Materials Management

Materials managementFrom Wikipedia, the free encyclopedia

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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 chainFrom Wikipedia, the free encyclopedia

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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

From Wikipedia, the free encyclopedia

Jump to: navigation, searchThis 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 accountingMain 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 managementFrom Wikipedia, the free encyclopedia

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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 periodADD Stock purchased during the periodAVERAGE 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 accountingFrom Wikipedia, the free encyclopedia

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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)From Wikipedia, the free encyclopedia

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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 materialFrom Wikipedia, the free encyclopedia

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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 processFrom Wikipedia, the free encyclopedia

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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 goodFrom Wikipedia, the free encyclopedia

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Look up finished good inWiktionary, 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 stockFrom 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)

ProcurementFrom 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 Procurement

Indirect Procurement

Raw Material and Production Goods

Maintenance, Repair and Operating (MRO)

Supplies

Capital Goods and

Services

F E A T U R E S

Quantity Large Low Low

Frequency High Relatively high Low

Value Industry specific Low High

Nature Operational Tactical Strategic

ExamplesCrude oil in petroleum industry

Lubricants, spare partsMachinery, 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 oPurchasingFrom Wikipedia, the free encyclopedia

Jump to: navigation, searchFor 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 PlanningFrom 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 materialsFrom 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 planningFrom 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 labelingFrom 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".

FragileDo not use hand hooks

This way up Keep away from sunlight

Keep away from water Centre of gravity

Clamp as indicated

Do not clamp as 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 shrinkwrapped by shrink film, heat sealer and heat tunnel on roller conveyer

High speed conveyor with bar code scanner for sorting transport packages

Label printer applicator applying a label to adjacent panels of a corrugated box.

Robotics used to palletize bread

[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.