Sep
14
3 tips on using Pareto for Supply Chain
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The Pareto Principle is a tried and tested management technique that aids you in decision making by using the 80/20 principle. What’s the 80/20 principle? It is an idea that a limited number of activities/causes can generate 80% of the value/issues
Some examples –
- 20% of your customers generate 80% of the revenue
- 20% of your products cause 80% of the customer complaints
- 20% of your sales force generate 80% of the sales
- 20% of a bill of materials will account for 80% of the total part cost
Used correctly this technique helps you focus – with laser like precision on the facts that matter – Pareto can be used almost everywhere and anywhere and Supply Chain professionals can really benefit from its application.
The principle behind how you use Pareto is fairly simple – in our example we’re investigating late deliveries by our suppliers – we have 600 suppliers and we have their annual deliveries, their late deliveries and we’ve calculated a percentage late figure – we’ve created a table of the results formatted as below .
| Supplier Name | Total Deliveries | Late Deliveries | % late | Cumulative % late |
| ABC Inc | 1000 | 200 | 20% | 3.6% |
Carrying out Pareto Analysis
First gather you data and summarise (as in the above example)
- Sort your table in descending order of the issue your investigating (in our example by number of Late Deliveries)
- Add a Cumulative % column for your issue
- On your table/list draw a line at 80%
- The Items in your list which add up to the 80% are typically the primary causes the ones between the 80-100% are the less important causes.
3 Key uses of Pareto Principle in Supply Chain
Here’s our three top three tips where to use Pareto
1/ Improving your supplier delivery schedule adherence
As in our example above – Pareto is an excellent tool when analysing supplier performance and deciding on your management strategy – which suppliers to focus on and what route causes to eradicate.
2/ Applying appropriate inventory management controls through ABC Analysis
Applying Pareto principles and methods to your parts when conducting ABC analysis. All parts are not equal – you don’t manage 5 cent screws the same way as a $50,000 part different ordering and inventory management techniques. ABC is used as a method to segment your parts/inventory allowing you to manage each appropriately. Click here for more on ABC analysis
3/ Cost Savings initiatives
Using Pareto techniques to analyse cost drivers within your organization can help you focus on the key contributory factors such as Suppliers, Parts or Bill of material elements allowing you to focus your improvement activities on the parts that matter.
These are just 3 examples of how you can use Pareto in the supply chain – if you have your own thoughts please contribute in the comments section below.
Sep
11
Key steps in the purchasing process
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Like any process the purchasing process is made up of several steps or activities each step takes information, processes it and turns into an output to feed into the next step.
While the purchasing process may vary from organisation to organisation the major fundamentals remain the same
1 Request to purchase / requisition
This phase deals with identifying the need – what to buy – how much of it – and when it is needed for – there are two main forms of requisition – a manual one i.e. that created on a form (such as a requisition form) or other document and that created automatically via an ERP type system. The requisition will likely go through an approvals process whereby authorisation is given to purchase the item (or not!)
2 supplier selection
Buyers may already know which supplier to to buy the item from that is being requested. If not a tender (or request for quote) process may be initiated to identify a supplier, price and lead time.
3 purchase order
A purchase order is despatched to the supplier (either a paper copy or electronically) to inform the supplier of the intent to purchase. The purchase order will identify the item(s) being procured, the quantity required and the price being paid. It will also identify delivery address and any terms and conditions that relate to the order. Click here for our guide on how to create a Purchase Order template using Excel
4 Fulfillment
The supplier will then despatch the goods to the buying organisation. Lead time might be required to allow the supplier to manufacture the item or receive deliver from Mitsubishi own suppliers.
5 Goods receipt
Once the goods arrive at the buying organisation they will typically go through some form of goods receipting process where the goods are checked to ensure that they match what was ordered and that they are of the correct quality.
6 Supplier invoice/payment
At time of despatch the supplier will typically issue an invoice – which either accompanies the goods or is sent separately. This will be received by the finance department – processed and paid (assuming the goods are received and are correct).
Summary
While these are the basic steps in the purchasing process all companies are different – some will wish to automate as much as possible replacing paper forms with electronic messages- others may have complex approval rules – despite these variations however the fundamentals remain the same.