1. Procurement in Industrial Management BPT3133
Order Management
Procurement in Industrial Management
BPT3133

2. Chapter Outline Order Processing Ordering Process Flow
Document Involved
Order Quantities
Independent Demand Order System
Economic Order Quantity (EOQ)
Reorder Point System (ROP)
Computer Information System

3. Learning Objectives
Identify methods of stock control and their application
Examine positive and negative reasons for holding stock and approaches to reducing inventories
Explain the Economic Order Quantity (EOQ) concept

4. Order Processing
Order processing is a key element of order fulfillment. Order processing operations or facilities are commonly called "distribution centers".
Order processing is the term generally used to describe the process or the work flow associated with the picking, packing and delivery of the packed item(s) to a shipping carrier.
The specific order fulfillment process or the operational procedures of distribution centers are determined by many factors. Each distribution center has its own unique requirements or priorities. There is no "one size fits all" process that universally provides the most efficient operation

5. Order Processing
Tactics and tools that can help manage the order fulfillment processes involving material flows between the firm and its external customers:
Inventory Placement
Vendor-managed inventories
Continuous replenishment program
Radio frequency identification
Distribution processes

6. Shop Floor Control System
Implemented by a combination of computer systems and human resources

7. Order Release
Generates the documents needed to process a production order through the factory
The documents are sometimes called the shop packet, which consists of:
Route sheet
Requisitions to obtain starting materials
Job cards to report direct labor time
Move tickets to transport parts
Parts list for assembly jobs

8. Order Scheduling
Assigns the production orders to work centers in the factory
A dispatch list is prepared indicating which orders should be accomplished at each work center
Also provides relative priorities for the jobs, e.g.: by showing due dates for each job
Dispatch list helps the department foreman assign work and allocate resources to achieve the master schedule

9. Order Progress
Monitors the status of the orders, work‑in‑process and other parameters in the plant that indicate progress and production performance
Various techniques are available to collect data from factory operations
Called the factory data collection system, the techniques range from requiring workers to submit paper forms that are later compiled, to fully automated techniques with no human participation

10. Inventory Every organization holds some things in stock (inventory)
Inventory is an important element in operational effectiveness and often appears on the balance sheet as the biggest of current assets
Inventory is created when the receipt of materials, parts or finished goods exceeds their disbursement

11. Types of Inventory
Different inventory control procedures are appropriate, according to which type is managed

12. Functions of Inventory
Provide a stock of goods to meet anticipated customer demand and provide a “selection” of goods
Provision for fluctuations in sales or production
Mistakes in planning
Allow one to take advantage of quantity discounts
To provide a hedge against inflation
To protect against shortages due to delivery variation
To permit operations to continue smoothly with the use of “work-in-process”

13. High Inventory – Hides Problems

14. Less Inventory – Exposes Problems

15. Identifying Critical Inventory
Divides on-hand inventory into 3 classes
A class, B class, C class
Basis is usually annual $ volume
$ volume = Annual demand x Unit cost
Policies based on ABC analysis
Develop class A suppliers more
Give tighter physical control of A items
Forecast A items more carefully 13

17. ABC Analysis A B C % of Inventory Items % Annual $ Usage Class % $ Vol20 40 60 80
100 50
150
% of Inventory Items
% Annual $ Usage A B C
Class
% $ Vol
% Items 15 30 5 55 14

18. Inventory Control
Concerned with achieving a balance between two competing objectives:
Minimizing the cost of maintaining inventory
Maximizing service to customers
Two different inventory control systems are required:
Order point systems – for independent demand items
Material requirements planning – for dependent demand items

19. Types of Demand Independent Demand Dependent Demand
Demand or consumption of the item is unrelated to demand for other items
Eg.: end products and spare parts
Dependent Demand
Demand for the item is directly related to demand for something else, usually because it is a component of a product subject to independent demand
Eg.: automobile – it’s an end product, its demand is independent
However, tires on new automobiles are examples of dependent demand

20. Order Point Systems
Two related issues encountered when controlling inventories of independent demand items:
How much to order - often decided by means of economic order quantity (EOQ) formula
When to order - accomplished using reorder points (ROP)
Model of inventory level over time in the typical make to stock situation

21. EOQ Assumptions Demand rate is constant Known and constant lead time
Instantaneous receipt of material
No quantity discounts
Only relevant costs are set-up (ordering) and holding
No constraints on lot size
Decisions for items are independent from other items 25

