UNIT 3

 PROCUREMENT FOR SUPPLY CHAIN

Procurement is the process of getting the goods and services your company needs to
fulfill its business model.

The tasks involved in procurement include:

-The development of quality standards

-Financing purchases

-Negotiating price

-Goods and services purchases

-Aligning purchases to company ethics and policies

-Inventory control

-Disposal of waste products like the packaging

In the overall supply chain process, the procurement function stops once your company has
possession of the goods. For a business to make a profit, the cost of procuring your goods must
be less than the amount you can sell the goods for, minus whatever costs are associated with
processing and selling them.

 INVENTORY MODELS

Inventory management is an essential process for all parties engaged in supply chain
activities, from the procurement of raw materials through to the delivery of finished goods. The
effective execution of this process has a major influence on both the financial and operational
performance of an organization.

Inventory model is a mathematical model that helps business in determining the optimum level
of inventories that should be maintained in a production process, managing frequency of
ordering, deciding on quantity of goods or raw materials to be stored, tracking flow of supply of
raw materials and goods to provide uninterrupted service to customers without any delay in
delivery.

There are two types of Inventory model widely used in business.

-Fixed Reorder Quantity System

-Fixed Reorder Period System.

-Fixed Reorder Quantity System.
Fixed Reorder Quantity System is an Inventory Model, where an alarm is raised
immediately when the inventory level drops below a fixed quantity and new orders are raised to
replenish the inventory to an optimum level based on the demand. The point at which the
inventory is ordered for replenishment is termed as Reorder Point. The inventory quantity at
Reorder Point is termed as Reorder Level and the quantity of new inventory ordered is referred
as Order

Safety Stock (S): It is the extra stock that is always maintained to mitigate any future risks
arising due to stock-outs because of shortfall of raw materials or supply, breakdown in machine
or plant, accidents, natural calamity or disaster, labour strike or any other crisis that may the
stall the production process.The quantity of safety stock is often derived by analysing historical
data and is set to an optimized level by evaluating carefully the current cost of inventory and
losses that may be incurred due to future risk

Reorder Level (RL): Reorder level is the inventory level, at which an alarm is triggered
immediately to replenish that particular inventory stock. Reorder level is defined, keeping into
consideration the Safety Stock to avoid any stock-out and Average Lead Time Demandbecause
even after raising the alarm, it would take one complete process cycle (Lead Time) till the new
inventories arrive to replenish the existing inventory.

-Fixed Reorder Period System.

Fixed Reorder Period System is an Inventory Model of managing inventories, where an

alarm is raised after every fixed period of time and orders are raised to replenish the inventory
to an optimum level based on the demand. In this case replenishment of inventory is a
continuous process done after every fixed interval of time.

Regular Intervals (R): Regular Interval is the fixed time interval at the end of which the
inventories would be reviewed and orders would be raised to replenish the inventory

Inventory on Hand (It): Inventory on hand is the Inventory level measured at any given point of
time.

Maximum Level (M): It is the maximum level of inventory allowed as per the production
guidelines. The maximum level is derived by analysing historical data.

Order Quantity: In this system, inventory is reviewed at regular intervals (R), inventory on hand
(It) is noted at the time of review and order quantity is placed for a quantity of (M) – (It).

 INVENTORY COUNTING SYSTEMS

Inventory control systems are technology solutions that integrate all aspects of an
organization’s inventory tasks, including shipping, purchasing, receiving, warehouse storage,
turnover, tracking, and reordering. While there is some debate about the differences between
inventory management and inventory control, the truth is that a good inventory control system
does it all by taking a holistic approach to inventory and empowering organizations to utilize
lean practices to optimize productivity and efficiency along the supply chain while having the
right inventory at the right locations to meet customer expectations.

 Main Inventory Control System Types:

 Perpetual Inventory System
 Periodic Inventory System
 Types of Inventory Management Systems within Inventory Control Systems:
 Barcode System
 Radio Frequency Identification (RFID) System

-Perpetual Inventory System

When you use a perpetual inventory system, it continually updates inventory records and
accounts for additions and subtractions when inventory items are received, sold from stock,
moved from one location to another, picked from inventory, and scrapped. Some organizations
prefer perpetual inventory systems because they deliver up-to-date inventory information and
better handle minimal physical inventory counts. Perpetual inventory systems also are preferred
for tracking inventory because they deliver accurate results on a continual basis when managed
properly. This type of inventory control system works best when used in conjunction with a
database of inventory quantities and bin locations updated in real time by warehouse workers
using barcode scanners.
There are some challenges associated with perpetual inventory systems. First, these systems
cannot be maintained manually and require specialized equipment and software that results in a
higher cost of implementation, especially for businesses with multiple locations or warehouses.
Periodic maintenance and upgrades are necessary for periodic inventory systems, which also
can become costly. Another challenge of using a perpetual inventory system is that recorded
inventory may not reflect actual inventory as time goes by because they do not use regular
physical inventory counts. The result is that errors, stolen items, and improperly scanned items
impact the recorded inventory records and cause them not to match actual inventory counts.

-Periodic Inventory System

Periodic inventory systems do not track inventory on a daily basis; rather, they allow
organizations to know the beginning and ending inventory levels during a certain period of time.
These types of inventory control systems track inventory using physical inventory counts. When
physical inventory is complete, the balance in the purchases account shifts into the inventory
account and is adjusted to match the cost of the ending inventory. Organizations may choose
whether to calculate the cost of ending inventory using LIFO or FIFO inventory accounting
methods or another method; keep in mind that beginning inventory is the previous period’s
ending inventory.
There are a few disadvantages of using a periodic inventory system. First, when physical
inventory counts are being completed, normal business activities nearly become suspended. As
a result, workers may hurry through their physical counts because of time constraints. Errors
and fraud may be more prevalent when you implement a periodic inventory system because
there is no continuous control over inventory. It also becomes more difficult to identify where
discrepancies in inventory counts occur when using a periodic inventory control system because
so much time passes between counts. The amount of labor that is required for periodic
inventory control systems make them better suited to smaller businesses.

