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Materials management

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Materials management is the branch of logistics that deals with the tangible components
of a supply chain. Specifically, this covers the acquisition of spare parts and
replacements, quality control of purchasing and ordering such parts, and the standards
involved in ordering, shipping, and warehousing the said parts.

Contents
[hide]

• 1 Areas of Concentration
o 1.1 Quality Assurance
o 1.2 Standards
o 1.3 Materials Management Week
• 2 References

• 3 External links

[edit] Areas of Concentration


[edit] Quality Assurance

A large component of materials management is ensuring that parts and materials used in
the supply chain meet minimum requirements by performing quality assurance (QA).
While most of the writing and discussion about materials management is on acquisition
and standards, much of the day to day work conducted in materials management deals
with QA issues. Parts and material are tested, both before purchase orders are placed and
during use, to ensure there are no short or long term issues that would disrupt the supply
chain. [1] This aspect of material management is most important heavily automated
industries, since failure rates due to faulty parts can slow or even stop production lines,
throwing off timetables for production goals.

[edit] Standards

The other major component of materials management is standards compliance. There are
standards that are followed in supply chain management that are critical to a supply
chain's function. For example, a supply chain that uses just-in-time or lean replenishment
requires absolute perfection in the shipping of parts and material from purchasing agent
to warehouse to place of destination. Systems reliant on vendor-managed inventories
must have up-to-date computerized inventories and robust ordering systems for outlying
vendors to place orders on. Materials management typically insures that the warehousing
and shipping of such components as are needed follows the standards required to avoid
problems. This component of materials management is the fastest changing part, due to
recent innovations in SCM and in logistics in general, including outsourced management
of warehousing, mobile computing, and real-time logistical inventories.

[edit] Materials Management Week

Each year, an entire week is dedicated to celebrating resource and materials management
professionals for their outstanding contributions to healthcare and the overall success of
the supply chain. Sponsored by the Association for Healthcare Resource & Materials
Management (AHRMM), National Healthcare Resource & Materials Management Week
(MM Week) provides an opportunity to recognize the integral role materials management
professionals play in delivering high-quality patient care throughout the health care
industry. In 2009 Material Management Week is October 4-10

Supply chain
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An illustration of a company's supply chain; the arrows stand for supplier-relationship


management, internal SCM and customer-relationship management (cf. Chen/Paulraj,
2004)

A 'supply chain is the system of organizations, people, technology, activities, information


and resources involved in moving a product or service from supplier to customer. Supply
chain activities transform natural resources, raw materials and components into a finished
product that is delivered to the end customer. In sophisticated supply chain systems, used
products may re-enter the supply chain at any point where residual value is recyclable.
Supply chains link value chains[1].

A typical supply chain begins with ecological and biological regulation of natural
resources, followed by the human extraction of raw material, and includes several
production links (e.g., component construction, assembly, and merging) before moving
on to several layers of storage facilities of ever-decreasing size and ever more remote
geographical locations, and finally reaching the consumer.

Many of the exchanges encountered in the supply chain will therefore be between
different companies that will seek to maximize their revenue within their sphere of
interest, but may have little or no knowledge or interest in the remaining players in the
supply chain. More recently, the loosely coupled, self-organizing network of businesses
that cooperates to provide product and service offerings has been called the Extended
Enterprise.[2]

Contents
[hide]

• 1 Supply chain modeling


• 2 Supply chain management
• 3 See also
• 4 External links

• 5 References

[edit] Supply chain modeling

A diagram of a supply chain. The black arrow represents the flow of materials and
information and the gray arrow represents the flow of information and backhauls. The
elements are (a) the initial supplier, (b) a supplier, (c) a manufacturer, (d) a customer, (e)
the final customer.

There are a variety of supply chain models, which address both the upstream and
downstream sides.

The SCOR (Supply Chain Operations Reference) model, developed by the Supply Chain
Council, measures total supply chain performance. It is a process reference model for
supply-chain management, spanning from the supplier's supplier to the customer's
customer.[3]. It includes delivery and order fulfillment performance, production flexibility,
warranty and returns processing costs, inventory and asset turns, and other factors in
evaluating the overall effective performance of a supply chain.

The Global Supply Chain Forum (GSCF) introduced another Supply Chain Model. This
framework [4] is built on eight key business processes that are both cross-functional and
cross-firm in nature. Each process is managed by a cross-functional team, including
representatives from logistics, production, purchasing, finance, marketing and research
and development. While each process will interface with key customers and suppliers, the
customer relationship management and supplier relationship management processes form
the critical linkages in the supply chain
Supply chain management

A German paper factory receives its daily supply of 75 tons of recyclable paper as its raw
material

In the 1980s the term Supply Chain Management (SCM) was developed [5], to express the
need to integrate the key business processes, from end user through original suppliers.
Original suppliers being those that provide products, services and information that add
value for customers and other stakeholders. The basic idea behind the SCM is that
companies and corporations involve themselves in a supply chain by exchanging
information regarding market fluctuations and production capabilities.

If all relevant information is accessible to any relevant company, every company in the
supply chain has the possibility to and can seek to help optimizing the entire supply chain
rather than sub optimize based on a local interest. This will lead to better planned overall
production and distribution which can cut costs and give a more attractive final product
leading to better sales and better overall results for the companies involved.

Incorporating SCM successfully leads to a new kind of competition on the global market
where competition is no longer of the company versus company form but rather takes on
a supply chain versus supply chain form.

Many electronics manufacturers of Guangdong rely on supply of parts from numerous


component shops in Guangzhou

The primary objective of supply chain management is to fulfill customer demands


through the most efficient use of resources, including distribution capacity, inventory and
labor. In theory, a supply chain seeks to match demand with supply and do so with the
minimal inventory. Various aspects of optimizing the supply chain include liaising with
suppliers to eliminate bottlenecks; sourcing strategically to strike a balance between
lowest material cost and transportation, implementing JIT (Just In Time) techniques to
optimize manufacturing flow; maintaining the right mix and location of factories and
warehouses to serve customer markets, and using location/allocation, vehicle routing
analysis, dynamic programming and, of course, traditional logistics optimization to
maximize the efficiency of the distribution side.

There is often confusion over the terms supply chain and logistics. It is now generally
accepted that the term Logistics applies to activities within one company/organization
involving distribution of product whereas the term Supply chain also encompasses
manufacturing and procurement and therefore has a much broader focus as it involves
multiple enterprises, including suppliers, manufacturers and retailers, working together to
meet a customer need for a product or service.[citation needed]

Starting in the 1990s several companies choose to outsource the logistics aspect of supply
chain management by partnering with a 3PL, Third-party logistics provider. Companies
also outsource production to contract manufacturers.[citation needed]

There are actually four common Supply Chain Models. Besides the two mentioned
above, there are the American Productivity & Quality Center's (APQC) Process
Classification Framework and the Supply Chain Best Practices Framework.

[edit] See also


• American Production and Inventory Control Society
• Cold chain
• C-VARWIP
• Demand chain
• Demand chain management
• Demand optimization
• Distribution
• Distribution resource planning
• Factory Physics
• Extended Enterprise
• Industrial engineering
• Inventory control
• Liquid logistics
• Logistics
• Military supply chain management
• Reverse logistics
• Supply network
• Supply chain management
• Supply chain network
• Supply chain optimization
• Supply chain security
• Value chain

Inventory
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This article is about business inventory. For other uses, see Inventory (disambiguation).
"Overstock" redirects here. For the online retailer, see Overstock.com.

Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business. It is also used for a list of the contents of a household
and for a list for testamentary purposes of the possessions of someone who has died. In
accounting inventory is considered an asset.

Contents
[hide]

• 1 Origins of the word Inventory


• 2 Business inventory
o 2.1 The reasons for keeping stock
o 2.2 Special terms used in dealing with inventory
o 2.3 Typology
o 2.4 Inventory examples
 2.4.1 Manufacturing
 2.4.2 Logistics or distribution
o 2.5 High level inventory management
o 2.6 Accounting perspectives
 2.6.1 The basis of Inventory accounting
 2.6.2 Accounting for Inventory
 2.6.3 Financial accounting
• 3 The role of a cost accountant on the 21st-century in a manufacturing
organization
o 3.1 FIFO vs. LIFO accounting
o 3.2 Standard cost accounting
o 3.3 Theory of Constraints cost accounting
• 4 National accounts
• 5 Distressed inventory
• 6 Inventory credit
• 7 See also
• 8 References
• 9 Further reading
• 10 External links

[edit] Origins of the word Inventory


The word inventory was first recorded in 1601. The French term inventaire, or "detailed
list of goods," dates back to 1415.

[edit] Business inventory


[edit] The reasons for keeping stock

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amount of inventory to use in this "lead
time"
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time at a place where user
needs it, when he needs it" principle tends to incur lots of costs in terms of
logistics. So bulk buying, movement and storing brings in economies of scale,
thus inventory.

All these stock reasons can apply to any owner or product stage.

• Buffer stock is held in individual workstations against the possibility that the
upstream workstation may be a little delayed in long setup or change-over time.
This stock is then used while that change-over is happening. This stock can be
eliminated by tools like SMED.

These classifications apply along the whole Supply chain not just within a facility or
plant.

Where these stocks contain the same or similar items it is often the work practice to hold
all these stocks mixed together before or after the sub-process to which they relate. This
'reduces' costs. Because they are mixed-up together there is no visual reminder to
operators of the adjacent sub-processes or line management of the stock which is due to a
particular cause and should be a particular individual's responsibility with inevitable
consequences. Some plants have centralized stock holding across sub-processes which
makes the situation even more acute.

[edit] Special terms used in dealing with inventory


• Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item. Therefore any change in the packaging or
product is a new SKU. This level of detailed specification assists in managing
inventory.
• Stockout means running out of the inventory of an SKU.[1]
• "New old stock" (sometimes abbreviated NOS) is a term used in business to refer
to merchandise being offered for sale which was manufactured long ago but that
has never been used. Such merchandise may not be produced any more, and the
new old stock may represent the only market source of a particular item at the
present time.

[edit] Typology

1. Buffer/safety stock
2. Cycle stock (Used in batch processes, it is the available inventory excluding
buffer stock)
3. De-coupling (Buffer stock that is held by both the supplier and the user)
4. Anticipation stock (building up extra stock for periods of increased demand - e.g.
ice cream for summer)
5. Pipeline stock (goods still in transit or in the process of distribution - have left the
factory but not arrived at the customer yet)

[edit] Inventory examples

While accountants often discuss inventory in terms of goods for sale, organizations -
manufacturers, service-providers and not-for-profits - also have inventories (fixtures,
furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and
wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a
warehouse or in a shop or store accessible to customers. Inventories not intended for sale
to customers or to clients may be held in any premises an organization uses. Stock ties up
cash and if uncontrolled it will be impossible to know the actual level of stocks and
therefore impossible to control them.

Whilst the reasons for holding stock are covered earlier, most manufacturing
organizations usually divide their "goods for sale" inventory into:

• Raw materials - materials and components scheduled for use in making a product.
• Work in process, WIP - materials and components that have begun their
transformation to finished goods.
• Finished goods - goods ready for sale to customers.
• Goods for resale - returned goods that are salable.
• Spare parts

For example:
[edit] Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form the
foods to be canned, empty cans and their lids (or coils of steel or aluminum for
constructing those components), labels, and anything else (solder, glue, ...) that will form
part of a finished can. The firm's work in process includes those materials from the time
of release to the work floor until they become complete and ready for sale to wholesale or
retail customers. This may be vats of prepared food, filled cans not yet labelled or sub-
assemblies of food components. It may also include finished cans that are not yet
packaged into cartons or pallets. Its finished good inventory consists of all the filled and
labelled cans of food in its warehouse that it has manufactured and wishes to sell to food
distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers
through arrangements like factory stores and outlet centers.

[edit] Logistics or distribution

The logistics chain includes the owners (wholesalers and retailers), manufacturers' agents,
and transportation channels that an item passes through between initial manufacture and
final purchase by a consumer. At each stage, goods belong (as assets) to the seller until
the buyer accepts them. Distribution includes four components:

1. Manufacturers' agents: Distributors who hold and transport a consignment of


finished goods for manufacturers without ever owning it. Accountants refer to
manufacturers' agents' inventory as "matériel" in order to differentiate it from
goods for sale.
2. Transportation: The movement of goods between owners, or between locations of
a given owner. The seller owns goods in transit until the buyer accepts them.
Sellers or buyers may transport goods but most transportation providers act as the
agent of the owner of the goods.
3. Wholesaling: Distributors who buy goods from manufacturers and other suppliers
(farmers, fishermen, etc.) for re-sale work in the wholesale industry. A
wholesaler's inventory consists of all the products in its warehouse that it has
purchased from manufacturers or other suppliers. A produce-wholesaler (or
distributor) may buy from distributors in other parts of the world or from local
farmers. Food distributors wish to sell their inventory to grocery stores, other
distributors, or possibly to consumers.
4. Retailing: A retailer's inventory of goods for sale consists of all the products on its
shelves that it has purchased from manufacturers or wholesalers. The store
attempts to sell its inventory (soup, bolts, sweaters, or other goods) to consumers.

It is a key observation in the "Lean Manufacturing" that it is often the case that more than
90% of a product's life prior to end user sale is spent in distribution of one form or
another. On the assumption that the time is not itself valuable to the customer this adds
enormously to the working capital tied up in the business as well as the complexity of the
supply chain. Reduction and elimination of these inventory 'wait' states is a key concept
in Lean.
[edit] High level inventory management

It seems that around about 1880[2] there was a change in manufacturing practice from
companies with relatively homogeneous lines of products to vertically integrated
companies with unprecedented diversity in processes and products. Those companies
(especially in metalworking) attempted to achieve success through economies of scope -
the gains of jointly producing two or more products in one facility. The managers now
needed information on the effect of product mix decisions on overall profits and therefore
needed accurate product cost information. A variety of attempts to achieve this were
unsuccessful due to the huge overhead of the information processing of the time.
However, the burgeoning need for financial reporting after 1900 created unavoidable
pressure for financial accounting of stock and the management need to cost manage
products became overshadowed. In particular it was the need for audited accounts that
sealed the fate of managerial cost accounting. The dominance of financial reporting
accounting over management accounting remains to this day with few exceptions and the
financial reporting definitions of 'cost' have distorted effective management 'cost'
accounting since that time. This is particularly true of inventory.

