INVENTORY AND PURCHASING

MANAGEMENT

Objectives:
 To provide an overview of the purchasing
function and the supply chain
 To describe the types of inventory, stock

valuation and classification

 To outline warehousing and warehousing

activities
 To indicate computerized warehousing options
INVENTORY AND PURCHASING
MANAGEMENT

Part 1: THE PURCHASING

FUNCTION
PURCHASING DEFINED
Purchasing is a major function of an organization
that is responsible for the acquisition of required
materials, services and equipment
Procurement is an organizational function that
includes specifications development, value
analysis, supplier market research, negotiation,
buying activities, contract administration,
inventory control, traffic, receiving and stores.
PURCHASING cont’d
Supply Management is the identification,
acquisition, access, positioning and management
of resources an organization needs in the
attainment of its strategic objectives.
Supply Chain Management is the design and
management of seamless, value-added processes
across organizational boundaries to meet the real
needs of the end customer. The development and
integration of people and technological resources
are critical to successful supply chain integration.
PURCHASING cont’d
Supply Chain is the series of organizations
from the raw materials supplier to the end-
user that integrate their processes to create
value for ultimate customers.
Purchasing Function
The purchasing and supply function affects
the strategic capabilities of the organization.

It is now a set of value-adding processes

that link directly to the market and the
organization’s ability to innovate and
deliver value in the marketplace.
PURCHASING
AFFECTS
 SHORT-TERM PROFITABILITY
 LONG-TERM SURVIVABILITY
The Value Of Purchasing
A STRATEGIC PERSPECTIVE
purchased inputs from raw materials to
overnight mail now represents the single
largest cost category for most organisations
> 60-80% in manufacturing firms
The Evolution Of Purchasing
Strategy

PRE WW II: clerical focus

WW II : increased emphasis
1950-1970 : managerial function
1973-mid ’80s: scarcity & inflation
increase visibility
1985-1995: focus on JIT
1995-NOW: outsourcing & SCM
A Competitive & Dynamic
Environment

ECONOMIC GLOBALIZATION
more options
new challenges in the form of
communication, culture, distance and
documentation
mental and operational flexibility needed
A Competitive & Dynamic
Environment

TIME COMPRESSION:
a JIT focus, quick response to changes in
demand
A Competitive & Dynamic
Environment

RISING CUSTOMER EXPECTATIONS

customers expect near perfect quality,
immediate responsiveness, universal
availability, continual innovation
A Competitive & Dynamic
Environment

PROCESS MANAGEMENT
a lean and agile supply chain calls for
cross-functional process integration and a
focus on the process rather than the
function
A Competitive & Dynamic
Environment

TECHNOLOGICAL INNOVATION
technology has helped shrink the world,
facilitated time compression, driven
customer demands and enables supply
chain integration
Questions for Discussion
Explain the concept of Purchasing vs Procurement
and Supply Management vs Supply Chain
Management. Is it possible for a firm to focus on
any one or all of these? What are the implications
of each?
What effect has existing in a competitive and
dynamic environment had on organizations’
perspective of demand and supply? Describe how
it affects the organization in which you work.
INVENTORY AND PURCHASING
MANAGEMENT

Part 2: The Purchasing Process

 The Purchasing Cycle
Action Mode
1. Need Recognition Customer
2. Define Requirements Specifications /
Statement Of Work
3. Communicate and Customer submits
Review Requirements Purchase Requisition,
Reviewed by Purchasing
4. Discuss Requirements Purchasing/Customer
5. Identify Resources Data Bases
 The Purchasing Cycle
Action Mode
6. Qualify Sources Audit
7. Select Source Request for Information,
Quote or Proposal
8. Form Contract Purchase Order
Acknowledgement
9. Deliver Product Packing List
10. Receive Product Receiving Report
11. Complete Contract Invoice, Payment, PO
Tactical To Strategic
TODAY’S PURCHASER MUST FIND A
WAY TO EXECUTE THE PURCHASING
PROCESS IN THIS GLOBALIZED,
HIGHLY TECHNOLOGICAL
COMPETITIVE WORLD WHERE
CONSUMERS NOW HAVE MORE
POWER THAN EVER BEFORE
 Traditional and Modern Views of
Purchasing
Traditional View Modern View
Staff Function Line Function
Clerical Managerial
Tactical Strategic
Reactive Proactive
Necessary Evil Team Player
Cost Center Profit Center
Purchasing Trends
Fewer Sources Of Supply
A Focus On Final Customer Satisfaction
Emphasis On Supplier Relations
A Requirement For Shorter Cycle Times
Concurrent Engineering
Purchasing Trends cont’d
Increased Global Sourcing
More End-users Releasing Orders
Team Approach To Sourcing Decisions
Increased Single Sourcing
World Class Purchaser Skills

