The supply chain approach to planning and procurement management

Hewlett-Packard Journal, Feb, 1997 by Gregory A. Kruger

* Predict average on-hand inventory and the range over which physical inventory can be expected to vary

* Trade off service level and inventory

* Trade off SRT and inventory

* Plot order aging curves so that you can see how long customers may have to wait when stock-outs do occur

* Measure the impact of reducing lead times, forecasting error, and delivery uncertainty

* Measure the impact of changing review periods and minimum order quantities to the supplier

* Stabilize the orders placed to suppliers so that they are not being subjected to undue uncertainties

* Reduce procurement overhead required for manipulating orders.

Turning off the Production Plan Overdrive

Many manufacturing planning organizations have traditionally handled the uncertainties of future demand by intentionally putting a near-term overdrive into the production plan (see Fig. 2). By driving the material requirements plan (MRP) higher than expected orders, a buffer of additional material is brought into the factory to guard against the inevitable differences between forecast and actual demand. In effect, this overdrive, or front loading, functions as safety stock, although it is never called that by the materials system.

[Figure 2 ILLUSTRATION OMITTED]

While this practice has helped many factories meet shipment demands, it has also caused frustrations with nonoptimal inventory levels. Biasing the build plan high across all products does not consider that it is unlikely that all of the products will be simultaneously above their respective forecasts. Therefore, inventories on parts common to several products tend to be excessive. Also, this approach treats all parts the same regardless of part lead times, rather than allocating safety stock inventory based upon each part's procurement lead time. The factory can easily end up with inventories too high on short lead time parts and too low on longer lead time parts. Finally, the practice of building a front-end overdrive into the plan can lead to conflict between the procurement and production planning departments. Wanting to ensure sufficient material to meet customer demand, the planning department's natural desire is to add a comfortable pad to the production plan. Procurement, aware of the built-in overdrive in the plan and under pressure to reduce inventories, may elect to second-guess the MRP system and order fewer parts than suggested. Should planning become aware that the intended safety pad is not really there, it can lead to an escalating battle between the two organizations.

Frame of Reference

Fundamental to the use of the statistical safety stock methods outlined in this paper is how one chooses to measure demand uncertainty, or in other words, what is the point of reference. The two alternative views are (see Fig. 3):

[Figure 3 ILLUSTRATION OMITTED]

* Demand uncertainty is the difference between part consumption in the factory and planned consumption.

* Demand uncertainty is the difference between real-time customer demand and the forecast.