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

To learn more about inventory management, consider the online course "Profitable Inventory Management and Control." Learn more by clicking here.

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Spotlight On Professional Development Opportunities

Are you setting yourself up for failure in inventory management? Bad inventory decisions can kill an organization's profitability, whittle away at its market share, and generally wreak havoc on the supply chain, but it doesn't have to be that way.

The course "Profitable Inventory Management and Control" will give you the skills you need to use inventory as a strategic weapon for boosting profitability and giving your organization a competitive advantage. You'll become an inventory management and control expert, you'll have fun doing so, and your organization's financial and operational performance will improve as you implement the easy-to-apply best practices taught in this course.

Learn more about Profitable Inventory Management And Control at:

www.NextLevelPurchasing.com/inventory

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.