INTERPERSONAL COMMUNCIATION
 building supplier relations
 cross-functional approach to sourcing
 reducing cycle time
TEAM SKILLS AND FACILITATION
 project teams
 new product teams
 commodity teams
World Class Purchaser Skills

ANALYTICAL PROBLEM SOLVING

 a move towards strategic supplier relationships
necessitates developing selection criteria, data
analysis, and looking beyond mere price.
TECHNICAL
 successfully managing a supply chain
necessitates an understanding of your supplier,
your supplier’s supplier as well as markets at
the 2nd and 3rd tier levels
World Class Purchaser Skills

COMPUTER LITERACY
 the use of IT as an enabler to the process is
vital as we streamline processes and eliminate
redundancies.
NEGOTIATIONS
 an approach where both parties are satisfied,
with lasting agreements and predictable results
over time
World Class Purchaser Skills

EDUCATION & PROFESSIONALISM

 technical qualifications
 procurement certification – Certified

Purchasing Manager (C.P.M.)

CONTINUAL LEARNING
 institutional and organizational knowledge,
industry knowledge and personal development
Purchasing Objectives

They are called the Seven Rights:

 Right Quality
 Right Quantity

 Right Time

 Right Source

 Right Service

 Right Price

 Right Place
Questions for Discussion
Map the Purchasing Process and describe the
functions and paper trail at each step.
What are the effects on purchasing when
information is not provided at any step and how
can this be corrected.
What view, in your opinion, generally exists of
purchasing currently. How is purchasing viewed
in your own organization.
Do you think the purchasing skills described are
relevant. If so, how? If not, why?
INVENTORY AND PURCHASING
MANAGEMENT

Part 3: Stock Valuation,

Classification and Coding
STOCK VALUATION
Stock Valuation can be defined as the cost
per unit of inventory.
It is calculated by dividing the total cost of
inventory by the total number of stock
keeping units (sku’s)
ABC Analysis
ABC analysis is a system that ranks
part number by the extended cost times
annual usage. ABC analysis is based
on principles developed by an Italian
economist, Vifredo Pareto, in 1860.
Pareto developed the theory that 20%
of a country’s population does 80% of
the work.
 ABC ANALYSIS
A Items B Items C Items
70% Value 20% Value 10% Value
10% Items 15% Items 75% Items
Review Manually Some attention Trivial many
Order Often Computer controlled Computer ordered
Count Often Order less often Order large quantities
Low safety stock Medium safety stock Large safety stock
Continual Expediting Preventative No expediting
expediting
STOCK CLASSIFICATIONS
Raw Material/Purchased Parts
The inventory that is purchased outside
and brought into the manufacturing
process. This class includes steel,
castings, purchased components, and
other raw materials.
Stock Classifications
Work in Process (WIP) Inventory: The
partially processed inventory in the
plant. This type includes components
or subassemblies that are being worked
on or are between operations in the
factory.
Stock Classifications
Finished Inventory: Finished product
waiting for sale or distribution to the
customer.
MRO Inventory: Supporting materials
needed for maintenance, operating and
supplies. These include items such as
tools, office supplies and shop towels.
This is often neglected.
Questions for Discussion
The type of firm determines the type of stock
classifications that would exist. Discuss.
For any three of the stocks classified, describe
how they would be accounted for, how they
should be treated and who would have ultimate
responsibility.
How does the Pareto rule apply to physical stock
taking.
INVENTORY AND PURCHASING
MANAGEMENT

