Purchasing & Stock Control

1. Purchasing & Stock Control

2. Flow of Purchasing & Production Purchasing Department Raw Materials & Components Production Line Finished Goods in Stock Distributed to Customers

3. Role of Purchasing Department • Aims of purchasing department are to… • Ensure the right quantity and quality of goods required for efficient production • Buy raw materials, components and other supplies at prices as competitive as possible • Arrange delivery in time to ensure stocks are available as required • To develop a good relationship with suppliers

4. Holding Stock • Any business with a production process needs to hold stocks • What are stocks? • Raw materials and other components – things that go into the production process • Work-in-progress – products that are not yet finished, but where the production process has started • Finished goods – products that have been completed to the right quality – and are waiting to be delivered to customers • For a manufacturing business, stocks can be one of the most valuable assets of the business

5. Costs of Holding Stock • It might be tempting to hold lots of stock in a business, or to cut down and hold little, but this can be costly • Holding costs • E.g. Building, staffing and maintaining a warehouse just to hold stocks • Cost of insuring stocks • Cost of stocks become unusable (“obsolete”) before they can be sold • Costs of stock theft (for example, this is a major problem in retail shops) • Stock-out costs • Lost sales if the right stocks are not available when the customer wants them • Buying costs • Costs of having a purchasing department

6. Consequences of a Stock-Out • Loss of production (with staff still being paid but no products being produced) • Late deliveries, loss of sales • Loss of customer goodwill – will they come back next time?

7. Implications of Higher Stock Levels • Advantages • Can meet sudden changes in demand • Less chance of loss of production time because of stock outs • Can take advantage of bulk buying economies of scale • Disadvantages • Costs of storage • Money tied up in stocks not being used elsewhere in business • Large stocks subject to deterioration and theft

8. Economic Order Quantity (“EOQ”) • Some businesses try to control stock on a scientific basis. The EOQ model is one way of doing this • It attempts to calculate the level of stocks that minimises costs • It balances costs of holding stocks (which rises with amount of stock held) against buying prices of stock (which falls when size of order increases)

9. Buffer Stocks • Some businesses find it hard to estimate what the demand for their product might be – or whether supplies can be obtained when needed • In this case, it is worth holding “buffer stocks” in order to reduce or eliminate the risk of stock-outs • “Safe” amount of stock that needs to be held to cover unforeseen rises in demand or problems of reordering supplies