How Much To Buy And When?

I want to bring your attention to an important basic and “best” practice that is often neglected.

Once your advanced planning, DRP or MRP system runs and creates recommendations for purchase or manufacture at lead time such that the right amount of material is supplied when it is needed in your time-phased plan, the recommendations are likely approved and executed.

While there may have been a batch or lot size calculation (or estimate) at some point in the past that was used to set a minimum lot size (or maybe even an incremental lot size) parameter in your item master, I suspect that there is no check to see if you would be better off buying or making two, three or four or more periods of material, given the total cost of ordering, manufacturing, and receiving, etc., as well as the available quantity discounts balanced against the cost of holding any additionally purchased material.

The counter argument is that you have used “lean thinking” to minimize setup and ordering costs and therefore, should only replenish what is immediately required by the next link in manufacturing or distribution.  Hopefully, it is even delivered “just-in-time” during that week.  That is a very worthy effort.

However, the ability to drive toward a lot size of one and immediate changeovers can go farther in some industries than in others.  There are also other economic realities that need to be considered (i.e. quantity discounts, handling costs, fluctuating material costs, etc.) and which should never be ignored, not to mention the opportunity to intelligently hedge for any value network risks that may be spiking at any given point.

If you are able to put this into practice – the explicit consideration of this kind of “look ahead” calculation to optimize a purchase or work order by minimizing setup costs like ordering and handling and to take advantage of quantity discounts, but not to the point of incurring unnecessary carrying costs or obsolescence, keep in mind that your safety stock for the period in which the new material arrives should probably be much less than the calculated amount, if not actually zero.

One way of dealing with this challenge lies through the path of collaboration.  If you can reliably share your requirements, costs and goals with your suppliers, they can then leverage the processes under their control in order to make sure you have what you need at the lowest total cost and risk.  This places the burden on the party who can most effectively address these considerations, but it will only work if the collaborative arrangement provides for shared risks and rewards that drive both parties toward mutual benefit.

Some serious thought should go into the process of managing the collaboration, including what tools and metrics will enable efficient communication and management by exception.

You also need to quantify the potential benefit before entering into a collaborative arrangement.

In those cases where a mutually vested partnership is not, or not yet, possible, there are analytical approaches that your organization can take internally to address this challenge.  

These analytical approaches are likely outside of the core functionality of your planning system, but complimentary capabilities can be developed leveraging heuristics or optimization that will add the necessary value.

In fact, the presence of a collaborative partnership with mutually vested interests simply means that you can strengthen your analytics and make them more comprehensive.

Thanks for taking a moment to read Supply Chain Action this week.

Malcolm Forbes once said, “The best vision is insight.”  Let’s make sure we have done the analysis necessary to acquire the insight necessary for our vision.

Have a wonderful weekend!

Advertisements

About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: