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Purchasing & Stock Slides


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Purchasing & Stock Slides

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