point: Re-Order Point: It Is the point in time when the It Is the point in time when the

Next purchase order is to be released to Next purchase order is to be released to replenish the stock. replenish the stock. ((This is done when the stock begins to fall below This is done when the stock begins to fall below the reorder stock level, which is the sum of the buffer stock, safety stock and the reorder stock level, which is the sum of the buffer stock, safety stock and reverse stock.)reverse stock.)

Buffer Stock: Buffer Stock: Is equivalent To the stock required to Is equivalent To the stock required to meet normal consumption during normal lead timemeet normal consumption during normal lead time

Virtual Stock: Virtual Stock: Is the sum Of reserve Stock, safety stock Is the sum Of reserve Stock, safety stock and order quantity. and order quantity.

Safety Stock: Safety Stock: It Is the stock which provides for delays in It Is the stock which provides for delays in the supply of material. the supply of material. It is Equal To The Normal Consumption rate It is Equal To The Normal Consumption rate and Max consumption rate multiplied by average lead Time.and Max consumption rate multiplied by average lead Time.

Reserve Stock: Reserve Stock: It Is The stock which provides for It Is The stock which provides for abnormal consumptionabnormal consumption. it Is Equal to the Difference . it Is Equal to the Difference Between Normal & Max Consumption Rate Multiplied by Between Normal & Max Consumption Rate Multiplied by average Lead timeaverage Lead time

EOQ FormulaEOQ Formula

EOQ = 2 X AC X OCEOQ = 2 X AC X OCCC %

Where: AC = Annual Consumption in Units OC = Ordering Cost Per Order

CC% = Inventory carry costs as a percentage of unit cost.

Ordering CostsOrdering Costs1.1. Costs Incurred in sending enquiries, Costs Incurred in sending enquiries,

Receiving quotations, Planning an Order, Receiving quotations, Planning an Order, Finalizing the order, expediting and follow up Finalizing the order, expediting and follow up costs of an order.costs of an order.

2.2. Transportation & Stationery costs.Transportation & Stationery costs.3.3. Rent For the space used By The Purchasing Rent For the space used By The Purchasing

departmentdepartment4.4. The Salaries and wages of the office staff of The Salaries and wages of the office staff of

the purchasing departmentthe purchasing department5.5. Deprecation of the equipments and furniture Deprecation of the equipments and furniture

Of the Purchase departmentsOf the Purchase departments6.6. Inspection Costs and costs Of the Settlement Inspection Costs and costs Of the Settlement

Of the payment.Of the payment.7.7. Purchase Audit costsPurchase Audit costs8.8. Other Over Heads.Other Over Heads.

Inventory Carrying costsInventory Carrying costs1.1. Rent For the Storage Space and period.Rent For the Storage Space and period.

2.2. Salaries and wages of store keeping Salaries and wages of store keeping DepartmentDepartment

3.3. Pilferage and deterioration costs Pilferage and deterioration costs 4.4. Internal Transportation & Stationery costs.Internal Transportation & Stationery costs.

5.5. Cost Of Obsolescence where the inventories Cost Of Obsolescence where the inventories rendered useless.rendered useless.

6.6. Interest On Capital Blocked in Interest On Capital Blocked in inventoriesinventories

7.7. Taxes on inventories.Taxes on inventories.

Standardization, Standardization, Codification, SimplificationCodification, Simplification

Advantages Of Classification & codification:Advantages Of Classification & codification:1.1. Correct identification of each & every Correct identification of each & every

item by systematic grouping of similar item by systematic grouping of similar items. items. (items kept in one place and coded with (items kept in one place and coded with proper numbers).proper numbers).

2.2. Reduction in sizes and varieties. Reduction in sizes and varieties. The usage of long The usage of long description is simplified and possible confusion avoided.description is simplified and possible confusion avoided.

3.3. Duplication of stocks & Duplication of stocks & Less confusionLess confusion . . Avoids Avoids duplication of the stocks of the same item being held under different duplication of the stocks of the same item being held under different names, Descriptions, Brand names ,Part numbers and different stores.names, Descriptions, Brand names ,Part numbers and different stores.

4.4. Standardization of Materials greatly improves and helps Standardization of Materials greatly improves and helps to finding substitutes.to finding substitutes.

