The lead time for an item starts when the item should be ordered, not when the order is sent to the supplier. To find out the effect on the required investment in inventory of that time difference, see the table in the article entitled “Reducing Lead Times”.
If a periodic review replenishment system is used then the reorder review period should be reduced as much as possible because ordering will be delayed until the next reorder review. See the article entitled “Reducing Reorder Review Periods” in that regard.
Using Up to Date Information
If reordering decisions are based on out of date information then the age of that information forms part of the lead time. If periodic, rather than continuous, review is used for reordering then the computer’s reordering recommendations should be produced immediately before the purchasing officer is ready to review those recommendations.
Review of the Computer’s Reordering Recommendations
The purchasing officer should review those recommendations as quickly as is possible while exercising due care. If it is found necessary to examine demand history for that purpose then consideration should be given to replacement of the algorithm used to forecast demands. It should not be necessary to review the appropriateness of the computer’s reordering recommendations on the basis of data held in the computer. If it is then the appropriateness of the reordering algorithms should be looked at. It should only be necessary to examine the computer’s recommendations on the basis of information which is not held in the computer (e.g. market knowledge). Time spent examining data held in the computer forms part of the lead time and, consequently, adversely affects the overall service level and/or investment in stock.
Approval of the resulting proposed order should be carried out as soon as possible after the purchasing officer has finalised it. That approval must not be delayed. There must always be someone available to attend to the task promptly. For that reason, there should be more than one person who can approve orders. Approval should never be delayed by absences, workload or other commitments. The approval process contributes to the lead time and, consequently, to the investment in inventory required to provide the desired overall service level. The longest approval time, rather than the average, is what has the greatest effect on the overall service level and/or investment in inventory. People responsible for approving orders should be made aware of the effects of delays. See the table in the article entitled “Reducing Lead Times” in that regard.
One simple method of facilitating rapid approval of orders is for the computer’s reordering recommendations to show the value of the recommended order quantity for each item for which reordering is recommended. It is also helpful for the total cost of the recommended order to be shown. If the review of the computer’s reordering recommendations is carried out using a spreadsheet then a column could be added showing the cost, for each item, of the order quantity proposed by the purchasing officer. The total of the costs in that column should also be shown.
Ideally, people responsible for approving orders should approve the maximum level for each item rather than approving individual orders. Under those circumstances, the approval process does not form part of the lead time. This could be done progressively. After an order has been approved, the new inventory position of an item could be regarded as the approved maximum level for that item. Such approval could be for a specified period of time or until there is a substantial change in the demand rate. Appropriate exception reporting (including reporting of substantial demand rate changes) by the computer would be helpful.
Consideration should be given to not requiring approval for items for which the value of the quantity to be ordered is small.
If management has sufficient confidence in the decisions of a purchasing officer then, instead of approving each order, spot checking of the purchasing officer’s decisions could be carried out retrospectively. That does not delay ordering and, consequently, the time taken for the spot checking would not form part of the lead time.
Sending the Order to the Supplier
This should be done as soon as possible after the order has been approved. In order to facilitate this, it is desirable for the computer’s reordering recommendations to be held in the computer as a tentative order. Then only the changes to the tentative order need to be entered into the computer. Also, any subsequent computer recommended orders can take into account the tentative order. If a decision is made not to proceed with a tentative order then it must be deleted immediately. Failure to do so will probably result in serious shortages.
In order to provide a high overall service level and minimise the investment in inventory required to achieve it, it is important to send orders to suppliers as soon as possible after the inventory positions of the items concerned fall below their reorder points. All delays in the process should be minimised. The data used for reordering purposes should be up to date.
If you need help with implementation of anything suggested in this article, feel free to contact me.