Procurement methods

Procurement and supply planning

It consists in organizing, planning and controlling a company's inventory levels.

Its main objective is the balance between quality service and holding costs (see spec sheet Free-Logistics.com © Procurement and supplying costs).

The main inventory management elements are :

• the orders issuing frequency

• the orders issuing time

• the quantities to order

The main factors influencing the procurement management are:

• the demand. It is necessary to know the characteristics of demand in order to adapt the procurement method. For example, in case of an erratic demand it is not relevant to use classic forecast methods like the Wilson formula (see spec sheet Free-Logistics.com © Wilson formula). It is preferable to work according to order point method .

• the procurement costs

• the procurement times and their reliability

• the Information System data updating frequency (inventory, consumption, forecast, reception, past orders...)

See spec sheet Free-Logistics.com © Supply Planning for more details on this function.

---> Recommended bibliography for procurement methods

The main procurement methods

To define the procurement policy the procurement manager will attempt to answer the following questions:

• What article to order?

• When to order?

• How many items to order?

Then, according to his company's organization and the article characteristics, he will define if the orders must have fixed or variable dates and quantities.

The classic procurement methods are thus among four:

• Calendar – Fixed Period Requirement : fixed date and fixed quantity,

• Order point : variable date and fixed quantity,

• Periodic replenishment – Period Order Quantity: fixed date and variable quantity,

• On demand : variable date and variable quantity.

The policy must be adapted to each article characteristics, it is thus frequent to combine the various policies in order to manage a global inventory.

Products are delivered to fixed dates in fixed quantities, often determined according to the Wilson formula (see spec sheet Free-Logistics.com © Wilson formula).

Order point

The order point corresponds to the inventory level which, once reached, will trigger an order.

See spec sheet Free-Logistics.com © Order point method .

Periodic replenishment - Period Order Quantity

The periodic replenishment consists in defining a supply calendar.

See spec sheet Free-Logistics.com © Periodic replenishment method .

On demand

Products are delivered at variable dates and in variable quantities, according to the needs.

Which procurement method to choose?

It is fundamental to adapt the procurement method to:

• the type of product

• the manufacturing process and its consumption (in case of industrial procurement)

• the commercial process and its consumption (in case of retail / distribution procurement)

See spec sheet Free-Logistics.com © Which procurement method to choose .

Recommended bibliography