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Ordering Process
Logistics is a comprehensive process encompassing the planning and execution of efficient transportation and storage of goods, ensuring their smooth journey from the point of origin to the point of consumption. Ordering, a crucial component of this logistical framework, is the act of purchasing goods to replenish inventory. In the ordering phase, careful consideration is given to estimating and forecasting. Estimating involves calculating current or near-future needs based on available data, while forecasting involves predicting future demand through the analysis of historical data and trends. Together, these elements form a cohesive system that optimizes supply chain management and enhances overall operational efficiency.
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Based on the pre-established frequency of systematic orders. - Period Model/ P Model
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Based on a pre-established threshold of stock levels. - Quantity Model/ Q Model
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Based on monitoring and responding to dynamic external factors. - Dynamic Model/ D Model
Prior to an in-depth analysis of each ordering model, it is essential to familiarize ourselves with pivotal terminologies that lay the foundation for a comprehensive understanding of the above-mentioned ordering methodologies.
This refers to a reserve that is used in unforeseen emergencies. It is also known as strategic stock or safety stock. To guarantee a consistent supply of drugs, it's important to closely track stock levels in order to maintain a buffer stock as a precaution.
This refers to the time it takes for a product or material to be delivered from the point of order placement to the point of receipt. It encompasses the entire process, including order processing, manufacturing (if applicable), transportation, and any other steps involved in getting the product from the supplier to the pharmaceutical organization.
P model involves a systematic approach to procurement, primarily characterized by coordination with suppliers who adhere to a predetermined cycle for specific items. This entails scheduled inventory reviews at fixed intervals. A key focus of this model is to ensure that stock levels do not fall below the established buffer stock by the time goods are received for the subsequent cycle. Notably, the ordering quantity remains flexible, adapting to changes in demand and operational requirements during each cycle. This method emphasizes strategic coordination with suppliers, regular inventory assessments, and adaptability in ordering quantities to optimize efficiency in stock management. In the P model, the inventory remaining at the storage facility or warehouse post-ordering, available for use or sale, until replenishment of stocks is termed as rest stock.
The Q model encompasses a systematic approach to inventory replenishment, involving the placement of a fixed order whenever the stock reaches the Re-Order Point (ROP) or Re-Order Level (ROL). This method emphasizes consistency by maintaining orders of a predetermined size, typically based on the Economic Order Quantity (EOQ) or Re-Order Quantity (ROQ) to optimize costs efficiently. The model integrates regular reviews of ROL/ROQ with forecasting, ensuring a proactive stance in adapting to changing demands. Notably, the Time-related aspects in this model are flexible, allowing for adaptability in timing to accommodate operational dynamics and fluctuations in demand, thereby enhancing the overall efficiency of the replenishment process.
The Re-Order Level (ROL) denotes the inventory threshold triggering the initiation of a purchase requisition for the replenishment of materials. As the on-hand stock approaches this predefined Re-Order Point(ROP), the storekeeper proactively takes measures to replenish the depleted inventory. The distinction between the Re-Order Level(ROL) and the Buffer Stock Level (minimum level) is carefully calculated to ensure adequacy in meeting requirements until the arrival of the fresh supply. Consequently, the determination of the ROL is meticulously orchestrated to facilitate the timely delivery of new material stock, ensuring it arrives just before the existing stock reaches its minimum level (buffer stock) under normal operational conditions. In the establishment of this level, critical considerations encompass factors such as the average consumption rate, buffer stock level, and lead time.
Re-Order Level = Buffer stock level + (Average consumption rate x Lead time)
The Re-Order Quantity (ROQ) signifies the magnitude of an order to be initiated with the chosen supplier upon reaching the Re-Order Level (ROL). The calculation of the ROQ involves a meticulous consideration of various factors, including the maintenance of Buffer Stock (minimum level), the Re-Order Level, lead time, and the overall total cost associated with the procurement process to optimize the efficiency and effectiveness of the replenishment strategy.
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Reorder Level represents that level of inventory which when reached the order for refilling inventory must be placed with the supplier so that the required material is delivered before the entire stock of material comes to an end. On the contrary, Reorder Quantity refers to the size of the material lot for which an order is placed with the chosen supplier when the level of stock falls to the reorder level.
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While Re-Order Level is associated with the time element, Re-Order Quantity is associated with quantity.
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Re-Order Level helps in ascertaining when to buy or place the order for the material lot, whereas, Re-Order Quantity facilitates in determining how much quantity of materials to be purchased by the firm at a time.
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At the time of determining the re-order level, factors like maximum consumption during lead time, lead time taken by the supplier, safety level, and replenishment period are considered. On the other hand, to ascertain re-order quantity, annual carrying cost, annual ordering cost, quantum of discount, and many other factors are taken into account.
The third model incorporates a dynamic approach to inventory management by adjusting orders in response to real-time demands and external factors, such as budget constraints or supplier offers. It emphasizes flexibility both in terms of order quantity and timing, allowing for adaptability to changing circumstances. Proactive inventory management is a key feature, aimed at mitigating risks associated with external factors by staying attuned to fluctuations in demand and market conditions. Despite the potential for higher associated costs, this model acknowledges the importance of strategic adjustments to optimize operational efficiency and responsiveness to the dynamic business environment.