Hence high level financial inventory has these two basic formulas which relate to the
accounting period:

1. Cost of Beginning Inventory at the start of the period + inventory purchases


within the period + cost of production within the period = cost of goods
2. Cost of goods − cost of ending inventory at the end of the period = cost of goods
sold

The benefit of these formulae is that the first absorbs all overheads of production and raw
material costs in to a value of inventory for reporting. The second formula then creates
the new start point for the next period and gives a figure to be subtracted from sales price
to determine some form of sales margin figure.

Manufacturing management is more interested in inventory turnover ratio or average


days to sell inventory since it tells them something about relative inventory levels.

Inventory turn over ratio (also known as inventory turns) = cost of goods sold /
Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending
Inventory) / 2)

and its inverse

Average Days to Sell Inventory = Number of Days a Year / Inventory Turn Over
Ratio = 365 days a year / Inventory Turn Over Ratio

This ratio estimates how many times the inventory turns over a year. This number tells us
how much cash/goods are tied up waiting for the process and is a critical measure of
process reliability and effectiveness. So a factory with two inventory turns has six months
stock on hand which generally not a good figure (depending upon industry) whereas a
factory that moves from six turns to twelve turns has probably improved effectiveness by
100%. This improvement will have some negative results in the financial reporting since
the 'value' now stored in the factory as inventory is reduced.

Whilst the simplicity of these accounting measures of inventory are very useful they are
in the end fraught with the danger of their own assumptions. There are in fact so many
things which can vary hidden under this appearance of simplicity that a variety of
'adjusting' assumptions may be used. These include:

• Specific Identification
• Weighted Average Cost
• Moving-Average Cost
• FIFO and LIFO.

Inventory Turn is a financial accounting tools for evaluating inventory and it is not
necessarily a management tool. Inventory management should be forward looking. The
methodology applied is based on historical cost of goods sold. The ratio may not be able
to reflect the usability of future production demand as well as customer demand.

Business models including Just in Time (JIT) Inventory, Vendor Managed Inventory
(VMI) and Customer Managed Inventory (CMI) attempt to minimize on-hand inventory
and increase inventory turns. VMI and CMI have gained considerable attention due to the
success of third party vendors who offer added expertise and knowledge that
organizations may not possess.

[edit] Accounting perspectives

[edit] The basis of Inventory accounting

Inventory needs to be accounted where it is held across accounting period boundaries


since generally expenses should be matched against the results of that expense within the
same period. When processes were simple and short then inventories were small but with
more complex processes then inventories became larger and significant valued items on
the balance sheet[3]. This need to value unsold and incomplete goods has driven many
new behaviours into management practise. Perhaps most significant of these are the
complexities of fixed cost recovery, transfer pricing, and the separation of direct from
indirect costs. This, supposedly, precluded "anticipating income" or "declaring dividends
out of capital". It is one of the intangible benefits of Lean and the TPS that process times
shorten and stock levels decline to the point where the importance of this activity is
hugely reduced and therefore effort, especially managerial, to achieve it can be
minimised.
[edit] Accounting for Inventory

Each country has its own rules about accounting for inventory that fit with their financial
reporting rules.

So for example, organizations in the U.S. define inventory to suit their needs within US
Generally Accepted Accounting Practices (GAAP), the rules defined by the Financial
Accounting Standards Board (FASB) (and others) and enforced by the U.S. Securities
and Exchange Commission (SEC) and other federal and state agencies. Other countries
often have similar arrangements but with their own GAAP and national agencies instead.

It is intentional that financial accounting uses standards that allow the public to compare
firms' performance, cost accounting functions internally to an organization and
potentially with much greater flexibility. A discussion of inventory from standard and
Theory of Constraints-based (throughput) cost accounting perspective follows some
examples and a discussion of inventory from a financial accounting perspective.

The internal costing/valuation of inventory can be complex. Whereas in the past most
enterprises ran simple one process factories, this is quite probably in the minority in the
21st century. Where 'one process' factories exist then there is a market for the goods
created which establishes an independent market value for the good. Today with multi-
stage process companies there is much inventory that would once have been finished
goods which is now held as 'work-in-process' (WIP). This needs to be valued in the
accounts but the valuation is a management decision since there is no market for the
partially finished product. This somewhat arbitrary 'valuation' of WIP combined with the
allocation of overheads to it has led to some unintended and undesirable results.

[edit] Financial accounting

An organization's inventory can appear a mixed blessing, since it counts as an asset on


the balance sheet, but it also ties up money that could serve for other purposes and
requires additional expense for its protection. Inventory may also cause significant tax
expenses, depending on particular countries' laws regarding depreciation of inventory, as
in Thor Power Tool Company v. Commissioner.

Inventory appears as a current asset on an organization's balance sheet because the


organization can, in principle, turn it into cash by selling it. Some organizations hold
larger inventories than their operations require in order to inflate their apparent asset
value and their perceived profitability.

In addition to the money tied up by acquiring inventory, inventory also brings associated
costs for warehouse space, for utilities, and for insurance to cover staff to handle and
protect it, fire and other disasters, obsolescence, shrinkage (theft and errors), and others.
Such holding costs can mount up: between a third and a half of its acquisition value per
year.
Businesses that stock too little inventory cannot take advantage of large orders from
customers if they cannot deliver. The conflicting objectives of cost control and customer
service often pit an organization's financial and operating managers against its sales and
marketing departments. Sales people, in particular, often receive sales commission
payments, so unavailable goods may reduce their potential personal income. This conflict
can be minimised by reducing production time to being near or less than customer
expected delivery time. This effort, known as "Lean production" will significantly reduce
working capital tied up in inventory and reduce manufacturing costs (See the Toyota
Production System).

[edit] The role of a cost accountant on the 21st-century


in a manufacturing organization
By helping the organization to make better decisions, the accountants can help the public
sector to change in a very positive way that delivers increased value for the taxpayer’s
investment. It can also help to incentivise progress and to ensure that reforms are
sustainable and effective in the long term, by ensuring that success is appropriately
recognized in both the formal and informal reward systems of the organization.

To say that they have a key role to play is an understatement. Finance is connected to
most, if not all, of the key business processes within the organization. It should be
steering the stewardship and accountability systems that ensure that the organization is
conducting its business in an appropriate, ethical manner. It is critical that these
foundations are firmly laid. So often they are the litmus test by which public confidence
in the institution is either won or lost.

Finance should also be providing the information, analysis and advice to enable the
organizations’ service managers to operate effectively. This goes beyond the traditional
preoccupation with budgets – how much have we spent so far, how much have we left to
spend? It is about helping the organization to better understand its own performance. That
means making the connections and understanding the relationships between given inputs
– the resources brought to bear – and the outputs and outcomes that they achieve. It is
also about understanding and actively managing risks within the organization and its
activities.

[edit] FIFO vs. LIFO accounting


Main article: FIFO and LIFO accounting

When a dealer sells goods from inventory, the value of the inventory is reduced by the
cost of goods sold (CoG sold). This is simple where the CoG has not varied across those
held in stock; but where it has, then an agreed method must be derived to evaluate it. For
commodity items that one cannot track individually, accountants must choose a method
that fits the nature of the sale. Two popular methods which normally exist are: FIFO and
LIFO accounting (first in - first out, last in - first out). FIFO regards the first unit that
arrived in inventory as the first one sold. LIFO considers the last unit arriving in
inventory as the first one sold. Which method an accountant selects can have a significant
effect on net income and book value and, in turn, on taxation. Using LIFO accounting for
inventory, a company generally reports lower net income and lower book value, due to
the effects of inflation. This generally results in lower taxation. Due to LIFO's potential to
skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory
accounting.

[edit] Standard cost accounting

Standard cost accounting uses ratios called efficiencies that compare the labour and
materials actually used to produce a good with those that the same goods would have
required under "standard" conditions. As long as similar actual and standard conditions
obtain, few problems arise. Unfortunately, standard cost accounting methods developed
about 100 years ago, when labor comprised the most important cost in manufactured
goods. Standard methods continue to emphasize labor efficiency even though that
resource now constitutes a (very) small part of cost in most cases.

Standard cost accounting can hurt managers, workers, and firms in several ways. For
example, a policy decision to increase inventory can harm a manufacturing managers'
performance evaluation. Increasing inventory requires increased production, which
means that processes must operate at higher rates. When (not if) something goes wrong,
the process takes longer and uses more than the standard labor time. The manager appears
responsible for the excess, even though s/he has no control over the production
requirement or the problem.

In adverse economic times, firms use the same efficiencies to downsize, rightsize, or
otherwise reduce their labor force. Workers laid off under those circumstances have even
less control over excess inventory and cost efficiencies than their managers.

Many financial and cost accountants have agreed for many years on the desirability of
replacing standard cost accounting. They have not, however, found a successor.

[edit] Theory of Constraints cost accounting

Eliyahu M. Goldratt developed the Theory of Constraints in part to address the cost-
accounting problems in what he calls the "cost world". He offers a substitute, called
throughput accounting, that uses throughput (money for goods sold to customers) in place
of output (goods produced that may sell or may boost inventory) and considers labor as a
fixed rather than as a variable cost. He defines inventory simply as everything the
organization owns that it plans to sell, including buildings, machinery, and many other
things in addition to the categories listed here. Throughput accounting recognizes only
one class of variable costs: the trully variable costs like materials and components that
vary directly with the quantity produced.

Finished goods inventories remain balance-sheet assets, but labor efficiency ratios no
longer evaluate managers and workers. Instead of an incentive to reduce labor cost,
throughput accounting focuses attention on the relationships between throughput
(revenue or income) on one hand and controllable operating expenses and changes in
inventory on the other. Those relationships direct attention to the constraints or
bottlenecks that prevent the system from producing more throughput, rather than to
people - who have little or no control over their situations.

[edit] National accounts


Inventories also play an important role in national accounts and the analysis of the
business cycle. Some short-term macroeconomic fluctuations are attributed to the
inventory cycle.

[edit] Distressed inventory


Also known as distressed or expired stock, distressed inventory is inventory whose
potential to be sold at a normal cost has or will soon pass. In certain industries it could
also mean that the stock is or will soon be impossible to sell. Examples of distressed
inventory include products that have reached its expiry date, or has reached a date in
advance of expiry at which the planned market will no longer purchase it (e.g. 3 months
left to expiry), clothing that is defective or out of fashion, and old newspapers or
magazines. It also includes computer or consumer-electronic equipment that is
obsolescent or discontinued and whose manufacturer is unable to support it. One current
example of distressed inventory is the VHS format.[4]

[edit] Inventory credit


Inventory credit refers to the use of stock, or inventory, as collateral to raise finance.
Where banks may be reluctant to accept traditional collateral, for example in developing
countries where land title may be lacking, inventory credit is a potentially important way
of overcoming financing constraints. This is not a new concept; archaeological evidence
suggests that it was practiced in Ancient Rome. Obtaining finance against stocks of a
wide range of products held in a bonded warehouse is common in much of the world. It
is, for example, used with parmesan cheese in Italy.[5] Inventory credit on the basis of
stored agricultural produce is widely used in Latin American countries and in some Asian
countries. [6]A precondition for such credit is that banks must be confident that the stored
product will be available if they need to call on the collateral; this implies the existence of
a reliable network of certified warehouses. Banks also face problems in valuing the
inventory. The possibility of sudden falls in commodity prices means that they are usually
reluctant to lend more than about 60% of the value of the inventory at the time of the
loan.

Stock management
From Wikipedia, the free encyclopedia

Jump to: navigation, search


This article does not cite any references or sources. Please help improve this article
by adding citations to reliable sources (ideally, using inline citations). Unsourced
material may be challenged and removed. (October 2007)

Stock management is the function of understanding the stock mix of a company and the
different demands on that stock. The demands are influenced by both external and
internal factors and are balanced by the creation of Purchase order requests to keep
supplies at a reasonable or prescribed level.

Contents
[hide]

• 1 Retail supply chain


o 1.1 Weighted Average Price Method
• 2 Software applications
• 3 Business models

• 4 References

[edit] Retail supply chain


Stock management in the retail supply chain follows the following sequence:

1. Request for new stock from stores to head office


2. Head office issues purchase orders to the vendor
3. Vendor ships the goods
4. Warehouse receives the goods
5. Warehouse stocks and distributes to the stores
6. Stores receive the goods
7. Goods are sold to customers at the stores

The management of the inventory in the supply chain involves managing the physical
quantities as well as the costing of the goods as it flows through the supply chain.

In managing the cost prices of the goods throughout the supply chain, several costing
methods are employed:

1. Retail method
2. Weighted Average Price method
3. FIFO (First In First Out) method
4. LIFO (Last In First Out) method
5. LPP (Last Purchase Price) method
6. BNM (Bottle neck method)

This is able to going with closer lead time of procurement on this method we save the
company money very much, for this method we have to make a proper plan of their
requirements, we plan for sub divisional equipments and less important products of
concern but it must be plan the date of availability and near by vendor,to save money

[edit] Weighted Average Price Method

The calculation can be done for different periods. If the calculation is done on a monthly
basis, then it is referred to the periodic method. In this method, the available stock is
calculated by:

ADD Stock at beginning of period


ADD Stock purchased during the period
AVERAGE total cost by total qty to arrive at the Average Cost of Goods for the period.

