LOGISTICS III

CHAPTER 10
Purchasing and Supply Scheduling Decisions

Department of Transport and Supply Chain Management

OVERVIEW

• Coordination In The Supply Channel

– Example: Anchor Hocking
• Just-ln-Time (JIT) Supply Scheduling
• KANBAN
• Materials Requirements Planning (MRP)
• Distribution Requirements Planning (DRP)
• PURCHASING
• Strategic Profit Model
• Price Cut Strategies
• Order Quantities and Timing
• Quantity discounts

LOGISTICS 3 CHAPTER 10 2
 Introduction
Purchasing and Supply Scheduling Decisions
(P 424)

•Improved logistical supply is achieved

when the elements of production
scheduling, purchasing, and
transportation are brought into proper
balance.

Coordinating the flow of goods/services between

physical facilities is a major issue in supply chain
management.

– Deciding on the product quantities to move,

– When to move them,
– How to move them,
– And from which locations to acquire them.

LOGISTICS 3 CHAPTER 10 3
 Just-ln-Time (JIT) Supply Scheduling
Philosophy of complete elimination of waste

"Just-in-Time" means making "only what is needed, when it is needed, and in

the amount needed.

The benefit of a JIT philosophy is to operate the channel with minimum

inventory, resulting in cost savings and service improvements.
– Production requirements are met just when they are needed, thereby reducing
the need for inventory in storage.

Just-in-time scheduling is Defined as:

A philosophy of scheduling where the entire supply channel is
synchronised to respond to the requirements of operations or
customers.

LOGISTICS 3 CHAPTER 10 4
JIT supply scheduling is Characterised by:

Discuss the characteristics of JIT supply scheduling.

Close relationships with a few suppliers and transport
carriers
Information is shared between buyers and suppliers
Frequent production/purchases and transport of goods
in small quantities with resulting minimal inventory levels
Elimination of uncertainties wherever possible
throughout the supply channel
High-quality goals

LOGISTICS 3 CHAPTER 10 5
 A good example of a JIT scheduling is
called the Kanban System

KANBAN is Toyota's production scheduling

system and is the best-known example of just- BAN
in-time scheduling.
Deliver a
•KANBAN is a card-based production control box of
system. parts
•A KAN card instructs a work center or
supplier to produce a standard quantity of an
item.
In a KANBAN scheduling system, the BAN
card requests a predefined standard quantity
of parts or subassemblies be brought to a work
center: KANBAN KAN BAN JIT KAN
•These cards are used as triggers for the Produce
production and movement of items. a box of
parts
•The KANBAN scheduling system involves
very LOGISTICS
low setup costs10 and very short lead
3 CHAPTER 6

times.
 A comparison between a KANBAN (JIT) system (where
production of items is frequently repeated)
AND
A production schedule built to take advantage of economies of
scale.

A typical example of a KANBAN production schedule for two products

might look like this: ABABABA
AAAABBBBAAAABBBB
ABAABAABABABBBAAABAAA
AAAAAAABBBBBBBAAAAAAA

A schedule of product models A and B that would exploit economies of

scale and reduce setup costs might be:

AAAAAAABBBBBBBAAAAAAABBBBBBBAAAAAAABBBBBBBB

LOGISTICS 3 CHAPTER 10 7
KANBAN
• Lead times are highly predictable because they are short.
– Suppliers are located near the site of operations and deliveries can be
made frequently, often once an hour, without incurring great transportation
expense.
• Order quantities are small because setup and procurement
costs are kept low.
– Since order quantities are related to setup or procurement costs, they
become the target for cost reduction. Small order quantities result in low
inventories.
• Few vendors are used, with correspondingly high expectations
of them.
• A high level of cooperation between the manufacturer and
vendor is developed to assure a high level of product and
logistical performance.
• Since KANBAN systems operate with minimum inventory levels
and few suppliers, the risk of immediate channel shutdown
from interruptions in the supply chain is great.

LOGISTICS 3 CHAPTER 10 8
MRP Mechanics

•MRP is a method of supply scheduling whereby the timing of

purchases or production is synchronised to meet period-by-period
operating requirements.

•MRP is also referred to as time-phased replenishment planning.

•Many computer software suppliers (e.g., SAP) have programs that

handle the MRP calculations required for thousands of items.

To meet these end-product requirements, a product schedule needs

to be developed showing when production should begin and when
and in what quantities clock mechanisms should be available.

LOGISTICS 3 CHAPTER 10 9
 Materials Requirements Planning (MRP)

•MRP is a method used for scheduling materials, and supplies whose demand is
reasonably well known.

•The purpose of MRP is to avoid carrying these items in inventory.

– Inventories can be minimised when the amount and timing of the end-product
requirements are known.

•Balancing (offsetting) the lead time with the request for materials/supplies, the
demand can be met at the time they develop.
•Precise timing of materials flows to meet production requirements is the principle
behind materials requirements planning (MRP).

