Post on 14-Jun-2015
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April 13, 2023 RA Dec 2008 1
PURCHASING & STCOK
Operations
April 13, 2023 RA Dec 2008 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.
April 13, 2023 RA Dec 2008 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
April 13, 2023 RA Dec 2008 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?
April 13, 2023 RA Dec 2008 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)
April 13, 2023 RA Dec 2008 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.
April 13, 2023 RA Dec 2008 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
April 13, 2023 RA Dec 2008 8
Control of stock
Procedure for monitoring, controlling and recording stock:
1. Materials should only be issued to departments when a stock requisition received.
2. Stock levels should be recorded on stock record cards or held on computer database.
April 13, 2023 RA Dec 2008 9
Storage of stock Centralised
Held in one central storage area
Decentralised
Located in different areas in which they are used
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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
April 13, 2023 RA Dec 2008 11
Benefits and costs of decentralised stock storageBenefits
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
April 13, 2023 RA Dec 2008 12
Costs of holding stockToo 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.
April 13, 2023 RA Dec 2008 13
Question 2Supermarkets have to make decisions onthe quantity of stock to hold.
Describe the problems caused by:
Overstocking Understocking
(6 marks)
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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.
April 13, 2023 RA Dec 2008 15
Effective stock controlThis involves the following:
Set a maximum (economic) stock level - the 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
April 13, 2023 RA Dec 2008 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
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Minimum stock levelThe 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 dayOrders: 5 days to deliverAdd: 3 day reserve
= 5+3 x 100 units= 800 units
April 13, 2023 RA Dec 2008 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
April 13, 2023 RA Dec 2008 19
Re-order quantityOnce 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
April 13, 2023 RA Dec 2008 20
0
MAXIMUM (Economic) STOCK LEVEL
MINIMUM STOCK LEVEL
RE-ORDER QUANTITY
LEAD TIME
LEAD TIME
RE-ORDER LEVEL
20
40
60
80
100
time
STOCK LEVELS
April 13, 2023 RA Dec 2008 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)
April 13, 2023 RA Dec 2008 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. - the 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.
April 13, 2023 RA Dec 2008 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.
April 13, 2023 RA Dec 2008 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
April 13, 2023 RA Dec 2008 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)
April 13, 2023 RA Dec 2008 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.
April 13, 2023 RA Dec 2008 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.
April 13, 2023 RA Dec 2008 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.
April 13, 2023 RA Dec 2008 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
April 13, 2023 RA Dec 2008 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
April 13, 2023 RA Dec 2008 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)
April 13, 2023 RA Dec 2008 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.