 UNIVERSAL BAR CODE

An UBC, short for universal bar code, is a type of code printed on retail product
packaging to aid in identifying a particular item. It consists of two parts – the machine-readable
barcode, which is a series of unique black bars, and the unique 12-digit number beneath it.
The purpose of UBCs is to make it easy to identify product features, such as the
brand name, item, size, and color, when an item is scanned at checkout. In fact, that’s why they
were created in the first place – to speed up the checkout process at grocery stores. UBCs are
also helpful in tracking inventory within a store or warehouse.To obtain a UBC for use on a
product a company has to first apply to become part of the system.

 MATERIAL RECRUITMENT PLANNING

Material recrutiment 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 and products are available for delivery to
customers.

-Maintain the lowest possible material and product levels in store

-Plan manufacturing activities, delivery schedules and purchasing activities.

The basic functions of an MRP system include: inventory control, bill of material processing, and
elementary scheduling. MRP helps organizations to maintain low inventory levels. It is used to
plan manufacturing, purchasing and delivering activities.
Companies need to control the types and quantities of materials they purchase, plan which
products are to be produced and in what quantities and ensure that they are able to meet
current and future customer demand, all at the lowest possible cost. Making a bad decision in
any of these areas will make the company lose money. A few examples are given below:

-If a company purchases insufficient quantities of an item used in manufacturing (or the wrong
item) it may be unable to meet contract obligations to supply products on time.

-If a company purchases excessive quantities of an item, money is wasted - the excess quantity
ties up cash while it remains as stock that might never be used at all.

-Beginning production of an order at the wrong time can cause customer deadlines to be
missed.
MRP is a tool to deal with these problems. It provides answers for several questions:

-What items are required?

-How many are required?

-When are they required?...

The data that must be considered include:

-The end item (or items) being created. This is sometimes called independent demand,
or Level "0" on BOM (bill of materials).

-How much items is required at a time.

-When the quantities are required to meet demand.

-Shelf life of stored materials.

-Inventory status records. Records of net materials available for use already in stock (on
hand) and materials on order from suppliers.

-Bills of materials. Details of the materials, components and sub-assemblies required to

make each product.

-Planning data. This includes all the restraints and directions to produce such items
as: routing, labor and machine standards, quality and testing standards, pull/work cell
and push commands, lot sizing techniques (i.e. fixed lot size, lot-for-lot, economic order
quantity), scrap percentages, and other inputs.

 JUST IN TIME

Just in time (JIT) inventory is a strategy to increase efficiency and decrease waste by
receiving goods only as they are needed in the production process, thereby reducing inventory
costs. In other words, JIT inventory refers to an inventory management system with objectives
of having inventory readily available to meet demand, but not to a point of excess where you
must stockpile extra products.
One example of a JIT system would be a car manufacturer that operates with low inventory
levels relying on its supply chain to deliver the parts it needs to build cars. The parts needed to
manufacture the cars do not arrive before or after the manufacturer needs them; instead, they
arrive just as the manufacturer needs them.

-Just-in-Time Inventory System Advantages

JIT inventory controls have several advantages over traditional models. Production runs
remain short, which means manufacturers can move from one product to another easily. This
method reduces costs by minimizing warehouse needs. Companies also spend less money
on raw materialsbecause they buy just enough resources to make just the ordered products and
no more.
-System Disadvantages
The disadvantages of JIT inventories involve disruptions in the supply chain. If a raw
materials supplier has a breakdown and cannot deliver the goods on time, one supplier can shut
down the entire production process. A sudden order for goods that surpasses expectations may
delay delivery of finished products to clients.

-JIT Good example

Toyota uses JIT inventory controls as part of its business model. Toyota sends off orders
for parts only when it receives new orders from customers. The company started this method in
the 1970s, and it took over 15 years to perfect. Several elements of JIT manufacturing need to
occur for Toyota to succeed. The company must have steady production, high-quality
workmanship, no machine breakdowns at the plant, reliable suppliers and quick ways to
assemble machines that put together vehicles.

 VENDOR MANAGEMENT INVENTORY

Vendor-management inventory (VMI) is an inventory management technique in which a

supplier of goods, usually the manufacturer, is responsible for optimizing the inventory held by a
distributor.VMI requires a communication link—typically electronic data interchange (EDI) or the
Internet—that provides the supplier with the distributor sales and inventory data it needs to plan
inventory and place orders. In contrast, under the traditional arrangement the distributor handles
those tasks. The inventory can be owned by the distributor, or by the supplier, often under
consignment.
The benefits of a vendor managed inventory system may include better inventory accuracy,
forecasting, and service, though it can present challenges in communication, cultural resistance,
more customer contact for their employees; retailers benefit from reduced risk, better store staff
knowledge (which builds brand loyalty for both the vendor and the retailer), and reduced display
maintenance outlays.
Consumers benefit from knowledgeable store staff who are in frequent and familiar contact with
manufacturer (vendor) representatives when parts or service are required. Store staff have good
knowledge of most product lines offered by the entire range of vendors. They can help the
consumer choose from competing products for items most suited to them and offer service
support being offered by the store.
At the goods' manufacturing level, VMI helps prevent overflowing warehouses or shortages, as
well as costly labor, purchasing and accounting. With VMI, businesses maintain a proper
inventory, and optimized inventory leads to easy access and fast processing with reduced labor
costs.
 TYPES OF PURCHASES