Procurement and Materials Management

Chapter 1.Production Environment -Importance of Procurement and Materials System

Introduction to Manufacturing

Primary goal of manufacturing o Create value for the producerso Create value for the customerso Resulting in creation of overall wealth for the society

KeywordsCosts, Profits, MarkupDemand, Supply, InventoryNatural resources, manpower, infrastructure

Manufacturing Operating Environment

These impact the companies and Operations Management thus has to work in a complex environment:

• Government• Economy• Competition• Customers• Quality

Order Qualifiers & Order WinnersManufacturing Strategy

There can also be hybrid strategies which are a mixture of above

SCM Concept / Operations Management Concept-

Conflicts in traditional operations systems-• Competing objectives of 3 key departments

Marketing Production Finance Areas of conflict

• Customer Service• Inventory• Smooth production (minimum disruptions)

In business everything is about costs and profits, and materials typically constitute as much as 70 to 80 % of the costs of production

Inventory thus forms an area of focus and conflict

Need for Procurement and Materials Management• Concept of having 1 department for flow of materials is used by modern Materials

management (Avoids conflicts)• Dedicated function needed to handle complex flows in complex environment• High costs of materials and high costs for inaccurate forecasting• Systematic handling of the overall material flow problem – needs proper management

– Operations Management• Works to 2 objectives:

I. Maximize the use of firm’s resourcesII. Provide the required level of customer service

• Procurement is an external looking function trying to minimize the firm’s costs while still retaining the customer service level

Chapter 2. Concepts in Materials - MRP, Planning JIT and JIS

Materials Requirement PlanningD1: A tool to plan components and parts to produce a final product (FG – Finished Good)D2: MRP is a logic for determining component requirements along with their scheduling information to ensure final product is ready on timeD3: Material requirements planning (MRP) is a production planning and inventory control system used to manage manufacturing processes.

• 2 main objectives MRP: Determine requirements and schedules Keep priorities current A good MRP plan:

Ensures proper balance of Demand and Supply Reduces lead times Lowest inventories while still able to maintain delivery dates Avoids chaos and absorbs variations and changes in supply chain

What MRP is not?

MRP ≠ MRP II (Manufacturing Resource Planning)MRP ≠ ERPMRP ≠ MPS (Master Production Schedule)MRP ≠ Tool to plan for final product demand (MPS)MRP ≠ Tool to derive schedule for final product (MPS)The last 2 are done by MPS (Master Production Schedule) which is a different process

History of MRP-• Developed by Joseph Orlicky in 1964• Primarily replaced Reorder Point (ROP) and EOQ • Implemented first at Black & Decker in 1964• By 1975, implemented by 700 companies• Orlicky in 1975 wrote book Material Requirements Planning which is even today

considered a great book – a must read for SCM professionals (3 editions of this book – each by different author – 1st and 3rd considered as great books; 3rd edition = Demand Driven MRP)

• By 1981 it had grown to 8000 companies

MRP Objectives Explained-• Determine Requirements and Schedules : This objective ensures:

1. What to Order (Component)2. How Much (Qty)3. When to Order (Netting with Inventory)4. When to schedule delivery (Schedule)

Keep Priorities Current: In real world nothing is constant. Lot of things change without notice like customers orders, demand, suppliers are late, machines break down (we will see examples shortly). MRP has to adjust its plans regularly to still be able to meet objective # 1. This is called as keeping priorities current.

MRP Key Concepts (Some covered here, some later)• Supply Chain Variations – Lead time variability, Supply variability, demand variability• Inputs to MRP – BOM, MPS, Inventory Records• Low Level Coding• Lot sizes• Scrap %• 2 types of demand – Independent & Dependent (examples)• Receipts = Scheduled Receipts, Purchase Orders• Projected Available• MRP Definitions revisited• Brief history of MRP

MRP Challenges• Plan is as good as the data

• Accurate BOMs• Inventory data is accurate• All the System in and out transactions are recorded correctly and on time

MRP Example and validation with objectives

• Question: What is the total lead time?• Question: What is the effective lead time if we have enough Chassis and Engines in

inventory?• Refer to the excel sheet for MRP example calculations

MRP Example with Low Level Coding

JIT and JIS• Just In Time• Just In Sequence• Both are lean manufacturing philosophies• One aspect of lean manufacturing is to eliminate waste (Muda)• 7 types of waste – one of them is (Excessive)Inventory (others being overproduction,

defects, waiting, move, unnecessary motion, inappropriate processing)• Key point in JIT is that components arrive just mins to hours before a particular

operation begins (no / minimum inventory)

3 Ms in Lean Manufacturing

Problems due to Inventory (not seen initially)

Chapter 3. World Wide Sourcing

What constitutes sourcing?Supplier, Organization and Customer

Sourcing (Procurement) Alternative terms used – Procurement, Supply Management, Purchasing, Integrated

logistics Sourcing : A key function enabling the standard procurement activities and additional

responsibilities like receiving, inspection, supplier education and development, interaction with customer’s and supplier supplier, tracking supplier effectiveness etc

To create value every organization strives to increase revenue and decrease cost. Contribution of sourcing (procurement) is not just focused on cost but on increasing revenue as well.

Supply area in manufacturing represents largest spend ranging from 50 to 80 % of revenue

Standard steps of procurement (Traditional)1. The recognition of need (from user and not purchase department)2. Translate need into commercially equivalent description / material3. Search for potential suppliers4. Evaluate and select suitable supplier(s)5. Agree on suitable order / contract details and terms6. Delivery of products and services (many times continual)7. Payment of suppliers

World Wide Sourcing (Global Procurement)Globalization of services and goods had created a global sourcing option for most companies with its own merits and problem areas (Global procurement has been there since centuries – Chinese silk, Indian spices etc)Key Events / Influences: Increasing interdependence on each other globally, Opening up of world economies*, Internet, transport technologies*Q: In what year did Indian economy “open up”?

Top Reasons for Global Sourcing1. Item / service not available domestically2. Competitive price3. Offset Agreements with governments and Marketing Tool4. Quality5. Continuity of supply6. Better technical service 7. Technology8. Competitive clout

Potential problem areas in Global Sourcing1. Source location and evaluation: Difficulty in getting correct information and costs2. Lead time and Delivery: Transportation delays and lead times, Obtaining letter of

credit, delays in customs, delays at port (unloading time and queue for ships)3. Expediting is difficult4. Political, Geopolitical, labor and other issues (coup in Egypt for example)5. Hidden costs like import tariffs, obsolescence, insurances, custom fees and penalties

6. Currency fluctuations7. Payment methods eg. Full payment before shipment, title of goods 8. Quality (or rather information on quality not easily available)9. Warranties and claims10. Tariffs and Duties11. Administration Costs12. Legal Issues13. Language & Communication14. Cultural and social nuances15. Ethics

Some important terms in Global sourcing A letter of credit is a document from a bank guaranteeing that a seller will receive

payment in full as long as certain delivery conditions have been met (usually 2 banks are involved)

Bill of Exchange (draft): Given to bank (by buyer). Unconditional order to pay determined money when shipping documents are sent to the bank by the seller.

