Topic 7.

Requisition Planning

Introduction

Efficient operation of a company depends on the sum

of efforts of different areas to reach the company’s strategic objectives. Although each area is
essential to meet these objectives, requisition planning has a special interest and approach, as it
determines the supply of finished goods to distribution centers the company designates
strategically to reach its market, or it determines the supply of raw materials for production
plants to manufacture products the company expects to sell in some time.

It is important to have product ready to sell as well as having clients to sell them, mainly
because being able to sell a product in the market depends mainly on it being available where it
is required.

That said, what do you think is the best way to coordinate the activities of a company to have
product available in the moment, place, and amount the market demands? Is this the sole
responsibility of logistics?

Explanation

7.1 Inventory requisition planning

Inventory requisition planning is a complex tax requiring the interaction of more than one area
in the company. Most companies establish requisitions based on demand behavior statistics for
each type of product they commercialize; they also combine factors such as industry expert
opinions, salesforce feedback, available production capacities, to mention a common few.

Each company establishes requisitions based on the factors they consider most important given
their specific situation, and even though the likelihood of having a 100% correct forecast is
low, there are methods that help managers have a support guide.

Coyle (2018) mentions in his work the method developed by the Center for Supply Chain
Research, where the different areas of the company work on a consensus forecast, which they
called “sales and operations planning”. The process comprises five steps:
 Source: Coyle, J. (2018). Administración de la cadena de suministro: Una perspectiva
logística (9th ed.). México: Cengage Learning.

1. Data and information are collected to develop a statistical forecast of future sales.
2. The marketing and sales departments review the forecast and adjust it as a function
of promotion of existing products, introduction of new products, or their elimination.
3. The operations personnel (manufacturing, forecast, and transportation) examines the
sales forecast and determines whether the existing capacity is adequate to manage
products. Production moments are also analyzed, and aspects such as storage space
issues, transportation or personnel availability are considered, among others.
4. The sales, marketing, operations, and finance personnel meets to review the initial
forecast and try to solve any capacity issue arising from step 3.
5. Financial decisions are made regarding sales forecasts and capacity issues. By
accepting forecasts, they become operational plans for the organization.

With this method it is attempted to achieve an active participation of all areas within the
company, with the purpose of forming a joint commitment to meet operational goals. To
consolidate these efforts, the management creates individual goals and indicators per area,
which are assigned based on the results of collaborative participation. Do not forget that an
organization is the sum of efforts of employees, and if they work individually in reaching their
objectives, when they are added they will be the organization's achievements.

Inventory planning is a crucial activity for a company's operations, just because a company’s
(producer or marketer of goods or services) raison d'être is precisely to supply that merchandise
or service to the market. This way, if inventory requisitions are not well planned, the company
will not be able to comply with its mission.

7.2 Purchase administration

Purchase administration is one of the activities related with planning and forecasting. Just as
there are efforts to form a joint responsibility throughout an organization to create the
operational forecasts where scope and goals are detailed, there are plans itemized jointly in
supply chain sourcing.

In the logistics department, a correct administration of supply chain links is a fundamental task.
Raw material requirements are determined by the production forecast, and it is the task of the
sourcing area to make it possible for materials to be in time and kind in the right moment and
place for processing. Likewise, if the company’s distribution network uses a certain number of
distribution centers with determinate level of demand for each, the distribution area should be
alert and make sure each of these centers are replenished in a timely fashion to face all the
requirements demanded by the market.

In the task of planning company requisitions there are different methods adopted by companies.
The starting point of company supply decisions is developed in the sales potential for each of
the company's line of products.

Using numerical terms to exemplify the above, let us suppose a company sold on average
during recent months 2000 units of product A, 3500 of product B, and 400 of product C.
Considering product A is comprised of 50% input X, 25% of input Y, and 25% of input Z;
product B contains 33% of X, 33% of Y, and 34% of Z; and C is made 15% of X, 80% of Y,
and 5% of Z.

What is the number of pieces necessary to make a requisition to vendors for input X, Y,
and Z?

Based on the percentages provided above, we can determine the following amounts:

Product A (2000 units) = 1000 pieces of input X + 500 pieces of input Y + 500 pieces of input
Z.
Product B (3500 units) = 1155 pieces of input X + 1155 pieces of input Y + 1190 pieces of
input Z.
Product C (400 units) = 60 pieces of input X + 320 pieces of input Y + 20 pieces of input Z.

 Input X = 2215 pieces.

 Input Y = 1975 pieces.
 Input Z = 1710 pieces.
In coordination with the company's inventory policy, it must work to get sufficient supplies of
inputs X, Y, and Z and to be able to produce the necessary products A, B, and C to meet their
sales planning. Additionally, the company must consider the seasonality of sales depending on
the months, as in all industries there are month to month variations that obey the changes
inherent to the market conditions in each industry.

