Chapter 15 Managing Purchasing and Inventory

1. Chapter 15 Managing Purchasing and Inventory Business Management Mrs. Deady

2. Objectives • Describe the importance of planning purchases • Identify factors that affect purchasing • Explain inventory procedures used by small business • Explain the importance and types of inventory control

3. Definitions 15.1Purchase Planning and Management • Purchasing – buying of all materials needed by organization (inventory) • Model Inventory – target of how much inventory you need to keep in stock • Vendors – businesses that sell you inventory • Trade discount – discounts given to wholesalers and retailers to recognize their role in the delivery chain

4. Definitions 15.1Purchase Planning and Management, cont’d • Quantity discount – discount given to buyer who places large orders • Cash discount – a % deduction if payment is received by a specified date (10 days usually) • Secured funds – forms of guaranteed payment; credit card, cashier’s check, wire transfer, cash • Invoice – itemized statement of money owed for goods shipped or services delivered

5. 7 Elements of Purchasing Management • Selecting the right quality • Buying the right quantity • Timing your purchases (so money and storage space aren’t tied up longer than necessary • Choosing the right vendors • Getting the Right Price • Payment Methods • Receiving and Following up on purchases

6. How to Choose a Vendor . . . • Reliability • Distance • Service

7. 3 Ways to Pay to Establish a Relationship with you Vendor • Secured funds (credit card, cashier’s check, wire transfer, cash) • single-party check • a series of post-dated checks deposited at specific times.

8. Action to Take When Inventory Arrives • Verify and record arrival • check PO against the invoice • verify the identity, quality and condition of the order • report problems to the vendor • Inventory control to mark size, cost, selling price and other information on each unit.

9. Definitions 15.2: Inventory Management • Financing Cost – cost of the interest you pay to borrow money • Opportunity cost – cost associated with giving up the use of money tied up in inventory • Storage cost – cost associated with renting or buying the space needed to store the inventory • Insurance cost – cost associated with insuring the inventory • Shrinkage cost – money lost when inventory items are broken, damaged, spoiled, or stolen • Obsolescence costs – money lost when products or materials become obsolete while in inventory

10. Definitions 15.2: Inventory Management • Warehousing – act of holding and handling goods in a warehouse (operations to inventory goods) • Lead time – gap in time between placing an order and receiving delivery • Usage rate – how quickly the inventory is used in a given period • Safety stock – cushion of products or materials that keeps you from running out of inventory

11. How do you determine Inventory needed? • Calculate how many months supply you should have in stock; • and how much that stock will cost you • Total inventory for 12 month period is $870,000 • $870,000/12 = $72,500 • Net sales for same 12 month period is $344,000 • Net Sales/Avg Inventory = Inventory Turnover Rate: • $340,000/$72,500 = 4.74 – inventory was sold and replaced 4.74 times in a 12-month period

12. Inventory Systems • Visual – look at what you have in stock compared to what you want to have (small store might use this) • Perpetual – computerized cash registers allow retail businesses to deduct inventory as it is sold; and added when new inventory arrives. • Partial – perpetual inventory maintained for the large share of company’s sales • JIT-Just in time – stocks kept at a minimum, and suppliers deliver just before it is used.

13. 7 factors should be considered for Warehousing • Receiving and shipping docks • Bulk storage areas • Staging areas • Picking rows • Assembly areas • Packing areas • Management Office and Lockers for employees’ personal belongings

14. Reordering Considerations • Plan inventory • Order and reorder in accordance with the plan • Check to see how well the plan has worked • Make any necessary adjustments