Tariff and Duties: Both are taxes (mostly on imports) and same thing and used interchangeably. Eg. “A tariff of 40 % on high end electronics”

Intermodal Transport (Truck, Rail, Ship, Air – uses more than one) Incoterms : International Commercial Terms (explained later) Country of Origin, Originating Country: Country where goods are produced or grown

Some important terms in Global sourcing• Countertrade: All forms of barters or exchanges (explained later)• Foreign Trade Zones, Special Economic Zones• Bonded Warehouse• Free Trade Agreements• Several international acts, laws and bodies :

WTO, CISG (International Sale of Goods), UCC (Uniform Commercial Code), UN Global Compact (set of core values for human rights, labour standards,

environment and anti-corruption) Foreign Corrupt Practices Act ITAR (International Traffic-in-Arms Regulations)

Incoterms International set of rules to clarify the costs, risks and obligations of buyers and sellers Apply to goods and not services• Group E: Departure

EXW – Ex Works at sellers given name place (named place)• Group F: Main Carriage Unpaid

FAS – Free Alongside Ship (named port of shipment) FCA – Free Carrier (names place) FOB – Free On Board (named port of shipment)

• Group C: Main Carriage Paid by Seller CFR – Cost and Freight (named port of destination) CIF – Cost, Insurance and Freight (named port of destination) CIP – Carriage and Insurance Paid (named port of destination)

CPT – Carriage Paid To (named port of destination)• Group D: Arrival

DAF – Delivered at Frontier (named place) DDP – Delivered Duty Paid (named place of destination) DDU – Delivered Duty Unpaid (named place of destination) DEQ – Delivered Ex Quay (named port of destination) DES – Delivered Ex Ship (named port of destination)

Following apply only to sea: FAS, FOB, CFR, CIF, DEQ and DES. Others apply to all modes of transport.

Locating and evaluating International SuppliersSources of information for buyers and sellers:

• Internet is the cheapest and easiest source. Most companies maintain their websites giving visibility and first level information

• Government sources in the local country (seller) and domestic country (buyer)• Chamber of commerce• Supply department of an international company• Companies dedicated to locating and evaluating suppliers and supply chain partners• Buyer-Supplier directory • International banks who are aware of suppliers that have worked with them. To

promote commerce and use of their banks for loans / credits, they also have dedicated departments to help buyers in international transactions

• Importers, trade brokers and trading firms

Intermediaries-Buy from intermediary instead of buying directly?• Import Brokers and Agents: For a fee they assist in locating suppliers and document

handling. Title with buyer.• Import Merchant: Buys on his name and sells to buyer. Based on contract• Seller’s subsidiary: Seller has subsidiary in local market• Sales representatives: Individuals hired to take care of helping in buying globally• Trading Company: Buying and supplying globally for many products (also stocks in

many cases)

Foreign Trade Zones and other zones• Foreign Trade Zone / Special Economic Zones: A zone where imported goods have no

duty applied or reduced duties based on certain conditions. • Typical conditions to get duty benefit:

The goods need to be re-exported to get duty benefit At least 50 % of labor content or components in the final product Should stimulate employment and economy in the country

• Activities allowed in FTZ/SEZ: Manufacturing, Transshipment (repacking, assembly), Storage, Manipulation, Exhibition and display

• Bonded Warehouse: Only for storage of goods on which duty can be deferred or exempt if re-exported

• Free Trade Agreement: Where countries allow goods to be exchanged between them without imposing any import duties. Helps increase trade, relations and makes the goods available to consumers at lower prices. Most free trade agreements are bilateral or trilateral. Participating countries need good framework to define rules

around “country of origin” for goods to avoid misuse of the agreements (eg., pushing goods from a non-participating country through a participating country in the Free Trade Agreement)

• WTO: World Trade Organization – it replaced GATT* in 1995. Objective of WTO is to help trade flow smoothly, freely, fairly and predictably. It looks after trade agreements, trade disputes (eg., Enron Dispute).

• GATT mainly dealt with goods while WTO has agreements for services and Intellectual Property right as well

*When India signed international agreements in 1991 for world trade and opened its economy, there was a lot of opposition for accepting the GATT terms.

CountertradeCountertrade is new name for “Barter”

• Barter / Swaps: Barter is exchange of different type of goods while swap is exchange of same type of goods (like sell maize and buy wheat)

• Offset Arrangements: Seller agrees to buy agreed dollar of goods from buyers country• Counter purchase: Similar to offset but seller buys from the buyer or finds a customer

for him• Buyback / Compensation: Seller firm sets up plant / warehouse in the buyers region /

country (as done by Boeing in India)• Switch Trade: In this a barter happens through a 3rd party who gives credits or debits

to individual company

Strategic SourcingLet’s see how Traditional Sourcing works…Standard steps (Traditional Sourcing)

1. The recognition of need2. Translate need into commercially equivalent description / material3. Search for potential suppliers4. Evaluate and select suitable supplier(s)5. Agree on suitable order / contract details and terms6. Delivery of products and services (many times continual)7. Payment of suppliers

Strategic Sourcing Steps In the 80’s Strategic Sourcing evolved and became popular in the West In India it’s adoption started only in late 90’s Internet and new technologies have accelerated adoption1. Preplanning, collection of data and spend analysis2. Develop a Cross Functional Team3. Market Information and Research (Surveys optional)4. Build a strategy (Sourcing Strategy)5. Request for Information / Proposal (RFx)6. Selection, Negotiation and Contracting7. Implementation and continuous improvement

Strategic Sourcing Vs Traditional Sourcing• Considers suppliers and supplier base integral to its own competitive advantage

(worries about Total Cost of Ownership)• For critical items, high cost items, can impact organizations success [Eg. Steel, tires etc

for automotive industries]

• Continuously improves and re-evaluates the purchasing activities of a company. Organized and Collaborative.