5.5. Simpler Storage methods, Accurate & proper Simpler Storage methods, Accurate & proper maintaining of records, Easy Inventory & Accounts maintaining of records, Easy Inventory & Accounts control Procedures etc. can be achievedcontrol Procedures etc. can be achieved

Principles Of Principles Of ClassificationClassification

Effective Classification & Effective Classification & codification systems are based on codification systems are based on UCUS:UCUS:

1.1. Basis Of Classification to be made Basis Of Classification to be made uniform uniform (Uniformity)(Uniformity)

2.2. Classification to cover full range Classification to cover full range of Items of Items (comprehensiveness)(comprehensiveness)

3.3. Unique one code number to Unique one code number to each itemeach item (Uniqueness) (Uniqueness)

4.4. Ease to adapt by each & every Ease to adapt by each & every oneone (simplicity) (simplicity)

Methods Of Classification & Methods Of Classification & CodificationCodification

Raw Material StoresRaw Material Stores Work-in-Process StoresWork-in-Process Stores Assembly StoresAssembly Stores Semi finished StoresSemi finished Stores Finished StoresFinished Stores Consumable StoresConsumable Stores Tools StoresTools Stores Packing Materials StoresPacking Materials Stores Spare parts storesSpare parts stores Small Parts StoresSmall Parts Stores Heavy Parts storesHeavy Parts stores Hardware StoresHardware Stores

Break Even Analysis

Elements of JIT Elements of JIT ManufacturingManufacturing

Eliminating wasteEliminating waste Enforced problem solving and Enforced problem solving and

continuous improvementcontinuous improvement People make JIT workPeople make JIT work Total Quality Management (TQM)Total Quality Management (TQM) Parallel processingParallel processing Kanban production controlKanban production control JIT purchasingJIT purchasing Reducing inventoriesReducing inventories Working toward repetitive Working toward repetitive

manufacturingmanufacturing

Benefits of JITBenefits of JIT Inventory levels are drastically Inventory levels are drastically

reduced:reduced:– frees up working capital for other frees up working capital for other

projectsprojects– less space is neededless space is needed– customer responsiveness increasescustomer responsiveness increases

Total product cycle time dropsTotal product cycle time drops Product quality is improvedProduct quality is improved Scrap and rework costs go downScrap and rework costs go down Forces managers to fix problems Forces managers to fix problems

and eliminate waste .... or it won’t and eliminate waste .... or it won’t work!work!

Supply Chain Supply Chain ManagementManagement

Introduction & Importance of Supply Chain Management

Module I: Global Supply Chain – Module I: Global Supply Chain – Overview Overview

Introduction & Importance of Supply Introduction & Importance of Supply Chain Management, Developing Chain Management, Developing Supply Chain as a Competitive Tool Supply Chain as a Competitive Tool for Customer Satisfaction and for Customer Satisfaction and Corporate Profitability, Channel Corporate Profitability, Channel Structure, Supplier Network Structure, Supplier Network Development, Outsourcing., Supply Development, Outsourcing., Supply Chain Logistics Operations. Chain Logistics Operations.

PREAMBLE: SCMManufacturers world over are frantically trying to

improve efficiencies in their operations, the urgency further accelerated by the shrinking global economy.

Falling customer demand, tighter credit, rising input prices and the economic uncertainty are forcing companies to re-evaluate their business plans especially with respect to investments in new capacities, markets and products.

At the same time, there is a renewed focus on making current assets work harder and maximize the return on the already invested dollar.

However, achieving operational efficiencies requires more than reducing costs, high utilization mandates, strict inventory control and rationalizing capacity or manpower.

There is no denying the usefulness of these steps, but the key is to ensure every bit of the supply chain is performing towards meeting a single objective – right product at the right place in the right quantity at the right time.

This requires all operational entities within the enterprise to be integrated through business processes and technological enablers.

PREAMBLE: SCMSupply Chain Management exists to an end –

satisfied customers at the optimum cost. And as markets and businesses have evolved,

supply chains have become more complex, more global and a more critical business function than ever before.

At the same time, many leading firms have realized that a well run supply chain can be a source of distinct competitive advantage in the marketplace, and have been in the forefront in adopting practices that deliver superlative efficiencies in their supply chain functions.

PREAMBLE: SCM

While many have been successful in optimizing important supply chain functions, a few have managed to make their entire supply chain behave as a single linked entity – from end customer delivery to raw material procurements – to achieve truly synchronized operations.

