BBDS2033 PROCUREMENT MANAGEMENT

Tutorial 5

1. Is inventory important to an organisation? Justify your answer.

Every organization holds some things in stock. Stock can be a nuisance, a necessity or a
convenience. Retailers and wholesalers see stock as the central feature of their businesses:
what they sell is what they buy, and they aim to sell from stock rather than from future
deliveries which have yet to arrive. Organizations such as some manufacturers, health-care
institutions and other service providers place stock in a subsidiary rather than a central
position, but it is still an important element in operational effectiveness and often appears
on the balance sheet as the biggest of current assets, locking up a lot of money. Holding
inventory costs money, and therefore reduces profitability. That inventory
is designed to support production and service operations. Some level of inventory
is essential in order to provide continuity of service and to avoid costly downtime
and service disruption and non-availability, but inventory reduction and, therefore,
the release of cash and reduced operating costs remain essential concerns of inventory
management.

2. Explain the advantages and disadvantages of having inventory in an organisation.

Why do we carry stock? The reasons include:

■ the convenience of having things available as and when required without
making special arrangements.
■ cost reduction through purchase or production of optimum quantities;
■ protection against the effects of forecast error, inaccurate records or mistakes
in planning; and
■ provision for fluctuations in sales or production.

Carrying stock is expensive, and it is accepted that many organizations carry

too much stock. A continuing drive to reduce stock without reducing service
is needed to combat the natural tendency of stock to increase. Constructive
approaches to stock reduction include:
■ arranging for things to be made and delivered just in time, instead of
Stockpiling just in case a need arises.
■ devising ways to reduce ordering costs, set-up costs and lead times so that
Optimum quantities are smaller.
■ making forecasts more accurate, ensuring that records are right, and better
planning.

3. Explain the 80/20 ruling in inventory management. Support your explanation with examples.

Generally, a relatively small proportion of the total items contained in an

inventory will account for a large proportion of the total inventory value. This
phenomenon is known as the Pareto law (named after Vilfredo Pareto, who
founded the principle) and is often referred to as the 80/20 rule. It is called
this because, typically, 80 per cent of an organisation’s inventory value will be
4. Explain the implementation process of ABC analysis in inventory management.
We can use Pareto analysis to focus on the more important items of stock in
terms of their usage value.
The results of a product analysis on a volume throughput basis will, classically,
show that:
■ A items – fast movers = high volume, few lines;
■ B items – medium movers = medium volume, medium lines;
■ C items – slow movers = low volume, many lines.
If the ABC analysis is undertaken on a product value basis, the following
purchasing/
stocking situation may apply in a manufacturing company:
■ A items – high-value items = low stock holding needing continuity in supply/
JIT or periodic review replenishment system (explained later). Bulk chemicals
are examples here.
■ B items – medium-value items = minimum–maximum or continuous review
replenishment system (see later) with supplier weekly check on stock/reorder.
An example could be protective paints.
■ C items – low-value items = two-bin-system replenishment (see later) for
items such as nuts, washers.
As an example, the following stocking policy is found for in-bound supplies
to serve production and is based on product values:
■ A items (by value) are tightly controlled, with orders only for known
requirements.
Continual accurate records/progressing with less than two
weeks’ safety stock being held.
■ B items are moderately controlled, with ordering against forecast based on
historic demand. Safety stocks of 6–8 weeks were held.
■ C items are at a lower control level, with larger levels of safety stocks around
12 weeks.

5. Elaborate the concepts of lean and agile supply and how they contribute to an organisation.

6. Explain the various types of waste that occur in an organisation, particularly in inventory control.

Overproduction. Simply put, overproduction is to manufacture an item before it is required.