• Sourcing strategy guides on objectives and decision framework for sourcing Ex. Multi source, Single source or insource [Example Tata Group]

• It needs to link and align with the overall organization strategy• In short difference is Strategic Vs Tactical

Objectives of Strategic Sourcing• Reduce the cost of goods and services (remember: procurement could amount to 80%

of total costs of company)And while doing this also –

• Maintain and Improve product quality• Promote innovation, continuous improvement and stay ahead of the curve• Create best practices and improve overall purchasing process

Strategic Sourcing Steps – Detailed1. Preplanning, collection of data and spend analysis

Someone in the org identifies areas for improvement (typically CXO level) Find all information (remember GIGO!) about particular category – involve all

stakeholders – Purchasing department, Engineering, Design etc Most important thing they decide is what categories to target for

improvement2. Developing a Cross Functional Team for categories

Executive sponsorship is must Mostly part time people from individual departments like Engineering,

Finance, Procurement, R&D etc Most important thing that they decide is the specs (what to buy), how etc

(they take part in the subsequent steps)3. Market Information and Research

Is it Supplier Market or Buyers Market [examples??] Alternatives to Incumbents Analysis of different forces (Substitute products, new entrants, customers etc) Most important thing is to gain information as input to strategy

4. Sourcing Strategy Main intention is how to exploit the identified improvement area Improvement area is NOT always reduction of cost, it could be minimizing risk

etc Examples of some strategies are Multi-sourcing Vs Single sourcing,

Standardize specs for parts or custom specs, go with reverse auction*, companies have even bought out suppliers!

Other important objectives are developing project charter, objectives, communication plan etc

*Reverse AuctionA reverse auction is a type of auction in which the roles of buyer and seller are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service by offering increasingly higher prices. Key Point: In Reverse Auction other sellers can see the lowest bidder and his price!

5. RFx Process

Note that it is very important to develop the strategy before sending out the RFx

RFI, RFQ, RFP => (RF Information, Quotation, Proposal) ITB => Invitation To Bid This is a critical process which marks transformation from planning

towards execution phase. Create documents for RFx and invite pre-qualified suppliers

6. Selection, Negotiation and Contracting Review completed responses from suppliers Follow a 2 or 3 stage process for selecting final supplier (Initial

Shortlist, Presentations, Final Shortlist) Create contract with finalized supplier

7. Implementation and continuous improvement This is the only execution step in the whole process! Continuously monitor the supplier performance Communication and Collaboration with supplier Focus on innovation Regular market analysis, internal analysis to identify and implement

further improvements

Benefits of Strategic Sourcing Steps

Chapter 4. Vendor Development and Performance Analysis

What is the need for Vendor Development?Why should companies spend their energy and resources in Vendor Development?Why to measure and track Vendor performance?You can manage only what you can measureEffective Vendor Management can only be done with proper Vendor Performance measurementThis forms the basis for Vendor Development

Supplier Performance Measurement Supplier measurement acts as a report card for the supplier This process differs from the initial supplier evaluation Continuous process (unlike one time supplier selection) Supplier Measurement system must consider business unit’s goals, objectives,

strategies (as mentioned earlier all processes in supply chain must be aligned to companies’ goals and strategy)

Supplier Performance Measurement Decisions Key decisions – strategic and tactical have to be taken1. What to measure: Objective and Subjective

Objective: a. Delivery Performance: Quantity and due date commitmentsb. Quality Performance: Factor gaining high importancec. Cost Reduction: Innovative approaches & partnership

Subjective:a. Problem resolving ability, technical abilityb. Supplier Cost reduction ideasc. Feedback from customers

Key point is that all these measurement parameters must be measurable and actionable – so that supplier can improve on them

2. Measurement and reporting frequencya. Reporting frequency to the buyer: Two types of reporting – daily/weekly

measurement and operational reporting and 2nd type is score carding probably once a month or quarterly

b. Reporting frequency to the supplier

Uses of Measurement Data• Identify suppliers not performing at expected levels• Identify highly capable suppliers• Identify innovative suppliers• Identify suppliers that are more aligned to organizations goals, philosophy (can

become good partners)• Measurement data also helps in supply base rationalization• Determine supplier’s future volume

Supplier Measurement Techniques• Categorical System• Weighted Point System• Cost-Based System

Categorical System• Very subjective system, ratings given to each category• Categories to be selected carefully• Ratings can be given by respective users of the service

Weighted Point System• Carefully select categories and assign weights• Develop decision rules• Less subjective

Cost-Based System• Least subjective (more accounting based)• Seeks to quantify the total cost (actual and opportunity cost) of doing business with a

supplier• Supplier Performance Index is based on actual costs and penalty / opportunity costs• Most difficult part is to justify and find value for penalty and opportunity costs• Nonperformance costs generally are based on penalties (real or implied) based on

individual deliveries of goods

SPI = Total Purchase Price + Nonperformance Costs X QTotal Purchase Price

Cost-Based System – SPI Calculation

Cost-Based System – Least Cost Supplier

Cost-Based System with Normalization Adjustment (Q)

• The high volume suppliers tend to get good ratings• So utilize a normalizing factor Q

SPI = Total Purchase Price + Nonperformance Costs X QTotal Purchase Price

where Q = Average Price of a lot for material for this supplierAverage Price of a lot of material for all suppliers

Cost-Based System with Normalization Adjustment (Q)• SPI skewing due to differing base volumes of buying• Supplier with low volume

SPI = $15,000 +$3000$15,000

=1. 2Supplier with high volume

SPI = $150,000 +$3000$150,000

=1 .02• If we consider only these 2 as suppliers• Q1 = 15,000 / 82,500 = 0.182• Q2 = 150,000 / 82,500 = 1.818

Supplier with low volume Supplier with high volume

SPIq = $15,000 +$3000 x 0 .182$15,000

=1 . 04

SPIq = $150,000 +$3000x1 .818$150,000

=1. 04

Supplier Base Rationalization• Pre-Step for Vendor Development• Rationalization – how many and which suppliers to maintain• Optimization – analysis to ensure that only the most capable suppliers are kept• Continuous process for optimization• Remove marginal suppliers first (low hanging fruit)

Vendor Development• Initially started in Japan way back in 1939 (Toyota)• Defined As: Activity undertaken by buyer to improve supplier’s performance which in

turn helps the buyer• What is most challenging barrier to vendor development?• Lack of trust, belief in intentions and direct involvement of organization in vendor’s

operations

Process for Vendor Development• Step 1: Identify Critical Commodities for development

Percentage contribution of commodities to total cost Potential for price reduction in particular commodity (competitive advantage) Potential for innovation / alternative material for commodity

• Step 2: Identify Critical suppliers for development• Is the supplier essential?

