Order Policy Best Practices

Set up a standard order period calendar that best suits your production schedule. For example: If your shop is closed on the weekends and for statutory holidays, consider setting up an order period calendar like the following:

When the total costs for two or more different order times per year are close, go with the higher order times per year, even if it costs a bit more to save on warehouse space.

For parts that have a long setup time, consider increasing the order period and the number of parts ordered to free up the work center for other work. For example: You have a part with a 4-day order period, but it takes you 15 hours to set up. Changing the order period to 9 days, or 14, will save you 15 to 30 hours of setup time, respectively.

For parts that are difficult to handle or prone to damage, consider decreasing the order period to decrease the amount of inventory that could take too long to store, or get damaged.

For inexpensive parts that are small and easy to store, consider increasing the order period to decrease the setup costs for the part.

Some areas of the order cost calculation do not need exact values, or the cost of the operation is trivial, like the time spent inspecting parts, or the cost of the paper and toner ink used on a work order. To ensure those values are taken into account, set a standardized order cost amount for these related costs. For example:

• Manufactured parts: Total Order Cost = Setup Cost + $10 other related costs

  Examples of order costs for manufactured parts:

  • Staff time spent on the work order

  • Paper costs for the work order

  • Machine setup time

  • Moving the work order through the shop

  • Inspecting received parts

  • Expeditings

• Purchased parts: Total Order Cost = Cost of transportation + $10 other related costs

  Examples of order costs for purchased parts:

  • Creating a PO

  • Sending the order to the supplier

  • Freight, depending on volume

  • Receiving parts

  • Inspecting received parts

  • Expediting

  • Processing invoices

While it can lead to grey numbers, standardizing the carrying cost percentage for your shop will decrease the chance of an error in a calculation later on. This percentage should be enough to cover the cost required to pay for the following, among other things:

• Financial costs, including interest rates, or missed dividends

• Storage costs, including building, shelving, and energy costs

• Obsolescence costs, including parts scrapped due to model changes or cancelled orders

• Deterioration costs, including rust, incidental damage, and other environmental factors

• Cycle counting costs

A good example standard carrying cost is 30%.

Set up order policy charts that allow you to select the best order policy at a glance. Order policy charts are usually based on the following key factors:

• Order Cost Range

• Total Value of Annual Volume

• Total Setup Time

Example Tables