Principles of Purchasing and Supply Management
Regular requirements are bought either for stock or for direct use in operations or production. Part of the functions or stock planning and control is to calculate what quantities are needed and when they are needed to meet requirements for stock or for production, manufacturing or assembly-type organizations.
The most important factors that determine the right quantities are as follows:
The demand for the final product into which the bought-out materials and components are incorporated.
The inventory policy of the undertaking.
Whether job, batch, assembly or process production methods are applicable.
Whether demand for the item is independent or dependent.
The service level that is the incidence of availability against requirements. The service level required for an item may be set at 100% for items where a stock out would result in great expense through production delays.
Market conditions such as financial, political and other considerations that determine whether requirements shall be purchased on a hand-to-month or forward basis
Factors determining economic order quantities.
The demand for the right quantity may be either independent or dependent.
Independent demand for an item is influenced by market conditions and not related to production decisions for any other item held in stock.
The quantities for independent demand can only be estimated, although fluctuating with random market influences.
Dependent demand for as an item derives for the product decisions for its ‘parents’ The term ‘parent’ is an item manufactured from one or more component items.
A component is one item that goes through one or more operations to be transformed into a parent.