• Supplier’s ratings and/or PSI• Does he supply critical components / components from step 1

• Step 3: Form Cross Functional Development Team Extremely important step in any collaborative and strategic sourcing initiative Cross Functional team should also be given justifiable decision making powers

in addition to advisory powers Creates Supplier Development Plan / Program

• Step 4: Meet with Supplier’s Top Management• “Buy In” from suppliers top management essential• Feeling of mutual trust and mutual benefit needs to be created• Alignment of Supplier development plan created by cross functional

team needs to be sought• Step 5: Identify opportunities and probability for improvement• Step 6: Define key metric and cost-sharing mechanisms• Step 7: Reach Agreement on key projects and joint resource requirement• Step 8: Execute and monitor projects, Modify strategies

Barriers to Vendor Development• Buyer Specific Barriers:

1. Purchase volume / value does not justify the effort2. No immediate benefit is evident3. Importance of purchased item (take long term focus)4. Lack of CXO support at buyer (difficult to move away from Carrot and Stick

approach)• Buyer-Supplier interface Barriers:

1. Supplier reluctant to share information, confidentiality2. Supplier does not trust buyer3. Differing organizational cultures (eg, Videocon Vs Whirlpool)4. Not enough motivation for the supplier

• Supplier Specific Barriers:1. Fear that vendor may overrun buyer2. Lack of commitment from supplier top management3. Supplier lacks Engineering & IT resources4. Supplier not convinced on the benefits of development5. Supplier not having scale to invest in training, improvement etc (the buyer

should help and share facilities)

Chapter 5. Negotiations and Contracts

• What is negotiation?• Negotiation framework• Negotiation planning• Power in negotiation• Concessions• Negotiation tactics: trying to reach agreement• Win-win negotiation• International negotiation• Comprehensive global negotiation skills and enhanced cultural understanding• The impact of the Internet on negotiations

What Is Negotiation?• A process of formal communication, either face-to-face or via electronic means,

where two or more people come together to seek mutual agreement about an issue or issues

• Involves the management of time, information, and power between individuals and organizations who are interdependent

• Relationships between people, not just organizations• Persuasion• Negotiation skills can be honed and practiced

Terms Used in Negotiation• BATNA (Best Alternative To a Negotiated Agreement)• Positions• Interests• Needs • Wants

BATNA• Bottom line or reservation point• Need to ensure that a negotiator’s BATNA is never revealed to the other party• All settlements must be judged in light of all other viable alternatives

Positions• A negotiator’s opening offer (or the current offer he is making)• Represents the optimistic or target value of the issues being negotiated• The stated demand at the negotiation table

Interests• The unspoken motivation or reason that underlies any given position• Unlikely to be expressly stated or acknowledged during the negotiation• May not be directly germane to the position• May be personal in nature• Play detective and try to discern the other party’s interests through a series of open-

ended, probing questions• Always focus on the other party’s underlying interests, not his/her stated positions

Needs vs. Wants• Needs – those negotiated outcomes that the negotiator must have in order to reach a

successful conclusion• Wants – those negotiated outcomes that a negotiator would like to have

• May often be exchanged as concessionsKnow Exactly What You Want

• Determine and write down specific goals and objectives• Can be referred during the negotiation• The more clearly defined, the more likely that can be achieved• Attempt to discern the other party’s likely needs and wants• Estimate underlying interests to the other party’s stated positions• Beware of expecting the other party to think in the same way• Ask open-ended questions to confirm or counter preconceived notions

Propose Action They Can Accept• Frame your own needs in terms of the other party’s needs• Make it easy for the other party to say, “Yes”• Remain fair, flexible, and reasonable

Negotiation Framework

Identify or Anticipate a Need• Purchase requisitions• Inventory counts• Reorder point systems• New product development• New facilities

Is Negotiation Required?• Is bid process inadequate?• Are many non-price issues involved?• Is contract large?• Are technical requirements complex?• Does contract involve plant and equipment?• Does contract involve a partnership?• Will supplier perform value-adding activities?• Will there be high risk or uncertainty?

When to Negotiate• Identification of allowable costs• Delivery schedules and lead times• Expected product and service quality levels• Performance metrics• Technological support needed• Contract volumes• Special packaging• Loss and damage liability• Payment terms and currency issues• Progress payment schedules• Transportation mode selection• Carrier selection• Filing freight claims• Warranties and replacements

Execute the agreement

Conduct the negotiation

Plan for the negotiation

Determine if negotiation is required

Identify or anticipate a purchase requirement

• Capacity issues• Material lead times• Penalty clauses• Performance incentives• Contract length• Contract renewal mechanism• Proprietary information

Negotiate in case of following situations or issues• Intellectual property• Resources related to closer buyer-supplier relationships• Contract resolution mechanisms• Spare parts• After-sale service• Operator and maintenance training• Improvement requirements

• Quality• Delivery performance• Lead time• Cost

Reasons for Negotiation• Total contract value or volume is large• Purchase involves complex technical requirements, perhaps even product and process

requirements and specification still evolving• Purchase involves capital-intensive plant and equipment• Agreement involves a special or collaborative buyer-supplier relationship• Supplier will perform important value-adding activities

Plan for the Negotiation• Identify participants• Develop objectives• Analyze strengths and weaknesses• Gather information• Recognize other party’s needs• Identify facts and issues• Establish positions• Develop strategies and tactics• Brief personnel• Practice the negotiation

Establish PositionsExample is a buyer-seller price negotiation

Conduct the Negotiation• Perform fact finding• Recess or caucus as necessary• Work to narrow differences• Manage time pressures• Maintain informal atmosphere• Summarize progress periodically

• Employ tactics• Keep relationships positive

Points to Focus On• Defining the issues• Defining the negotiating mix• Defining interests• Defining objectives and openings• Assessing constituents and social context• Analyzing the other party• Planning issue presentation and defense• Defining protocols• Where to negotiate

Face-to-Face Negotiation Phases• Fact finding and information sharing• Recess to:

• Reassess relative strengths and weaknesses• Review and revise objectives and positions• Reorganize the negotiation agenda

• Narrow differences• Seek agreement and conclusion• May involve several iterations

Being an Effective Negotiator• Willing to compromise or revise goals• View issues independently• Establish upper and lower ranges for each major issue• Explore additional options• Build on common ground between parties• Avoid making irritating comments• Avoid argumentation by presenting too many reasons• Make fewer counterproposals