This Average Cost Price is applied to all movements and adjustments in that period.
Ending stock in qty is arrived at by Applying all the changes in qty to the Available
balance.
Multiplying the stock balance in qty by the Average cost gives the Stock cost at the end of
the period.

Using the perpetual method, the calculation is done upon every purchase transaction.

Thus, the calculation is the same based on the periodic calculation whether by period
(periodic) or by transaction (perpetual).

The only difference is the 'periodicity' or scope of the calculation. - Periodic is done
monthly - Perpetual is done for the duration of the purchase until the next purchase

In practice, the daily averaging has been used to closely approximate the perpetual
method. 6. Bottle neck method ( depends on proper planning support)

[edit] Software applications


The implementation of inventory management applications has become a valuable tool
for organizations looking to more efficiently manage stock. While the capabilities of
applications vary, most inventory management applications give organizations a
structured method of accounting for all incoming and outgoing inventory within their
facilities. Organizations save a significant amount in costs associated with manual
inventory counts, administrative errors and reductions in inventory stock-outs.

[edit] Business models


Just-in-time Inventory (JIT), Vendor Managed Inventory (VMI) and Customer Managed
Inventory (CMI) are a few of the popular models being employed by organizations
looking to have greater stock management control.

JIT is a model which attempts to replenish inventory for organizations when the
inventory is required. The model attempts to avoid excess inventory and its associated
costs. As a result, companies receive inventory only when the need for more stock is
approaching.

VMI and CMI are two business models that adhere to the JIT inventory principles. VMI
gives the vendor in a vendor/customer relationship the ability to monitor, plan and control
inventory for their customers. Customers relinquish the order making responsibilities in
exchange for timely inventory replenishment that increases organizational efficiency.

CMI allows the customer to order and control their inventory from their
vendors/suppliers. Both VMI and CMI benefit the vendor as well as the customer.
Vendors see a significant increase in sales due to increased inventory turns and cost
savings realized by their customers, while customers realize similar benefits.

FIFO and LIFO accounting


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material may be challenged and removed. (November 2007)

FIFO and LIFO accounting methods are means of managing inventory and financial
matters involving the money a company ties up within inventory of produced goods, raw
materials, parts, components, or feed stocks. FIFO stands for first-in, first-out, meaning
that the oldest inventory items are recorded as sold first. LIFO stands for last-in, first-out,
meaning that the most recently purchased items are recorded as sold first. Since the
1970s, U.S. companies have tended to use LIFO, which reduces their income taxes in
times of inflation.[1]

Contents
[hide]

• 1 LIFO accounting
• 2 FIFO accounting
• 3 LIFO liquidation
• 4 See also

• 5 References

[edit] LIFO accounting


LIFO is an acronym for "last in, first out." (Sometimes the term FILO ("first in, last out")
is used synonymously.) In LIFO accounting, a historical method of recording the value
of inventory, a firm records the last units purchased as the first units sold. LIFO
accounting is in contrast to the method FIFO accounting covered below.

Since prices generally rise over time because of inflation, this method records the sale of
the most expensive inventory first and thereby decreases profit and reduces taxes.
However, this method rarely reflects the physical flow of indistinguishable items.

LIFO valuation is permitted in the belief that an ongoing business does not realize an
economic profit solely from inflation. When prices are increasing, they must replace
inventory currently being sold with higher priced goods. LIFO better matches current
cost against current revenue. It also defers paying taxes on phantom income arising solely
from inflation. LIFO is attractive to business in that it delays a major detrimental effect of
inflation, namely higher taxes. However, in a very long run, both methods converge.

“Last in first out” (LIFO) is not acceptable in the IFRS. [2]

[edit] FIFO accounting


FIFO accounting is a common method for recording the value of inventory. It is
appropriate where there are many different batches of similar products. The method
presumes that the next item to be shipped will be the oldest of that type in the warehouse.
In practice, this usually reflects the underlying commercial substance of the transaction,
since many companies rotate their inventory (especially of perishable goods). This is still
not in contrast to LIFO because FIFO and LIFO are cost flow assumptions not product
flow assumptions.

In an economy of rising prices (during inflation), it is common for beginning companies


to use FIFO for reporting the value of merchandise to bolster their balance sheet. As the
older and cheaper goods are sold, the newer and more expensive goods remain as assets
on the company's books. Having the higher valued inventory and the lower cost of goods
sold on the company's financial statements may increase the chances of getting a loan.
However, as it prospers the company may switch to LIFO to reduce the amount of taxes it
pays to the government.

[edit] LIFO liquidation


Notwithstanding its deferred tax advantage, a LIFO inventory system can lead to LIFO
liquidation, a situation where in the absence of new replacement inventory or a search for
increased profits, older inventory is increasingly liquidated (or sold). If prices have been
rising, for example through inflation, this older inventory will have a lower cost, and its
liquidation will lead to the recognition of higher net income and the payment of higher
taxes, thus reversing the deferred tax advantage that initially encouraged the adoption of a
LIFO system. Some companies who use LIFO have decades-old inventory recorded on
their books at a very low cost. For these companies a LIFO liquidation would result in an
inflated net income and higher tax payments. This situation is usually undesirable; on rare
occasions a company in financial stress could abuse this method to temporarily increase
income

Just-in-time (business)
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Capital investment decisions


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Just-in-time (JIT) is an inventory strategy implemented to improve the return on


investment of a business by reducing in-process inventory and its associated carrying
costs. In order to achieve JIT the process must have signals of what is going on elsewhere
within the process. This means that the process is often driven by a series of signals,
which can be Kanban (看板 Kanban?), that tell production processes when to make the
next part. Kanban are usually 'tickets' but can be simple visual signals, such as the
presence or absence of a part on a shelf. When implemented correctly, JIT can lead to
dramatic improvements in a manufacturing organization's return on investment, quality,
and efficiency.

Quick communication of the consumption of old stock which triggers new stock to be
ordered is key to JIT and inventory reduction. This saves warehouse space and costs.
However since stock levels are determined by historical demand, any sudden demand
rises above the historical average demand, the firm will deplete inventory faster than
usual and cause customer service issues. Some[1] have suggested that recycling Kanban
faster can also help flex the system by as much as 10-30%. In recent years manufacturers
have touted a trailing 13 week average as a better predictor for JIT planning than most
forecastors could provide.[2]
Contents
[hide]

• 1 History
• 2 Philosophy
o 2.1 Transaction cost approach
o 2.2 Environmental concerns
o 2.3 Price volatility
o 2.4 Quality volatility
o 2.5 Demand stability
• 3 JIT Implementation Design
o 3.1 Effects
o 3.2 Benefits
o 3.3 Problems
 3.3.1 Within a JIT system
 3.3.2 Within a raw material stream
 3.3.3 Oil
• 4 Business models following similar approach
o 4.1 Vendor Managed Inventory
o 4.2 Customer Managed Inventory
• 5 See also
• 6 References

• 7 Further reading

[edit] History
The technique was first used by the Ford Motor Company as described explicitly by
Henry Ford's My Life and Work (1923): "We have found in buying materials that it is not
worthwhile to buy for other than immediate needs. We buy only enough to fit into the
plan of production, taking into consideration the state of transportation at the time. If
transportation were perfect and an even flow of materials could be assured, it would not
be necessary to carry any stock whatsoever. The carloads of raw materials would arrive
on schedule and in the planned order and amounts, and go from the railway cars into
production. That would save a great deal of money, for it would give a very rapid
turnover and thus decrease the amount of money tied up in materials. With bad
transportation one has to carry larger stocks." This statement also describes the concept of
"dock to factory floor" in which incoming materials are not even stored or warehoused
before going into production. The concept needed an effective freight management
system (FMS); Ford's Today and Tomorrow (1926) describes one.

The technique was subsequently adopted and publicized by Toyota Motor Corporation of
Japan as part of its Toyota Production System (TPS). However, Toyota famously did not
adopt the procedure from Ford, but from Piggly Wiggly. Although Toyota visited Ford as
part of its tour of American businesses, Ford had not fully adopted the Just-In-Time
system, and Toyota executives were appalled at the piles of inventory laying around and
the uneven work schedule of the employees of Ford. Toyota also visited Piggly Wiggly,
and it was there that Toyota executives first observed a fully functioning and successful
Just-In-Time system, and modeled TPS after it.

It is hard for Japanese corporations to warehouse finished products and parts, due to the
limited amount of land available for them. Before the 1950s, this was thought to be a
disadvantage because it forced the production lot size below the economic lot size. (An
economic lot size is the number of identical products that should be produced, given the
cost of changing the production process over to another product.) The undesirable result
was poor return on investment for a factory.

The chief engineer at Toyota in the 1950s, Taiichi Ohno (大野 耐一 Ohno Taiichi?),
examined accounting assumptions and realized that another method was possible. The
factory could implement JIT which would require it to be made more flexible and reduce
the overhead costs of retooling and thereby reduce the economic lot size to fit the
available warehouse space. JIT is now regarded by Ohno as one of the two 'pillars' of the
Toyota Production System.

Therefore over a period of several years, Toyota engineers redesigned car models for
commonality of tooling for such production processes as paint-spraying and welding.
Toyota was one of the first to apply flexible robotic systems for these tasks. Some of the
changes were as simple as standardizing the hole sizes used to hang parts on hooks. The
number and types of fasteners were reduced in order to standardize assembly steps and
tools. In some cases, identical sub-assemblies could be used in several models.

Toyota engineers then determined that the remaining critical bottleneck in the retooling
process was the time required to change the stamping dies used for body parts. These
were adjusted by hand, using crowbars and wrenches. It sometimes took as long as
several days to install a large, multi-ton die set and adjust it for acceptable quality.
Further, these were usually installed one at a time by a team of experts, so that the line
was down for several weeks.

So Toyota implemented a strategy now called Single Minute Exchange of Die (SMED),
developed with Shigeo Shingo (新郷 重雄 Shingō Shigeo?). With very simple fixtures,
measurements were substituted for adjustments. Almost immediately, die change times
fell to hours instead of days. At the same time, quality of the stampings became
controlled by a written recipe, reducing the skill level required for the change. Further
analysis showed that a lot of the remaining time was used to search for hand tools and
move dies. Procedural changes (such as moving the new die in place with the line in
operation) and dedicated tool-racks reduced the die-change times to as little as 40
seconds. Today dies are changed in a ripple through the factory as a new product begins
flowing.

After SMED, economic lot sizes fell to as little as one vehicle in some Toyota plants.
Carrying the process into parts-storage made it possible to store as little as one part in
each assembly station. When a part disappeared, that was used as a signal (Kanban) to
produce or order a replacement.

[edit] Philosophy
The philosophy of JIT is simple - inventory is defined to be waste. JIT inventory systems
expose the hidden causes of inventory keeping and are therefore not a simple solution a
company can adopt; there is a wh working come from many different disciplines
including statistics, industrial engineering, production management and behavioral
science. In the JIT inventory philosophy there are views with respect to how inventory is
looked upon, what it says about the management within the company, and the main
principle behind JIT.

Inventory is seen as incurring costs, or waste, instead of adding and storing value,
contrary to traditional accounting. This does not mean to say JIT is implemented without
an awareness that removing inventory exposes pre-existing manufacturing issues. With
this way of working, businesses are encouraged to eliminate inventory that does not
compensate for manufacturing process issues, and then to constantly improve those
processes so that less inventory can be kept. Secondly, allowing any stock habituates the
management to stock keeping and it can then be a bit like a narcotic. Management are
then tempted to keep stock there to hide problems within the production system. These
problems include backups at work centers, machine reliability, process variability, lack of
flexibility of employees and equipment, and inadequate capacity among other things.

In short, the just-in-time inventory system is all about having “the right material, at the
right time, at the right place, and in the exact amount”, without the safety net of
inventory. The JIT system has implications of which are broad for the implementers.

[edit] Transaction cost approach

JIT reduces inventory in a firm. However, unless it is used throughout the supply chain, it
can be hypothesized that firms are simply outsourcing their input inventory to suppliers
(Naj 1993). This effect was investigated by Newman (1993), who found, on average,
suppliers in Japan charged JIT customers a 5% price premium.

[edit] Environmental concerns

During the birth of JIT, multiple daily deliveries were often made by bicycle; with
increases in scale has come the adoption of vans and lorries (trucks) for these deliveries.
Cusumano (1994) has highlighted the potential and actual problems this causes with
regard to gridlock and the burning of fossil fuels. This violates three JIT wastes:

1. Time; wasted in traffic jams


2. Inventory; specifically pipeline (in transport) inventory and
3. Scrap; with respect to petrol or diesel burned while not physically moving.
[edit] Price volatility

JIT implicitly assumes a level of input price stability such that it is desirable to inventory
inputs at today's prices. Where input prices are expected to rise storing inputs may be
desirable.

[edit] Quality volatility

JIT implicitly assumes the quality of available inputs remains constant over time. If not,
firms may benefit from hoarding high quality inputs.

[edit] Demand stability

Karmarker (1989) highlights the importance of relatively stable demand which can help
ensure efficient capital utilisation rates. Karmarker argues without a significant stable
component of demand, JIT becomes untenable in high capital cost production. In the
U.S., the 1992 railway strikes resulted in General Motors having to idle a 75,000-worker
plant because they had no supplies coming in.

[edit] JIT Implementation Design


Based on a diagram modeled after the one used by Hewlett-Packard’s Boise plant to
accomplish its JIT program.