Part 3: Warehousing, Planning

and Layout
Types of Warehouses
Raw Materials and Component
Warehouse – holds raw materials at or near
the point of induction into a manufacturing
or assembly process
Work-in-process Warehouse – holds
partially completed assemblies and products
at various points along an assembly or
production line
Types of Warehouses
Finished Goods Warehouse – hold
inventory used to balance and buffer the
variation between production schedules and
demand. Usually located near the point of
manufacture, characterised by the flow of
full pallets in and full pallets out.
Types of Warehouses
Distribution Warehouse and Distribution
Centers – accumulate and consolidate
products from various points of
manufacture within a single firm, or from
several firms, for combined shipment to
common customers. May be located central
to either the production locations or the
customer base.
Types of Warehouses
Fulfillment warehouses and Fulfillment
Centers – receive, pick and ship small orders for
individual consumers
Local Warehouses – distributed in the field in
order to shorten transportation distances to permit
rapid response to customer demand.
Value-Added Service Warehouses – serve as the
facility where key production customization
activities are executed, including packaging,
labeling, marking, pricing and returns processing.
Warehouse Layout
A warehouse layout is based on the space
requirements for and the interrelationships
between individual warehouse processes.
Step 1: Space Requirements Planning:
determine the overall space requirements for all
warehouse processes
Step 2: Material Flow Planning: Specify a U-
Shape; Straight-Thru or Modular Spine;
Multistory Flow Plan
Material Flow Planning
U-Shaped Flow – typically, products flow in at
receiving, move into storage in the back of the
warehouse, and then to shipping, which is located
adjacent to receiving on the same side of the
building.
Straight-Thru Flow – lends itself to operations
that are pure cross-docking facilities or operations
in which the peak receiving and shipping times
coincide. The major disadvantage is that the
design makes it difficult to take advantage of ABC
storage.
U-Shaped Flow Design

It is the most advantageous:

 Excellent utilization of dock resources (dock
doors, dock equipment, dock space, dock
operators and dock supervisors) because the
receiving and shipping processes can share
dock doors
 Facilitating cross-docking because the

receiving and shipping docks are adjacent to

one another and may be co-mingled
U-Shaped Flow Design cont’d
Excellent lift truck utilization because putaway
and retrieval trips are easily combined and
because the storage locations closest to the
receiving and shipping docks are natural locations
to house fast moving items.
Enables expansion opportunities in three
directions
Yield excellent security because there is a single
side of the building used for entry and exit.
It is the benchmark upon which all other flow
designs should be compared.
Material Flow Planning
Modular-Spine Design – well-suited for
large-scale operations in which individual
processes are so large that they merit stand-
alone and uniquely designed buildings.
Examples include an air conditioned low
bay building for customizing operations
such as pricing and marking or a low-bay
shipping building equipped with high-speed
sortation equipment.
Material Flow Planning
Multistory Layouts – multistory
distribution buildings are necessary when
land is extremely scarce. Multistory
distribution centres are common in Japan
and in some parts of Europe. They are the
least desirable of the flow path alternatives
because of the material handling difficulties
and bottlenecks encountered in moving
merchandise between floors.
Warehouse Layout
Adjacency Planning : Locate functions
with High Adjacency Requirements close to
one another – for example, reserve storage
should be located near receiving because
there is typically a lot of material flow
between receiving and reserve storage.
The same can be said for receiving and
cross-docking, cross-docking and shipping,
case picking and pallet storage.
Warehouse Layout
Process Location : One of the major reasons for
low space utilization in warehouse facilities is that
processes that can be executed in low-bay for e.g.
receiving, broken case picking and customization,
are executed in high-bay space.
If the high-bay space is existing, it can be
mezzanined to accommodate multiple low-bay
processes in the same floorspace.
The key is to assign processes with High Storage
requirements to High-Bay Space and Labour
Intensive processes in Low-Bay space
Warehouse Layout
Expansion/Contraction Planning : This speaks
to flexibility – a warehouse should be able to
facilitate larger or smaller, faster or slower, more
variety or less variety, more people or less, etc.
To accommodate the rapid pace of change, a
carefully configured warehouse layout includes
expansion and contraction plans for each
warehouse and the warehouse as a whole.
Stock/Inventory Control
Inventory Control is the management of
inventories, including decisions about
which items to stock at each
location/warehouse; how much stock to
keep on hand at various levels of operation;
when to buy; how much to buy; controlling
pilferage and damage; and managing
shortages and back orders
Stock/Inventory Control
Inventory Control may be a shared function
between Purchasing and Warehouse
It may be incorporated in the Logistics or
Supply-Chain function.
Material Handling and Stores
Typical warehouse operations cover how
materials are handled and stored. They
include:
 Receiving
 Prepackaging (optional)

