Advance Supply Chain Management : Holistic Overview with respect to an ERP and Inventory Control Systems

Adva nce Supply Chain Management Holistic Overview with respect to an ERP and Control Systems Rahul Guhathakurta, Associate Consultant – SCM Email: rahulg@evosys.co.in or rahulogy@gmail.com

Contents

Inventory System Design

Inventory Costs

Independent vs. Dependent Demand

Basic Fixed-Order Quantity Models

Basic Fixed-Time Period Model- we will omit.

Economic Production Quantity Model- we will omit.

Single Time Period Model- we will omit.

Quantity Discounts-also known as price break models.

Purposes of Inventory

1. To maintain independence of operations.

2. To meet variation in product demand .

3. To allow flexibility in production scheduling.

4. To provide a safeguard for variation in raw material delivery time.

5. To take advantage of economic purchase-order size.

Types of Inventory Costs

Holding (or carrying) costs.

Costs for storage, handling, insurance, etc.

Setup (or production change) costs.

Costs for arranging specific equipment setups, etc.

Ordering costs.

Costs of someone placing an order, etc.

Shortage costs.

Costs of canceling an order, etc.

Independent vs. Dependent Demand Independent Demand (Demand not related to other items or the final end-product) Dependent Demand (Derived demand items for component parts, subassemblies, raw materials, etc.)

Inventory System Design ERP » sells » delivers » collects purchases « pays « receives « payments/collections « » products Client Supplier Bank Logistics

Participants of the Process Client Supplier Bank Private Accountancy IRS Logistics W W W

Inventory System Design: EBS Integration

Introduction of the ERP Platform

Local non-intrusive integration devices

Private Accountancy Receivables W W W Client Supplier Bank Logistics

Purchase Process

Electronic Invoice

Collection & Reconciliation

Central Repository

Purchase Process 1) The Company requests a quote 2) The Supplier sends the estimate 3) The Purchase Order is issued Private Accountancy Rec. W W W Logistics Supplier Client Bank Quote Purchase Order I.ERP I.ERP

Purchase Process 4) Supplier requests the delivery to Logistics 5) It issues the Packing Slip 6) Logistics delivers the products with the packing slip Private Accountancy Rec. W W W Supplier Packing Slip Client Bank Logistics

Purchase Process 8) The Company pays the purchase 9) Supplier receives notification of the payment 7) The Invoice is sent $ Private Accountancy Rec. W W W Invoice Supplier Invoice Integration with Receivables Client Bank Logistics

Purchase Process 10) Other entities related to the process may be integrated into the Platform and receive relevant information Private Accountancy Rec. W W W Client Supplier Bank Logistics

Electronic Invoice

Documents are available from any web access, anytime

Visualization, printing, editing, forwarding capabilities, and more

Costs and time optimization

Centralized storage

Informs IRS Supplier Client Invoice XXX XXX XXX Invoice

Collection and Reconciliation The Client decides how and where to pay Notification to the Reconciliation module Information sent to the Supplier Integration with other entities available Supplier Bank Client IRS W W W Private Accountancy

Central Repository

They can be reviewed and retrieved from a web access

All documents created are stored on a Central Repository

Private Accountancy Rec. W W W Client Supplier Bank Logistics Quote Purchase Order Packig Slip Invoice REPOSITORY

Basic Fixed-Order Quantity Model and Reorder Point Behavior R = Reorder point Q = Economic order quantity L = Lead time L L Q Q Q R Time Number of units on hand R = Reorder point Q = Economic order quantity L = Lead time L L Q Q Q R Time Number of units on hand

Cost Minimization Goal Ordering Costs Holding Costs Q OPT Order Quantity (Q) C O S T Annual Cost of Items (DC) Total Cost

Deriving the EOQ

EOQ Example Problem Data Annual Demand = 1,000 units Days per year considered in average daily demand = 365 Cost to place an order = $10 Holding cost per unit per year = $2.50 Lead time = 7 days Cost per unit = $15 Given the information below, what are the EOQ and reorder point?

EOQ Example Solution “ WITH NO SAFETY STOCK”

Safety Stock Safety stock reduces risk of Stock-out during lead time LT Time Expected demand during lead time Maximum probable demand during lead time ROP Quantity Safety stock

Reorder Point The ROP based on a normal Distribution of lead time demand ROP Risk of a stockout Service level Probability of no stock-out Expected demand Safety stock 0 z Quantity z-scale

Special Purpose Model: Price-Break Model Formula Based on the same assumptions as the EOQ model, the price-break model has a similar Q opt formula:

i = annual percentage of unit cost attributed to carrying inventory

C = cost per unit

Price-Break Example Problem Data (Part 1) Order Quantity(units) Price/unit($) 0 to 2,499 $1.20 2,500 to 3,999 1.00 4,000 or more .98 Start at lowest price per unit

Price-Break Example Solution (Part 2) Annual Demand (D)= 10,000 units Cost to place an order (S)= $4 First, start with the lowest price per unit. Carrying cost % of total cost (i)= 2% Cost per unit (C) = $1.20, $1.00, $0.98 Interval from 0 to 2499, the Q opt value is feasible. Interval from 2500-3999, the Q opt value is not feasible. Interval from 4000 & more, the Q opt value is not feasible. Next, determine if the computed Q opt values are feasible or not.

Price-Break Example Solution (Part 3) TC(1826)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20) = $12,043.82 TC(2500) = $10,041 TC(4000) = $9,949.20 Next, Compare total cost for the feasible root Q and price break Q values.

Price-Break Example Since the feasible solution occurred in the first price-break, it means that all the other true Q opt values occur at the beginnings of each price-break interval. Why? 0 1826 2500 4000 Order Quantity Total annual costs Because the total annual cost function is a “u” shaped function. EOQ Not EOQ Not EOQ

ABC Classification System

Items kept in inventory are not of equal importance in terms of:

dollars invested

profit potential

sales or usage volume

stock-out penalties

0 30 60 30 60 A B C % of $ Value % of Use So, identify inventory items based on percentage of total dollar value, where “A” items are roughly top 15 %, “B” items as next 35 %, and the lower 65% are the “C” items.

Bibliography

Essentials of Supply Chain Management by Michael Hugos

Oracle E-Business Suite Manufacturing & SCM by Bastin Gerald, Nigel King and Dan Natchek

Oracle’s Inventory User Guide

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