Purchasing in the case of discontinuities in needs

Planning purchases in the amount resulting from the optimal batch of demand is justifiable in an ongoing demand and if demand does not show excessive fluctuations. In the case where demand is variable or intermittent, making purchases according to the optimal amount can cause excessive inventories, temporary backlog in the warehouse and thus causing considerable costs for maintaining them. This is because the methods of cost-optimal procurement of raw materials do not reflect actual demand from manufacturing to produce excessive levels of inventories. In situations of sporadically demand for raw materials or characterized by large deviations from the optimal size of demand, suitable methods of purchase are those in which the optimum purchasing batch sizes are the variable.

These amounts are determined at the designated levels, depending on the shape to forecast demand or scheduled utilization of raw materials and costs related to the maintenance and creation of stocks. In this case the optimal batch size is fixed at carefully selected time intervals, e.g. a month.

In the case of discontinuities of needs, most commonly used model is variable size delivery.

Ordering standard specifies the level of inventory at which there should be order for supplemental raw materials. Standard order should be set in a way that allows uninterrupted production until next delivery. Delivery size is set using the maximum norm, i.e., the difference between the maximum stock and the actual stock. The main problem in planning purchases in the event of a change of the requirements is ignorance of the level of demand for this type of material. Deviations in cycles in the sizes of the supply and flow of inventory for production must be compensated from the contingency reserve, or supplemented in safe mode that usually causes an increase of the purchase cost compared to trading activities in the normal mode.

See also:

• Purchase strategy

Purchasing in the case of discontinuities in needs — recommended articles

Pull system — Dependent demand — Economic batch size — Distribution expense — Maximum stock level — Order point — Pipelined production — Stock level — Independent demand

References

• Tripsas, M. (2008). Customer preference discontinuities: A trigger for radical technological change. Managerial and decision economics, 29(2‐3), 79-97.