A company needs to be able to react to sudden changes in the market, managing a safety stock,
both of inputs and of finished product. These inventories have the purpose of facing any change
in the market, or the standard deviation of the average determined by the company based on
historical sales.

In addition to this, within purchase administration planning, the company must include in its
operations the time it takes to vendors to supply placed orders, so orders must be placed with
enough time to meet their goals.

All this process is complex for the organization, as the task of managing supplies magnifies
when there are several components to produce a wide variety of products, which have to be
distributed in different regions through diverse channels of distribution. Now, if this was not
complex enough, you need to consider additional variables that are very common nowadays
due to globalization, when you may source from any part in the world and commercialize with
any region, with different requirements for product characteristics, packaging, or packing.

In support of this complex task there are methods that attempt a collaboration between the links
in the supply chain, involving vendors as an important part in the process. This methodology is
known as “collaborative planning, forecasting, and replenishment.” This business model
involves the use of technology for collaboration between retailers, distributors, and
manufacturers in replenishment activities, allowing commercial partners to work on a single
joint forecast and all companies to work on that same operational plan.

Collaborative forecasting is established using statistical, quantitative, and qualitative

information proper of the market conditions. This forecasting can range from simple methods
such as simple moving average and weighted moving average (adding specific information of
demand collected directly from suppliers, clients, government, specialists, etcetera), to complex
methods involving exponential smoothing of market trends and seasonal influence on demand.

Coyle (2018) mentions there were methodologies aimed at creating a comprehensive

collaboration of supply chain participants, highlighting the following:

QR (Quick Response): Based on quick response to react to changes in consumption levels

trying to reduce lead times from the moment the purchase order is placed until the end product
is delivered, with the purpose of increasing customer satisfaction.

VMI (Vendor Management Inventory): Used by an organization to manage inventories

maintained in the client’s distribution centers.
 1. The vendor and its client agree on what products will be managed using VMI.
2. An agreement is made on the points for new orders and the economic amounts to
place an order for each of these products.
3. As these products are shipped from the client's distribution center, the client notifies
the vendor of the shipped volumes in real time.
4. The vendor supervises available inventories in the client’s distribution centers, and
when the stock reaches the agreed point of new order, the vendor places an order for
replenishment, notifies the client’s distribution center of the amount and time of
delivery, and ships the order to replenish the distribution center.

CRP (Continuous Replenishment Program): Based on communication and collaboration

between the members of the supply chain to supply products in real time by notifying the
manufacturer of the daily levels of sales, as well as shipments requested from the distribution
center, in order to manage continuous replenishment, avoiding any production shutdowns.

ECR (Efficient Consumer Response): Involves a strategy to reduce the bullwhip effect between
the manufacturer, distributor, wholesaler, and retailer through frequent deliveries, short lead
times, and small production lots. Each of them represented progress towards integration of
supply chain, however, they would not have enough commitment to company results.

The main contribution of the collaborative planning, forecasting and replenishment is that
companies participating and interacting in a single supply chain develop a joint, not individual
working plan, in such a way that they work as a true supply chain, with all the links placed
correctly. For this to work, participating companies need to cooperate with data flow between
them and provide continuous feedback.

Purchase administration based on collaborative planning, forecasting and replenishment

translates into a manufacturer production and replenishment program, where the amounts and
time periods are implicit. If this works correctly and according to the programs, the
manufacturer inventory must be reduced, by using resources in cycles coordinated with
vendors, generating savings on working capital and a more efficient operation.

There are information technology systems that allow the sourcing area, and the organization in
general, to have elements to maintain order in scheduling the necessary material and product
requisitions. They were designed to calculate more accurately what, when, and in what amounts
to place orders, anticipating the needs. These systems are, for instance, MRP (Material
Requirements Planning), MRP II (Manufacturing Resource Planning) and ERP (Enterprise
Resource Planning). They will be explained in depth in the following topics.

Conclusion

Requisition planning methods comprise collaborative efforts where the main areas of the
company involved in operation develop a joint working plan. This is one of the most important
activities for the organization's operation, as it determines short-term goals, establishing
activities of each area to reach these objectives.
As there is great responsibility in this area, and it is also very complex, there are methods for
intersectional engagement for forecasting developed by an area to be validated by the other
areas. That is, if the marketing and sales department determines that sales levels will be of
certain volume for a specific period, the production and logistics areas must validate if these
volumes are feasible to be attained with the current productive, storage, and operative personnel
capacities.