1) F Design Flow Process


- F Redesign/relayout for flow
- L Reduce lot sizes
- O Link operations
- W Balance workstation capacity
- M Preventative maintenance
- S Reduce Setup Times
2) Q Total quality control
- C worker compliance
- I Automatic inspection
- M quality measures
- M fail-safe methods
- W Worker participation

3) S Stabilize Schedule
- S Level Schedule
- W establish freeze windows
- UC Underutilize Capacity
4) K Kanban Pull System
- D Demand pull
- B Backflush
- L Reduce lot sizes
5) V Work with vendors
- L Reduce lead time
- D Frequent deliveries
- U Project usage requirements
- Q Quality Expectations
6) I Further reduce inventory in other areas
S Stores
- T Transit
- C Implement Carroussel to reduce motion waste
- C Implement Conveyor belts to reduce motion waste

7) P Improve Product Design


- P Standard Production Configuration
- P Standardize and reduce the number of parts
- P Process design with product design
- Q Quality Expectations

[edit] Effects

Some of the initial results at Toyota were horrible, but in contrast to that a huge amount
of cash appeared, apparently from nowhere, as in-process inventory was built out and
sold. This by itself generated tremendous enthusiasm in upper management.[citation needed]

Another surprising effect was that the response time of the factory fell to about a day.
This improved customer satisfaction by providing vehicles usually within a day or two of
the minimum economic shipping delay.

Also, many vehicles began to be built to order, completely eliminating the risk they
would not be sold. This dramatically improved the company's return on equity by
eliminating a major source of risk.

Since assemblers no longer had a choice of which part to use, every part had to fit
perfectly. The result was a severe quality assurance crisis, and a dramatic improvement in
product quality. Eventually, Toyota redesigned every part of its vehicles to eliminate or
widen tolerances, while simultaneously implementing careful statistical controls for
quality control. Toyota had to test and train suppliers of parts in order to assure quality
and delivery. In some cases, the company eliminated multiple suppliers.

When a process problem or bad parts surfaced on the production line, the entire
production line had to be slowed or even stopped. No inventory meant that a line could
not operate from in-process inventory while a production problem was fixed. Many
people in Toyota confidently predicted that the initiative would be abandoned for this
reason. In the first week, line stops occurred almost hourly. But by the end of the first
month, the rate had fallen to a few line stops per day. After six months, line stops had so
little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-
pull, that permitted any worker on the production line to order a line stop for a process or
quality problem. Even with this, line stops fell to a few per week.

The result was a factory that eventually became the envy of the industrialized world, and
has since been widely emulated.
The just-in-time philosophy was also applied to other segments of the supply chain in
several types of industries. In the commercial sector, it meant eliminating one or all of the
warehouses in the link between a factory and a retail establishment. Examples in the field
of sales, marketing and customer service involve applying information systems and
mobile hardware to deliver customer information immediately, at the time it is needed,
and reducing waste by applying video conferencing to cut travel time[3].

[edit] Benefits

As most companies use an inventory system best suited for their company, the Just-In-
Time Inventory System (JIT) can have many benefits resulting from it. The main benefits
of JIT are listed below.

1. Set up times are significantly reduced in the factory. Cutting down the set up time
to be more productive will allow the company to improve their bottom line to
look more efficient and focus time spent on other areas that may need
improvement. This allows the reduction or elimination of the inventory held to
cover the "changeover" time, the tool used here is SMED.
2. The flows of goods from warehouse to shelves are improved. Having employees
focused on specific areas of the system will allow them to process goods faster
instead of having them vulnerable to fatigue from doing too many jobs at once
and simplifies the tasks at hand. Small or individual piece lot sizes reduce lot
delay inventories which simplifies inventory flow and its management.
3. Employees who possess multiple skills are utilized more efficiently. Having
employees trained to work on different parts of the inventory cycle system will
allow companies to use workers in situations where they are needed when there is
a shortage of workers and a high demand for a particular product.
4. Better consistency of scheduling and consistency of employee work hours. If there
is no demand for a product at the time, workers don’t have to be working. This
can save the company money by not having to pay workers for a job not
completed or could have them focus on other jobs around the warehouse that
would not necessarily be done on a normal day.
5. Increased emphasis on supplier relationships. No company wants a break in their
inventory system that would create a shortage of supplies while not having
inventory sit on shelves. Having a trusting supplier relationship means that you
can rely on goods being there when you need them in order to satisfy the
company and keep the company name in good standing with the public.
6. Supplies continue around the clock keeping workers productive and businesses
focused on turnover. Having management focused on meeting deadlines will
make employees work hard to meet the company goals to see benefits in terms of
job satisfaction, promotion or even higher pay.

[edit] Problems
[edit] Within a JIT system

The major problem with just-in-time operation is that it leaves the supplier and
downstream consumers open to supply shocks and large supply or demand changes. For
internal reasons, this was seen as a feature rather than a bug by Ohno, who used the
analogy of lowering the level of water in a river in order to expose the rocks to explain
how removing inventory showed where flow of production was interrupted. Once the
barriers were exposed, they could be removed; since one of the main barriers was rework,
lowering inventory forced each shop to improve its own quality or cause a holdup in the
next downstream area. One of the other key tools to manage this weakness is production
levelling to remove these variations. Just-in-time is a means to improving performance of
the system, not an end.

With very low stock levels meaning that there are shipments of the same part coming in
sometimes several times per day, Toyota is especially susceptible to an interruption in the
flow. For that reason, Toyota is careful to use two suppliers for most assemblies. As noted
in Liker (2003), there was an exception to this rule that put the entire company at risk by
the 1997 Aisin fire. However, since Toyota also makes a point of maintaining high quality
relations with its entire supplier network, several other suppliers immediately took up
production of the Aisin-built parts by using existing capability and documentation. Thus,
a strong, long-term relationship with a few suppliers is preferred to short-term, price-
based relationships with competing suppliers. This long-term relationship has also been
used by Toyota to send Toyota staff into their suppliers to improve their suppliers'
processes. These interventions have now been going on for twenty years and result in
improved margins for Toyota and the supplier as well as lower final customer costs and a
more reliable supply chain. Toyota encourages their suppliers to duplicate this work with
their own suppliers.

[edit] Within a raw material stream


This article may contain wording that promotes the subject in a subjective manner
without imparting real information. Please remove or replace such wording or find
sources which back the claims.

As noted by Liker (2003) and Womack and Jones (2003), it would ultimately be desirable
to introduce synchronised flow and linked JIT all the way back through the supply
stream. However, none followed this in detail all the way back through the processes to
the raw materials. With present technology, for example, an ear of corn cannot be grown
and delivered to order. The same is true of most raw materials, which must be discovered
and/or grown through natural processes that require time and must account for natural
variability in weather and discovery. The part of this currently viewed as impossible is the
synchronised part of flow and the linked part of JIT. It is for the reasons stated raw
materials companies decouple their supply chain from their clients' demand by carrying
large 'finished goods' stocks. Both flow and JIT can be implemented in isolated process
islands within the raw materials stream. The challenge then becomes to achieve that
isolation by some means other than the huge stocks they carry to achieve it today.
It is because of this almost all value chains are split into a part which makes-to-forecast
and a part which could, by using JIT, become make-to-order. Often, historically, the
make-to-order part has been within the retailer portion of the value chain. Toyota's
revolutionary step has been to take Piggly Wiggly's supermarket replenishment system
and drive it back to at least half way through their automobile factories. Their challenge
today is to drive it all the way back to their goods-inwards dock. Of course, the mining of
iron and making of steel is still not done specifically because somebody orders a
particular car. Recognising JIT could be driven back up the supply chain has reaped
Toyota huge benefits and a world dominating position in the auto industry.

It should be noted that the advent of the mini mill steelmaking facility is starting to
challenge how far back JIT can be implemented, as the electric arc furnaces at the heart
of many mini-mills can be started and stopped quickly, and steel grades changed rapidly.

[edit] Oil

It has been frequently charged that the oil industry has been influenced by JIT.[4][5][6]

The argument is presented as follows:

The number of refineries in the United States has fallen from 279 in 1975 to 205
in 1990 and further to 149 in 2004. As a result, the industry is susceptible to
supply shocks, which cause spikes in prices and subsequently reduction in
domestic manufacturing output. The effects of hurricanes Katrina and Rita are
given as an example: in 2005, Katrina caused the shutdown of 9 refineries in
Louisiana and 6 more in Mississippi, and a large number of oil production and
transfer facilities, resulting in the loss of 20% of the US domestic refinery output.
Rita subsequently shut down refineries in Texas, further reducing output. The
GDP figures for the third and fourth quarters showed a slowdown from 3.5% to
1.2% growth. Similar arguments were made in earlier crises.

Beside the obvious point that prices went up because of the reduction in supply and not
for anything to do with the practice of JIT, JIT students and even oil & gas industry
analysts question whether JIT as it has been developed by Ohno, Goldratt, and others is
used by the petroleum industry. Companies routinely shut down facilities for reasons
other than the application of JIT. One of those reasons may be economic rationalization:
when the benefits of operating no longer outweigh the costs, including opportunity costs,
the plant may be economically inefficient. JIT has never subscribed to such
considerations directly; following Waddel and Bodek (2005), this ROI-based thinking
conforms more to Brown-style accounting and Sloan management. Further, and more
significantly, JIT calls for a reduction in inventory capacity, not production capacity.
From 1975 to 1990 to 2005, the annual average stocks of gasoline have fallen by only
8.5% from 228,331 to 222,903 bbls to 208,986 (Energy Information Administration data).
Stocks fluctuate seasonally by as much as 20,000 bbls. During the 2005 hurricane season,
stocks never fell below 194,000 thousand bbls, while the low for the period 1990 to 2006
was 187,017 thousand bbls in 1997. This shows that while industry storage capacity has
decreased in the last 30 years, it hasn't been drastically reduced as JIT practitioners would
prefer.

Finally, as shown in a pair of articles in the Oil & Gas Journal, JIT does not seem to have
been a goal of the industry. In Waguespack and Cantor (1996), the authors point out that
JIT would require a significant change in the supplier/refiner relationship, but the changes
in inventories in the oil industry exhibit none of those tendencies. Specifically, the
relationships remain cost-driven among many competing suppliers rather than quality-
based among a select few long-term relationships. They find that a large part of the shift
came about because of the availability of short-haul crudes from Latin America. In the
follow-up editorial, the Oil & Gas Journal claimed that "casually adopting popular
business terminology that doesn't apply" had provided a "rhetorical bogey" to industry
critics. Confessing that they had been as guilty as other media sources, they confirmed
that "It also happens not to be accurate."

[edit] Business models following similar approach


[edit] Vendor Managed Inventory

Vendor Managed Inventory (VMI) employs the same principles as those of JIT inventory
however the responsibilities of managing inventory is placed with the vendor in a
vendor/customer relationship. Whether it’s a manufacturer who is managing inventory for
a distributor, or a distributor managing inventory for their customers; the role of
managing inventory is given to the vendor.

The primary advantage of this business model is that the vendor has industry experience
and expertise which enables them to better anticipate demand and inventory needs. The
inventory planning and controlling is facilitated by the use of applications that allow
vendors to have access to the inventory picture of its customer.

Third party applications offer vendors the benefit afforded by a quick implementation
time. Further, such companies hold valuable inventory management knowledge and
expertise that helps organizations immensely.

[edit] Customer Managed Inventory

With Customer Managed Inventory (CMI), the customer as opposed to the vendor in a
VMI model is given the responsibility of making all inventory decisions. This is similar
to the concepts employed by JIT inventory. With a clear picture of their inventory and
that of their supplier’s, the customer is able to anticipate fluctuations in demand and make
inventory replenishment decisions accordingly.

Raw material
From Wikipedia, the free encyclopedia
Jump to: navigation, search

A raw material is something that is acted upon or used by or by human labour or


industry, for use as a building material to create some product or structure.[citation needed]
Often the term is used to denote material that came from nature and is in an unprocessed
or minimally processed state. Iron ore, logs, and crude oil, would be examples. A non-
human related raw material would include twigs and found objects as used by birds to
make nests.

In Marxian economics and some industries, the term is used in a distinct sense: raw
material is a 'subject of labor', something that will be worked on by labor that has already
undergone some alteration by labour. In other words it does not apply to materials in their
entirely unprocessed state. Some examples are dimensional lumber, glass and steel.

Work in process
From Wikipedia, the free encyclopedia

Jump to: navigation, search

Work in process or in-process inventory consists of the unfinished products in a


production process. They are not yet complete but either being fabricated or waiting in a
queue or storage. The concept is used in production and supply chain management.

Production management aims to minimize work in process. Work in process requires


storage space, represents capital investment and presents a risk of expiration of the goods.
A queue to a production step shows that the step is probably under-capacity with respect
to other steps.

Just-in-time (JIT) production is an effort to reduce work in process. Barcode and RFID
tracking can be used to identify workpieces to a computer to locate and count them.

[edit] WIP In Construction Projects


Work-In-Process in construction accounting identifies the value of construction projects
which are currently being worked on by the construction firm. In order to properly
account for each project, FOUR values are needed for each project at the end of any
given month (or period):

1) the Sales Price (excluding sales tax) for the project,


2) the total Cost Estimate for the project,
3) the Costs-To-Date,
4) the Billed-To-Date.

By taking the Costs-To-Date divided by the Cost Estimate, the "percentage complete" for
the project is calculated. For example:
* Assume a project is estimated to cost $70,000 by the time the
work is complete
* Assume at the end of December, $35,000 has been spent to date
for the project
* $35,000 divided by $70,000 is 50%, therefore, the project can
be considered 50% complete at December 31.

Calculation of the Percentage complete is a valuable tool in determining how much the
client should be billed - it is important that Billings, and even collection of these billings,
are greater than the costs expended to do the work. This ensures that the client is directly
funding the construction work, and that the contracting firm minimizes borrowing on
behalf of the client. Using the example above, suppose the following:

A) the Sales Price of the project is $100,000


B) $100,000 times 50% (the level of completion) = $50,000
Therefore, for the period ending December 31, the client should
be invoiced at least $50,000 in order
to properly fund the work.

