Dynamic Order Management

One of the main sources of supply chain costs is ordering. Handling each purchase order line requires a large number of activities. Reducing the number of order lines can greatly reduce supply chain costs.

This may appear easy to do but it rarely is. It requires striking a balance between order process costs, inventory costs and space costs. And a couple of other things.

Dynamic Lead Time Management

Larger hospitals receive frequent deliveries from their primary vendors, often five days a week (except for holidays and traffic- or weather-related delays). So, the hospital can plan most of the time around an order lead time of one day. No, that won't work because of weekends. You need to figure on an average lead time of three days to cover weekends.

But three days is not enough to cover the five-day lead times that can occur across long holiday weekends. So maybe you need to figure on a five-day order lead time to avoid stockouts over these long weekends. If you do this, you will incur substantial inventory capital costs and space costs and lose much of the savings from a JIT supply chain.

Order Pipeline Management

Automated ordering may not always take into account orders already in the pipeline. This is particularly true for frequently ordered items. Your order timing and order quantity should reflect both pipeline orders for the item and the actual lead time the order faces.

Order Cutoff Times

This brings us to vendor order cutoff times. Some vendors have a noon or 1 PM cutoff for next (business) day delivery. Others may extend the cutoff to 5 PM for EDI orders. Then there are weekend cutoffs that apply mainly to automated (EDI) orders. Each new order should be adjusted to allow for cutoff-adjusted delivery timing.

Demand Pattern Adjustment

And, while you are thinking about dynamic order management, you might want to incorporate a look-ahead or forecasting function that adjusts for demand trends and patterns. For more on this topic, see Demand Forecasting.

How Can You Do All of This?

The "how" is the hard part. Automated point-of-use (POU) ordering systems generate requisition files that are uploaded to enterprise purchasing applications, usually several times a day. These apps typically aggregate requisition lines by ship-to location and item to generate a single purchase order line. What the purchasing agent or buyer sees is the result of this behind the scenes ordering process — a purchase order for each ship-to location containing one line for each item.

Some purchasing (or, more often, inventory management) applications allow for (static) order lead time and order quantity adjustments but keeping the required item master fields up to date is a major task and headache.

The answer is likely to be some type of intermediary application that intercepts and consolidates requisitions after taking into account all of the above real-world considerations. The mechanics of dynamic order management itself is not especially complicated.

We look next at forecasting end-use demand since this is critical to costs ... Dynamic Demand Forecasting ...

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Just-In-Time

Creating a purchase order line sets in motion a lengthy chain of events, each of which adds to the handling cost of order lines. These costs when added up can be substantial.

A major part of what we do is estimating these order line costs.

In past, orders were timed around fairly long and quite variable lead times. More recently, with pressures growing to minimize inventory investment and space usage, hospitals have moved toward just-in-time (JIT) ordering. This can reduce inventories dramatically but it also demands frequent deliveries and more frequent orders.

Just-in-time supply can be extremely costly if not carefully managed, as we suggest in the main content of this page. Frequent orders and undisciplined ordering, especially by automated systems, can create huge new supply chain costs.

Our simulation methodology includes dynamic order management to estimate what cost reductions might be possible with alternative order management approaches.

Just-in-time ordering requires dynamic order management to avoid these typically high and unnecessary supply chain costs.