Execute the Agreement• Provide performance feedback• Build on the success of the negotiation• Monitor contract provisions

Power in Negotiation• Power is the ability to influence another person or organization• Power by itself is neither good or bad; it is the application or use of power that makes

it good or bad• Sources of negotiating power

Sources of Negotiating Power• Informational power - facts, data, and persuasive arguments• Reward power - offer something of perceived value to the other• Coercive power - Ability to punish – financially, physically, or mentally• Legitimate power – power from position (manager, director, judge etc)• Expert power - Special Information power (agreed authority, verified source)• Referent power – gained from social attraction, personalities (eg Amitabh Bachchan)

Use of Power• Used to support one’s advantage• Need to be careful not to abuse power

• Damaged relationships• Invited retaliation

• Diminished value of that power• Some types of power interact synergistically with others• Example - expert and referent power

Concessions• Movement away from a negotiating position that has value to the other party• Give-and-take process is normal in most negotiations• Need to avoid giving away concessions without receiving something of equal or

greater value in returnGuidelines for Making Concessions

• Give yourself enough room to make concessions• Try to get the other party to start revealing its needs and objectives first• Be the first to concede on a minor issue but not the first on a major one• Make unimportant concessions and portray them as valuable• Make the other party work hard for every concession you make• Use tradeoffs to obtain something for every concession you make• Generally, concede slowly and give a little with each concession• Do not reveal your deadline to the other party – ever• Occasionally, say “No” to the other party• Be careful trying to take back concessions, even tentative ones• Keep a record of concessions made to try and identify a pattern• Do not concede too often, too soon, or too much

Negotiation Tactics• Low ball• Honesty and openness• Questions• Caucus (taking time-out)• Trial balloon• Price increase• High ball• Best and final offer• Silence• Planned concessions• Venue

Power of InfluenceAll negotiation tactics classified as per to 6 social psychology principles

• Reciprocation• Consistency• Social proof• Liking• Authority• Scarcity

Reciprocation• An obligation to give something back of equal or greater value to someone after

having received something from them• Creates a powerful obligation response• Can be used effectively when giving concessions• Patterns of concession (quid pro quo – “something for something in exchange”)

Consistency• People tend to want to be perceived as being consistent in their beliefs and actions• It is difficult to back away from something already agreed to• Beware the consistency trap

• Small commitments often lead to larger onesSocial Proof

• Looking to the behavior of others to determine what is desirable, appropriate, or correct

• Power of the endorsement• Everyone is doing it

Liking• People work well and are more agreeable with others that we like or who are like us• Get to know the other party better to build on the relationship when concessions are

being offeredAuthority

• People are more likely to accept the positions, arguments, and directions from recognized authority figures

• Power of titles and perceived importanceScarcity

• Can also be the perception of scarcity• Act now• For a limited time only• Offer expires tomorrow• Suppliers often use potential price increases as a scarcity technique

Overcoming Tactics• Modify tactics when they don’t work• Prepare for likely tactics to be used against you• Tactics are more effective on you if you are unprepared, stressed, under severe

deadlines, inexperienced, fatigued, or disinterested• Try not to react without thinking

Win-Win Negotiation• Win-lose – competitive or distributive bargaining• Win-win – collaboration or integrative bargaining• Expand the value or resources available to all participants• Equitable sharing of a larger and expanded pie

Win-Win Methods• Expand the pie• Logroll• Use nonspecific compensation• Cut the costs for compliance• Find a bridge solution

International Negotiation• Added complexity and challenge• Substantial extra time and effort required• Culture shock• Barriers and obstacles• Need for translators

Barriers and Obstacles• Miscommunication due to language• Time limitations• Cultural differences• Limited authority of international negotiators

Characteristics to Overcome Barriers• Patience• Knowledge of the contract agreement

• Honest and polite attitude• Familiarity with foreign cultures and customs

Caveats when Negotiating Overseas• Don’t think that everyone else negotiates like the Americans• There is a danger in stereotyping or oversimplifying characteristics of other cultures

• There is always substantial interpersonal variation within any culture• However, there are often common tendencies

Impact of the Internet on Negotiations• Electronically-based negotiations tend to equalize the differences between the parties

• Normal visual and auditory clues are diminished or not readily apparent• Status differences and social differences are less discernible• Problem of being anonymous

• Negotiators tend to be more risk taking• Real time vs. asynchronous• Loss of information richness• More difficult to provide feedback and conduct active listening• E-negotiators ask fewer questions and tend to make more assumptions• What does “silence” mean?

Chapter 6. Inventory Analysis and Replenishment Models

Purpose of Inventory?To decouple Demand and SupplyForm almost 20 to 60 % of total assets

Inventory Analysis / ManagementAggregate Inventory Analysis / Management: Deals according to classification of inventory (raw materials, WIP, FG)

1. Flows and kinds of inventory needed2. Supply and demand patterns3. Functions that inventories perform4. Objectives of inventory management5. Costs associated with inventories

Item Inventory Analysis / Management:1. Which individual inventory items are most important (ABC Analysis)2. How individual items are to be controlled3. How much to order at one time4. When to place an order

Inventory and Flow of Material

Functions of Inventory- The basic purpose of inventories is to decouple supply and demand

Inventory serves as a buffer between:• Supply and demand• Customer demand and finished goods• Finished goods and component availability• Requirements for an operation and the output from the preceding operation• Parts and materials to begin production and the suppliers of materials• Anticipation Inventory: Anticipation of future demand. Before peak season, vacation

shutdown, promotion, strike etc• Fluctuation Inventory (Safety Stock): To cover random unpredictable fluctuation in

supply, demand and lead time. • Lot Size Inventory (Cycle Stock): Based on lot size rather than just on demand. Due to

Qty Discounts, shipping, manufacturing conditions, minimum purchase quantity etc• Transportation Inventory (In Transit): Arise due to finite time needed for

transportationAverage Transportation Inventory = tA/365t = Transit Time in Days,

A = Annual Demand Hedge Inventory: For commodities purchased based on the prices and expected

future prices as hedge MRO: Maintenance, Repair, and Operating Supplies: items used to support general

operations and maintenance but that do not become directly part of a product.Q: Delivery of goods from a supplier is in transit for 10 days. If the annual demand is 5200 units, what is the average annual inventory in transit?A: Transportation Inventory = (10 * 5200)/365 = 142.5 unitsRepresents inventory which is not usable but ties up the funds

Objectives of Inventory Management• Maximum customer service• Low-cost plant operation: Acting as buffer between 2 or more operations with different throughput• Minimum inventory investment

Inventory CostsThe following costs are used for inventory management decisions:• Item cost• Carrying costs• Ordering costs• Stock out costs• Capacity-associated costs

Financial Analysis and Inventory Turns Raw material purchased is Inventory and an Asset When it is processed it turns in WIP and its value increases It is said to absorb the overhead Unsold finished good is also an Asset which has a value and as far as it remains unsold

it absorbs costs (storage, maintenance etc) Cash Flow analysis analyzes how and when inventory turns to cash Inventory Turns = Annual Cost Of Goods Sold (COGS) / Avg. Inv. In $ If the annual cost of goods sold is $1 million and the average inventory is $500,000,

then Inv. Turns = 2 If average inventory is $200,000 then Inventory Turns = ?