 Putaway

 Storage
Material Handling and Stores
 Order Picking
 Packaging and/or pricing (optional)

 Sortation and/or accumulation

 Unitizing and shipping

Receiving
Receiving is the collection of activities
involved in :
 The orderly receipt of all materials coming into
the warehouse
 Providing the assurance that the quantity and

quality of such materials are as ordered

 Disbursing materials to storage or to other

organization functions requiring them

Pre-Packaging
Pre-packaging is performed in a warehouse
when products are received in bulk from a
supplier and subsequently packaged singly,
in merchandisable quantities, or in
combinations with other parts to form kits
or assortments.
Putaway and Storage
Putaway is the act of placing merchandise
in storage. It includes material handling,
location verification and product placement
Storage is the physical containment of
merchanidise while it is awaiting demand.
The storage method depends on the size and
quantity of the items in inventory and the
handling characteristics of the product or its
container.
Order Picking
Order Picking is the process of removing
items from storage to meet a specific
demand. It is the basic service a warehouse
provides for customers and is the function
around which most warehouse designs are
based.
Packaging
Packaging may be done as an optional step after
the picking process. As in the prepackaging
function, individual items or assortments are
containerized for more convenient use. Waiting
until after picking to perform these functions has
the advantage of providing more flexibility in the
use of on-hand inventory. Individual Items are
available for use in any of the packaging
configurations right up to the time of need.
Pricing
Pricing is current at the time of sale.
Prepricing at manufacture or receipt into the
warehouse inevitably leads to some
repricing activity as price lists are changed
while merchandise sits in inventory.
Picking tickets and price stickers are
sometimes combined into a single
document.
Sortation
Sortation of batch picks into individual
orders and accumulation of distributed
picks into orders must be done when an
order has more than one item and the
accumulation is not done as the picks are
made.
Unitizing and Shipping
Unitizing and Shipping include:
 Checking orders for completeness
 Packaging merchandise in appropriate shipping
containers
 Preparing shipping documents, including packing lists,
address labels and bills of lading
 Weighing shipments to determine shipping charges
 Accumulating orders by outbound carrier
 Loading trucks
Questions for Discussion
What are the different types of warehouses?
Can each exist under one roof?
In terms of layout, what is the difference
between the types and in what
circumstances would they be used?
What are the typical activities that take
place within a warehouse? What
documentation are used?
INVENTORY AND PURCHASING
MANAGEMENT

Part 4: Using the Computer in

Stock and Inventory Control
Computerizing Warehouse
Operations

The proper role for the computer in

warehouse operations is to help warehouse
managers manage and to help warehouse
operators to operate.
What the Computer Should Provide
for Managers

Continuously profile warehouse activity to

help managers pinpoint and anticipate
problem areas and major shifts in activity
levels and patterns
Continuously monitor warehouse
performance in productivity, shipping and
inventory accuracy, warehouse order cycle
time and storage density
For Managers
Continuously simplify the warehouse
operations by reliably optimizing and
communicating transactions to/from
warehouse operators and equipment
For Warehouse Operators
For warehouse operators, the system should
facilitate hands-free and paperless activities.
Paperless and Wireless Warehouse
Systems