Finished good
From Wikipedia, the free encyclopedia

(Redirected from Finished goods)


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Look up finished good in
Wiktionary, the free dictionary.

Finished goods are goods that have completed the manufacturing process but have not
yet been sold or distributed to the end user.

[edit] Manufacturing
Main article: Manufacturing

Manufacturing has three classes of inventory:

1. Raw material
2. Work in process
3. Finished goods

A good purchased as a "raw material" goes into the manufacture of a product. A good
only partially completed during the manufacturing process is called "work in process".
When the good is completed as to manufacturing but not yet sold or distributed to the
end-user is called a "finished good".
Finished goods is a relative term. In a
Supply chain management flow, the
finished goods of a suppliSafety stock
From Wikipedia, the free encyclopedia

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Safety stock is a term used by inventory specialists to describe a level of stock that is
maintained below the cycle stock to buffer against stockouts. Safety Stock (also called
Buffer Stock) exists to counter uncertainties in supply and demand. [1] Safety stock is
defined as extra units of inventory carried as protection against possible stockouts. By
having an adequate amount of safety stock on hand, a company can meet a sales demand
which exceeds their sales forecast without altering their production plan.[2] It is held when
an organization cannot accurately predict demand and/or lead time for the product. It
serves as an insurance against stockouts.

With a new product, safety stock can be utilized as a strategic tool until the company can
judge how accurate their forecast is after the first few years, especially when used with a
material requirements planning worksheet. With a material requirements planning (MRP)
worksheet a company can judge how much they will need to produce to meet their
forecasted sales demand without relying on safety stock. However, a common strategy is
to try and reduce the level of safety stock to help keep inventory costs low once the
product demand becomes more predictable. This can be extremely important for
companies with a smaller financial cushion or those trying to run on lean manufacturing,
which is aimed towards eliminating waste throughout the production process.

The amount of safety stock an organization chooses to keep on hand can dramatically
affect their business. Too much safety stock can result in high holding costs of inventory.
In addition, products which are stored for too long a time can spoil, expire, or break
during the warehousing process. Too little safety stock can result in lost sales and, thus, a
higher rate of customer turnover. As a result, finding the right balance between too much
and too little safety stock is essential.[3]

Contents
[hide]

• 1 Reasons for Safety Stock


• 2 Reducing safety stock
• 3 Inventory Policy
• 4 Calculating Safety Stock
• 5 References

[edit] Reasons for Safety Stock


Safety Stocks enable organizations to satisfy customer demand in the event of these
possibilities:[4]

• Supplier may deliver their product late or not at all


• The warehouse may be on strike
• A number of items at the warehouse may be of poor quality and replacements are
still on order
• A competitor may be sold out on a product, which is increasing the demand for
your products
• Random demand (in reality, random events occur)
• Machinery Breakdown
• Unexpected increase in demand
• ...and more

[edit] Reducing safety stock


Safety stock is used as a buffer to protect organizations from stockouts caused by
inaccurate planning or poor schedule adherence by suppliers. As such, its cost (in both
material and management) is often seen as a drain on financial resources which results in
reduction initiatives. In addition, time sensitive goods such as food, drink, and other
perishable items could spoil and go to waste if held as safety stock for too long.
[5][6]
Various methods exist to reduce safety stock, these includes better use of technology,
increased collaboration with suppliers, and more accurate forecasting [7][8] In a lean supply
environment, lead times are reduced which can help minimize safety stock levels thus
reducing the likelihood and impact of stockouts.[9] Due to the cost of safety stock, many
organizations opt for a service level led safety stock calculation; for example, a 95%
service level could result in stockouts, but is at a level which is satisfactory to the
company. The lower the service level, the lower the requirement for safety stock.

An Enterprise Resource Planning System (ERP system) can also help an organization
reduce its level of safety stock. Most ERP systems provide a type of Production Planning
module. An ERP module such as this can help a company develop highly accurate and
dynamic sales forecasts and sales and operations plans. By creating more accurate and
dynamic forecasts, a company reduces their chance of producing insufficient inventory
for a given period and, thus, should be able to reduce the amount of safety stock which
they require.[10]In addition, ERP systems use established formulas to help calculate
appropriate levels of safety stock based on the previously developed production plans.
While an ERP system aids an organization in estimating a reasonable amount of safety
stock, the ERP module must be set up to plan requirements effectively.[11]
[edit] Inventory Policy
The size of the safety stock depends on the type of inventory policy that is in effect.[12] An
inventory node is supplied from a "source" which fulfills orders for the considered
product after a certain replenishment lead time. In a 'periodic review' inventory policy
the inventory level is checked periodically (such as once a month) and an order is placed
at that time if necessary; in this case the risk period is equal to the time until the next
review plus the replenishment lead time. On the other hand, if the inventory policy is a
'continuous review' policy (such as an Order point-Order Quantity policy or an Order
Point-Order Up To policy) the inventory level is being check continuously and orders can
be placed immediately, so the risk period is just the replenishment lead time. Therefore
'continuous review' inventory policies can make do with a smaller safety stock.

[edit] Calculating Safety Stock


A commonly used approach is that Safety Stock should be decided based on the
following factors:

Demand: the amount of items consumed by customers, on average, per unit time.

Lead Time: the delay between the time the reorder point (inventory level which initiates
an order[13]) is reached and renewed availability.

Service level: the desired probability that a chosen level of safety stock will not lead to
stock-out. Naturally, when the desired service level is increased, the required safety stock
increases as well.

Forecast error: an estimate of how far actual demand may be from forecasted demand.
Expressed as the standard deviation of demand.

Suggested calculation:

1. Z: NORMSINV(Service level) , for example Z=1.96 for a 97.5% service level

2. Safety Stock: {Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg.


Demand^2*Standard Deviation of Lead Time^2)}[14]

3. Re-order Point (ROP): Average Lead Time*Average Demand + Z*SQRT(Avg. Lead


Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead
Time^2)[15]

Notes:

• Italicized section of the ROP formula is safety stock


• The first term in the ROP formula (Average Lead time*Average Demand) is the
average demand during the lead time.

• The second (italicized) term is the term that allows for the safety stock. In other
words, the optimal safety stock level.[16]

• The sqrt( avgleadtime) is needed to SCALE the std deviation of the demand
period to the length of the lead time period.

[edit] References
1. ^ Inverntory Management Review. "Charles Atkins on inventory management topics:
Safety Stock." June 10, 2005.
http://www.inventorymanagementreview.org/2005/06/safety_stock.html (April 11, 2008).
2. ^ Monk, Ellen and Bret Wagner. Concepts in Enterprise Resource Planning. 3rd Edition.
Boston: Course Technology Cengage Learning, 2009.
3. ^ Andrew Goldman, "Safety Stock", http://www.gaebler.com/Safety-Stock.htm
4. ^ About.com "Logistics/Supply Chain: "Safety Stock."
http://logistics.about.com/od/glossary/g/safety_stock.htm (April 11, 2008).
5. ^ Monk, Ellen and Bret Wagner. Concepts in Enterprise Resource Planning. 3rd Edition.
Boston: Course Technology Cengage Learning, 2009.
6. ^ Goldman, Andrew. Safety Stock. 17 November 2008 <http://www.gaebler.com/Safety-
Stock.htm>
7. ^ The IOMA Handbook of Logistics and Inventory Management By Bob Donath,
Institute of Management and Administration (Ioma), Institute of Management &
Administration
8. ^ S. P. Meyn, 2007. Control Techniques for Complex

This article is an orphan, as few or no other articles link to it. Please introduce links
to this page from other articles related to it. (February 2009)

Obsolete stock or stock obsolescence calculations are done by companies to determine


how much of their stock on hand is unlikely to be used in the future.

The financial value of stock obsolescence that is calculated can be entered into a general
ledger system to create a "stock obsolescence provision" which can reduce the tax
liability of a company. For this reason, a systematic and auditable approach to designing a
stock obsolescence report should be used. Estimation of stock obsolescence without any
traceable calculations will probably not be acceptable to an auditor.

Typically, a stock obsolescence report uses the value of "stock on hand" as a starting
point, and then reduces this value based on the potential that stock will be used up in the
future. The higher the probability that stock will be used in the future, the more the on-
hand stock value can be reduced. Sometimes a historical usage of the item can also
reduce the value, in this case, the more recently the item was used, the more the on-hand
value can be reduced.
The formulae that calculate how much the on-hand value can be reduced by may vary
from company to company and are normally described in a general way in the GAAP
(Generally Accepted Accounting Practices) for that company or country. For example one
formula may be: "If there is any future usage of the item in the next 3 months then reduce
the value by 100%, if there is usage in the next 6 months then reduce by 50%, and if it is
only going to be used in a year's time then reduce by 10%, if it has been used in the past 6
months then reduce by 70%, if there has been usage in the past year then reduce by 30%".

Some formulae may also take into account the volume used e.g.: reduce the on-hand
value by the percentage of product used in the past 6 months.

This article relies largely or entirely upon a single source. Please help improve this
article by introducing appropriate citations of additional sources. (July 2007)

Procurement
From Wikipedia, the free encyclopedia

Jump to: navigation, search

Procurement is the acquisition of goods and/or services at the best possible total cost of
ownership, in the right quantity and quality, at the right time, in the right place and from
the right source for the direct benefit or use of corporations or individuals, generally via a
contract.[citation needed] Simple procurement may involve nothing more than repeat
purchasing. Complex procurement could involve finding long term partners – or even 'co-
destiny' suppliers that might fundamentally commit one organization to another.

Contents
[hide]

• 1 Overview
• 2 Procurement: Topics
o 2.1 Acquisition Process
o 2.2 Procurement systems
o 2.3 Shared services
o 2.4 Procurement process
o 2.5 Procurement steps
• 3 See also
• 4 References

• 5 External links
[edit] Overview
Almost all purchasing decisions include factors such as delivery and handling, marginal
benefit, and price fluctuations. Procurement generally involves making buying decisions
under conditions of scarcity. If good data are available, it is good practice to make use of
economic analysis methods such as cost-benefit analysis or cost-utility analysis.

An important distinction is made between analysis without risk and those with risk.
Where risk is involved, either in the costs or the benefits, the concept of expected value
may be employed.

Direct procurement and indirect procurement


TYPES
Direct
Indirect Procurement
Procurement
Maintenance, Repair Capital
Raw Material and
and Operating (MRO) Goods and
Production Goods
Supplies Services

F Quantity Large Low Low


E Frequency High Relatively high Low
A
T Value Industry specific Low High
U
R Nature Operational Tactical Strategic
E Crude oil in Machinery,
S Examples petroleum industry Lubricants, spare parts
computers

Based on the consumption purposes of the acquired goods and services, procurement
activities are often split into two distinct categories. The first category being direct,
production-related procurement and the second being indirect, non-production-related
procurement.

Direct procurement occurs in manufacturing settings only. It encompasses all items that
are part of finished products, such as raw material, components and parts. Direct
procurement, which is the focus in supply chain management, directly affects the
production process of manufacturing firms. In contrast, indirect procurement activities
concern “operating resources” that a company purchases to enable its operations. It
comprises a wide variety of goods and services, from standardised low value items like
office supplies and machine lubricants to complex and costly products and services like
heavy equipment and consulting services.

[edit] Procurement: Topics


[edit] Acquisition Process

The revised acquisition process for major systems in industry and defense is shown in the
next figure. The process is defined by a series of phases during which technology is
defined and matured into viable concepts, which are subsequently developed and readied
for production, after which the systems produced are supported in the field.[1]

Model of the Acquisition Process.[1]

The process allows for a given system to enter the process at any of the development
phases. For example, a system using unproven technology would enter at the beginning
stages of the process and would proceed through a lengthy period of technology
maturation, while a system based on mature and proven technologies might enter directly
into engineering development or, conceivably, even production. The process itself
includes four phases of development:[1]

• Concept and Technology Development: is intended to explore alternative concepts


based on assessments of operational needs, technology readiness, risk, and
affordability.
• Concept and Technology Development phase begins with concept exploration.
During this stage, concept studies are undertaken to define alternative concepts
and to provide information about capability and risk that would permit an
objective comparison of competing concepts.
• System Development and Demonstration phase. This phase could be entered
directly as a result of a technological opportunity and urgent user need, as well as
having come through concept and technology development.
• The last, and longest, phase is the Sustainment and Disposal phase of the
program. During this phase all necessary activities are accomplished to maintain
and sustain the system in the field in the most cost-effective manner possible.
[edit] Procurement systems

Another common procurement issue is the 'timing' of purchases. Just In Time is a system
(commonly used by Japanese companies but widely adopted by many global
manufacturers from the 1990s onwards) of timing the purchases of consumables so as to
keep inventory costs low.

[edit] Shared services

In order to achieve greater economies of scale, an organization’s procurement functions


may be joined into shared services. This combines several small procurement agents into
one centralized procurement system.

[edit] Procurement process

Procurement may also involve a bidding process i.e, Tendering. A company may want to
purchase a given product or service. If the cost for that product/service is over the
threshold that has been established (eg: Company X policy: "any product/service desired
that is over $1,000 requires a bidding process"), depending on policy or legal
requirements, Company X is required to state the product/service desired and make the
contract open to the bidding process. Company X may have ten submitters that state the
cost of the product/service they are willing to provide. Then, Company X will usually
select the lowest bidder. If the lowest bidder is deemed incompetent to provide the
desired product/service, Company X will then select the submitter who has the next best
price, and is competent to provide the product/service. In the European Union there are
strict rules on procurement processes that must be followed by public bodies, with
contract value thresholds dictating what processes should be observed (relating to
advertising the contract, the actual process etc).

