ABC classification process
- Establish the item characteristics for each classificiation (A, B and C), fx. annual dollar usage or scarcity of material.
- Classify items into groups based on criteria.
- Apply degree of control based on the importance of the group.
Purpose of ABC classification
Helps decide the importance of each item and how they should be controlled. Degree of control based on ABC value:
* A items about 20% of items, 80% of value
* B items about 30% of items, 15% of value
* C items about 50% of items, 5% of value
The use of ABC classification in SCM
- The ABC analysis helps focus management attention on what is really important.
- Managers concentrate on the “vital few” A-items and spend less time on the “trivial many” C-items.
- ABC analysis can also be used on segments, suppliers, customers, and employees.
Lot-size decision rules
Item inventory management is concerned with:
* How much inventory should be ordered at one time?
* When should an order be placed?
Use lot-size decision rules:
Variable demand - dynamic order quantity:
1. Lot-for-lot
2. Period review system - based on POQ
3. Qmin.-Qmax. system
4. Order point system (Q-Qmin. system) - based on EOQ
Economic Order Quantity (EOQ):
Periodic Order Quantity (POQ):
Lot-for-Lot
Dynamic order quantity
Order exactly what is needed
- Change as requirements change
- We have minimum-level inventory
- Usually used for A items, rare items or customer-specific items
Periodic Review System
Dynamic order quantity
Order enough to cover a demand over a certain period
- The period can be calculated
- The order quantity will not be the same every time, it depends on demand
Min.-Max. system
Dynamic order quantity
An order is placed when the quantity falls below the minimum quantity. The quantity ordered is the difference between the actual quantity available at the time of order and the maximum quantity. We order up to maximum.
IOW: When we reach a decided minimum level we will order up to a decided maximum level
Order Point System (Q-Qmin. system)
Fixed order quantity
Order a fixed quantity when you go below the minimum
Order the same amount each time (based on EOQ or POQ)
Economic Order Quantity (EOQ)
EOQ is about finding the most cost-efficient order size (Q) considering the total cost. That is where the:
- Total cost is at min.
- Ordering cost = carrying cost (intersection)
Often used for C items
Assumes:
1. Demand is relatively constant and known
2. The item is purchased in lots or batches
3. Preparation costs and ordering costs are constant and known
4. Replacement occurs all at once
Period-Order Quantity (POQ)
POQ sets an economic time interval between orders - the order size will vary, and orders are placed to satisfy requirements for the calculated time interval
Better for fluctuating demand
POQ = EOQ / average weekly usage
Objectives of Supplier Relationship Management (SRM)
- Optimizing supplier performance
- Improving quality
- Enhancing collaboration and building stronger relationships
- Cost reduction
- Risk Management
- Sustainability and ethical practices
- Strategic alignment
SRM
- Forward-looking and focuses on how to better the supplier (traditionally you look backwards to evaluate suppliers’ past performance)
- Focus on developing collaborative relationships with key suppliers to exploit opportunities for pooling resources and developing new competitive capabilities.
- Looking backward and judging supplier = armlength relationship with lack of cooperation.
- Competitive advantages gained form sharing knowledge and expertise are lost
SRM Framework
- Controlling
- Managing
- Developing
- Innovating
See model!