Overproduction is highly costly to a manufacturing plant because it prohibits the smooth flow of
materials and degrades quality and productivity. The Toyota Production System is also referred to as
‘just in time’ (JIT) because every item is made just as it is needed. Overproduction manufacturing is
referred to as ‘just in case’. This creates excessive lead times,
results in high storage costs and makes it difficult to detect defects. The simple solution to
overproduction is turning off the tap; this requires a lot of courage because the problems that
overproduction is hiding will be revealed. The concept is to schedule and produce only what can be
immediately sold/ shipped and improve machine changeover/set-up capability.
2 Waiting. Whenever goods are not moving or being processed, the waste of waiting occurs.
Typically, more than 99 per cent of a product’s life in traditional batch-and-queue manufacture will be
spent waiting to be processed. Much of a product’s lead time is tied up in waiting for the next
operation; this is usually because material flow is poor, production runs are too long and distances
between work centers are too great. One hour lost in a bottleneck process is one hour lost to the entire
factory’s output, which can never be recovered. Linking processes together so that one feeds directly
into the next can dramatically reduce waiting.
3 Transporting. Transporting product between processes is a cost incursion that adds no value to the
product. Excessive movement and handling cause damage and are an opportunity for quality to
deteriorate. Material handlers must be used to transport the materials, resulting in another
organizational cost that adds no customer value. Transportation can be difficult to reduce due to the
perceived costs of moving equipment and processes closer together. Furthermore, it is often hard to
determine which processes should be next to each other. Mapping product flows can make this easier
to visualise.
4 Inappropriate processing. Often termed as ‘using a sledgehammer to crack a nut’, many
organizations use expensive high-precision equipment where simpler tools would be sufficient. This
often results in poor plant layout because preceding or subsequent operations are located far apart. In
addition, they encourage high asset utilization (overproduction with minimal changeovers) in order to
recover the high cost of this equipment. Toyota is famous for their use of low-cost automation,
combined with immaculately maintained, often older machines. Investing in smaller, more flexible
equipment where possible, creating manufacturing cells and combining steps will greatly reduce the
waste of inappropriate processing.
5 Unnecessary inventories. Work in Progress (WIP) is a direct result of overproduction and waiting.
Excess inventory tends to hide problems on the plant floor, which must be identified and resolved in
order to improve operating performance. Excess inventory increases lead times, consumes productive
floor space, delays the identification of problems and inhibits communication. By achieving a
seamless flow between workstations, many manufacturers have been able to improve customer
service and slash inventories and their associated costs.
6 Unnecessary/excess motion. This waste is related to ergonomics and is seen in all instances of
bending, stretching, walking, lifting and reaching. These are also health and safety issues, which in
today’s litigious society are becoming more of a problem for organizations. Jobs with excessive
motion should be analyzed and redesigned for improvement with the involvement of
plant personnel.
7 Defects. Having a direct impact to the bottom line, quality defects resulting in rework or scrap are a
tremendous cost to organizations. Associated costs include quarantining inventory, re-inspecting,
rescheduling and capacity loss. In many organizations the total cost of defects is often a significant
percentage of total manufacturing cost. Through employee involvement and Continuous Process
Improvement (CPI), there is a huge opportunity to reduce defects at many facilities.

Reason inventory as waste

Influential thinkers in supply chain management have suggested that inventory

is waste and should be avoided wherever possible. The reasons
behind
this view are that stocks of materials can adversely impact any
organization
because they:
■ tie up capital;
■ impair cash flow;
■ impair flexibility;
■ need to be stored (at a cost);
■ need to be handled (at a cost);
■ need to be managed (at a cost);
■ are at risk of loss through fire, theft and many other possible misfortunes;
■ usually depreciate in value.
It is also argued that stocks are frequently held for the wrong reasons,
sometimes
to mask inefficiencies in the management of the organization.
Examples
include:
■ Masking poor quality – ‘If this one is faulty, we have a reserve in the stores.’
■ Masking poor planning – ‘We haven’t worked out exactly what to do as yet,
we’d better stock items to include all possibilities.’
■ Masking poor suppliers (or poor relationships with suppliers) – ‘We can’t
always
rely on them to deliver, but carrying some stock protects us from
this uncertainty.’
We should critically evaluate decisions as to whether to adopt an item as a
stocked line and take care to see that the justification is sound. The important
thing to remember is that it is unnecessary inventory that constitutes waste; the
important question is, ‘is it necessary?’