Accounting Best Practices, Fifth Edition

16–38. Reduce Safety Stocks by Accelerating the Flow of Internal Information

A typical reordering scenario is for the warehouse manager to forward to the purchasing department a daily list of items requiring reordering. This goes by intercompany mail to the purchasing department, which places it in the department inbound work queue. After some time passes, the request reaches the top of the stack, and a purchasing person confirms the need for the item, obtains supervisory approval, and then mails a purchase order to a supplier. The total lag caused by all these activities and wait times can easily exceed a week; during this time, the inventory level continues to decline, possibly resulting in a stockout before the delivery arrives from the supplier. When this problem goes on for some time, the purchasing staff starts to lengthen the item lead times in its database, forcing the company to order sooner and sooner. The result is long lead times for many items, requiring extremely long time horizons for product forecasting, which becomes inherently more difficult when stretched further into the future.

To avoid longer lead times caused by internal communications problems, we must shrink the time required to notify suppliers of new purchasing requirements. This can involve a number of system improvements, such as having a computerized materials planning database automatically issue purchase orders to suppliers without human intervention, based on the production plan and existing stock ...