A full information technology solution for

warehouse operations includes:
 A computing platform (that is mainframe, mid-
range, client-server network, and/or network of
personal computers)
 A network of paperless devices (that is radio

frequency terminals, bar code scanners, light-

directed systems and voice headsets)
Paperless and Wireless Warehouse
Systems

A relational and/or object database (that is,

Oracle, Sybase, Informix and/or
proprietary)
Warehouse Management software
Enterprise system interface software
Material handling and paperless device
interface software
Why is “Paperless” Top Priority
Many of the pitfalls are related to paper
and paper handling.
1. It is easy to lose paper
2. You have to read paper
3. You have to write on paper
4. Things on paper cannot be communicated in
real time
5. Paper is expensive to print, handle and file
6. It is easy to damage and smudge paper
Digital and Real-Time Warehousing

Digital and real-time warehousing requires

an enabling set of device and technologies
These devices are the data collection and
communication devices forming the
backbone of integrated logistics information
systems.
Digital and Real-Time Warehousing

Though the set of devices is changing and

being upgraded rapidly, the general
categories of technologies have remained
fairly stable over the last few years.
To support paperless logistics, we need a
way to:
Digital and Real-Time Warehousing

Identify a logistics object (that is a

container, document or location)
Communicate information to a logistics
operator
Present information to a logistics operator
Major Categories of Technologies

Automatic Identification Technologies

 Bar codes and Bar code scanners
 Radio Frequency Tags and antennae

 Smart Card and magnetic stripes

 Vision Systems
Major Categories of Technologies

Automatic Communication and

Presentation Technologies
 Radio Frequency Data communications
 Synthesized voice

 Virtual displays

 Pick-to-light systems
Bar Code and Bar Code Scanners
A bar code system include a bar code
symbology to represent a series of
alphanumeric characters, bar code readers
to interpret the bar code symbology, and bar
code printers to reliably and accurately
print bar codes on labels, cartons and/or
picking/shipping documents.
Radio Frequency Tags and Antennae

Radio Frequency (RF) tags encode data on

a chip encased in a tag. When a tag is
within range of a special antennae, the chip
is decoded and read by a tag reader. RF
tags can be programmable or permanently
coded and can be read from up to 70 feet
away.
Magnetic Stripes and Optical Cards

Magnetic stripes commonly appear on the back of

credit or bank cards. They are used to store a
large quantity of information in a small space.
The magnetic stripe is readable through dirt and
grease. Data contained in the stripe can be
changed. The stripe must be read by contact.
Magnetic stripe systems are generally more
expensive than bar code systems
Vision Systems
Vision System cameras take pictures of
objects and codes and send the pictures to a
computer for interpretation.
Vision systems “read” at moderate speeds
with excellent accuracy. The accuracy is
highly dependent on the quality of light.
They do not require contact with the object
or code.
Automatic Communication and
Presentation Technologies
Radio Frequency Data Communications –
handheld, lift-truck mounted and hands-free radio
data terminals (RDTs) are rapidly emerging as
reliable tools for both inventory and vehicle/driver
management.
They are hand-held wands or scanners for data-
entry, product identification and location
verification.
It augers tighter control of inventory and improved
resource utilization.
Synthesized Voice
In stationary systems, a synthesized voice is
used to direct the warehouse operator. For
example, at a wholesale grocery distribution
center, carousel operators are directed by
lights and a broadcast synthesized voice
speaks the correct picking location and
quantity.
Virtual “Heads-Up” Displays
Present an operation with virtual overlays
on the warehouse fllor, products, or layouts
to direct an operator through travel paths
and/or to perform specific transactions on
specific products.
Pick-to-Light Systems
Light-directed operations use indicator
lights and lighted alphanumeric displays to
direct warehouse operators in order picking,
put-away and sortation.
The most popular use is in broken case
picking from flow racks, shelving and/or
carousels.
Questions for Discussion
What are the advantages of a computerized
warehouse?
What are the disadvantages?
Does being computerized make a
warehouse more effective? In what ways?
If a warehouse is computerized yet not
effective, what are some of the possible
reasons.
END OF LECTURE
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