19 th International Conference on Production Research A PROCUREMENT PLANNING IMPROVEMENT BY USING LINEAR PROGRAMMING AND FORECASTING MODELS Athakorn Kengpol, Peerapol Kaoien Department of Industrial Engineering, Faculty of Engineering, King Mongkut’s Institute of Technology North Bangkok, Bangkok 10800, Thailand Abstract As known that an appropriate procurement policy is one of industrial competitive advantages, an over or under inventory in procurement system can significantly affect management in capital and stock of raw material. The objectives of this research, therefore, are to achieve targets of procurement planning that is to calculate the optimal inventory level, and to optimise the purchasing policies by applying linear programming and forecasting models, which is corresponded with each of purchasing conditions. At the first phase, the trend in material’s price is analysed , then Microsoft Excel CB Predictor programme Add-Ins is applied to forecast the results, after that the model is optimized by using program Microsoft Excel Add-Ins. Finally, the model had been tested to improve raw materials purchasing since January 2004 to June 2005 (for 18 months), and then compared the efficiency with the actual purchasing. The research results show that the mathematical model can improve the raw materials procurement planning. Moreover, performance index in inventory policies are increased 83.33 %, performance index order quantity in ratio from Japan’ suppliers are increased 44.45 %, performance index supplier partnership are increased in 44.45 % and total cost are decreased 0.68 %. The other results, limitations and recommendations are also presented. Keywords: Procurement Planning, linear programming, forecasting models 1 INTRODUCTION An appropriate procurement policy is one of industrial competitive advantages, an over procurement can affect not only to the inventory and storage area but also budget spending on unnecessary procurement works. On the other hand, under procurement can make lack of raw material which could cause interrupting continuous process until the product can not be finished in time. Some of practical problems in raw material procurement are for example, actual amount of raw material is not in level as policy setting due to the procurement staff lacks of knowledge in optimizing inventory level. As raw material procurements are not in optimization level, the procurement budget usually is spending higher than needed. There are some researches that have been studied and recommended ways to use mathematical models to solve the procurement problems. There are, for example, Gutierrez et al. [1] suggests to use Bounded/Limited Inventory model to calculate the amount of inventory level. Martel et al. [2] purpose a procurement planning model which converts all decision making decision to mathematical models. Skouri and Parachristos [3] attempt to improve a Continuous Review Inventory Model from Vairaktarakis [4], in order to suggest a way to set procurement qualities within limited budget by using elasticity model. However, none of them proposes a way to deal with optimal inventory as well as purchasing policies. The objectives of this research are to achieves target of procurement planning that is to maintain the suitable inventory level, and to achieve the purchasing policies by using mathematical model, which is corresponded with each of purchasing conditions. The model developed for this research has been tested in foreign raw materials procurement in paper industry. The paper industry has to use old corrugated containers (OCC) as main raw material to produce paper fiber before it can be eventually enhanced to become packaging papers. The costs of the OCC are the major factor of the paper productions and also play the main role in the production capital. Including OCC inventory itself is complicated to be controlled e.g. lead time and raw material transportation cost, and unit price of raw materials are difference depending on their sources etc. 1.1 Scope of research 1. The data of Foreign Raw Materials Procurement in paper industry were used in this research (Singapore, Japan, Middle East, Australia and United Kingdom). 2. The improvement of procurement planning emphasize to meet all of policies such as the inventory level control policies which need to have enough of raw materials for paper production process minimum for 30 days and maximum for 37 days, the Japan raw material procurement policy is not over than 70 percent and is not less than 60 percent of all foreign raw material procurement, the capital is reduced to minimum by the control procurement capital policies and partnership maintenance of supplier policies which regularly order to supplier. 3. The changing of interest and current were not included in the minimum capital consideration. 2 RESEARCH METHODOLOGY IN COLLABORATION WITH A FIRM There are two basic models in this research: forecasting model and linear programming model, which are collaborated with a paper manufacturing. The forecasting model contains single moving average, single exponential smoothing, double moving average, double exponential smoothing and winters method. The mentioned model can be seen basically in a number of text books in the field of quantitative analysis. According to Figure 1: Research model, the price for database have to be analysed in forecasting model which have: