Purchasing Decisions to include Inventory

Planning Dr K M MadrechaProjects & Quality ManagerThe 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

Parameter Existing Proposed

Sales 100 105 (5% up)

Income (Sales-Material costs)

40 42 (5% up)

Controllable Expenses

20 18 (10% down)

Other Expenses 15 15

Profit 5 9 (80% up)

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