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Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
Purchasing & Stock Slides
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Purchasing & Stock Slides


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  • 1. PURCHASING & STCOK Operations
  • 2. The importance of purchasing
    • This varies depending on size and nature of organisation.
    • Not as important in service industries e.g. hairdressing
    • In manufacturing industries, likely to be a purchasing department and a team of specialists.
    • Responsible for:
    • Delivering the best quality materials
    • At the lowest cost
    • Delivered in the correct quantities
    • At the correct time.
  • 3. Purchasing
    • Decisions have to be made as to how much raw material (the quantity) and from whom raw materials are to be purchased (the supplier)
    • Four main issues
    • Stock of raw materials currently available
    • Duration of time which will elapse between this order and any future orders
    • Amount of raw materials likely to be required during period
    • Storage space available and cost
  • 4. Purchasing mix
    • Decision needs to be taken on which supplier offers the best terms.
    • Following factors need to be considered:
    • Quality - acceptable and consistent for firm’s needs
    • Quantity - able to deliver correct quantity
    • Time - able to meet firm’s delivery dates
    • Dependability - are they likely to stay in business?
    • Price - lowest price for quality needed, discounts, terms
    • Location - check for additional charges on delivery
    • Storage facilities - what are the firm’s capabilities?
  • 5. Question 1
    • The quality of materials will help an organisation decide which supplier to use.
    • Describe other factors that a purchasing manager should consider when choosing a supplier.
    • (4 marks)
  • 6. Solution
    • The purchasing manager would need to consider the whether the supplier could provide goods which were of a quality acceptable and consistent for firm’s needs.
    • They would also need to consider whether the supplier had the capability to deliver goods in the quantity required and whether they could meet change in demand.
    • They would need to consider whether the supplier had the capability to meet their requirements on time.
    • They would also need to think about the suppliers dependability and whether they are likely remain in business as it would cause disruption if they were to close down.
  • 7. Definition of stock
    • “ Raw materials, work in progress and finished goods”
    • Raw materials and components - stored to meet changes in production, delays can be avoided
    • work-in-progress - partially built products, valued according to percentage of completion
    • finished goods - stored to meet changes in demand, firm can meet urgent orders immediately
  • 8. Control of stock
    • Procedure for monitoring, controlling and recording stock:
    • Materials should only be issued to departments when a stock requisition received.
    • Stock levels should be recorded on stock record cards or held on computer database.
  • 9. Storage of stock
    • Centralised
    • Held in one central storage area
    • Decentralised
    • Located in different areas in which they are used
  • 10. Benefits and costs of centralised stock storage
    • Benefits
    • Improved security from loss or theft
    • Agreed procedures followed
    • Improved efficiency
    • Bulk ordering may be cheaper
    • Costs
    • Time wasting going to and from stores
    • Cost of specialist staff
    • Cost of dedicated storage area
  • 11. Benefits and costs of decentralised stock storage
    • Benefits
    • Stock always ‘at hand’.
    • Orders reflect actual production useage or sales levels
    • Reduced likelihood of deterioration or decay due to speedier turnover.
    • Costs
    • Less rigid control
    • Takes up space in production areas
  • 12. Costs of holding stock
    • Too much stock
    • High storage costs
    • High maintenance costs
    • High security costs
    • High insurance costs
    • Deterioration of stock
    • Money tied up
    • Theft
    • Too little stock
    • Unable to meet demand
    • Unable to cope with shortages of materials
    • Increased ordering/admin costs
    • Poor reputation
    Careful control of stock levels can improve business performance – in some companies stock can be 30% of assets.
  • 13. Question 2
    • Supermarkets have to make decisions on
    • the quantity of stock to hold.
    • Describe the problems caused by:
    • Overstocking
    • Understocking
    • (6 marks)
  • 14. Solutions
    • Overstocking could lead to money being tied up which could be profitably utilsed elsewhere.
    • There could also be the problem of high storage costs as a large,suitable space would have to be found and maintained.
    • Large amounts of stock could increase the chances of undetected theft or loss of stock.
    • Understocking may mean the organisation is unable to meet the demand of customers leading to reduced sales.
    • This in turn could result in a poor reputation as the organisation is unable to meet its demand.
    • Regular ordering will increase admin costs and eat into profit levels.
  • 15. Effective stock control
    • This involves the following:
    • Set a maximum (economic) stock level - t he ideal amount of stock to hold
    • Set a minimum stock level - do not want to go below this level as production may have to cease
    • Set a re-order level - allows a delivery to be received before the minimum level is reached
    • Set a reorder quantity - amount required to take stocks back up to the economic stock level
  • 16. Maximum (economic) stock level
    • This is the level of appropriate stock which should be held for an organisation to minimise its costs.
    • Takes into account storage space, cost of storage, finance available and security.