Days of Supply (DOS)Days of Supply (DOS) is a measure of the equivalent number of days of inventory on hand, based on usageDOS = Inventory On Hand / Average Daily Usage------------------- OR----------DOS = Ending Inventory for current period / Daily Usages for all subsequent periods (excluding today) till the on hand inventory is exhaustedQ: A company has 9000 units on hand and the annual usage is 48,000 units. There are 240 working days in the year. What is the days of supply?A: Avg. Daily Usage = 48,000/240 = 200DOS = 9000 / 200 = 45 Days

Days Of Supply (DOS)DOS = Ending Inventory For current period / Daily Usage for all subsequent period (excluding today) till the on hand inventory is exhausted

Methods of Evaluating InventoryImportant from accounting perspective

• FIFO• LIFO• Average Cost• Standard Cost

ABC AnalysisHelps Answer:1. What is the importance of the inventory item?2. How are they to be controlled?Group A: About 20% items account for about 80% of the dollar usageGroup B: About 30% items account for about 15% of the dollar usageGroup C: About 50% items account for about 5% of the dollar usage

In calculating ABC levels it is important to calculate individual contribution and then sort descending according to individual contribution to place the limits of the 3 levelsQ: Solve problem on page 271 of Tony Arnold

Controlling using ABC AnalysisDifferent controls used with different classifications:• A items: high priority. Tight control including complete accurate records, regular and frequent review by management, frequent review of demand forecasts, and close follow-up and expediting to reduce lead time• B items: medium priority. Normal controls with good records, regular attention, and normal processing• C items: lowest priority. Simplest possible controls—make sure there are plenty. Simple or no records; perhaps use a two-bin system or periodic review system. Order large quantities and carry safety stock.

Inventory Models

Deterministic models• The Economic Order Quantity (EOQ) model• Sensitivity analysis• A price-break Model

Probabilistic Inventory models• Single-period inventory models• A fixed order quantity model• A fixed time period model

Inventory Replenishment ModelsEOQ Model (Also a reorder point method)

Q¿=√ 2DSH

D - Annual demandQ - Order quantityS - Cost of placing orderH - Annual per-unit holding costOrdering cost = SD/Q Holding cost = HQ/2Total cost = SD/Q + HQ/2

• Tony Arnold – Chapters 9 to 11• Additional PPT shared by DG “Inventory Replenishment Models -

Lecture4_Inv_f06_604”

Chapter 7.Service Levels – Uncertainties in supply chains – Product Availability

Multi Echelon Supply Chain

What is Service Level?Customer Service Level: A measure of delivery performance of finished goods, usually expressed as a percentageMake To Stock: Order Fill Rate: Percentage of customer orders filled and shipped on timeMake To Order: Percentage of number of orders shipped in a given period to the number of orders supposed to be filledBackorder level in case of MTO: Number of orders waiting to be filled or fulfilledService Level (Inventory): Represents the expected probability of not hitting a stock-out. Inventory level at which demand for an item, group of items, or a system can be met from the on-hand stock. Expressed as a percentage of orders satisfied

What are the uncertainties in Supply Chain?

Ideal world!!! Do you need Safety Stock?

D1 D4 D7D10

D13D16

D19D22

D25D28

D31D34

D37D40

D43D46

D49D52

020406080

100120140160

Reorder Point Safety StockStock On Hand Stockout Level

Safety Stock helps mitigate all 3 uncertainties

It is a form (logical) of finished goods inventory

Which Uncertainty?

D1 D4 D7D10

D13D16

D19D22

D25D28

D31D34

D37D40

D43D46

D49D52

0

40

80

120

160

Reorder Point Safety StockStock On Hand Stockout Level

D1 D4 D7D10

D13D16

D19D22

D25D28

D31D34

D37D40

D43D46

D49D52-20

020406080

100120140160

Reorder Point Safety StockStock On Hand Stockout Level

D1 D4 D7D10

D13D16

D19D22

D25D28

D31D34

D37D40

D43D46

D49D52

0

40

80

120

160

Reorder Point Safety StockStock On Hand Stockout Level

Service LevelsActual Service Level =

(Number of orders fulfilled on time / Number of orders placed)A cheese manufacturer had following orders placed and fulfilled on days of a week. Calculate the Service Level:

Service Levels

Safety factor: The service level is directly related to the number of standard deviations provided as safety stockSafety Stock = sigma x safety factorSigma = Std. Deviation 1. Calculate the deviation for each period by subtracting the actual demand from the forecast demand.2. Square each deviation.3. Add the squares of the deviations.4. Divide the value in step 3 by the number of periods to determine the average of the squared deviations.5. Calculate the square root of the value calculated in step 4. This is the standard deviation.

Given the below Forecast Demand and Actual Demand, calculate

1. standard deviation 2. 2. Safety Stock for 95 % Service level3. Safety Stock for 99.99 service level

Avg. Sq. Deviation = 400,000 / 101. Standard Deviation = Sq. Root (40,000)

= 2002. Safety Stock =Sigma x Saf. Fac.

= 200 x 1.65 = 3303. Safety Stock =Sigma x Saf. Fac.

= 200 x 4 = 800

Inventory and Replenishment Models

Order Point = Demand During Lead Time + Safety Stock= OP = DDLT + SSAverage inventory = Q/2 + SS

Product AvailabilityAvailable To Promise (ATP): Also known as Delivery Promises

Function of Master Production Schedule, mostly referred to as Master Scheduling or MPS.

Not a function of MRP. (Q: why not?)

The ATP is calculated by adding scheduled receipts to the beginning inventory and then subtracting actual orders scheduled before the next scheduled receipt. A scheduled receipt is an order that has been issued either to manufacturing or to a supplier. This method assumes that the ATP will be sold before the next scheduled receipt arrives. It is there to be sold, and the assumption is that it will be sold. If it is not sold, whatever is left forms an on-hand balance available for the next period.

• Tony Arnold – Chapters 9 to 11

Chapter 8.Physical Inventory and Warehouse Management System & Material Codification System

Topic:Physical Inventory and Warehouse Management System & Material Codification System Goods needs to be storedHence the need for Warehouse Management (WM)

Don’t we store groceries and stuff at Home?Why is WM such a big deal then?Why does it have to be so detailed science?

Functions of Warehouse• Provide timely customer service and maintain the service level• Keep track of items so they can be found readily and correctly• Minimize the total physical effort and thus the cost • Provide communication links with customers

Two Costs:• Capital Costs: Space, Equipment, • Operating Costs: Labor, Electricity, Rent etc

For maximizing productivity and minimizing cost:• Maximum use of space is essential: space is the largest capital cost (typically most

warehouses are outside the city to avoid large cost)• Effective use of labor and equipment (2nd largest contributor)

Warehouse Activities

Inbound (Receiving Side)Outbound (Delivery Side)Housekeeping, Auditing and Operating the System

Warehouse Activities – Receiving• Receive Goods:

Check the goods against an order and the bill of lading Check the quantities Check for damage and fill out damage reports if necessary Inspect goods if required

• Identify Goods: Label and identify the SKUs and quantities• Putaway: Store goods at correct locations

Warehouse Activities – Delivery• Pick Goods: As per the order, items needs to be picked up• Shipment Marshalling: Goods making up a single order are brought together and

checked for omissions or errors. Order records are updated [details explained later]• Pack: Orders are packaged, shipping documents prepared• Ship: goods loaded on the right vehicle, close doors and dispatch

Warehouse Activities – Housekeeping and othersHousekeeping, Auditing and Operating the System

• Place orders on the source locations• Ensure Inventory accuracy: Physical Inventory counts and Cycle counts• Filing reports for lost / damaged stock• Continuous Training of the staff

Effective Use of WarehouseFactors influencing effective use of warehouse:

• Cube utilization and accessibility• Stock location• Order picking and assembly• Packaging (not covered – not in scope)

Effective Use – Cube Utilization & Accessibility

Goods stored on floor but also verticallyStacking factor: 3 high means 3 pallets on top of each other [or on a shelf]Pallet Positions: Number of pallets on the floorWarehouse size usually given in Sq feet and also the defined stacking factorSpace is required for Aisle, offices, assembly areas etc

Q: Suppose that a maximum of 90,000 cartons is to be inventoried and 30 cartons fit on a pallet. Space is needed for 3000 pallets. If pallets are stacked three high, 1000 pallet positions are required. A pallet is a platform usually measuring 48″ × 40″ × 4″.

• The 4 feet width of the storage corresponds with the width of the pallet (48 inches)• Allow 2 inch tolerance between 2 pallets. So 40” + 2” = 42”• Hence (120’ x 12”)/42” = 34.3 = 34 pallet positions each side• Stacking factor = 3, so answer = 34 x 2 x 3 = 204• Accessibility : Ease of getting good with minimum movement of other goods• For material 1 to 10 except 9, it is 100 %• For material 9, it will have to be defined and calculated (how many maximum

movements allowed would be 0 % etc)

Cube Utilization: Is the effective use of space vertically and horizontally.There is room for 30 pallets, but only 21 spaces are being used for a cube utilization of 70% (21 ÷ 30 × 100)

Cube Utilization problem: A small warehouse stores five different SKUs in pallet loads. If pallets are stacked three high and there is to be 100% accessibility, how many pallet positions are needed? What is the cube utilization?SKU A = 4 palletsSKU B = 6 palletsSKU C = 14 palletsSKU D = 8 pallets

SKU E = 5 palletsTotal = 37 pallets

Due to 100 % accessibility the pallets cannot be mixed*Pallet positions for each SKUSKU A = 2 SKU B = 2 SKU C = 5SKU D = 3 SKU E = 2 Total = 14 positionsIdeal storage space = 14 x 3 = 42Pallets actually stored = 37 Cube Utilization = 37*100/42 = 88 %* In case racks are used pallets can be mixed as racks separate the pallets giving 100 % accessibility. But it increases capital cost.

Effective Use – Stock Location• Group functionally related items together• Group fast moving items together• Group physically similar items together: For example all items stored in barrels• Locate working stock and reserve stock separately

Assigning Locations to StockWhy would this be such a big deal?Don’t we assign locations to groceries in our house?Warehouse operations could be complex.For eg., some companies have 1 million sq feet warehouses

2 Basic systems• Fixed Location: Used in small and simple warehouses

An SKU is assigned a fixed location typically marked for that item (nothing else stored there)

Typically only 50 % cube utilization• Floating location: Used in big and complex warehouses

Goods stored anywhere yet appropriate place Mostly done by computers and requires to maintain lot of transactional data Many a times used with AGV (Automated Guided Vehicles) Floor (location) is usually given coordinates

Another classification of Assigning Locations• Point-Of-Use storage: Used in JIT

Working stock located close to the operation Mostly no buffer / reserve stocks

• Central Storage: The most common option One centralized location Operations is easier as everything is at 1 place

Physical Control and SecurityImportant aspects while designing these processes

1. A good part numbering system (SKU)

2. Simple and effective transaction system3. Limited access (to prevent unauthorized use, avoid offline transactions not recorded

in the system)4. Well trained workforce5. Security aspects like cameras etc.

Housekeeping activities – Inventory Accuracy

The usefulness of inventory is directly related to its accuracy.Only banks achieve 100 % accuracy!Causes of inventory errors: theft, damage, unauthorized withdrawal, ineffective use of transaction system, training issuesTypically error tolerances are set for each item in inventoryInventory accuracy is measured periodically. Many a times this is a requirement from finance to assess the value of “assets”Usually blind count method is used to compare actual Vs system

Measuring Inventory AccuracyPeriodic (annual) inventory: Typically once a year all the stock is measured and compared with the values shown in the system.

