Chapter 15

2. Chapter 15 Managing Purchasing and Inventory Purchase Planning and Management 15.1 Inventory Management 15.2

3. 15.1 • Describe the importance of planning purchases. • Identify factors that affect purchasing. Section 15.1 Purchase Planning and Management

4. 15.1 Businesses need to get the best possible products or materials for the price. Making smart spending decisions can result in better values for customers and larger profits for the business. Section 15.1 Purchase Planning and Management

5. 15.1 purchasing model inventory vendors trade discount quantity discount cash discount secured funds invoice Section 15.1 Purchase Planning and Management

6. Planning Purchases Purchasing decisions mean the difference between success and failure for the entrepreneur. purchasingalso known as procurement, the buying of all the materials needed by the organization Section 15.1 Purchase Planning and Management

7. Developing a Model Inventory As a beginning entrepreneur, after identifying your inventory needs, it is helpful to set up a model inventory. model inventorya target inventory of what a business thinks it will need to keep in stock Section 15.1 Purchase Planning and Management

8. Developing a Model Inventory When you are in business, you can rely on regular input from vendors. vendorsbusinesses that sell inventory to merchants Section 15.1 Purchase Planning and Management

9. Managing Purchases Key Factors That Affect Purchasing Selecting Selecting the right quality Buying Buying the right quantity Timing Timing your purchases Choosing Choosing the right vendors Getting Getting the right price Receiving Receiving and following up on purchases Section 15.1 Purchase Planning and Management 9

10. Choosing the Right Vendors Considerations in Vendor Selection Reliability Service Distance Section 15.1 Purchase Planning and Management 10

11. Getting the Right Price Contact several vendors to find the best price. A purchase discount, such as a trade discount, can affect prices. trade discounta discount from the list price of an item allowed by a manufacturer or wholesaler to a merchant Section 15.1 Purchase Planning and Management

12. Getting the Right Price An entrepreneur may be able to take advantage of a quantity discount or a cash discount. quantity discounta discount that a vendor gives to a buyer who places large orders cash discountan amount deducted from the selling price for payment within a specified time period Section 15.1 Purchase Planning and Management

13. Getting the Right Price Dating Terms Early payment Advance dating Extra dating End-of-month (EOM) dating Receipt-of-goods (ROG) dating Section 15.1 Purchase Planning and Management 13

14. Getting the Right Price Until you establish a good working relationship, your new vendor may request secured funds. secured fundsa form of guaranteed payment, such as a credit card, a cashier’s check, a wire transfer, or cash Section 15.1 Purchase Planning and Management

15. Receiving and Following Up on Purchases When you receive a shipment from a vendor, it should be accompanied by an invoice, indicating size, cost, selling price, and other similar information. invoicean itemized statement of money owed for goods shipped or services rendered Section 15.1 Purchase Planning and Management

16. 15.1 • Describe the importance of planning purchases. Making smart spending decisions can result in better values for customers and larger profits for the business. Section 15.1 Purchase Planning and Management

17. 15.1 • Identify factors that affect purchasing. Factors that affect purchasing are selecting the right quality, buying the right quantity, timing the purchases, choosing the right vendors, getting the right price, and receiving and following up on purchases. Section 15.1 Purchase Planning and Management

18. 15.2 • Explain inventory procedures used by small business. • Explain the importance and types of inventory control. Section 15.2 Inventory Management

19. 15.2 An entrepreneur’s main profit stems from the sale of inventory. He or she needs to keep careful control over this valuable asset. Section 15.2 Inventory Management

20. 15.2 financing cost opportunity cost storage cost insurance cost shrinkage cost obsolescence cost warehousing lead time usage rate safety stock Section 15.2 Inventory Management

21. Inventory Management When you keep too much inventory on hand, the cost of inventory can increase by as much as 25 percent. Added costs include: • financing • opportunity • storage • insurance • shrinkage • obsolescence Section 15.2 Inventory Management

22. Inventory Management Financing cost on excess inventory can impact the prices businesses charge customers. financing cost the cost of interest paid to borrow money Section 15.2 Inventory Management

23. Inventory Management A business can incur opportunity cost and storage cost by keeping too much inventory. opportunity cost the cost associated with giving up the use of money tied up in inventory storage cost the cost associated with renting or buying space needed to store inventory Section 15.2 Inventory Management

24. Inventory Management A business with sound inventory procedures can reduce insurance cost and shrinkage cost. insurance cost the cost associated with insuring inventory shrinkage cost the cost associated with the loss of inventory items that are broken, damaged, spoiled, or stolen Section 15.2 Inventory Management

25. Inventory Management A business must closely monitor inventory turnover rates in order to control obsolescence cost on items that remain in inventory too long. obsolescence cost the cost associated with products or materials that become obsolete while in inventory Section 15.2 Inventory Management

26. Planning Inventory There are two steps involved in determining the amount of inventory you need: • Calculate the supply you need. • Calculate the inventory investment. Section 15.2 Inventory Management

27. Inventory Control Inventory control systems include: • visual inventory system • perpetual inventory system • partial inventory system • just-in-time (JIT) inventory system Section 15.2 Inventory Management

28. Warehousing Warehousing operations can occur in dedicated structure or an assigned space within a structure. warehousing the act of holding and handling goods in a warehouse Section 15.2 Inventory Management

29. Warehousing Warehouse Operations Areas Pickingrows Receiving and shipping docks Packingareas Management office and lockers Assembly areas Bulk storage areas Staging areas Section 15.2 Inventory Management 29

30. Reordering To maintain proper inventory levels, you need to decide when and how much to reorder. The type of inventory you keep determines which reordering system is best for you: • periodic reordering • nonperiodic reordering Section 15.2 Inventory Management

31. Reordering Products or raw materials that are inexpensive, used often, and easy to get should be reordered periodically. A sandwich shop might restock bread daily. Section 15.2 Inventory Management

32. Reordering Lead time must be considered for inventory that is suited to nonperiodic reordering. lead time the gap in time between placing an order and receiving delivery Section 15.2 Inventory Management

33. Reordering When using a nonperiodic reordering system, inventory needs must be projected so that usage rate can be calculated and safety stock is available. usage rate how quickly inventory will be used in a given period of time safety stock a cushion of products or materials that prevents a business from running out of inventory while waiting for an order Section 15.2 Inventory Management

34. 15.2 • Explain inventory procedures used by small business. Inventory procedures include planning to determine and maintain inventory levels that are neither too large nor too small. Inventory procedures encompass the control of inventories after they are purchased and before they are sold. Many small businesses use inventory control systems to track inventory. Section 15.2 Inventory Management

35. 15.2 • Explain the importance and types of inventory control. There are four types of inventory control: visual, perpetual, partial, and just-in-time. Regardless of which system is used, a business should conduct periodic physical inventory counts so that inventory levels are neither too small nor too large. Section 15.2 Inventory Management

36. Internet Purchasing Online purchasing communities allow businesses to bid on or sell products and services and negotiate for the best possible prices. E-procurement, business-to-business communities, and public and private exchanges have changed business purchasing procedures. Section 15.2 Inventory Management 36

37. Tech Terms B2B community an electronic marketplace where companies can bid on products and services or offer their services up for bid e-procurement the business-to-business purchase and sale of supplies and services over the Internet Section 15.2 Inventory Management 37

38. Tech Terms private exchange an exchange that is operated for exclusive use of a single company, for example a company that sets up an exchange to deal with vendors for all the parts and services it uses each day public exchange a business-to-business network open to any company that wants to take part; there is usually a fee to join the exchange Section 15.2 Inventory Management 38

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