[edit] Procurement steps

Procurement life cycle in modern businesses usually consists of seven steps:

• Information Gathering: If the potential customer does not already have an


established relationship with sales/ marketing functions of suppliers of needed
products and services (P/S), it is necessary to search for suppliers who can satisfy
the requirements.
• Supplier Contact: When one or more suitable suppliers have been identified,
Requests for Quotation (RFQ), Requests for Proposals (RFP), Requests for
Information (RFI) or Requests for Tender (RFT or ITT) may be advertised, or
direct contact may be made with the suppliers.
• Background Review: References for product/service quality are consulted, and
any requirements for follow-up services including installation, maintenance, and
warranty are investigated. Samples of the P/S being considered may be examined,
or trials undertaken.
• Negotiation: Negotiations are undertaken, and price, availability, and
customization possibilities are established. Delivery schedules are negotiated, and
a contract to acquire the P/S is completed.
• Fulfillment: Supplier preparation, shipment, delivery, and payment for the P/S
are completed, based on contract terms. Installation and training may also be
included.
• Consumption, Maintenance and Disposal: During this phase the company
evaluates the performance of the P/S and any accompanying service support, as
they are consumed.

Renewal: When the P/S has been


consumed and/or disposed of, the contract
expires, or the product or service is to be
re-ordered, company experience with the
P/S is reviewed. If the P/S is to be re-
ordered, the company determines
whether to consider oPurchasing
From Wikipedia, the free encyclopedia

Jump to: navigation, search


For other uses, see Purchase (disambiguation).

Purchasing refers to a business or organization attempting to acquire goods or services to


accomplish the goals of the enterprise. Though there are several organizations that
attempt to set standards in the purchasing process, processes can vary greatly between
organizations. Typically the word “purchasing” is not used interchangeably with the word
“procurement”, since procurement typically includes Expediting, Supplier Quality, and
Traffic and Logistics (T&L) in addition to Purchasing.

Contents
[hide]

• 1 Overview
• 2 Purchasing: Topics
o 2.1 Acquisition Process
o 2.2 Selection of Bidders
o 2.3 Bidding Process
o 2.4 Technical Evaluation
o 2.5 Commercial Evaluation
o 2.6 Negotiating
o 2.7 Post-Award Administration
o 2.8 Order Closeout
• 3 See also

• 4 References

[edit] Overview
Purchasing managers/directors, and procurement managers/directors guide the
organization’s acquisition procedures and standards. Most organizations use a three-way
check as the foundation of their purchasing programs. This involves three departments in
the organization completing separate parts of the acquisition process. The three
departments do not all report to the same senior manager to prevent unethical practices
and lend credibility to the process. These departments can be purchasing, receiving; and
accounts payable or engineering, purchasing and accounts payable; or a plant manager,
purchasing and accounts payable. Combinations can vary significantly, but a purchasing
department and accounts payable are usually two of the three departments involved.

Historically, the purchasing department issued Purchase Orders for supplies, services,
equipment, and raw materials. Then, in an effort to decrease the administrative costs
associated with the repetitive ordering of basic consumable items, "Blanket" or "Master"
Agreements were put into place. These types of agreements typically have a longer
duration and increased scope to maximize the Quantities of Scale concept. When
additional supplies are required, a simple release would be issued to the supplier to
provide the goods or services.

Another method of decreasing administrative costs associated with repetitive contracts


for common material, is the use of company credit cards, also known as "Purchasing
Cards" or simply "P-Cards". P-card programs vary, but all of them have internal checks
and audits to ensure appropriate use. Purchasing managers realized once contracts for the
low dollar value consumables are in place, procurement can take a smaller role in the
operation and use of the contracts. There is still oversight in the forms of audits and
monthly statement reviews, but most of their time is now available to negotiate major
purchases and setting up of other long term contracts. These contracts are typically
renewable annually.

This trend away from the daily procurement function (tactical purchasing) resulted in
several changes in the industry. The first was the reduction of personnel. Purchasing
departments were now smaller. There was no need for the army of clerks processing
orders for individual parts as in the past. Another change was the focus on negotiating
contracts and procurement of large capital equipment. Both of these functions permitted
purchasing departments to make the biggest financial contribution to the organization. A
new terms and job title emerged – Strategic sourcing and Sourcing Managers. These
professionals not only focused on the bidding process and negotiating with suppliers, but
the entire supply function. In these roles they were able to add value and maximize
savings for organizations. This value was manifested in lower inventories, less personnel,
and getting the end product to the organization’s consumer quicker. Purchasing
manager’s success in these roles resulted in new assignments outside to the traditional
purchasing function – logistics, materials management, distribution, and warehousing.
More and more purchasing managers were becoming Supply Chain Managers handling
additional functions of their organizations operation. Purchasing managers were not the
only ones to become Supply Chain Managers. Logistic managers, material managers,
distribution managers, etc all rose the broader function and some had responsibility for
the purchasing functions now.

In accounting, purchases is the amount of goods a company bought throughout this year.
They are added to inventory. Purchases are offset by Purchase Discounts and Purchase
Returns and Allowances. When it should be added depends on the Free On Board (FOB)
policy of the trade. For the purchaser, this new inventory is added on shipment if the
policy was FOB shipping point, and the seller remove this item from its inventory. On the
other hand, the purchaser added this inventory on receipt if the policy was FOB
destination, and the seller remove this item from its inventory when it was delivered.

Goods bought for the purpose other than direct selling, such as for Research and
Development, are added to inventory and allocated to Research and Development
expense as they are used. On a side note, equipments bought for Research and
Development are not added to inventory, but are capitalized as assets...

[edit] Purchasing: Topics


[edit] Acquisition Process

The revised acquisition process for major systems in industry and defense is shown in the
next figure. The process is defined by a series of phases during which technology is
defined and matured into viable concepts, which are subsequently developed and readied
for production, after which the systems produced are supported in the field.[1]
Model of the Acquisition Process.[1]

The process allows for a given system to enter the process at any of the development
phases. For example, a system using unproven technology would enter at the beginning
stages of the process and would proceed through a lengthy period of technology
maturation, while a system based on mature and proven technologies might enter directly
into engineering development or, conceivably, even production. The process itself
includes four phases of development:[1]

• Concept and Technology Development: is intended to explore alternative concepts


based on assessments of operational needs, technology readiness, risk, and
affordability.
• Concept and Technology Development phase begins with concept exploration.
During this stage, concept studies are undertaken to define alternative concepts
and to provide information about capability and risk that would permit an
objective comparison of competing concepts.
• System Development and Demonstration phase. This phase could be entered
directly as a result of a technological opportunity and urgent user need, as well as
having come through concept and technology development.
• The last, and longest, phase is the Sustainment and Disposal phase of the
program. During this phase all necessary activities are accomplished to maintain
and sustain the system in the field in the most cost-effective manner possible.

[edit] Selection of Bidders

This is the process where the organization identifies potential suppliers for specified
supplies, services or equipment. These suppliers' credentials (qualifications) and history
are analyzed, together with the products or services they offer. The bidder selection
process varies from organization to organization, but can include running credit reports,
interviewing management, testing products, and touring facilities. This process is not
always done in order of importance, but rather in order of expense. Often purchasing
managers research potential bidders obtaining information on the organizations and
products from media sources and their own industry contacts. Additionally, purchasing
might send Request for Information (RFI) to potential suppliers to help gather
information. Engineering would also inspect sample products to determine if the
company can produce products they need. If the bidder passes both of these stages
engineering may decide to do some testing on the materials to further verify quality
standards. These tests can be expensive and involve significant time of multiple
technicians and engineers. Engineering management must make this decision based on
the cost of the products they are likely to procure, the importance of the bidders’ product
to production, and other factors. Credit checks, interviewing management, touring plants
as well as other steps could all be utilized if engineering, manufacturing, and supply
chain managers decide they could help their decision and the cost is justifiable.

Other organizations might have minority procurement goals to consider in selection of


bidders. Organizations identify goals in the use of companies owned and operated by
certain ethnicities or women owned business enterprises. Significant utilizing of minority
suppliers may qualify the firm as a potential bidder for a contract with a company or
governmental entity looking to increase their minority supplier programs.

This selection process can include or exclude international suppliers depending on


organizational goals and criteria. Companies looking to increase their pacific rim supplier
base may exclude suppliers from the Americas, Europe, and Australia. Other
organizations may be looking to purchase domestically to ensure a quicker response to
orders as well as easier collaboration on design and production.

Organizational goals will dictate the criteria for the selection process of bidders. It is also
possible that the product or service being procured is so specialized that the number of
bidders are limited and the criteria must be very wide to permit competition. If only one
firm can meet the specifications for the product then the purchasing managers must
consider utilizing a “Sole Source” option or work with engineering to broaden the
specifications if the project will permit alteration in the specifications. The sole source
option is the part of the selection of bidders that acknowledges there is sometimes only
one reasonable supplier for some services or products. This can be because of the limited
applications for the product cannot support more than one manufacturer, proximity of the
service provided, or the products are newly designed or invented and competition is not
yet available.

[edit] Bidding Process

This is the process an organization utilizes to procure goods, services or equipment.


Processes vary significantly from the stringent to the very informal. Large corporations
and governmental entities are most likely to have stringent and formal processes. These
processes can utilize specialized bid forms that require specific procedures and detail.
The very stringent procedures require bids to be open by several staff from various
departments to ensure fairness and impartiality. Responses are usually very detailed.
Bidders not responding exactly as specified and following the published procedures can
be disqualified. Smaller private businesses are more likely to have less formal
procedures. Bids can be in the form of an email to all of the bidders specifying products
or services. Responses by bidders can be detailed or just the proposed dollar amount.

Most bid processes are multi-tiered. Acquisitions under a specified dollar amount can be
“user discretion” permitting the requestor to choose who ever they want. This level can
be as low as $100 or as high as $10,000 depending on the organization. The rationale is
the savings realized by processing these request the same as expensive items is minimal
and does not justify the time and expense. Purchasing departments watch for abuses of
the user discretion privilege. Acquisitions in a mid range can be processed with a slightly
more formal process. This process may involve the user providing quotes from three
separate suppliers. Purchasing may be asked or required to obtain the quotes. The formal
bid process starts as low as $10,000 or as high as $100,000 depending on the
organization. The bid usually involves a specific form the bidder fills out and must be
returned by a specified deadline. Depending of the commodity being purchased and the
organization the bid may specify a weighted evaluation criterion. Other bids would be
evaluated at the discretion of purchasing or the end users. Some bids could be evaluated
by a cross-functional committee. Other bids may be evaluated by the end user or the
buyer in Purchasing. Especially in small, private firms the bidders could be evaluated on
criteria or factors that have little if anything to do with the actual bid. Examples of these
factors are history of the bidder with the company, history of the bidder with the
company’s senior management at other firms, and bidder’s breadth of products.

[edit] Technical Evaluation

Technical Evaluations, evaluations of the technical suitability of the quoted goods or


services, if required, are normally performed prior to the Commercial Evaluation. During
this phase of the procurement process, a technical representative of the company (usually
an engineer) will review the proposal and designate each bidder as either technically
acceptable or technically unacceptable.

....

[edit] Commercial Evaluation

Payment Terms

Cost of Money - Cost of Money is calculated by multiplying the applicable currency


interest rate multiplied by the amount of money paid prior to the receipt of GOODS. If
the money were to have remained in the Buyer's account, interest would be drawn. That
interest is essentially an additional cost associated with such Progress or Milestone
payments.
Manufacturing Location - The manufacturing location is taken into consideration during
the evaluation stage primarily to calculate freight costs and regional issues which may be
considered. For instance, in Europe it is common for factories to close during the month
of August for Summer holiday. Labor agreements may also be taken into consideration
and may be drawn into the evaluation if the particular region is known to frequent labor
unions.

Manufacturing Lead-Time - the manufacturing lead-time is the time from the placement
of the order (or time final drawings are submitted by the Buyer to the Seller) until the
goods are manufactured and prepared for delivery. Lead-times vary by commodity and
can range from several days to years.

Transportation Time - Transportation time is evaluated while comparing the delivery of


goods to the Buyer's required use-date. If Goods are shipped from a remote port, with
infrequent vessel transportation, the transportation time could exceed the schedule an
adjustments would need to be made.

Delivery Charges - the charge for the Goods to be delivered to a stated point. Bid Validity
Packing Bid Adjustments Terms and Conditions Seller's Services Standards
Organizations Financial Review Payment Currency Risk Analysis - market volatility,
financial stress within the bidders Testing

[edit] Negotiating

Negotiating is a key skillset in the Purchasing field. One of the goals of Purchasing
Agents is to acquire goods per the most advantageous terms of the buying entity (or
simply, the "Buyer"). Purchasing Agents typically attempt to decrease costs while
meeting the Buyer's other requirements such as an on-time delivery, compliance to the
commercial terms and conditions (including the warranty, the transfer of risk, assignment,
auditing rights, confidentiality, remedies, etc).

Good negotiators, those with high levels of documented "cost savings", receive a
premium within the industry relative to their compensation. Depending on the
employment agreement between the Purchasing Agent (Buyer) and the employer, Buyer's
cost savings can result in the creation of value to the business, and may result in a flat-
rate bonus, or a percentage payout to the Purchasing Agent of the documented cost
savings.

Purchasing Departments, while they can be considered as a support function of the key
business, are actually revenue generating departments. For example, if the company
needs to buy $30 million USD of widgets and the Purchasing Department secures the
widgets for $25M USD, the Purchasing Department would have saved the company $5M
USD. That savings could exceed the annual budget of the department, which in effect
would pay the department's overhead - the employee's salaries, computers, office space,
etc.
[edit] Post-Award Administration

Post-award administration typically consists of making minor changes, additions or


subtractions, that in some way change the terms of the agreement or the Seller's Scope of
Supply. Such changes are often minor, but for auditing purposes must be documented into
the existing agreement. Examples include increasing the quantity of a Line Item or
changing the metallurgy of particular components.

