ITLS144 Topic 2 (Buy It) PDF

Topic 2: Buy it (Inventory & Supply) Lecturer: Ulrike Kussing 13350 Introduction to Transport and Logistics Systems 144 Colleen Parker, contemporary artist and illustrator...

Topic 2: Buy it (Inventory & Supply) Lecturer: Ulrike Kussing 13350 Introduction to Transport and Logistics Systems 144 Colleen Parker, contemporary artist and illustrator #WomensArt   Topic outcomes  Introduction  The purchasing function and its objectives  The purchasing cycle/procedure  Introduction to inventory  Inventory defined  The role of inventory in a SC Plan for today  Types of inventory  Managing inventory costs  Inventory planning and control NOTE: This topic is based on extracts from Fundamental Principles of Supply Chain Management – 1st edition (2015) by Mbanje and Lunga (eds.). You can find the relevant pages from this book on the SUNLearn page, in the Topic 2 section. 2   If you want to sell things, you must buy things Topic 2 – e.g. coffee beans, paper cups, plastic (1-4 August) lids, stirrers, sugar/sweetener, milk, serviettes, etc.  Have to decide who you are going to From Intro to Topics buy these from, and “how” lecture on 23 July  Won’t just buy for daily demand, so you’ll need to keep stock/inventory LM: Buy it (Inventory & Supply) 3   Describe the purchasing function Topic outcomes  Explain the purchasing objectives and activities to be carried out to achieve the objectives  Explain the purchasing cycle/procedure  Explain the role of inventory in the supply chain  Differentiate between the various types of inventory  Provide examples of items with dependent and independent demand At the end of this  Identify and explain the different inventory costs topic, you should  Explain how inventory planning takes place for dependent and be able to … independent demand items 4  Think for a moment about what you spend your money on …  What are the “things” that you buy? Introduction –  How do you decide where to buy them from? GENERAL  How often do you buy them?  When do you buy them?  How much do you buy at a time?  ….. Before we start on the theory … 5 Introduction – PURCHASING How purchasing fits into SCM … If you want to watch the video again … https://youtu.be/zYbtZ0x9_SA?si=n82i4_7HWhIC-Toy 6 Introduction – PURCHASING Before you can make (produce) something, you need to acquire the necessary inputs and maintain the production tools 7 You can download the CSCMP glossary from https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx PURCHASING Introduction – PURCHASING The functions associated with buying the goods and services required by the firm. PROCUREMENT The activities associated with acquiring products or services. Key procurement The range of activities can vary widely between organizations terminology to include all of parts of the functions of procurement planning, (CSCMP) purchasing, inventory control, traffic, receiving, incoming inspection, and salvage operations. 8 You can download the CSCMP glossary from https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx Introduction – PURCHASING STRATEGIC SOURCING The process of determining long-term supply requirements, finding sources to fulfill those needs, selecting suppliers to Focus on long-term provide the services, negotiating the purchase agreements and creation of value managing the suppliers’ performance. Focuses on developing the most effective relationships with the right suppliers, to ensure that the right price is paid and that lifetime product costs are minimized. It also assesses whether services or Key procurement processes would provide better value if they were outsourced terminology to specialist organizations. (CSCMP) 9 You can download the CSCMP glossary from https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx TOTAL COST OF OWNERSHIP (TCO) Inleiding –  TCO includes all of the direct and indirect costs associated AANKOPE with an asset or acquisition over the entire life cycle of the product or service  It includes not just the purchase price, but also such things It's about more than just as transportation, handling and storage, damage and purchase price... shrinkage, taxes and insurance, and redistribution costs  In some cases, one must also add installation, upgrade costs, training, support, service, maintenance, downtime, retirement costs and/or disposal. Kern verkrygings- terminologie (CSCMP) What should My Brew consider when buying a new coffee machine? 10 The purchasing function and its objectives  … of the right quality  at the right time  from the right suppliers (reliable & good service)  of the right quantity Get it RIGHT (while  at the right/best price remembering that you might need to compromise) 11 The purchasing function and its objectives Examples of purchasing objectives 12 The purchasing cycle/procedure NB 1 Identify and describe the need “So tell me what you want, what you really, really want” Will contain some  Communicate … or all of these steps – Quantity – Quality – Timing 13  2 Evaluate and select suppliers The purchasing Consider a variety of factors  Most of the time, it is about more than cycle/procedure just the cost price 3 Place the order NB An order is like a contract  Check that the details are correct, before you place it (and keep record of your order) Will contain some 4 Follow up on the order or all of these steps  Follow up to make sure that delivery date will be kept  Might need to expedite or delay 14  5 Receive and inspect the product (or service) Prearrange delivery  Check invoice against goods & Check condition The purchasing … let purchasing department know (or indicate on system) cycle/procedure 6 Deal with faulty consignments Purchasing department will resolve issues around faulty products or bad service with suppliers  Relationship management NB 7 Analyse the invoice Where you billed/invoiced correctly?  