Basic Introduction Supply Chain Management

ManufacturerWholesale

Distributors ConsumersMulti-tierSuppliers Retailers

Time

Sale

s

Sale

s

Time

Sale

s

Time

Sale

s

Time

Supply Chain TimelineRaw

MaterialsEnd

Consumer

Push Strategy Pull Strategy

Typical Supply Chain

Actual demand from a customer is 8 units

The retailer may then order 10 units from the distributor; an extra 2 units are to ensure they don’t run out of floor stock.

Supplier then orders 20 units from the manufacturer; allowing them to buy in bulk so they have enough stock to guarantee timely shipment of goods to the retailer.

The manufacturer then receives the order and then orders from their supplier in bulk; ordering 40 units to ensure economy of scale in production to meet demand.

Now 40 units have been produced for a demand of only 8 units; meaning the retailer will have to increase demand by dropping prices or finding more customers by marketing and advertising.

Purchasing vs. Procurement Purchasing Procurement

Process of ordering and receiving goods and services.

Refers to the process involved > Ordering goods > Request approval > Issue purchase order (PO) > Receiving of goods.

More strategic and focuses on the ('why' and 'how').

Identify the needs and tries to align with the organisational strategy rather than just process orders and 'buy things'.

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

Remember 5-Rs !!To procure….1) The RIGHT material2) With the RIGHT quality with along

with the RIGHT quantity3) At the RIGHT time4) For the RIGHT price5) From the RIGHT source.

Supply Chain Management

Logistic Management

Stock Ctrl

Purchasing

Transport

Warehouse Invoicing

Customer

Prod Dev

SourcingDemand Supply

Order Fulfilment

Supplier

Suppliers sourcingCriteria that influences supplier’s selection

Price Location / Delivery period

Lead time

Capacity Warranty Payment Term

Client based(Reputation)

Service(Aft sales)

Response Time

Technology Area of expertise MOQ

Item Spec compliance Quality Cert. Green initiative

Delivery term(door to door, FOB, CIF)

Technical Support / Technical capabilities

Recover plan(Backup)

Vision & Mission Core Business Management Team

HR(Absenteeism)

Purchasing Policy(ethics, transparency, gifts, open tender, vendor rating, etc. )

Logistic Mgmt(warehouse facilities)

Selection of supplierWhy negotiation fail?

- Not prepared

- Lack of confident

- No target

- Lack of knowledge – Product Knowledge

- Lack of knowledge – Market Knowledge

- Lack of knowledge – Process Knowledge

Pre-Nego Preparation

Knowledge

Company background Product Process

PastCan substitute?

(replaceable)How this item being

made?Present

Future

Bargaining Analysis

Influencing Factors L-M-H Position

What if L ?

What if M ?

What if H ?

Action Action ActionQuantity, MOQ Low e.g. Blanket order

e.g. Combine orderSingle Source Low e.g. Look for alternative

e.g. Good pay masterMarket Demand High e.g. Substitution

e.g. Future buyingSourcingSubstitutePlanningRelationship Lead Time

Supplier Profile to keep (for reference):

(2) Liaison personnelInfluencing Power

Price Delivery

General Mgr

Finance Mgr

Production Mgr

Sales Mgr

(1) Supplier Capacity

(3) Costing Analysis Qty (BOM)

Source (e.g. country / brandname)

Wastage

Raw mat item

ABC Analysis (Pareto Analysis/ 80.20 Rules)Or literally means “Always Better Control”

Cat. Highest consumption value

Total Inventory Item

Frequency of Control

Cycle Count

A 70% - 80% 10% - 20% Frequent review Every Quarterly

B 15% - 25% 30% Regular review Every Half Yearly

C 5% 50% Intermittent review Annually

A

B

C

High

Low

Few ManyNos. of items

$ Value of items

Input   

Results       

Item Sold Qty Unit Price Sold Amount % of Shares Sold Portion Cumulative % Classification

A 5000 30.00 150,000.00 48.91% 78.25% 48.91% AB 200 450.00 90,000.00 29.34%  78.25% AC 2000 10.00 20,000.00 6.52% 15.00% 84.77% BD 800 20.00 16,000.00 5.22%  89.99% BE 1000 10.00 10,000.00 3.26%  93.25% BF 1200 5.00 6,000.00 1.96% 6.75% 95.21% CG 1300 4.00 5,200.00 1.70%  96.90% CH 2500 2.00 5,000.00 1.63%  98.53% CI 3500 1.00 3,500.00 1.14%  99.67% CJ 500 2.00 1,000.00 0.33%  100.00% C

    Total 306,700.00   100.00%    

Example:

Other Purchasing methods:S-D-E Analysis

Key Stands for Definition

S Scarce These materials are always in shortage and difficult in procurement. These materials sometimes require government approvals, procurement through government agencies. Normally one has to make the payment in advance for sourcing these materials.

D Difficult These materials though not easy to procure but are available at a longer lead times and source of supply may be very far from the consumption. Procurement of these materials requires planning and scheduling in advance.

E Easy These materials are normally standard items and easily available in the market and can be purchased anytime.