• Lot of preparation needed• Usually this is a big task with shutdown of warehouse needed• Items need to be sorted, all locations identified, counted etc• May introduce error instead of correcting it• Was a old concept and replaced with Cycle counting

Cycle counting: Continually count few items per day to ensure complete count in a year (or fixed period)

• Major advantage is timely detection of problem and • Less or no disruption to the company (no shutdown)

Steps:1. Identify Count Frequency: Use ABC method, zone method or location audit method2. Identify when to count3. Perform the count and compare with system, update system4. Find reasons for errors and fix them

Cycle Counting Steps1. Identify Count Frequency: ABC Method

1. Identify Count Frequency: Zone Method• Items are grouped by zones to make counting more efficient• Used in fixed location systems• Depending upon the items in each zone identify the number of items to be

counted each day• Each zone will typically have different person (assigned to that zone)

1. Identify Count Frequency: Location Audit method• Used in floating location systems• Mostly human error causes items to be placed at different location than

assigned by the computer• Each day predetermined occupied locations are audited and checked if the

correct item in correct quantity is stored• Unoccupied locations are also audited to assess if really nothing is stored

there (human error)

2. When to count:• When an order is placed (just before it is placed): counting at a time when

stock is low• When an order is received (just before it is received): Inventory is at its lowest

level• When the inventory record reaches zero (easiest way): Reduces work.

Specially used in addition to other methods in both fixed and floating location types

• When a specified number of transactions have occurred: Errors occur when transactions occur

• When an error occurs: A special count is appropriate in such case. System may even show a negative stock!

3. Perform the count and compare with system, update system• Always use a blind count. The person counting is not shown the

current stock level of the item – avoids significant human error• In case of mismatches a recount might be needed

• After approvals from store manager and informing finance, system can be updated with correct stock quantity

4. Find reasons for errors and fix them• Troubleshoot and analyze the reasons• Create report identifying causes of error• Create and implement plans to fix them

Newer trendsCompanies like Wal-Mart use RFID tags to identify pallets, cartons and other items

• Eases and minimizes work to find and locate items• Simplifies cycle counting or other stock counting methods*

*Do note that physically measuring inventory accuracy is still needed (although effort and frequency is minimal)AGVs: Direct, travel and do the picking and putaway activities automatically. Level of automation may vary. Costs justified in critical environments like Pharma plantLights-off warehouses: Fully automated warehouse with no personnel

Material Codification SystemsSimply put these determine the naming of the SKUs

1. Arbitrary approach: Each items gets new automated number each time it enters warehouse. Same item entering at different times will get different number. Not used typically.

2. Symbolic Approach: In short item codes has intelligence. Example C 3 701 1193 or G 2 197 2198, where naming convention is <Storage condition> <item condition> <store identifier> <item identifier>Storage condition = Chilled (C ), General (G) , No moisture (N) etcItem condition = Fragile (2), Durable (3), Short Shelf Life (1)Storage identifier = Location of storage or some other parameterItem Identifier = Typically Item number (Try avoiding supplier or customer part number as suppliers could change)

Material Codification SystemsSimply put these determine the naming of the SKUs

1. Engineering Drawing numbering: • Use the same numbering used by engineering used to denote each

component and assembly• Possible prefix with some codes for warehouse (like storage condition etc)• Has the advantage of simplifying the process and having 1 standard naming

convention• Typically where many components are stored (like medium power generation

systems, engines etc) and there are frequent design changes and engineering changes this method is most suited

Good Practices in codification1. Avoid using 0, I, L2. Avoid using manufacturer or OEMs item number3. Avoid using very long item number4. Use letters only when they add “intelligence” to the number (example using C for

Chilled or item categories like SAU101 where SAU means “Sauce” etc)

5. Typically have the item description printed below the item number6. Use same numbering across all warehouses and DCs

• Tony Arnold – Chapters 12

Spare Parts Management, MROWhat is the purpose of inventory?To decouple demand and supply, right?So we always want to sell the inventory ASAP, right?

Now what are Spare Parts?And why should they be stocked/inventoried?What is the purpose of Spare Parts inventory?Spare parts inventory are needed for maintenance and repair of final products, equipmentNo one wants frequent repairs and products are typically built to sustain wear and tearDemands are low and number of parts are many.Inventory management is complex!

Spare Parts and MRO

MRO = Maintenance, Repair and Operations Meaning and usage of MRO and Spare Parts overlaps Spare Parts are only “spares” – components that go into the final product MRO items could be anything that is needed in maintaining, repair and operations MRO items are used in the creation of a product but are not present in the final

product itself. They just get “consumed” or “support” in the process of repairing or maintaining the final product (cleaning material, anti rust agents, trolleys, repair machinery etc)

Machine used to make / repair a product Spare Parts for the machinery that creates the product Consumables and other supporting equipment

Normal Inventory Vs Spare Parts & MRO Inventory

Reliability Overview

Infant Mortality: • Weaker units / components in a population fail• Decreasing rate of failure• Good design techniques, stress testing and trail runs of components to avoid

Infant Mortality Normal / Useful Life:

• Low and relatively constant failure rate – MTBF calculated here• Parts fail randomly – many failure modes• Overall decreasing trend

End of Life / Wear Out: • Fatigue and wear outs cause failure at higher rates• Useful life of the component ends• Better to replace / repair component before to avoid disruption

Reliability Data MTBF: Mean Time Between Failures: Used for repairable products

MTBF = T/R = Total Time / Number of Failures MTTF: Mean Time To Failure: Used for non-repairable products

MTTF = *Time to Fail for 1 product = T/R Difficult to measure directly, so measured with experiments

Example: Suppose 10 devices are tested for 500 hours. During the test 2 failures occur. *Slight difference in calculation of MTBF and MTTF which we will ignoreThe estimate of the MTBF is: (10 * 500 )/ 2 = 2500 hrs/failureThe estimate of the MTTF is: (10*500)/2 = 2500 hrs / failure

Forecasting Considering MTTF/MTBF

Considering a MTTF of 100,000 hrs/failure for Optical component of CCTV camera, estimate the inventory that should be kept in stock by the Police Department of a big metro where 5000 CCTV cameras are deployed. The department procures once every quarter such that stock is replenished in 90 days. Assume failure distribution to be Normal Distribution and service level expected is 95 %. For inventory calculation considering service level use formula

Stock Level =S+(Safety Factor )∗√SWhere S = Stock Needed as per MTTF requirements (this in turn will have to be evaluated using correct formula)

Forecasting Considering MTTF/MTBF

First, lets check formula for S. The repl. lead time (R) is 90 Days. 1 component will fail in 100,000/24 = 4167 DaysIf 1 component can fail in 4167 Days then in 90 days, 90/4167 = 0.022 components could fail.But with 5000 of them installed, the probability is 0.022 * 5000 = 108So, S = (N * R)/ (MTTF)Safety Factor for 95 % service level is 1.65.So, Stock Level = 108 + 1.65 * sqrt(108) = 108 + 17 = 125