Material Requirements Planning


From Wikipedia, the free encyclopedia

(Redirected from Material requirements planning)


Jump to: navigation, search
Manufacturing Resource Planning (MRP2 or MRPII) - Around 1980, over-frequent
changes in sales forecasts, entailing continual reajustments in production, as well as the
unsuitability of the parameters fixed by the system, led MRP (Material Requirements
Planning) to evolve into a new concept : Manufacturing Resource Planning or MRP2[1]

Material Requirements Planning (MRP) is a software based production planning and


inventory control system used to manage manufacturing processes. Although it is not
common nowadays, it is possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet three objectives:

• Ensure materials and products are available for production and delivery to
customers.
• Maintain the lowest possible level of inventory.
• Plan manufacturing activities, delivery schedules and purchasing activities.

Contents
[hide]

• 1 The scope of MRP in manufacturing


• 2 Problems with MRP systems
• 3 References
• 4 External links

• 5 See also

[edit] The scope of MRP in manufacturing


Manufacturing organizations, whatever their products, face the same daily practical
problem - that customers want products to be available in a shorter time than it takes to
make them. This means that some level of planning is required.

Companies need to control the types and quantities of materials they purchase, plan
which products are to be produced and in what quantities and ensure that they are able to
meet current and future customer demand, all at the lowest possible cost. Making a bad
decision in any of these areas will make the company lose money. A few examples are
given below:

• If a company purchases insufficient quantities of an item used in manufacturing,


or the wrong item, they may be unable to meet contracts to supply products by the
agreed date.

• If a company purchases excessive quantities of an item, money is being wasted -


the excess quantity ties up cash while it remains as stock and may never even be
used at all. However, some purchased items will have a minimum quantity that
must be met, therefore, purchasing excess is necessary.

• Beginning production of an order at the wrong time can cause customer deadlines
to be missed.

MRP is a tool to deal with these problems. It provides answers for several questions:

• What items are required?


• How many are required?
• When are they required?

MRP can be applied both to items that are purchased from outside suppliers and to sub-
assemblies, produced internally, that are components of more complex items.

The data that must be considered include:

• The end item (or items) being created. This is sometimes called Independent
Demand, or Level "0" on BOM (Bill of materials).
• How much is required at a time.
• When the quantities are required to meet demand.
• Shelf life of stored materials.
• Inventory status records. Records of net materials available for use already in
stock (on hand) and materials on order from suppliers.
• Bills of materials. Details of the materials, components and subassemblies
required to make each product.
• Planning Data. This includes all the restraints and directions to produce the end
items. This includes such items as: Routings, Labor and Machine Standards,
Quality and Testing Standards, Pull/Work Cell and Push commands, Lot sizing
techniques (i.e. Fixed Lot Size, Lot-For-Lot, Economic Order Quantity), Scrap
Percentages, and other inputs.

Outputs

There are two outputs and a variety of messages/reports:

• Output 1 is the "Recommended Production Schedule" which lays out a detailed


schedule of the required minimum start and completion dates, with quantities, for
each step of the Routing and Bill Of Material required to satisfy the demand from
the Master Production Schedule (MPS).
• Output 2 is the "Recommended Purchasing Schedule". This lays out both the
dates that the purchased items should be received into the facility AND the dates
that the Purchase orders, or Blanket Order Release should occur to match the
production schedules.

Messages and Reports:

• Purchase orders. An order to a supplier to provide materials.


• Reschedule notices. These recommend cancelling, increasing, delaying or
speeding up existing orders.

Note that the outputs are recommended. Due to a variety of changing conditions in
companies, since the last MRP / ERP system Re-Generation, the recommended outputs
need to be reviewed by trained people to group orders for benefits in set-up or freight
savings. These actions are beyond the linear calculations of the MRP computer software.
[edit] Problems with MRP systems
The major problem with MRP systems is the integrity of the data. If there are any errors
in the inventory data, the bill of materials (commonly referred to as 'BOM') data, or the
master production schedule, then the outputted data will also be incorrect. Most vendors
of this type of system recommend at least 99% data integrity for the system to give useful
results.

Another major problem with MRP systems is the requirement that the user specify how
long it will take a factory to make a product from its component parts (assuming they are
all available). Additionally, the system design also assumes that this "lead time" in
manufacturing will be the same each time the item is made, without regard to quantity
being made, or other items being made simultaneously in the factory.

A manufacturer may have factories in different cities or even countries. It is no good for
an MRP system to say that we do not need to order some material because we have plenty
thousands of miles away. The overall ERP system needs to be able to organize inventory
and needs by individual factory, and intercommunicate needs in order to enable each
factory to redistribute components in order to serve the overall enterprise.

This means that other systems in the enterprise need to work properly both before
implementing an MRP system, and into the future. For example systems like variety
reduction and engineering which makes sure that product comes out right first time
(without defects) must be in place.

Production may be in progress for some part, whose design gets changed, with customer
orders in the system for both the old design, and the new one, concurrently. The overall
ERP system needs to have a system of coding parts such that the MRP will correctly
calculate needs and tracking for both versions. Parts must be booked into and out of
stores more regularly than the MRP calculations take place. Note, these other systems can
well be manual systems, but must interface to the MRP. For example, a 'walk around'
stocktake done just prior to the MRP calculations can be a practical solution for a small
inventory (especially if it is an "open store").

The other major drawback of MRP is that takes no account of capacity in its calculations.
This means it will give results that are impossible to implement due to manpower or
machine or supplier capacity constraints. However this is largely dealt with by MRP II.

Generally, MRP II refers to a system with integrated financials. An MRP II system can
include finite / infinite capacity planning. But, to be considered a true MRP II system
must also include financials.

In the MRP II (or MRP2) concept, fluctuations in forecast data are taken into account by
including simulation of the master production schedule, thus creating a long-term
control[2]. A more general feature of MRP2 is its extension to purchasing, to marketing
and to finance (integration of all the function of the company), ERP has been the next
step.

Bill of materials
From Wikipedia, the free encyclopedia

Jump to: navigation, search


This article may require cleanup to meet Wikipedia's quality standards. Please
improve this article if you can. (September 2008)

Bill of materials (BOM) is the term used to describe the raw materials, sub-assemblies,
intermediate assemblies, sub-components, components, parts and the quantities of each
needed to manufacture an end item (final product) .[1] It may be used for communication
between manufacturing partners,[2] or confined to a single manufacturing plant.

A BOM can define products as they are designed (engineering bill of materials), as they
are ordered (sales bill of materials), as they are built (manufacturing bill of materials), or
as they are maintained (service bill of materials). The different types of BOMs depend on
the business need and use for which they are intended. In process industries, the BOM is
also known as the formula, recipe, or ingredients list. In electronics, the BOM represents
the list of components used on the printed wiring board or printed circuit board. Once the
design of the circuit is completed, the BOM list is passed on to the PCB layout engineer
as well as component engineer who will procure the components required for the design.

BOMs are hierarchical in nature with the top level representing the finished product
which may be a sub-assembly or a completed item. BOMs that describe the sub-
assemblies are referred to as modular BOMs. An example of this is the NAAMS BOM
that is used in the automative industry to list all the components in an assembly line. The
structure of the NAAMS BOM is System, Line, Tool, Unit and Detail.

The first hierarchical databases were developed for automating bills of materials for
manufacturing organizations in the early 1960s.[3]

A bill of materials "implosion" links component pieces to a major assembly, while a bill
of materials "explosion" breaks apart each assembly or sub-assembly into its component
parts.

A BOM can be displayed in the following formats:

• A single-level BOM that displays the assembly or sub-assembly with only one
level of children. Thus it displays the components directly needed to make the
assembly or sub-assembly.[4]
• An indented BOM that displays the highest-level item closest to the left margin
and the components used in that item indented more to the right.[1]
Manufacturing resource planning
From Wikipedia, the free encyclopedia

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Manufacturing Resource Planning (MRP II) is defined by APICS as a method for the
effective planning of all resources of a manufacturing company. Ideally, it addresses
operational planning in units, financial planning in dollars, and has a simulation
capability to answer "what-if" questions and extension of closed-loop MRP.
Manufacturing Resource Planning (or MRP2) - Around 1980, over-frequent changes in
sales forecasts, entailing continual readjustments in production, as well as the
unsuitability of the parameters fixed by the system, led MRP (Material Requirement
Planning) to evolve into a new concept : Manufacturing Resource Planning (e.g. MRP
2)[1]

This is not exclusively a software function, but a marriage of people skills, dedication to
data base accuracy, and computer resources. It is a total company management concept
for using human resources more productively.
Contents
[hide]

• 1 Key functions and features


• 2 Benefits
• 3 Industry Specifics
• 4 MRP and MRPII: History and Evolution
• 5 MRP and MRPII: General Concepts
• 6 Criticism
• 7 References

• 8 See also

[edit] Key functions and features


MRP II is not a proprietary software system and can thus take many forms. It is almost
impossible to visualize an MRP II system that does not use a computer, but an MRP II
system can be based on either purchased–licensed or in-house software.

Almost every MRP II system is modular in construction. Characteristic basic modules in


an MRP II system are:

• Master Production Schedule (MPS)


• Item Master Data (Technical Data)
• Bill of materials (BOM) (Technical Data)
• Production Resources Data (Manufacturing Technical Data)
• Inventories and Orders (Inventory Control)
• Purchasing Management
• Material Requirements Planning (MRP)
• Shop Floor Control (SFC)
• Capacity planning or Capacity Requirements Planning (CRP)
• Standard Costing (Cost Control)
• Cost Reporting / Management (Cost Control)
• Distribution resource planning (DRP)

together with auxiliary systems such as:

• Business Planning
• Lot Traceability
• Contract Management
• Tool Management
• Engineering Change Control
• Configuration Management
• Shop Floor Data Collection
• Sales Analysis and Forecasting
• Finite Capacity Scheduling (FCS)

and related systems such as:

• General Ledger
• Accounts Payable (Purchase Ledger)
• Accounts Receivable (Sales Ledger)
• Sales Order Management
• Distribution Requirements Planning (DRP)
• [Automated] Warehouse Management
• Project Management
• Technical Records
• Estimating
• Computer-aided design/Computer-aided manufacturing (CAD/CAM)
• CAPP

The MRP II system integrates these modules together so that they use common data and
freely exchange information, in a model of how a manufacturing enterprise should and
can operate. The MRP II approach is therefore very different from the “point solution”
approach, where individual systems are deployed to help a company plan, control or
manage a specific activity. MRP II is by definition fully integrated or at least fully
interfaced.

[edit] Benefits
MRP II systems can provide:

• Better control of inventories


• Improved scheduling
• Productive relationships with suppliers

For Design / Engineering:

• Improved design control


• Better quality and quality control

For Financial and Costing:

• Reduced working capital for inventory


• Improved cash flow through quicker deliveries
• Accurate inventory records
• Timely and valid cost and profitability information

[edit] Industry Specifics


MRP II systems have been implemented in most manufacturing industries. Some
industries need specialised functions e.g. lot traceability in regulated manufacturing such
as pharmaceuticals or food. Other industries can afford to disregard facilities required by
others e.g. the tableware industry has few starting materials – mainly clay – and does not
need complex materials planning. Capacity planning is the key to success in this as in
many industries, and it is in those that MRP II is less appropriate.

[edit] MRP and MRPII: History and Evolution


Material Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII)
are predecessors of Enterprise Resource Planning (ERP), a business information
integration system. The development of these manufacturing coordination and integration
methods and tools made today’s ERP systems possible. Both MRP and MRPII are still
widely used, independently and as modules of more comprehensive ERP systems, but the
original vision of integrated information systems as we know them today began with the
development of MRP and MRPII in manufacturing.

The vision for MRP and MRPII was to centralize and integrate business information in a
way that would facilitate decision making for production line managers and increase the
efficiency of the production line overall. In the 1980s, manufacturers developed systems
for calculating the resource requirements of a production run based on sales forecasts. In
order to calculate the raw materials needed to produce products and to schedule the
purchase of those materials along with the machine and labor time needed, production
managers recognized that they would need to use computer and software technology to
manage the information. Originally, manufacturing operations built custom software
programs that ran on mainframes.

Material Requirements Planning (MRP) was an early iteration of the integrated


information systems vision. MRP information systems helped managers determine the
quantity and timing of raw materials purchases. Information systems that would assist
managers with other parts of the manufacturing process, MRPII, followed. While MRP
was primarily concerned with materials, MRPII was concerned with the integration of all
aspects of the manufacturing process, including materials, finance and human relations.

Like today’s ERP systems, MRPII was designed to integrate a lot of information by way
of a centralized database. However, the hardware, software, and relational database
technology of the 1980s was not advanced enough to provide the speed and capacity to
run these systems in real-time[2], and the cost of these systems was prohibitive for most
businesses. Nonetheless, the vision had been established, and shifts in the underlying
business processes along with rapid advances in technology led to the more affordable
enterprise and application integration systems that big businesses and many medium and
smaller businesses use today (Monk and Wagner).

[edit] MRP and MRPII: General Concepts


Material Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII)
are both incremental information integration business process strategies that are
implemented using hardware and modular software applications linked to a central
database that stores and delivers business data and information.

MRP is concerned primarily with manufacturing materials while MRPII is concerned


with the coordination of the entire manufacturing production, including materials,
finance, and human relations. The goal of MRPII is to provide consistent data to all
players in the manufacturing process as the product moves through the production line.

Paper-based information systems and non-integrated computer systems that provide paper
or disk outputs result in many information errors, including missing data, redundant data,
numerical errors that result from being incorrectly keyed into the system, incorrect
calculations based on numerical errors, and bad decisions based on incorrect or old data.
In addition, some data is unreliable in non-integrated systems because the same data is
categorized differently in the individual databases used by different functional areas.

