Purchasing Decisions to include Inventory Planning

Purchasing Decisions to include Inventory Planning Dr K M Madrecha Projects & Quality Manager The Kanoo Group For Supply Chain & Logistics Group (17-9-2004)

SUPPLY CHAIN MANAGEMENT • SUPPLY– Provide goods as needed • CHAIN – Link from supplier to customer • SUPPLY CHAIN = LOGISTICS NETWORK (MANUFACTURER TO DISTRIBUTOR/ RETAILER/CUSTOMER/CONSUMER) • MANAGEMENT – Management of Supply Chain (Potential to become a Board Room function)

KEY PARTNERS: SUPPLY CHAIN/LOGISTICS • CUSTOMER • SUPPLIER • EMPLOYEE • TRANSPORTER • MANUFACTURER • DISTRIBUTOR • WHOLESALER • RETAILER

KEY PERFORMANCE INDICATORS • THROUGHPUT TIME • TRANSPORTATION COST • MATERIAL COST • INVENTORY COST • SPACE COST • MANPOWER COST • HANDLING LOSSES

Supply Chain and Business Excellence • Criteria 4 (Partnerships) of EFQM/DQA/SKEA • Managing Partnerships • Managing Finances • Managing Processes & Continuous Improvement • Leadership • Policy & Strategy

Matching Organization Structure – To include • SCM Policy & Strategy • Purchasing • Incoming Transportation • Warehousing/Stores • Inventory Control • Fleet & Distribution • Customer Service • Benchmarking/Reporting to Senior Mgmt

INVENTORY CONTROL • INVENTORY CARRYING COST(Cc) • ORDERING COST(Co) • UNIT COST (Cu) • ECONOMIC ORDER QUANTITY(Q*)

Scientific Inventory Mgmt • EOQ=sq. root[ (2*Annual Consumption*Ordering Cost)/(Unit Cost*Carrying Cost)] • TC=[(A/Q)*Co]+[0.5*QCuCc]

Economic Order Quantity • Example: EOQ=Sq. Root(2*1200*100/10*0.15) • =160,000 • Example: EOQ=Sq. Root(2*120*50/10*0.15) • =8,000

8 RIGHTS OF PURHASING • Right Material • Right Specification/Quality • Right Quantity • Right Supplier • Right Packaging • Right Mode of transportation • Right Time • Right Documentation

Stakeholders in purchase function • Company Purchase Dept • Supplier • Transporter • Company Finance Dept • Company Quality Dept(for inspection) • Bank (for LCs etc.)

Possible economies in purchase • Save due to Bulk Discount • Reduce cost of materials by locating a cheaper Supplier • Save on Freight • Save on obsolescence costs • Save on return of defective goods • Save on penalties due to delayed deliveries.

MAXIMIZE PROFIT • INCREASE SALES • INCREASE INCOME • REDUCE CONTROLLABLE EXPENSES, eg. Material costs(40-60%), Freight(5 to 10%), Insurance & Inventory Carrying Costs(5 to 10%)

INCREASE SALES • FASTER THROUGHPUT • SATISFYING CUSTOMERS • IMPROVING REFERRAL SALES • ABLE TO INCREASE SELLING PRICE FOR TIME SAVING OF CUSTOMERS

Effect on Bottom Line

Profit Increase from costs/price • Save buying price by better negotiation • Save storage cost by saving space • Save material obsolescence cost • Save interest cost of inventory • Save freight cost by optimum transport method (air/sea/road and routing) • Increase sales quantity or unit selling price by better customer service

Bring SCM to Board Level • Link to income, expense & profit/Finance/Strategic Planning • Link to KPIs/HR • Link to customer satisfaction/Marketing • Link to employee satisfaction/HR • Link to company image

Becoming world class • Global Purchasing • Global Manufacturing • Global Warehousing • Global Distribution • Use of world class technology • Use of world class systems, eg. SAP, JD Edwards, Baans, MfgPro, etc.

Thank You Questions, Comments & What can we do to improve in our companies

Purchasing Decisions to include Inventory Planning