Lecture : 6

Procurement & Sourcing

Instructor: Mr. Babar Kamal

Key Learnings
• Classification of purchases.
• ABC classification
• Forecasting
• Dependent / Independent Demand
• MRP
• Lean supply & JIT
• Kanban
 Classification of Purchases
Type of Purchases
Energy

Raw Materials

MRO

Resale Items

Parts and Subassemblies

Packaging

Services or tools

Capital Goods
 ABC Classification of Purchases
Based on Monetary Value – Pareto 80-20 Rule
Example of ABC Analysis
 ABC Classification of Purchases

An ABC inventory classification might be used as a foundation for any

of the following policies:

•Putting more time , effort & money into cultivating relationships with
the suppliers of A items.
•Warehousing A items in the most secure part of your facilities & taking
more care in transporting them.
•Conducting more rigorous demand forecasts for A items then for other
items.
• Prioritizing cycle counting.
 Forecasting
Forecasting is the business function that attempts to predict sales and
use of products so they can be purchased or manufactured in
appropriate quantities in advance.

Principles of forecasting:
•Forecast are almost always wrong (Its at best an estimate).
•Forecast should include an estimate of error (statistical analysis of the
variability of demand around the average demand provides the basis for
this error estimate).
•Forecast are more accurate for groups than for single items.
•Forecast for near- demand are more accurate than long term forecasts.
 Forecasting

Demand forecasting can be done using quantitative and/or qualitative

methods.

Qualitative forecasting techniques: An approach to forecasting that is

based on intuitive or judgmental evaluation. It is used generally when
data are scarce, not available or no longer relevant. Common types
include – personal insight, sales force estimate, panel consensus,
market research, visionary forecasting and Delphi method.

Quantitative forecasting techniques: An approach to forecasting

where historical demand data is used to project future demand. It can
be divided into two types:
•Intrinsic Method
•Extrinsic Method
 Forecasting

Extrinsic forecasting: The forecast method based on correlated

leading indicators. This technique is called a causal technique because
it analyzes data on condition thought to result in changes in demand for
a particular item, such as forecast of diaper demand based on birth
rate. That is, they seek to find correlation or cause & effect relationship
between the indicator and overall market demand.

Intrinsic forecasting: is based on internal factors, such as average of

past sales. This technique is known as time series model because it
incorporates data collected during set intervals of time – hours, days,
weeks, months. E.g. time series forecasting, casual models , statistical
tools.
 Dependent & Independent Demand

Demand can be classified into two types:

Dependent demand: Demand for a component used in

making the product is dependent. Demand that is directly
related to or derived from the bill of material for other item
or end product.

Independent Demand: The demand for an item that is

unrelated to the demand of other items. Demand for a
finished product is independent
 Material Requirement Planning (MRP)

Material requirements planning (MRP) is a production planning,

scheduling, and inventory control system used to manage
manufacturing processes. Most MRP systems are software-based, but
it is possible to conduct MRP by hand as well.

An MRP system is intended to simultaneously meet three objectives:

•Ensure materials are available for production.

•Maintain the lowest possible material and product levels in store
•Plan manufacturing activities, delivery schedules and purchasing
activities.
 Material Requirement Planning (MRP)

• Based on a master production schedule, a material requirements

planning system:
– Creates schedules identifying the specific parts and materials
required to produce end items
– Determines exact numbers needed
– Determines the dates when orders for those materials should be
released, based on lead times.

• “Get the right materials to the right place at the right time.”
 Key Inputs to MRP

• Master production schedule (when do we need

it)

• Inventory record file (what do we have and what

do we need)

• Bill of material (how does it get made)

 MRP Implications for Purchasing

• Accurate records for quantities, lead times, bills of

material, and specifications
• Tight control of inventory
• Cooperation from suppliers for on-time delivery, proper
quantities and batch sizes, exacting quality (zero
defects)
– May need to re-evaluate existing contracts
• Long-term planning horizon
 Lean Supply & JIT
• True JIT production systems strive to eliminate waste
– Waste includes: inefficient set-up procedures,
inventories
– Focus on all aspects of the production system: human
resources, supply, technology, and inventories
• JIT is based on the logic that nothing will be produced
until it is needed
– When a unit is sold, the system pulls a replacement
unit from the last position in the system
– This process continues throughout the system
 JIT Imposed Supplier Activities
• Frequent deliveries

• Small lot sizes

• Long-term relationships/contracts

• Reduced number of suppliers

 Supply Managers’ JIT Expectations

• Reduction in number of suppliers

• Reduction in supplier lead time

• Improvement in supplier quality

• Improvement in supplier delivery

• Increased inventory turnover

• Inventory reduction in total dollars

 Kanban
Kanban is a scheduling system for lean manufacturing and just-in-time
manufacturing (JIT). Kanban is an inventory control system for supply
chains.

Kanban cards are a key component of Kanban, they signal the need to
move materials within a production facility or to move materials from an
outside supplier into the production facility.
The Kanban card is, in effect, a message that signals depletion of
product, parts, or inventory. When received, the Kanban triggers
replenishment of that product, part, or inventory.
Consumption, therefore, drives demand for more production, and the
Kanban card signals demand for more product—so Kanban cards help
create a demand-driven system.
The End

THANKS!