A Portfolio Approach for Purchasing Systems: Impact of Switching Point
In operations management different ordering policies, such as, economic order quantity, lot for lot and periodic ordering, are used in various combinations without deeper considerations for the likely consequences on cash flow and profitability. The success of these techniques is analyzed through in...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
Massachusetts Institute of Technology. Engineering Systems Division
2016
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| Online Access: | http://hdl.handle.net/1721.1/102861 |
| _version_ | 1826190172196175872 |
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| author | Hilmola, Olli-Pekka Ma, Hongze Datta, Shoumen Palit Austin |
| author_facet | Hilmola, Olli-Pekka Ma, Hongze Datta, Shoumen Palit Austin |
| author_sort | Hilmola, Olli-Pekka |
| collection | MIT |
| description | In operations management different ordering policies, such as, economic order quantity, lot for lot and periodic ordering, are used in various combinations without deeper considerations for the likely consequences on cash flow and profitability. The success of these techniques is analyzed through inventory levels and/or total cost. In this paper, we present results of simulation which uses three different product groups with varying demand characteristics, changing product margins and also considers product quality failures (due to ordering, engineering change or customer requests). Based on our results, we suggest a portfolio approach where lot for lot policy may be useful in an early phase of the product life-cycle and later it may be an advantage to change over to economic order quantity (EOQ) based ordering. However, demand sustainability and failure rates create instances where orders in larger economical lots may reduce profitability. Therefore, manufacturing may benefit from a portfolio of different purchase order policies and may evaluate the successful balance of policies using cash flow as a parameter. Accuracy of demand forecasting is vital to switching point estimation. Further research on real-world applications of advanced forecasting tools is advocated as well as a framework to develop the portfolio for intelligent purchasing systems. |
| first_indexed | 2024-09-23T08:36:11Z |
| format | Working Paper |
| id | mit-1721.1/102861 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T08:36:11Z |
| publishDate | 2016 |
| publisher | Massachusetts Institute of Technology. Engineering Systems Division |
| record_format | dspace |
| spelling | mit-1721.1/1028612019-04-09T18:44:09Z A Portfolio Approach for Purchasing Systems: Impact of Switching Point Hilmola, Olli-Pekka Ma, Hongze Datta, Shoumen Palit Austin In operations management different ordering policies, such as, economic order quantity, lot for lot and periodic ordering, are used in various combinations without deeper considerations for the likely consequences on cash flow and profitability. The success of these techniques is analyzed through inventory levels and/or total cost. In this paper, we present results of simulation which uses three different product groups with varying demand characteristics, changing product margins and also considers product quality failures (due to ordering, engineering change or customer requests). Based on our results, we suggest a portfolio approach where lot for lot policy may be useful in an early phase of the product life-cycle and later it may be an advantage to change over to economic order quantity (EOQ) based ordering. However, demand sustainability and failure rates create instances where orders in larger economical lots may reduce profitability. Therefore, manufacturing may benefit from a portfolio of different purchase order policies and may evaluate the successful balance of policies using cash flow as a parameter. Accuracy of demand forecasting is vital to switching point estimation. Further research on real-world applications of advanced forecasting tools is advocated as well as a framework to develop the portfolio for intelligent purchasing systems. 2016-06-02T19:56:54Z 2016-06-02T19:56:54Z 2008-01 Working Paper http://hdl.handle.net/1721.1/102861 en_US ESD Working Papers;ESD-WP-2008-07 application/pdf Massachusetts Institute of Technology. Engineering Systems Division |
| spellingShingle | Hilmola, Olli-Pekka Ma, Hongze Datta, Shoumen Palit Austin A Portfolio Approach for Purchasing Systems: Impact of Switching Point |
| title | A Portfolio Approach for Purchasing Systems: Impact of Switching Point |
| title_full | A Portfolio Approach for Purchasing Systems: Impact of Switching Point |
| title_fullStr | A Portfolio Approach for Purchasing Systems: Impact of Switching Point |
| title_full_unstemmed | A Portfolio Approach for Purchasing Systems: Impact of Switching Point |
| title_short | A Portfolio Approach for Purchasing Systems: Impact of Switching Point |
| title_sort | portfolio approach for purchasing systems impact of switching point |
| url | http://hdl.handle.net/1721.1/102861 |
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