Academic journal article Journal of Supply Chain Management

Designing Ordering and Inventory Management Methodologies for Purchased Parts

Academic journal article Journal of Supply Chain Management

Designing Ordering and Inventory Management Methodologies for Purchased Parts

Article excerpt

There seems to be widespread agreement on the potential advantages of integrating or at least coordinating intra- and inter-organizational functions under the umbrella of supply chain management (e.g., Ellram and Cooper 1990; Landeros et al. 1995; Eliram and Hendrick 1995; Graham et al. 1994. The actual creation of interfaces between the individual links, however, is problematic (Jahnukainen and Lahti 1999) and the available literature does not seem to offer a great deal of help, especially not for individual managers. While Fawcett and Fawcett (1995) emphasized the importance of an integrated approach involving purchasing, logistics, and operations, the corresponding fields of literature still seem to follow separate ways. For example, Beamon (1998) concluded that operations management literature lacks sufficient design techniques for operationalizing its concepts. Maloni and Benton (1997) concluded that the vast majority of contributions in operations research still focus on one-product-one-supplier setting s, which is not immediately relevant for a manager facing several thousands of items from more than a hundred suppliers. The purchasing and supply literature (see, for example, van Weele 1994) recognizes the perspective of materials managers, yet is less clear on the operational interface between incoming goods and production.

Therefore, this article takes the viewpoint of a manager who has to deal with many items from multiple suppliers and who has to decide which ways of ordering, managing inventory, and expediting should be used for the various categories of purchased items. A design method for supporting managers in making these decisions is proposed.

The article begins with a discussion of the terminology and starting points underlying the design method, followed by a detailed presentation of the design method itself. The method is subsequently illustrated by examples from a practical application. The article concludes with a discussion of the results and implications for further research.

DEFINITION OF TERMS AND STARTING POINTS FOR THE DESIGN METHOD

An ordering and inventory management (OIM) method is defined here as a particular combination of (1) a way of releasing replenishment orders for a purchased item, (2) a way of determining the quantity to be ordered (i.e., lot sizing) for that item, and (3) a way of expediting the timely delivery of the item by the supplier. In theory, many different OIM methods can be conceived of (see Figure 1).

The starting point in this article is the setting of a manufacturing firm which procures materials and items that vary in terms of such factors as demand, demand variability, size, physical appearance, and monetary value. In such a setting, it makes sense to consider different OIM methods for different purchased items. For example, for purchased items of exceptional monetary value and a high but stable demand, it may be beneficial to use an OIM method that seeks relatively low levels of inventory. Similarly, other aspects may be specifically important for other items, for example the cost of releasing and handling orders.

The total set of OIM methods a firm uses for different (categories of) items is called the OIM configuration. The design of the ON configuration is a complicated task because of (1) the large number of options available in terms of alternative ON methods; (2) the presence of several criteria that may have to be taken into account when evaluating different OIM methods for a certain purchased part; (3) the often large number of items that must be decided upon; and (4) the restrictions that follow from decisions about the supplier base and the supply strategies to be pursued. Consistent with Simon (1993), the method described in this article is concerned with procedural rationality (i.e., how to decide) rather than substantive rationality (i.e., what to decide).

As becomes clear from Figure 2, instead of analyzing all theoretically possible OIM methods for each individual purchased item, the method simplifies this huge task by decomposing the problem into more manageable subproblems. …

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