Order Management

Order ManagementProcurement in Industrial Management BPT3133Chapter OutlineOrder ProcessingOrdering Process FlowDocument Involved

Order Quantities

Independent Demand Order SystemEconomic Order Quantity (EOQ)Reorder Point System (ROP)

Computer Information System

Learning ObjectivesIdentify methods of stock control and their applicationExamine positive and negative reasons for holding stock and approaches to reducing inventoriesExplain the Economic Order Quantity (EOQ) concept

Order ProcessingOrder 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 operationOrder ProcessingTactics and tools that can help manage the order fulfillment processes involving material flows between the firm and its external customers:

Inventory PlacementVendor-managed inventoriesContinuous replenishment programRadio frequency identificationDistribution processes

Shop Floor Control SystemImplemented by a combination of computer systems and human resources

Order ReleaseGenerates 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 jobsOrder SchedulingAssigns 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 jobDispatch list helps the department foreman assign work and allocate resources to achieve the master scheduleOrder ProgressMonitors the status of the orders, workinprocess 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 InventoryEvery 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 assetsInventory is created when the receipt of materials, parts or finished goods exceeds their disbursement

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

Functions of InventoryProvide a stock of goods to meet anticipated customer demand and provide a selection of goodsProvision for fluctuations in sales or productionMistakes in planningAllow one to take advantage of quantity discountsTo provide a hedge against inflationTo protect against shortages due to delivery variationTo permit operations to continue smoothly with the use of work-in-processHigh Inventory Hides Problems

Less Inventory Exposes Problems

Divides on-hand inventory into 3 classesA class, B class, C class

Basis is usually annual $ volume$ volume = Annual demand x Unit cost

Policies based on ABC analysisDevelop class A suppliers moreGive tighter physical control of A itemsForecast A items more carefullyIdentifying Critical Inventory13

020406080100050100150% of Inventory Items% Annual $ UsageABCClass% $ Vol% ItemsA8015B1530C555ABC Analysis14Inventory ControlConcerned with achieving a balance between two competing objectives: Minimizing the cost of maintaining inventoryMaximizing service to customers

Two different inventory control systems are required: Order point systems for independent demand itemsMaterial requirements planning for dependent demand items

Types of DemandIndependent DemandDemand or consumption of the item is unrelated to demand for other itemsEg.: end products and spare parts

Dependent DemandDemand for the item is directly related to demand for something else, usually because it is a component of a product subject to independent demandEg.: automobile its an end product, its demand is independentHowever, tires on new automobiles are examples of dependent demand

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) formulaWhen to order - accomplished using reorder points (ROP)

Model of inventory level over time in the typical make to stock situationDemand rate is constantKnown and constant lead timeInstantaneous receipt of materialNo quantity discountsOnly relevant costs are set-up (ordering) and holdingNo constraints on lot sizeDecisions for items are independent from other itemsEOQ Assumptions25EOQ Cost Model Order Quantity, QAnnual cost ($)Total CostHolding Cost =HQ2Slope = 0Minimum total costOptimal order QoptSet-up Cost =SDQ(Carrying)(Ordering)22More units must be stored if more orderedPurchase OrderDescriptionQty.Microwave1Order quantity

Purchase OrderDescriptionQty.Microwave1000Order quantityWhy Holding Costs Increase27Cost is spread over more unitsExample: You need 1000 microwave ovens Purchase OrderDescriptionQty.Microwave1Purchase OrderDescriptionQty.Microwave1Purchase OrderDescriptionQty.Microwave1Purchase OrderDescriptionQty.Microwave11 Order (Postage $ 0.32)1000 Orders (Postage $320)Order quantityPurchase OrderDescriptionQty.Microwave1000Why Order Costs Decrease28S - set-up (ordering) cost D - annual demandH holding (carrying) costQ - order quantity1. Total annual cycle-inventory cost = Holding Cost + Set-up Cost SDQHQ2EOQ Cost Model +TIC =2. Economic (Optimal) Order Quantity, EOQ = D SH23. Expected Number of Orders, N =DEOQ4. Expected Time Between Orders, T =Working Days/YearN25H = $0.75 per yardS = $150D = 10,000 yardsQopt =2SDHQopt =2(150)(10,000)(0.75)Qopt = 2,000 yardsTIC = +SDQHQ2TIC = +(150)(10,000)2,000(0.75)(2,000)2TIC = $750 + $750 = $1,500No. of orders,N =D/Qopt =10,000/2,000=5 orders/yearOrder Cycle Time,T = 311 days/ N =311/5=62.2 store daysEOQ Calculation Example26Reorder Point SystemWhen 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 systemsOperation of a reorder point inventory systemReorder Point SystemdWorking Days/Year=D=ROPdLD = Demand per year ; d = Demand per day ; L = Lead time in days

EOQ and ROP

29Material Requirements PlanningComputational 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

Lead Times in MRPThe lead time for a job is the time that must be allowed to complete the job from start to finishTwo 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 completionMRP Example

Inputs to the MRP SystemFor the MRP processor to function properly, it must receive inputs from several files: Master production scheduleProduct design data as a bill of materials fileInventory recordsCapacity requirements planningMRP Output Reports Order releases - authorize placement of orders planned by MRP systemPlanned order releases in future periodsRescheduling notices - indicating changes in due dates for open ordersCancellation notices - indicate that certain orders are canceled due to changes in the master scheduleInventory status reportsException reports, showing deviations from schedule, overdue orders, scrap, etc.Benefits of MRPInventory reductionsFaster response to changes in demandReduced setup and changeover costsBetter machine utilizationImproved ability to respond to changes in the master scheduleHelpful in developing the master schedule E-Commerce or CISInternet enables firms to reengineer their order placement process to benefit both the customer and the firm itself. Advantages include:Cost ReductionAllows greater participation by the customerReduce the need for call centers labor intensiveRevenue Flow IncreaseReduces the time lags often associated with billing the customerGlobal AccessAccept orders 24 hours a day reduce the time it takes to satisfy customersA competitive advantage over brick and mortar firmsPricing FlexibilityChange prices as the needs arises avoiding the cost and delay publishing new catalogs

SummaryThe method of ordering used depends upon the industry, the usage, the production technique and the cost of orderingStock is expensive to hold, therefore it is advantageous to reduce levelsEOQ 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.