Purchasing & Inventory Management Hook Up!

PurchTips - Edition # 116 December 27, 2006

By Charles Dominick, SPSM

Will Your Role Include Inventory Management?

A big trend is for organizations to blend their operational functions under the umbrella known as supply chain management. Often, the first two functions to merge are purchasing and inventory management.

So, as a purchasing professional, you must understand inventory management principles to remain valuable.

First, you must know how much inventory to have on hand to ensure continuity of supply in the event of an uncharacteristic increase in either demand and/or lead time. This quantity of inventory is called the safety stock. There is no universally used formula for determining safety stock quantity, but PurchTips Edition 86 suggested a risk averse calculation.

Second, you must know when to reorder materials for inventory. Generally, this point in time is determined when the quantity of materials in stock decreases to a certain level, called the reorder point. The reorder point is determined by the formula:

ROP = SSQ + (QUD x ALT)

Where,

ROP = Reorder Point

SSQ = Safety Stock Quantity

QUD = Quantity Used Daily

ALT = Average Lead Time (in days)

Third, you must know how much to order. A complex mathematical equation determines the Economic Order Quantity, or EOQ. The equation recognizes the tug of war between acquisition costs and inventory carrying costs: when you order bigger quantities less frequently, your aggregate acquisition costs are low but your inventory costs are high due to higher inventory levels. Conversely, when you order smaller quantities more often, your inventory costs are low but your acquisition costs are higher because you are expending more resources on ordering. The EOQ is the order quantity that minimizes the sum of these two costs.

Fortunately, inventory management systems calculate the EOQ for you. But if you want to see the EOQ equation, check out my blog post entitled Purchasing and Inventory Management.

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Spotlight On Professional Development Opportunities

Are you tired of not getting enough opportunities, respect, and money out of your purchasing career? Well, guess what? Nothing will change unless you take action towards becoming a world-class purchasing professional.

You see, today's employers refuse to reward employees for yesterday's skills. They demand that purchasing professionals like you use the most modern skills and achieve unprecedented results. They want you to save more money, achieve better operational performance, and reduce risk.

Earning your Senior Professional in Supply Management^SM (SPSM) Certification is the action to take if you want to bring the most modern purchasing practices into your organization and achieve your career potential. Learn how to earn your SPSM^SM Certification at:

www.NextLevelPurchasing.com

The Latest Purchasing News

• Purchasing Managers: How skilled is your department? We can help you find out. Read more at www.NextLevelPurchasing.com/manage
• Considering a career move? There are approximately 100 jobs preferring candidates with the SPSM Certification posted at www.NextLevelPurchasing.com/jobs

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Worried about purchasing job security? The report “Career Survival in Supply Management” can help you.