MRPII systems begin with MRP, Material Requirements Planning. MRP allows for the
input of sales forecasts from sales and marketing. These forecasts determine the raw
materials demand. MRP and MRPII systems draw on a Master Production Schedule, the
break down of specific plans for each product on a line. While MRP allows for the
coordination of raw materials purchasing, MRPII facilitates the development of a detailed
production schedule that accounts for machine and labor capacity, scheduling the
production runs according to the arrival of materials. An MRPII output is a final labor
and machine schedule. Data about the cost of production, including machine time, labor
time and materials used, as well as final production numbers, is provided from the MRPII
system to accounting and finance (Monk and Wagner).

Packaging and labeling


From Wikipedia, the free encyclopedia

(Redirected from Packaging)


Jump to: navigation, search
"Packaging" redirects here. For the semiconductor device fabrication term, see
integrated circuit packaging.
A sealed pack of diced pork from Tesco. It shows the cooking time, number of servings,
'display until' date, 'use by' date, weight in kg, price, price to weight ratio in both £/kg and
£/lb, freezing and storage instructions. It says 'Less than 3% Fat' and 'No Carbs per
serving' and includes a barcode. The Union Flag, British Farm Standard tractor logo, and
British Meat Quality Standard logo are also present.

Tablets in a blister pack, which was itself packaged in a folding carton made of
paperboard.

Packaging is the science, art and technology of enclosing or protecting products for
distribution, storage, sale, and use. Packaging also refers to the process of design,
evaluation, and production of packages. Package labelling (BrE) or labeling (AmE) is
any written, electronic, or graphic communications on the packaging or on a separate but
associated label.

Packaging can be described as a coordinated system of preparing goods for transport,


warehousing, logistics, sale, and end use. Packaging contains, protects, preserves,
transports, informs, and sells.[1] It is fully integrated into government, business,
institutional, industry, and personal use.

Contents
[hide]

• 1 The purposes of packaging and package labels


• 2 Packaging types
• 3 Symbols used on packages and labels
o 3.1 Shipping container labeling
• 4 Package development considerations
• 5 Packaging machines
• 6 History
• 7 See also
• 8 References

• 9 Bibliography

[edit] The purposes of packaging and package labels


Packaging and package labeling have several objectives[2]

• Physical protection - The objects enclosed in the package may require protection
from, among other things, shock, vibration, compression, temperature[3], etc.
• Barrier protection - A barrier from oxygen, water vapor, dust, etc., is often
required. Permeation is a critical factor in design. Some packages contain
desiccants or Oxygen absorbers to help extend shelf life. Modified atmospheres [4]
or controlled atmospheres are also maintained in some food packages. Keeping
the contents clean, fresh, sterile[5] and safe for the intended shelf life is a primary
function.
• Containment or agglomeration - Small objects are typically grouped together in
one package for reasons of efficiency. For example, a single box of 1000 pencils
requires less physical handling than 1000 single pencils. Liquids, powders, and
granular materials need containment.
• Information transmission - Packages and labels communicate how to use,
transport, recycle, or dispose of the package or product. With pharmaceuticals,
food, medical, and chemical products, some types of information are required by
governments.
• Marketing - The packaging and labels can be used by marketers to encourage
potential buyers to purchase the product. Package design has been an important
and constantly evolving phenomenon for several decades. Marketing
communications and graphic design are applied to the surface of the package and
(in many cases) the point of sale display.
• Security - Packaging can play an important role in reducing the security risks of
shipment. Packages can be made with improved tamper resistance to deter
tampering and also can have tamper-evident[6] features to help indicate tampering.
Packages can be engineered to help reduce the risks of package pilferage: Some
package constructions are more resistant to pilferage and some have pilfer
indicating seals. Packages may include authentication seals and use security
printing to help indicate that the package and contents are not counterfeit.
Packages also can include anti-theft devices, such as dye-packs, RFID tags, or
electronic article surveillance[7]. tags, that can be activated or detected by devices
at exit points and require specialized tools to deactivate. Using packaging in this
way is a means of loss prevention.
• Convenience - Packages can have features which add convenience in distribution,
handling, stacking, display, sale, opening, reclosing, use, and reuse.
• Portion control - Single serving or single dosage packaging has a precise amount
of contents to control usage. Bulk commodities (such as salt) can be divided into
packages that are a more suitable size for individual households. It is also aids the
control of inventory: selling sealed one-liter-bottles of milk, rather than having
people bring their own bottles to fill themselves.

[edit] Packaging types

Various household packaging types for foods

Packaging may be looked at as several different types. For example a transport package
or distribution package is the package form used to ship, store, and handle the product
or inner packages. Some identify a consumer package as one which is directed toward a
consumer or household.

Packaging may discussed in relation to the type of product being packaged: medical
device packaging, bulk chemical packaging, over-the-counter drug packaging, retail food
packaging, military materiel packaging, pharmaceutical packaging, etc.
Pull open aluminum can

It is sometimes convenient to categorize packages by layer or function: "primary",


"secondary", etc.

• Primary packaging is the material that first envelops the product and holds it. This
usually is the smallest unit of distribution or use and is the package which is in
direct contact with the contents.
• Secondary packaging is outside the primary packaging – perhaps used to group
primary packages together.
• Tertiary packaging is used for bulk handling, warehouse storage and transport
shipping. The most common form is a palletized unit load that packs tightly into
containers.

These broad categories can be somewhat arbitrary. For example, depending on the use, a
shrink wrap can be primary packaging when applied directly to the product, secondary
packaging when combining smaller packages, and tertiary packaging on some
distribution packs.

[edit] Symbols used on packages and labels


Many types of symbols for package labeling are nationally and internationally
standardized. For consumer packaging, symbols exist for product certifications,
trademarks, proof of purchase, etc. Some requirements and symbols exist to communicate
aspects of consumer use and safety. Recycling directions, Resin identification code
(below), and package environmental claims have special codes and symbols.

Bar codes (below), Universal Product Codes, and RFID labels are common to allow
automated information management.
"Wikipedia" encoded in Code 128

[edit] Shipping container labeling

This image is a candidate for speedy deletion. It may be deleted after Tuesday, 7 April 2009.

Technologies related to shipping containers are identification codes, bar codes, and
electronic data interchange (EDI). These three core technologies serve to enable the
business functions in the process of shipping containers throughout the distribution
channel. Each has an essential function: identification codes either relate product
information or serve as keys to other data, bar codes allow for the automated input of
identification codes and other data, and EDI moves data between trading partners within
the distribution channel.

Elements of these core technologies include UPC and EAN item identification codes, the
SCC-14 (UPC shipping container code), the SSCC-18 (Serial Shipping Container Codes),
Interleaved 2-of-5 and UCC/EAN-128 (newly designated GS1-128) bar code
symbologies, and ANSI ASC X12 and UN/EDIFACT EDI standards.

Small parcel carriers often have their own formats. For example, United Parcel Service
has a MaxiCode 2-D code for parcel tracking.

RFID labels for shipping containers are also increasing in usage. A Wal-Mart division,
Sam's Club, has also moved in this direction and is putting pressure on on its suppliers for
compliance. [8]

Shipments of hazardous materials or dangerous goods have special information and


symbols (labels, plackards, etc) as required by UN, country, and specific carrier
requirements. Two examples are below:

With transport packages, standardised symbols are also used to aid in handling. Some
common ones are shown below while others are listed in ASTM D5445 "Standard
Practice for Pictorial Markings for Handling of Goods" and ISO 780 "Pictorial marking
for handling of goods".
Do not use hand
Fragile This way up Keep away from sunlight
hooks

Keep away from Clamp as Do not clamp as


water Centre of gravity
indicated indicated

[edit] Package development considerations


Package design and development are often thought of as an integral part of the new
product development process. Alternatively, development of a package (or component)
can be a separate process, but must be linked closely with the product to be packaged.
Package design starts with the identification of all the requirements: structural design,
marketing, shelf life, quality assurance, logistics, legal, regulatory, graphic design, end-
use, environmental, etc. The design criteria, time targets, resources, and cost constraints
need to be established and agreed upon.

Transport packaging needs to be matched to its logistics system. Packages designed for
controlled shipments of uniform pallet loads may not be suited to mixed shipments with
expresscarriers.

An example of how package design is affected by other factors is the relationship to


logistics. When the distribution system includes individual shipments by a small parcel
carrier, the sortation, handling, and mixed stacking make severe demands on the strength
and protective ability of the transport package. If the logistics system consists of uniform
palletized unit loads, the structural design of the package can be designed to those
specific needs: vertical stacking, perhaps for a longer time frame. A package designed for
one mode of shipment may not be suited for another.

Sometimes the objectives of package development seem contradictory. For example,


regulations for an over-the-counter drug might require the package to be tamper-evident
and child resistant[9] :These intentionally make the package difficult to open.[10]. The
intended consumer, however, might be handicapped or elderly and be unable to readily
open the package. Meeting all goals is a challenge.
Package design may take place within a company or with various degrees of external
packaging engineering: contract engineers, consultants, vendor evaluations, independent
laboratories, contract packagers, total outsourcing, etc. Some sort of formal Project
planning and Project management methodology is required for all but the simplest
package design and development programs. An effective quality management system and
Verification and Validation protocols are mandatory for some types of packaging and
recommended for all.

Package development involves considerations for sustainability, environmental


responsibility, and applicable environmental and recycling regulations. It may involve a
life cycle assessment[11] [12] which considers the material and energy inputs and outputs to
the package, the packaged product (contents), the packaging process, the logistics
system[13], waste management, etc. It is necessary to know the relevant regulatory
requirements for point of manufacture, sale, and use.

The traditional “three R’s” of reduce, reuse, and recycle are part of a waste hierarchy
which may be considered in product and package development.

The waste hierarchy

• Prevention – Waste prevention is a primary goal. Packaging should be used only


where needed. Proper packaging can also help prevent waste. Packaging plays an
important part in preventing loss or damage to the packaged-product (contents).
Usually, the energy content and material usage of the product being packaged are
much greater than that of the package. A vital function of the package is to protect
the product for its intended use: if the product is damaged or degraded, its entire
energy and material content may be lost.[14] [15]
• Minimization –(also "source reduction") The mass and volume of packaging (per
unit of contents) can be measured and used as one of the criteria to minimize
during the package design process. Usually “reduced” packaging also helps
minimize costs. Packaging engineers continue to work toward reduced
packging.[16]
• Reuse – The reuse of a package or component for other purposes is encouraged.
Returnable packaging has long been useful (and economically viable) for closed
loop logistics systems. Inspection, cleaning, repair and recouperage are often
needed.
• Recycling – Recycling is the reprocessing of materials (pre- and post-consumer)
into new products. Emphasis is focused on recycling the largest primary
components of a package: steel, aluminum, papers, plastics, etc. Small
components can be chosen which are not difficult to separate and do not
contaminate recycling operations.
• Energy recovery – Waste-to-energy and Refuse-derived fuel in approved facilities
are able to make use of the heat available from the packaging components.
• Disposal – Incineration, and placement in a sanitary landfill are needed for some
materials. Certain states within the US regulate packages for toxic contents, which
have the potential to contaminate emissions and ash from incineration and
leachate from landfill.[17] Packages should not be littered.

Development of sustainable packaging is an area of considerable interest by standards


organizations, government, consumers, packagers, and retailers.

[edit] Packaging machines

Bottling lines for beer plant

A choice of packaging machinery includes, technical capabilities, labor requirements,


worker safety, maintainability, serviceability, reliability, ability to integrate into the
packaging line, capital cost, floorspace, flexibility (change-over, materials, etc.), energy
usage, quality of outgoing packages, qualifications (for food, pharmaceuticals, etc.),
throughput, efficiency, productivity, ergonomics, etc.

Packaging machines may be of the following general types:

• Blister packs, skin packs and Vacuum Packaging Machines


• Bottle caps equipment, Over-Capping, Lidding, Closing, Seaming and Sealing
Machines
• Box, Case and Tray Forming, Packing, Unpacking, Closing and Sealing Machines
• Cartoning Machines
• Cleaning, Sterilizing, Cooling and Drying Machines
• Converting Machines
• Conveyor belts, Accumulating and Related Machines
• Feeding, Orienting, Placing and Related Machines
• Filling Machines: handling liquid and powdered products
• Inspecting, Detecting and Check weigher Machines
• Label dispensers Help peel and apply labels more efficiently
• Package Filling and Closing Machines
• Palletizing, Depalletizing, Unit load assembly
• Product Identification: labeling, marking, etc.
• Shrink wrap Machines
• Form, Fill and Seal Machines
• Other speciality machinery: slitters, perforating, laser cutters, parts attachment,
etc.

Bakery goods Label printer


shrinkwrapped by High speed conveyor applicator applying a
with bar code scanner Robotics used to
shrink film, heat sealer label to adjacent
for sorting transport palletize bread
and heat tunnel on panels of a corrugated
roller conveyer packages box.

[edit] History

Amphorae on display in Bodrum Castle, Turkey

The first packages used the natural materials available at the time: Baskets of reeds,
wineskins (Bota bags), wooden boxes, pottery vases, ceramic amphorae, wooden barrels,
woven bags, etc. Processed materials were used to form packages as they were
developed: for example, early glass and bronze vessels. The study of old packages is an
important aspect of archaeology.

Iron and tin plated steel were used to make cans in the early 19th century. Paperboard
cartons and corrugated fiberboard boxes were first introduced in the late 19th century.
Packaging advancements in the early 20th century included Bakelite closures on bottles,
transparent cellophane overwraps and panels on cartons, increased processing efficiency
and improved food safety. As additional materials such as aluminium and several types of
plastic were developed, they were incorporated into packages to improve performance
and functionality.

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