Supply Chain ProcessSupply Chain ProcessIntegrated , coordinated network of valueIntegrated , coordinated network of value

delivering business processes that delivering business processes that procureprocure

raw materials, transform them into finalraw materials, transform them into final

products, services and delivers the products, services and delivers the product toproduct to

the customers the customers ProcurementProcurement Manufacturing/assemblyManufacturing/assembly Inbound logisticsInbound logistics WarehousingWarehousing DistributionDistribution Outbound logisticsOutbound logistics

Supply Chain Management Supply Chain Management ProcessesProcesses

Supply Chain Management is the management of Supply Chain Management is the management of eight key business processeseight key business processes1.1. Customer Relationship ManagementCustomer Relationship Management2.2. Customer Service ManagementCustomer Service Management3.3. Demand ManagementDemand Management4.4. Order FulfillmentOrder Fulfillment5.5. Manufacturing Flow ManagementManufacturing Flow Management6.6. ProcurementProcurement7.7. Product Development and commercializationProduct Development and commercialization8.8. ReturnsReturns

Key requirement for successful implementation Key requirement for successful implementation of supply chain management are executive of supply chain management are executive support, leadership, commitment to change, support, leadership, commitment to change, and empowerment.and empowerment.

• Different aspects of SCM which have received much attention in traditional production and operations management community:– Inventory control, – forecasting, – transportation logistics, – distribution, and – procurement

In the first half of the In the first half of the twentieth century industry twentieth century industry replaced agriculture, in the replaced agriculture, in the second half of the twentieth second half of the twentieth

century –“service” has century –“service” has replaced “manufacturing” -replaced “manufacturing” -

and right now, the and right now, the knowledge industry is knowledge industry is

beginning to replace the beginning to replace the others.others. −−−−George George

KotzmetzkKotzmetzk

IntroductionIntroduction*What is Supply Chain Management?What is Supply Chain Management?* Why is Supply Chain Management Why is Supply Chain Management important?important?* The origins of Supply Chain The origins of Supply Chain ManagementManagement* *Important Elements of Supply Chain Important Elements of Supply Chain Management:Management:

- Purchasing- Purchasing- Operations- Operations- Distribution- Distribution- Integration- Integration

* Strategies for Supply Chain Strategies for Supply Chain ManagementManagement* Future Trends in Supply Chain Future Trends in Supply Chain ManagementManagement

What is a Supply What is a Supply Chain?Chain?

A supply chain consists of the flow of products and A supply chain consists of the flow of products and services from/to:services from/to:

--Raw materials manufacturers--Raw materials manufacturers--Intermediate products manufacturers--Intermediate products manufacturers--End product manufacturers--End product manufacturers--Wholesalers and distributors--Wholesalers and distributors--Retailers and, --Retailers and, --End customers--End customers

Connected by agents, transportation and storage activities, Connected by agents, transportation and storage activities, andand

Integrated through sharing of information, planning, and Integrated through sharing of information, planning, and processing activities\processing activities\

Examples???Examples???

Typical Supply ChainsTypical Supply Chains

Purchasing Receiving Storage Operations Storage

Production Distribution

Typical Supply Chain for a Typical Supply Chain for a ManufacturerManufacturer

Supplier

Supplier

Supplier

Storage} Mfg. Storage Dist. Retailer Customer

What is Supply Chain What is Supply Chain Management?Management?

Here are two definitions:Here are two definitions:

The design and management of seamless, value-added The design and management of seamless, value-added process across organizational boundaries to meet the real process across organizational boundaries to meet the real needs of the end customerneeds of the end customer

-- Institute for Supply Management-- Institute for Supply Management

Managing supply and demand, sourcing raw materials and Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, inventory tracking, order entry and order management, distribution across all channels, and delivery to the distribution across all channels, and delivery to the customercustomer

-- The Supply Chain Council-- The Supply Chain Council

Supply chain management (SCM) holds promise for not just improving productivity

but also competitiveness.

SCM has to be leveraged for corporate India’s gain without delay

In consumer durables, the entry of MNCs has increased competition and SCM is

perceived as the vital factor, which differentiates failure from success.

SCM Offers Opportunities for:SCM Offers Opportunities for: Reduction in costs across functionsReduction in costs across functions Better planning for purchase and Better planning for purchase and

productionproduction More efficient use of capitalMore efficient use of capital A $50 billion (13% of our GDP) A $50 billion (13% of our GDP)

opportunity for a variety of servicesopportunity for a variety of services– Trucking, warehousing, IT, etc.Trucking, warehousing, IT, etc.

Most leading companies in India Most leading companies in India have an SCM drive in place.have an SCM drive in place.

Source:ETIG-PwC SCM Survey 2002

Supply Chains in IndiaSupply Chains in India

Sony IndiaSony India managed to reduce its managed to reduce its inventories by 70% just six months inventories by 70% just six months after it began its SCM initiativeafter it began its SCM initiative

Maruti Maruti has wired all its suppliers has wired all its suppliers together and 60% of business together and 60% of business transactions are now happening transactions are now happening onlineonline

Source: “Pulling Power”, DATAQUEST; 31 October 2001.

