OM - Purchasing Flashcards
(15 cards)
Define re-order level
the level of stock at which a
new order is placed.
Define re-order quantity
the quantity ordered in order to return the stockholding to maximum level – measured by the difference between the maximum and minimum stock holding levels
Define lead time
the amount of time that elapses
between placing an order and the delivery of that
order
Define buffer stock
the amount of stock held between
the minimum stock holding and zero stock. Used in case of late deliveries or extra orders.
Key aspects of effective stock management
- Businesses must ensure that stock is available for use within the manufacturing process as and when it is needed.
- Part-finished goods (work in progress) do not sit around the factory floor unused and losing value: instead they are brought to the next stage as soon as possible.
- Finished goods are available for timely delivery to customers and are not made before customers are found for them.
Explain purchasing
Effective stock management, whether it is of raw materials, work in progress or of finished goods, is an important part of an efficient operations management plan. Purchasing of stock at the required quality and quantities is a key factor in the production process. Ensuring a smooth flow of goods from the production line to the final consumer is a complex process, which may involve numerous different suppliers.
Explain computerised stock control
Businesses today hold their stock details on computer databases. This improves efficiency and accuracy. When the quantity of stock decreases or increases, the database is updated instantly, which allows for accurate stock checks and the automatic reordering of stock if the level falls below the reorder level. The best example of this is the stock control systems used by the main supermarkets. The system is connected via computers to the checkout tills, and when products are scanned in the stock control database is automatically updated
Explain JIT
Many businesses today operate a JIT manufacturing system, which is designed to minimise the costs of holding stocks of raw materials, components, work in progress and finished goods. This is achieved by carefully planned scheduling in order that resources can flow through the production process smoothly. Under a JIT system, materials are delivered shortly before they are required by the manufacturers and go straight onto the production line – virtually no stock is stored on site. Products are not made unless an order has already been placed, and when the goods are complete they leave the factory to be delivered to the customer.
Key requirements for JIT to operate effectively
- a very efficient ordering system
- suppliers that reliably deliver raw materials and components just when they are required
- a well-trained workforce which can be trusted and who are willing to work in teams
- a cooperative (non confrontational) culture, whereby management encourage employees to achieve their goals and work flexibly
Problems with JIT
☒ Ordering and administration costs are likely to rise and the advantages of bulk buying may be lost
☒ Suppliers who do not deliver on time can bring the whole production line to a halt, leading to a manufacturer’s reputation being damaged if customers do not receive their goods on time
Consequences of not having enough stock
☒ Production of that model will have to cease and production schedules reorganised.
☒ Employees may have to be laid off and sent home if alternative work cannot be found.
☒ Orders may be late and the firm’s reputation may be damaged.
☒ Orders may be cancelled and profits may fall.
Consequences of holding too much stock
☒ High costs – storage, insurance, lighting, refrigeration, handling, security, warehouse staff wages, etc.
☒ Takes up space that may be more productively used e.g. better factory layout.
☒ Opportunity cost – money is tied up and could be more effectively used elsewhere in the business. Loss of interest if in bank account.
☒ Could be left with stocks if they cannot be sold due to unexpected change in demand.
☒ Stock may become obsolete if superseded by newer, better product.
☒ Theft may occur – employees may feel that theft from large stocks may not be so readily noticed.
☒ Stocks can be damaged – temperature, vermin, mishandling, etc.
☒ Health and safety issues - danger to staff through accidents etc
Advantages of effective stock management
- Reduction in working capital. This frees money for investment and improves liquidity. There is an opportunity cost of holding stock. This means that if money is tied up in stock it is not free for use elsewhere in the business.
- Improved relationships with customers. Helping to guarantee ongoing orders.
- Freeing of storage space. This can release retail or manufacturing space.
- Less stock wastage and discounting. Smaller buffer stocks and supplies of finished goods will mean that stock is less likely to be damaged before it is used and finished goods are less likely to become out of date or out of fashion.
- Easier stock rotation. Stock rotation means ensuring that older stock is used before newer stock. When buffer stocks are small and deliveries are regular this becomes easier – this is because stock is used shortly after delivery
Systems for effective stock management
- Effective relationships with suppliers and customers. Suppliers must be able to switch to the new, very efficient ordering system. There is no point in expecting to have regular and timely deliveries just when they are required if suppliers are unable to comply with this requirement. Often this type of ordering and delivery system will involve some integration between the two companies. This type of integration of systems can be achieved by the use of EPOS and bar coding systems.
- Effective internal relationships. There must be a customer chain within the manufacturing process. This means that internal supply operates on the same basis as external supply - in other words, each team within the production process treats the next as its customer. Goods and parts are only supplied precisely when they are needed in the next stage of production
Outcomes of effective stock management
*Assess the performance of products
*Monitor and limit shrinkage
*Maintain stock in good condition
*Monitor customer preferences
*Maintain stock security