F-S-N AnalysisKey Stands for Definition

F Fast Selling like hot cakes! items where by the transaction moves rather fast

S Slow Items which are moving but slow

N Non-move Items which are not saleable, no transaction.(Non-moving item must be periodically reviewed to prevent expiry and obsolete)

“Useful to control items especially with expiry date”

F-S-N AnalysisCase Example: Item Code - A1

A B C D E F

DateReceipt

QtyReturn

QtyAdjustment

QtyIssue Qty

Closing Bal

Inventory Holding Days

Opening Bal 5001/01/2016 10 0 0 0 60 6002/01/2016 15 7 0 15 67 12703/01/2016 0 0 0 0 67 19404/01/2016 0 0 0 0 67 26105/01/2016 0 0 5 0 72 33306/01/2016 20 0 0 0 92 42507/01/2016 0 0 0 12 80 50508/01/2016 0 4 0 0 84 58909/01/2016 0 0 0 0 84 67310/01/2016 10 0 0 7 87 76011/01/2016 0 0 0 0 87 84712/01/2016 0 0 0 12 75 92213/01/2016 0 0 0 0 75 99714/01/2016 10 0 -3 0 82 107915/01/2016 0 0 0 0 82 1161

65 11 2 46 - -

E = (last closing bal;E+A+B)-(C+D)

Average Stay of Item = Cumulative nos. of Inventory Holding Days (Total Qty Received + Opening Balance)

= 1161 / (65+50)= 1161 / 115= 10.09 days

Consumption Rate = Total Issue Quantity Total Period Duration = 46 / 15= 3.06 pcs per day

A9A10

Average Stay10.09

7.58.234.2

Item CodeA1A2A3A4A5

Consumption Rate3.065.2

4.712

5.16128

9.1111.27.21

A6A7A8

5.763.984.485.23

4

Average Stay

Cum. Average Stay

% Average Stay FSN Classification

12 12 14.36% S11.2 23.2 27.77% S

10.09 33.29 39.85% S9.11 42.4 50.75% S8.23 50.63 60.61% S

8 58.63 70.18% S7.5 66.13 79.16% N

7.21 73.34 87.79% N6 79.34 94.97% F

4.2 83.54 100.00% F

A10A5A4

A7A2

A6A9A1A8A3

Item Code

Consumption Rate

Cum. Consump Rate

% Consumption Rate

FSN Classification

5.76 5.76 13.24% F5.23 10.99 25.25% F5.2 16.19 37.20% F5.1 21.29 48.92% F

4.71 26 59.74% F4.48 30.48 70.04% F

4 34.48 79.23% N3.98 38.46 88.37% N3.06 41.52 95.40% S

2 43.52 100.00% S

A10A7A1A4

A6A9A2A5A3A8

Item Code

Procurement Cost

Holding Cost

Total Cost = Purchase cost + Ordering Cost + Holding Cost

Qty

Cost

EOQ

Economic Ordering Quantity

EOQ formula

2 (Annual usage/demand) x (Cost per order)

Annual Holding cost per unit

Combination of order costs and inventory carrying costs are the least. The result is the most cost effective quantity to order.

Raymond would like to sell Item A:Cost per PC = RM 2.00Selling Price = RM 15.00

Sales projection = 144,000 pcs / year (1,200 pcs per month)

However, there is one problem, whenever Raymond order from supplier, Supplier shall charge Raymond an ordering fee/ Set-up Cost amounting RM 80.00 per order.(If Raymond put an order every month from the supplier, then RM 80.00 x 12 = RM 960.00 per year!!!)

So, Raymond had an instant solution! “Why don’t I order 144,000pcs whole lot to avoid paying high Set-up cost!”

“But then again…..With such huge quantity, how do I store them?, I need SPACE !!!”

And to rent a space will cost RM 2.00 per pc in the warehouse . (Holding Cost)

Then how much (RIGHT) quantity that I should order to save my ordering cost and the holding cost?

DISCLAIMERHowever, EOQ is not applicable IF:a) The demand fluctuatesb) There is a long Lead time after orderc) Quantity ordered too small hence not able to get bulk discount.

2 (Annual usage/demand) x (Cost per order)

Annual Holding cost per unit

2 (144,000) x (80.00)2.00=

23,040,000

2.00=

= 115200000

= 3394.1

EOQ is 3,394 pcs Per Order

How to Calculate? Lead time Demand

Safety Stock

Re-Order Point

Trader placed an order with the manufacturer from China

Trader need to have enough stock-on-hand to cover these 47 days of salesLet's say trader sold about 800 per month, (800/31 = 26pcs per day)

Lead time Demand

= Lead Time x Average Daily Sold= 47 x 26= 1,222 pcs

Meaning trader will need at least 1,222pcs to tide them over until their next shipment arrives, “if nothing unexpected happens.”

Example:

Process Time Today daysPick & Pack 2

Arrange Truck to receiving port 5

Shipping from China to M’sia 30

Arrival & Customs processing 7

Delivery to warehouse 3

Overall days spent 47

Safety Stock

= (Max. Daily sold x Max. Lead time) - (Avrg. Daily sold x Avrg. Lead time)= (36 x 54) - (26 x 47)= 722pcs

Re-Order Point = Lead time Demand + Safety Stock= 1,222 + 722= 1,944

So once their stock hits 1,944pcs, trader will need to place a new order with their supplier. At 1,944pcs, they’ll have enough to last them as they wait for new stock to arrive (1,222pcs), while holding enough stock (722pcs) as a buffer against an unexpected surge in demand or supply chain problems.

Description Days Remark

Manufacturer’s goods to Trader 47 Avrg. lead time

Manufacturer’s goods to Trader 54 Max. lead time (Due to holidays / Unforeseen events)

Trader sells to customer 26 per day Daily Average (On Weekdays)

Trader sells to customer 36 per day Daily Average (On Weekends/ P. Holidays)

Trader sold about 202 Per week 26pcs (Mon-Fri), 36pcs (Sat-Sun)

722pcs safety stock last about = 722 / 202 3.57weeks -

Thank You!