PO Generation

+ Transcript

Purchase orders need to be created to fulfill job requirements, customer orders, and to replenish stock. PO planning must deal with the following issues:

  • Should an item be purchased to order or to stock?
  • If purchased to stock, what is the appropriate reorder level?
  • How can a PO reflect an economical order quantity?
  • How are POs planned for extremely long lead time items?
  • How can POs be issued at regular intervals for blanket purchases?
  • How much time should be allocated to purchase an item?

In DBA POs are generated by MRP, which stands for "material requirements planning." Three common sense item settings - the Lead Days, Reorder Level, and Minimum Order - are used by MRP to generate POs in response to the net demand within each item's planning period.

POs are generated on a just in time basis within a lean master schedule that is coordinated with your job and sales order requirements.

The first of our three common sense purchased item settings is the Lead Days.

Here we are looking at the MRP Settings screen. The Lead Days is the number of days allocated by MRP for procuring the item from its default supplier. Take note that the Lead Days amount is an "allocation" and is not the literal time it takes to procure the item. For example, an item may take only two days to be received from the supplier, but for planning purposes, you might set the Lead Days amount to four or five days to cover possible delays and to account for receiving processing time.

Here we are looking at the Delivery tab. To help you make this allocation, you can review the Delivery inquiry to get a listing of actual delivery days associated with past PO receipts.

The second of our three common sense purchased item settings is the Reorder Level.

Some items with long lead times need to be purchased to stock so that they are immediately available when needed by jobs or sales orders. To purchase an item to stock, it must be given a Reorder Level. MRP will generate a PO whenever net demand within the item's planning period falls below its Reorder Level.

The Reorder Level amount is established using the Reorder Calculator, which is launched by clicking the button in the Reorder Level field.

The Reorder Level must be sufficient to cover projected demand within the item's planning period. Projected demand consists of three elements:

Here you enter estimated monthly unit sales for the item. Here you enter estimated monthly usage for the item, meaning its use as a purchased component in jobs. You can also enter a safety stock amount to cover potential variations in net demand that can occur in any given month.

In the lower portion of the screen you can review past sales and usage history with monthly and quarterly averages to help determine your monthly estimates.

Here we see the item's Planning Period, which is the number of days allocated by MRP to purchase the item.

This screen provides a breakdown of the variable that comprise the planning period.

The program translates the sum of these monthly amounts into a daily average that is then multiplied by the item's planning period days to arrive at a calculated Reorder Level.

The third and final common sense purchased item setting is the Minimum Order.

The Minimum Order setting provides control over PO quantities. When MRP generates a PO, the quantity will be equal or greater than the Minimum Order amount, no matter how little the actual net demand may be.

The Minimum Order amount can be directly entered when used as an economical order quantity to take advantage of supplier price breaks and to reduce unit shipping and handling costs that are typically higher with smaller orders.

If you wish to use the Minimum Order to manage extremely long lead time items or blanket purchase items, click the button in the Minimum Order field to launch the Reorder Calculator.

The Reorder Calculator can be used to calculate a Minimum Order, based on entering a Supply Days amount.

The Supply Days represents the number of days of projected demand you wish to be covered by each PO. Projected monthly demand is entered over here in the form of estimated monthly sales, monthly usage, plus a safety stock factor. The program takes projected monthly demand, converts that amount into a daily average, then multiplies it by the Supply Days to generate a calculated Minimum Order amount.

Using the Supply Days in combination with a Reorder Level solves two common purchasing issues - how to purchase items with extremely long lead times, and how to generate blanket purchases at regular intervals.

When an item has an extremely long lead time, the Minimum Order can be used to create a series of staggered POs. For example, let's take an item with a six month lead time. Here in the Supply Days field, we are specifying that the Minimum Order will cover 30 days of projected demand. MRP will generate a PO approximately every 30 days. So in the case of our six month lead time item, at any given time, six POs would be in progress, each due to arrive in 30 day intervals.

The Supply Days setting can also be used for blanket purchasing. If you give a supplier an annual volume commitment in exchange for a fixed price and you wish to issue POs at regular intervals, such as once a month, set the Supply Days for 30 days and MRP will generate POs in approximate 30 day intervals.

POs are generated within the MRP screen.

To generate POs, click the Generate button. Select the Generate Planned POs option. POs are generated in response to each item's net demand relative to its Reorder Level.

What is "net demand?" Within the item's planning period, it is the item's stock on hand, plus expected supply from open POs, less demand from sales orders and jobs. The item's planning period, is the number of days allocated by MRP to purchase the item. Any demand outside the planning period is responded to in a future MRP run. This makes the master PO schedule easier to manage because scheduling dates are short term and the number of POs is kept to a minimum.

Here we are looking at a set of planned POs.

You can click the Demand icon to view the Stock Status Inquiry to view all the supply and demand detail, as well as the item's MRP settings.

Here you see the item's default supplier. You can change suppliers on an exception basis, if you wish, by selecting an alternate supplier from the lookup.

As each PO is reviewed, it is selected for conversion. After all POs are flagged for conversion, you click the Convert button to convert the POs into actual POs.

Subcontract POs

The other type of POs required for manufacturing are for subcontract services such as painting, plating, and heat-treating that are performed during the course of jobs.

Here in the Job Subcontracting screen, POs are automatically generated for subcontract services as needed within your open jobs. You simply select the Convert checkbox, then click the Convert button. Here we are looking at a sample printout of a subcontract service purchase order.

The master PO schedule can be viewed in the PO Schedule screen.

Because MRP only generates POs in response to the net demand within each item's planning period, POs are scheduled on a just in time basis. Therefore the master schedule is short term in nature. Demand beyond an item's planning period does not require an immediate PO and will be given a PO later when that demand falls into the planning period. This keeps the schedule lean and accurate for maximum efficiency.

In DBA, purchase order planning is coordinated with your master job schedule so that components and raw materials are available when needed by jobs, on a just in time basis, without shortages, over-stocking, or costly expediting.

The master PO schedule is driven by three common sense item settings. Focus on the quality of your purchased item settings and you can achieve lean manufacturing - completing jobs on time using less inventory and WIP.