LOGISTICS 3 CHAPTER 10 10
Distribution Requirement Planning (DRP)
(P 442)

•Compressing the time between when customer orders are placed and
when they are received can be a competitive advantage.
•DRP is based on many of the same ideas behind MRP scheduling:
– Use information to reduce uncertainties
– Use electronic information transmission to reduce the order-cycle time.
– Use computer technology to speed the production and or filling of customer
orders.

Careful application of these concepts to the distribution channel can

improve customer service and lower costs.

LOGISTICS 3 CHAPTER 10 11
 Integrated Supply Channel Management

•The methods of MRP can also be used in

the distribution channel, called
distribution-requirements planning
(DRP), to allow integrated supply
scheduling throughout a company's entire DRP
logistics channel, from suppliers to
customers.
•It is not rare to see physical distribution
scheduling managed separately from
production or supply scheduling.
•Pull methods of inventory management in
field warehouses are taught as ways to
manage inventory levels and to
recommend to production when and in
what quantities to produce. MRP

LOGISTICS 3 CHAPTER 10 12
Applying DRP to the physical distribution channel offers
an alternative with several benefits to the more
traditional Pull methods. (p 443)

These benefits are:

• A similar information base is created for the entire production/logistics
channel. This encourages integrated planning throughout the channel.
• The DRP concepts are compatible with those of MRP used at the plant.
• Since DRP shows planned future shipments, decision making is assisted in
such areas as transport capacity planning, vehicle dispatching, and
warehouse order filling.
• Increased flexibility and an improved ability to react to change.
• When developing a schedule, all demand sources can be incorporated, not
just the forecast.
• Whereas ROP /EOQ systems generally manage individual items from
independent multiple warehouses, DRP allows them to be managed
collectively.

LOGISTICS 3 CHAPTER 10 13
 DRP Mechanics
DRP is an extension of the MRP logic that has
already been described.

•DRP begins with an item demand

forecast which may be the demand
in a field warehouse.
•This demand is for a number of
periods into the future and is
developed from the item forecast,
future customer orders, planned
promotions, etc.
•This demand becomes the
forecast requirements in the DRP
system.
An example of the basic DRP
record is shown in Figure 10-10.

LOGISTICS 3 CHAPTER 10 14
PURCHASING

Purchasing involves buying the raw materials, supplies, and

components for the organisation.
The activities associated with it include the following:
– Selecting and qualifying suppliers
– Rating supplier performance
– Negotiating contracts
– Comparing price, quality, and service
– Sourcing goods and services
– Timing purchases
– Setting terms of sale
– Evaluating the value received
– Measuring inbound quality, if this is not a responsibility of quality
control
– Predicting price, service, and sometimes demand changes
– Specifying the form in which goods are to be received

LOGISTICS 3 CHAPTER 10 15
Importance of Purchasing

• Purchasing has an important position in organisations since

purchased parts, components, and supplies typically represent 40
to 60 % of an end product's sales value.

• This means that relatively small cost reductions gained in the

acquisition of materials can have a greater impact on profits than
equal improvements in other cost-sales areas of the organization.
This is known as the leverage principle.

LOGISTICS 3 CHAPTER 10 16
Sales 850 STRATEGIC PROFIT MODEL
Cost of sales % 47% (R MILLIONS) SALES
Variable Expenses 10 GROSS
Fixed Expenses 40 NET NET MARGIN -
Inventory 70 PROFIT PROFIT COST OF
Acc. Receivable 15 MARGIN SALES
Fixed Assets 200 % /
Other Assets 10 SALES -
Tax 32% VARIABLE
Net Worth 300 EXPENSES
TOTAL
EXPENSES +
RETURN FIXED
RETURN ON NET FINANCIAL ON - EXPENSES
WORTH LEVERAGE ASSETS TAXES
% = X % X
Tot Assets INVENTORY
Net Worth
+
ACCOUNTS
SALES RECEIVABLE
ASSET CURRENT
TURNOVER / ASSETS +
TOTAL OTHER
ASSETS + CURRENT
LOGISTICS 3 CHAPTER 10 Fixed Assets ASSETS 17
 STRATEGIC PROFIT MODEL
(R MILLIONS) SALES
GROSS 850
NET NET MARGIN -
PROFIT PROFIT 450.5 COST OF
MARGIN 272.340 SALES
32.040% % / 399.5
SALES -
850 VARIABLE
EXPENSES
TOTAL 10
EXPENSES +
RETURN RETURN 50.000 FIXED
ON NET FINANCIAL ON - EXPENSES
WORTH LEVERAGE ASSETS TAXES 40
90.780% = 0.983 X 92.319% X 128.160
Tot Assets INVENTORY
Net Worth 70
+
ACCOUNTS
SALES RECEIVABLE
ASSET 850 CURRENT 15
TURNOVER / ASSETS +
2.88 TOTAL 95 OTHER
ASSETS + CURRENT
295 Fixed Assets ASSETS
200 10
LOGISTICS 3 CHAPTER 10 18
LOGISTICS III
CHAPTER 10
END

Department of Transport and Supply Chain Management