Supply Chains in IndiaSupply Chains in India

Samsung Samsung manages a 5,000-dealers' manages a 5,000-dealers' online network with just 15 online network with just 15 employeesemployees

Mahindra & Mahindra'sMahindra & Mahindra's tractor tractor division aims for a reduction of 48% division aims for a reduction of 48% in inventories, 30% in logistics costs in inventories, 30% in logistics costs and a cutback in production cycle and a cutback in production cycle from a month to a weekfrom a month to a week

Source: “Pulling Power”, DATAQUEST; 31 October 2001.

Supply Chains in IndiaSupply Chains in India

All these companies have one thing in All these companies have one thing in common. common.

They are among the early adopters of They are among the early adopters of Supply Chain Management systems in Supply Chain Management systems in

the country—the country—

They went out all by themselves, setting They went out all by themselves, setting a path for others to learn from.a path for others to learn from.

Source: “Pulling Power”, DATAQUEST; 31 October 2001.

What is new in SCM?What is new in SCM?– Two dimensions which Two dimensions which

differentiate SCM from traditional differentiate SCM from traditional concepts:concepts: Organizational Integration andOrganizational Integration and

Flow CoordinationFlow Coordination

Stated simply, a supply chain is a Stated simply, a supply chain is a network of entities that starts with the network of entities that starts with the suppliers’ suppliers and ends with the suppliers’ suppliers and ends with the customers’ customers for production customers’ customers for production and delivery of goods and services.and delivery of goods and services.

Customer service

Competitiveness

Integration: Coordination:

Choice of partners Use of information and communication

technologyNetwork organization and inter-organizational

collaboration Process orientation

Leadership Advanced planning

Foundations:

Logistics, marketing, operations research, organizational theory,

purchasing and supply…

: Fig. House of SCM

Supply Chain Building Supply Chain Building BlocksBlocks

StructuralStructuralLogicalLogical IT / ITECIT / ITEC

InformationalInformational

Structural Building BlocksStructural Building Blocks

SuppliersSuppliers Manufacturing / Assembly PlantsManufacturing / Assembly Plants WarehousesWarehouses Distribution CentersDistribution Centers Retailers / CustomersRetailers / Customers Logistics Network Logistics Network

– InboundInbound– OutboundOutbound

Customers OrdersCustomers Orders

Suppliers(International)

1.2 Million PC/Yr.Glasgow U.K.

Warehouse

PortPC Assembly

Plant

13 TransshipmentPoints (TPs) in Europe

Country-wide Distribution

Centers (DCs)

Retailers

Example of a Typical Supply Chain: IBM Europe PC Supply Chain

Logical Building Blocks

OPERATIONAL

TACTICAL

STRATEGIC

Procurement DistributionManufacturing LogisticsLogistics

Order/ Product Flow through Supply Chain Functions

Order Management Channel A

Channel B Customer

Channel CProduct Distribution

Manufacturing

Demand PlanningSupply PlanningPart Supply

Orders

DemandForecast

ComponentRequirement

PartsProduction Plans

Products Products

Orders

Products

Products

Orders

Orders

ConclusionConclusion

Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers of Supply Chain Performance

Source: Chopra & Meindl/Logistics Strategy

Elements of Supply Chain Elements of Supply Chain ManagementManagement

SourcingInbound

Logistics ManufacturingOutbound

Logistics

After Market

Service

•Vendor Number, Location, Capacity etc

•Product design support

•Tooling design and supply

•Spot market purchase or partnership

•Delivery schedules

•Supplier development

•PO tracking

•EDI links

•Warehouse Number, Location, Size, Function etc

•Transportation mode

•In-house vs contract carrier

•Inventory/safety stock levels

•AS/AR systems

•Vehicle dispatching

•Bar coding

•Plant Location(s)

•Capacity Levels

•Process Technologies

•Product & process development

•Maintenance programs

•WIP targets

•Workforce levels

•Robotics

•CAD/CAM/CAE

•DC Location(s)

•DC functions and size

•In-house vs contract carrier

•Inventory/safety stock levels

•AS/AR systems

•Package engineering

•EDI customer links

•Shipping schedules

•Number & location of service centers

•Function and size

•Spares inventory level and locations

•Service fleet size and equipment

•Failure analysis

•Data mining

•Work force levels

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