22. EOQ Cost Model Order Quantity, Q Annual cost ($) Total Cost
Set-up Cost = SD Q
Slope = 0
Minimum total cost
Optimal order
Qopt
Holding Cost = HQ 2
(Carrying)
(Ordering)

23. Why Holding Costs Increase
More units must be stored if more ordered
Purchase Order
Description
Qty.
Microwave
1000
Order quantity
Purchase Order
Description
Qty.
Microwave 1
Order quantity 27

24. Why Order Costs Decrease
Cost is spread over more units
Example: You need 1000 microwave ovens
Purchase Order
Description
Qty.
Microwave 1
1 Order (Postage $ 0.32)
1000 Orders (Postage $320)
Order quantity
1000 28

25. EOQ Cost Model + S - set-up (ordering) cost D - annual demand
H – holding (carrying) cost Q - order quantity
1. Total annual cycle-inventory cost = Holding Cost + Set-up Cost SD Q HQ 2
TIC = + 2 × D × S
2. Economic (Optimal) Order Quantity, EOQ = H D
3. Expected Number of Orders, N =
EOQ
Working Days /
Year
4. Expected Time Between Orders, T = N

26. EOQ Calculation Example
H = $0.75 per yard S = $150 D = 10,000 yards
Qopt =
2SD H
2(150)(10,000)
(0.75)
Qopt = 2,000 yards
TIC = SD Q HQ 2
TIC =
(150)(10,000)
2,000
(0.75)(2,000)
TIC = $750 + $750 = $1,500
No. of orders,N = D/Qopt
= 10,000/2,000
= 5 orders/year
Order Cycle Time,T = 311 days/ N
= 311/5
= 62.2 store days

27. Reorder Point System
When the inventory level for a given stock item declines to some point defined as the reorder point, this is the signal to place an order to restock the item
Reorder point is set at a high enough level so as to minimize the probability that a stock out will occur during the period between when the reorder point is reached and a new batch is received
Reorder point policies can be implemented using computerized inventory control systems

28. Operation of a reorder point inventory system
Reorder Point System
Operation of a reorder point inventory system D d = = ×
ROP d L
Working Days /
Year
D = Demand per year ; d = Demand per day ; L = Lead time in days

29. EOQ and ROP 29

30. Material Requirements Planning
Computational procedure to convert the master production schedule for end products into a detailed schedule for raw materials and components used in the end products
The detailed schedule indicates the quantities of each item, when it must be ordered and when it must be delivered to achieve the master schedule
Most appropriate for job shop and batch production of a variety of products consisting of multiple components, each of which must be purchased and/or fabricated
It is the proper technique for determining quantities of dependent demand items that is raw materials, purchased parts and WIP which are used to manufacture independent demand products

31. Lead Times in MRP
The lead time for a job is the time that must be allowed to complete the job from start to finish
Two kinds of lead times in MRP:
Ordering lead time - time required from initiation of the purchase requisition to receipt of the item from the vendor
Manufacturing lead time - time required to produce the item in the company's own plant, from order release to completion

32. MRP Example

33. Inputs to the MRP System
For the MRP processor to function properly, it must receive inputs from several files:
Master production schedule
Product design data as a bill of materials file
Inventory records
Capacity requirements planning

34. MRP Output Reports
Order releases - authorize placement of orders planned by MRP system
Planned order releases in future periods
Rescheduling notices - indicating changes in due dates for open orders
Cancellation notices - indicate that certain orders are canceled due to changes in the master schedule
Inventory status reports
Exception reports, showing deviations from schedule, overdue orders, scrap, etc.

35. Benefits of MRP Inventory reductions
Faster response to changes in demand
Reduced setup and changeover costs
Better machine utilization
Improved ability to respond to changes in the master schedule
Helpful in developing the master schedule

36. E-Commerce or CIS
Internet enables firms to reengineer their order placement process to benefit both the customer and the firm itself. Advantages include:
Cost Reduction
Allows greater participation by the customer
Reduce the need for call centers – labor intensive
Revenue Flow Increase
Reduces the time lags often associated with billing the customer
Global Access
Accept orders 24 hours a day – reduce the time it takes to satisfy customers
A competitive advantage over brick and mortar firms
Pricing Flexibility
Change prices as the needs arises – avoiding the cost and delay publishing new catalogs

37. Summary
The method of ordering used depends upon the industry, the usage, the production technique and the cost of ordering
Stock is expensive to hold, therefore it is advantageous to reduce levels
EOQ technique works well for minor items used on a variety of products but makes limiting assumptions that price is stable and usage steady. It ignores lead time.