    • E.g. to ensure production continues without interruption for a 20-day period where 100 units are used daily the M(E)SL would be:
    • 20 days x 100 units = 2000 units
  • 17. Minimum stock level
    • The level that stock must not fall below as shortages may result in reduced output. Should take into account ordering and delivery times.
    • Usage: 100 per day
    • Orders: 5 days to deliver
    • Add: 3 day reserve
    • = 5+3 x 100 units
    • = 800 units
  • 18. Re-order level
    • Point at which new stocks should be ordered Calculated on the basis of usage per day, minimum stock held + lead time (delivery time for new stock)
    • Minimum stock level = 800
    • lead time = 5 days
    • average usage = 100 units per day
    • R-O L = 800 + (100 units per day x 5 days)
    • = 800 + 500
    • = 1300 units
  • 19. Re-order quantity
    • Once re-order level reached, a standard quantity is automatically requested. On receipt of delivery, should return stock level to maximum (economic) stock level.
    • M(E)SL = 2000
    • Minimum stock level = 800 units
    • R-OQ = ESL - Min SL
    • = 2000 - 800
    • = 1,200
  • 21. Question 3
    • The efficient control of stock is essential for the liquidity of an organisation.
    • Explain how an effective form of stock control can be used in a business.
    • (4 marks)
  • 22. Solution
    • They should set a maximum (economic) stock level as this will ensure that they can continue production without any interruption but minimise storage costs etc. for the business. - t he ideal amount of stock to hold
    • They should set a minimum stock level as this will ensure that production is not disrupted by shortages as it takes into account how long is required for ordering and delivery times.
    • They should set a re-order level and when this point is reached, new stock should be ordered. This will ensure that the organisation doesn’t run out.
    • They should also set a reorder quantity which will ensure that when the re-order level is reached, the quantity requested will take the stock level back to the maximum (economic) stock level.
  • 23. Computerised stock control
    • Many businesses hold all information regarding stock on computer database.
    • Keeps balances up-to-date after stock has been issued and received.
    • Can be programmed to order automatically.
    • E.g. supermarkets use bar codes - as each item is scanned, one taken from recorded stock level.
  • 24. Costs and benefits of computerised stock control for a supermarket
    • Benefits
    • Stock levels can be checked
    • Stock values can be checked
    • Sales can be checked
    • Can be programmed to reorder
    • Best sellers & slow moving lines can be identified
    • Costs
    • Expensive to set up
  • 25. Question 4
    • Department stores need to be able to identify best-selling items in order to maintain appropriate stock levels.
    • Describe how ICT can help an organisation to maintain appropriate stock levels.
    • (3 marks)
  • 26. Solution
    • Stock levels can be updated quickly when receipts and issues are made scanning a barcode.
    • The computer can be programmed to automatically reorder stock when the reorder level is reached.
    • Managers can use ICT to identify best-selling products and make sure they sell more of them.
  • 27. Just-in-time (JIT)
    • A Japanese concept
    • Popular method for mass manufacturers
    • Involves keeping stock levels to a minimum
    • Stock arrives just in time to be used in production
    • Works best where there is a close relationship between manufacturer and suppliers
    • Goods not produced unless firm has an order from a customer
    • Aims to get highest volume of output at the lowest unit cost.
  • 28. Just-in-time (JIT)
    • A method of production control.
    • No demand - no production!
    • Anticipated/planned consumer demand triggers production
    • Finished goods assembled just in time to be sold to customer
    • Component parts assembled just in time to become finished goods
    • Materials purchased just in time to make component parts.
  • 29. Advantages of JIT
    • Capital not tied up in stocks
    • Less space required for stock
    • Closer relationships with suppliers
    • Reduced deterioration
    • Less vulnerability to fashion and technology changes
    • Reduction in stockholding costs
    • Increase in cash flow
  • 30. Disadvantages of JIT
    • Danger of disrupted production due to non-arrival of supplies
    • Danger of lost sales
    • High dependence on suppliers
    • Less time for quality control on arrival of materials
    • Increased ordering and admin costs
    • May lose bulk-buying discounts
  • 31. Question 5
    • Dell, the computer manufacturer, uses the JIT system of stock control.
    • Explain the costs and benefits of Dell using this system.
    • (4 marks)
  • 32. Solution
    • Dell do not have to tie up capital in stock which means they can invest it in other areas of the business, such as R&D or promotion, to increase sales.
    • Dell require less space for stock which means they save money on storage facilities which will increase their profit margins.
    • Dell have a high dependence on their suppliers and should the suppliers fail them, it is Dell’s reputation and sales which would suffer if they were unable to meet demand from their customers.
    • Dell may be unable to benefit from bulk-buy discounts which leaves them with an option of increasing the price to the customer or reducing their own profit margin.