Purchasing or Finance department checks Will contain some or all of these steps 8 Close the order File all the necessary paperwork  Keep for records (and audit purposes) 15  The methods of procurement will be adapted, based on two factors:  Overall complexity of the supply market, e.g. The purchasing – the number of potential suppliers available, cycle/procedure – the rate of technological change, – barriers to entry for potential new suppliers, and NOT for assessment – potential transport complexity (perhaps due to distance or special purposes packaging requirements)  Relative importance of the purchasing decision to the business, e.g. – overall value of the decision, Kraljic matrix – the strategic importance of the item to the business, and (FROM: Richards & – impact of the price of this item on profitability Grinsted, 2013) (See https://expertprogrammanagement.com/2022/01/the-kraljic- matrix/ if you want to know more about this model.) 16 The purchasing cycle/procedure NOT for assessment purposes Kraljic matrix (FROM: Richards & Grinsted, 2013) 17  Think for a moment about the stuff that you own …  Those things could fall into different categories, e.g. clothes, Introduction to electronics, groceries, etc. Inventory  Each of these categories could be broken down into smaller categories, e.g. clothes  socks, underwear, pants, tops, etc.  You could also group these things into categories, e.g. Things I’ll use every day Things I’ll use in the future Things I’ve used in the past (but won’t use again)  Are there things that you are running out of, or that would need to be replaced soon? When will you buy them? How long will it take to get them? Before we start on the theory … Congratulations! You are a SC manager that has to make decisions about the inventory that you keep. 18 You can download the CSCMP glossary from https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx CSCMP description Inventory defined Components, raw materials, work in process, finished goods and supplies required for the creation of goods and services; It can also refer to the number of units and/or value of the stock of goods held by a company. Look at Section 10.1.1 for further definitions Various ways to look at it … 19 You can download the CSCMP glossary from https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx Stock Keeping Unit – SKU Inventory defined A category of unit with unique combination of form, fit, and function Definitions/descriptions (i.e. unique components held in stock). taken from the CSCMP’s NOTE: See CSCMP Glossary for an example/illustration SCM Terms and Glossary Item NB A uniquely identifiable piece of inventory. Also known as a part number or SKU, an item can be raw materials, fluids, component Key terminology – parts, subassemblies, finished assemblies, packaging, etc. Usually Item & SKU differentiated by form, fit or function. Items which are painted different colours are generally viewed as different items. 20 Inventory defined Retail perspective Key terminology – SKU SOURCE: https://www.thebalancemoney.com/what-is-a-sku-in-retail-terms-2890158 21 Inventory defined Retail perspective Key terminology – SKU codes SOURCE: https://redstagfulfillment.com/sku-numbers/ 22 Inventory defined Retail perspective Key terminology – SKU codes SOURCE: https://sell.amazon.com.sg/blog/sku 23 The role of inventory in a SC External The following 7 slides will illustrate the various roles that inventory plays in a SC NB Section 10.2 24 The role of inventory in a SC  The aim of inventory is to provide immediate satisfaction for 1. Balancing supply customer demand and demand  But all products are not always being produced during the periods in which they are demanded  NEED TO KEEP INVENTORY 25 The role of inventory in a SC  Production can require a lot of different inputs (raw materials, components, etc.), but there can be delays in buying these from 2. To support suppliers production  Keep BUFFER stock (inventory) to make sure that production can continue even if there are delays elsewhere in the inbound SC 26   Buying in bulk is cheaper (and you The role of can save on transport costs) inventory in a SC  Can also keep inventory to hedge against future price changes  buy more than you need now, if you expect the price to go up 3. Facilitate economics of buying 27   Extra inventory prevents shortages … The role of  Invest in safety stock or buffer stock to guard against uncertainty in inventory in a SC demand and supply  so that you can maintain acceptable customer service levels Uncertainty about actual customer Uncertainty about demand transport lead times, especially on imports 4. A buffer throughout the SC 28   Carry inventory of MRO (maintenance, repair and operating The role of supplies) to make sure that the organisation can continue running inventory in a SC  Can you think of examples of MRO inventory that the university has? 5. To support operational requirements 29   Keep buffer inventory between the different stage of a production process, in order to ensure smooth and efficient operations The role of  Keep inventory at different stages or different locations in the SC inventory in a SC 6. Decoupling stages in the production process 30  Will also have in-transit inventory The role of inventory in a SC Different parts of the SC will be located in the best place for them  need inventory across the SC 7. Facilitate geographical specialisation 31 Types of inventory Value of the inventory increases, as it gets closer to the consumer  Raw material  in an unprocessed state, awaiting conversion; used to make components or the final product; usually low in value and high in volume  Work-in-process (WIP)  semi-finished products at various stages of Classification based the production process; held to support manufacturing; value higher than raw materials on position in the SC  Packaging material  different types of packaging used in different stages of the total logistics process  Finished goods inventory  completed products ready for shipment and sale to customers; kept in various locations in the SC; highest value 32   Cycle stock (base stock) – Inventory that results from “normal” replenishment for conditions Types of inventory of certainty – Amount/level depends on average demand and lead time  (In) Transit inventory – En route from one location to another (not available for use/sale) – Owned either by the supplier or the receiver (INCO terms)  Safety (buffer) stock – Held in excess of cycle stock due to of uncertainty in demand Classification based and/or lead time  level depends on severity of uncertainties on the inventory’s  Speculative stock purpose – Held for reasons other than satisfying normal day-to day demand – see p.150 for potential reasons 33  Inventory management models differ according to the nature and types of inventory being considered, and can be classified as … Types of inventory  Dependent demand – Demand for the items is derived from the demand for some other item, e.g. paper cup – Can be calculated once the demand for the final product is known  Materials Requirement Planning (MRP) NB – Calculate based on the Bill of Materials (BoM)  basically the “list of ingredients” for something  Independent demand Dependent vs. – Demand for a product that is not connected to the demand for Independent another product, e.g. cup of coffee demand – Demand pattern affected by trends, seasonal patterns and general market conditions – Use forecasting to determine independent demand 34   AIM  hold inventories at the lowest possible cost, while ensuring Managing uninterrupted supplies for ongoing operations and meeting required inventory costs customer service levels  OBJECTIVES: – Increase corporate profitability – Predict the impact of corporate policies on inventory levels – Minimise the total cost Objectives and of logistics activities trade-offs (remember the end of Topic 1’s slides …) 35 NB 36 Managing Costs associated with: “Ordering” costs include: inventory costs  Transmitting and processing (Think of the steps in the purchasing cycle) inventory transfer  Preparing specifications  Handling product (if in stock) or cost of setting up* production (if  Order preparation not in stock)  Order transmittal  Receiving at the distribution  Order follow-up and warehouse inspection costs  Processing the associated Ordering/set-up  Order receiving documentation costs  Costs of processing invoices * Set-up costs include  Accounts payable processing preparation costs for production or assembly of items) 37   Direct and indirect costs associated with carrying items in inventory – Capital investment (you had to pay for the items in inventory) Managing inventory costs – Storage facility (warehouse or DC  rental, electricity, staff, etc.) – Insurance costs – Obsolescence and depreciation  inventory can become “un- sellable” or un-usable, or decrease in value – Taxes on the held inventory – Handling costs – Damage, spoilage and pilferage Inventory  Costs are directly related to the volume of inventory carried  need carrying/holding to decide what the average inventory level should be costs  Trade-off between cost of carrying inventory and cost of lost sales due to a stock-out (bad for customer service) 38 Managing inventory costs Stock-out/shortage costs 39 Managing Key terminology  STOCK-OUT inventory costs A stock-out occurs when insufficient stock exists to fill an order Inventory isn’t available to meet demand  may result in a backorder Shortage costs take the form of …  Loss of goodwill  Idle time for machines/employees  Cost of lost sales  Overtime costs  Customer irritation  Increased administrative costs Stock-out/shortage  Increased transport cost  Set-up costs costs  Back-order costs 40 Inventory planning Key and control decisions Only learn what is covered on this slide  For independent demand  make a statistical forecast of how much will be required – Can either do this at regular intervals, or Key decisions – Calculate EOQ (economic order quantity) and reorder point (Section 10.5)  For dependent demand  calculate quantity from (forecasted) demand for independent demand item  When to order  determine reorder point based on lead times 41 ANY QUESTIONS? Contemporary textile artist Anne Honeymoon creates bowls that depict hedgerows, gardens, woodland flowers #WomensArt 42