Purchasing &
Inventory
Management
Prof. Mansour Lotayif
Head of Business Depar tment, 2023
PROF. MANSOUR LOTAYIF, 2023
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“Learning is a nonstop process
with two partners i.e. the student
and the instructor.”
M. L otayif
PROF. MANSOUR LOTAYIF, 2023
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Chapter 5: The Right Quantity
Chapter Aims
After studying this chapter, you should be able to understanding the followings:
1. To consider provisioning systems for stock and production purposes
2. To examine positive and negative reasons for holding stock and approaches to reducing inventories
3. To identify methods of stock control and their application To explain the EOQ concept
4. To discuss the usefulness and limitations of forecasting in the supply context
5. To develop an appreciation of MRP, MRP2, DRP and ERP systems
6. To discuss ‘just in time’ and related philosophies
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1- Provisioning systems
Regular requirements are bought either for stock, or for direct use in operations or production.
Ordering policies used by purchasing include:
•
Blanket orders which group many small requirements together for contractual purposes.
•
Capacity booking orders, which reserve supplier capacity for the production of various parts,
•
Period contracts stating an estimated total quantity for the period and the agreed price,
•
Period contracts which specify a series of delivery dates and quantities (e.g. ‘1000 during the first week of each month’).
•
Spot contracts and futures contracts in various combinations.
•
‘Open-to-buy’ (OTB) sometimes used by stock controllers in the retailing sector.
•
Part-period balancing, lot-for-lot, and other approaches favored by production controllers in conjunction with materials
requirement planning (MRP) or kanban systems.
•
The economic order quantity (EOQ).
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2- To examine positive and negative reasons for holding stock and approaches to reducing
inventories
➢Retailers and wholesalers ….see stock as the central feature of their
businesses: what they sell is what they buy, and they aim to sell from stock
rather than from future deliveries.
Why do we carry stock? The reasons include: (positive)
1)
the convenience of having things available
2)
cost reduction through purchase or production of optimum quantities.
3)
protection against the effects of forecast error, inaccurate records, or mistakes in planning; and
4)
protection for fluctuations in sales or production.
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negative reasons ….Inventory (stock) as waste
❖tie up capital;
❖tie up cash flow;
❖tie up flexibility;
❖need to be stored (at a cost);
❖need to be handled (at a cost);
❖need to be managed (at a cost);
❖are at risk of loss through fire, theft and many …etc.
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3- To identify methods of stock control and their application To explain the EOQ
concept
Constructive approaches to stock reduction include:
1)
EOQ Method…..Economic Order Quantity
2)
Reorder point…..Ways to reduce ordering costs, set-up costs, and lead times so that optimum
quantities are smaller.
3)
Making forecasts more accurate, ensuring that records are right, and better planning.
4)
JIT Method…arranging for things to be made and delivered just in time instead of keeping
stock.
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3-1- The basic EOQ formula
2 × annual usage quantity × ordering cost
−−−−−−−−−−−−−−−−−−−− −
EOQ=
unit cost × stockholding cost
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Example
•
•
•
•
U= for annual demand or usage quantity;
P= for the paperwork and administrative cost associated with an order;
c =for unit cost or price;
s =for the cost of holding stock as a decimal fraction of average stock value, the formula
becomes:
𝐸𝑂𝑄 =
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2×u×p
−−−−−−−−−−−− −
𝐶× 𝑆
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stock-turn rate impacts on profit of improving
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3-2-Reorder Point
➢Reorder level methods …….. stock control are procedures in which, whenever the stock of an individual
item is down to a quantity called reorder level (or order level, or order point), an order is initiated to obtain
more stock.
➢The order level …..is the average quantity required in the lead time plus buffer stock.
➢Buffer stock …..is a reserve to take care of requirements running at above the average rate, or of delivery
periods which exceed the normal lead time. The order quantity may be the EOQ, or may be determined in
some other way.
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4-To discuss the usefulness and limitations of forecasting in the supply context
A forecast is a projection of patterns in past events into the future. All
forecasts have one thing in common: they are generally wrong for the
following reasons:
1- The perceived pattern is not continued into the future.
2- The past pattern has not been adequately understood.
3- Random fluctuations have prevented the pattern from being recognized.
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5-To develop an appreciation of MRP, MRP2, DRP and ERP systems
➢The standard system for calculating the quantities of components,
subassemblies and material required to carry out a production
programmed for complex products is called materials requirements
planning (MRP).
➢This could be carried out by manual methods but is more easily
done by computer software.
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Developing the master production schedule
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Manufacturing resource planning (MRP2)
➢MRP2 is an extension of MRP.
➢The first stage in the conversion of MRP into MRP2 is the development of a ‘closed-loop’ MRP
system.
➢Closed-loop MRP means that the various functions in production planning and control (capacity
planning, inventory management and shop-floor control) have all been integrated into a single system.
➢This represents an improvement over MRP because it provides a number of additional features, such
as:
◦ Priority planning – ‘rush’ jobs can be brought forward in time and others put back in time
• Integration of related functions into the system
• There is feedback from vendors, the production shop, stores, etc.
•
Could be used for simulation purposes.
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Distribution resource planning (DRP)
➢DRP is a system for forecasting or projecting requirements for finished
products at the point of demand. For instance…Production of 100 units
needs 60 tons of raw material (1), and 20 tones of raw martial 2 etc..
➢DRP is a ‘pull’ approach …..it depends on awareness of customers’ (end
users’) requirements, which pulls the rest of the system through the levels
of the distribution system.
➢If DRP is a ‘pull’ system linked to the customer (end user), MRP is (in end
user terms) a ‘push’ system linked to the master production schedule.
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Note….
❑Briefly, manufacturing resource planning (MRP2) systems and
distribution resource planning (DRP) systems are organizational
processes enabling physical resources requirements to be
planned together with production and purchasing control.
❑These systems establish logistics resources planning (LRP), a
control of the entire logistics system. It is always possible to go
even wider in search for integration.
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Enterprise resource planning (ERP)
➢ The concept of ‘ERP’ …. an approach whereby the resource requirements of
the entire organization, with reference to those of its neighbors in the supply
chain, can be taken into account in planning.
➢ ERP ….is a multi-mode group of software, operating on a company-wide
basis, which might be concerned with all aspects of the business including, for
example, purchasing, inventories, production, sales, human resource
management, marketing, engineering and cash flows.
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6-To discuss ‘just in time’ and related philosophies
➢ JIT… is a long-lasting relationship with suppliers i.e. whenever you need me, you find me.
➢JIT ….eliminates all forms of waste in materials and money invested in inventories.
➢Perhaps the best known of the JIT systems is the kanban system developed by Toyota.
➢Kanban is similar to the MRP planning system previously considered. The main difference is that, in
order to make the Kanban system work, it is necessary to smooth product mix, monthly and daily. So far as
possible, batch production is made similar.
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A simple Kanban system
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The ‘milk round’ routing of collection transport
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Vendor (retailer/wholesaler) managed inventory (VMI)
➢vendor will carry stocks to compensate for or accommodate
unpredictable demands from a given customer. It has the following
merits:
❑ Collaboration. Between companies.
❑ Minimal cost to the two companies.
❑Framework. The parties involved understand their responsibilities,
❑Continuous improvement.
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Many thanks
M. Lotayif