MANAGING OPERATIONS

CHAPTER 10

ENTREPRENEURSHIP

Chapter Objectives• To understand the importance or correct purchasing in a venture• To list the activities involved in purchasing• To tabulate the elements of a purchase policy• To discuss the ways to evaluate suppliers• To discuss the best practices in purchasing• To list the kinds of inventory carrying costs• To classify different kinds of inventory• To understand the importance of cash management• To understand the role of the cash manager• To appreciate the challenges posed by cash flows• To understand the principles of receivables management• To discuss managing for disasters• To understand the strategies followed by seasonal businesses

Entrepreneurship

Purchase

Unplanned purchasing can lead to:

• spending more money than you need to

• buying goods that aren't of the proper quality

• choosing suppliers that don't offer the required level of customer service

Role of the Purchase Manager

• gather orders from various departments• make sure the orders are complete, • stay within specified spending parameters• select appropriate vendors • order for the goods • check condition upon receipt • check to make sure the invoice is correct• ensure timely payment of the invoice by forwarding it to

the accounting department• communicate effectively with the suppliers on various

issues

Entrepreneurship

Purchase Policy

The purchase policy should address the following issues:

• Who is authorized to purchase various goods?• How is the budget set for a purchase?• How does the venture hope to ensure

competition among vendors?• How to ensure quality of received goods?• What will be the payment system?• What will be the level of confidentiality between

the venture and vendors?

Suppliers

Evaluate a supplier on:• Timely delivery• Completeness of orders shipped • Quality of items • Price competitiveness• Strength of financial condition • Ability to service special orders • Quality of customer service • Expertise of sales representatives and technical staff• Consistency on above factors

Prioritising Purchases

Some items need more attention than others, on the basis of:

• Unit cost

• Total cost

• Time to delivery

• Quality

• Criticality

Inventory

Costs of carrying inventory• Interest on the financial investment in inventory. • Cost of insurance covering inventory. • Rental or ownership related costs of the store • Cost of handling inventory• Obsolescence• Pilferage, wastage or deterioration of stock

Types of Inventory

On the basis of stage in process:

• Raw Materials

• Work In Progress (WIP)

• Finished goods

• Goods for resale

Types of Inventory

On the basis of reason for stock to be held:

• Buffer stock

• Safety stock

• Overproduction

• Lot delay stock

• Demand fluctuation stock

• Line balance stock

Cash Management

• The efficient utilization of current assets and current liabilities throughout each phase of the business cycle.

• The systematic planning, management and monitoring of the company’s collections and disbursements.

• The collection, management and dissemination of information to enable effective use of available funds.

Good Vs Bad Cash Management

• Increasing the possibility that your business never runs out of cash.

• Eliminating the constant worry associated with not knowing your current and future cash position

• Improved relationships with your vendors as a result of good payment practices.

• The ability to foresee cash flow problems long before they actually happen.

• Suppliers are going to be dissatisfied with late paymentsand that will lead to higher prices, late deliveries or quality problems.

• If you are unable to meet salary obligations on payday, employees are going to be worried about the financial stability of the firm.

• If your cash problems are a result of tardy collections, customers will stand to gain a lot by not paying up and taking their business elsewhere.

Cash Manager

Role of the cash manager:• Efficiently collecting cash inflows• Concentrating collected funds• Controlling the timing of cash outflows• Forecasting the cash position• Securing adequate sources of short-term funds• Optimizing use of any temporary cash surpluses• Gathering timely information • Implementing the systems necessary to monitor,

manage and control the cash position• Ensuring the internal and external transfer of financial

data between departments or with the bank.

Cash Problems

As a result of business growth, cash can be:

• Mismatched

• Irregular

• Unpredictable

Collecting Accounts Receivable

• Investigate new customers.

• Supply against written orders.

• Sign on a legal contract.

• Maintain close contact with customers.

• Get and repeat positive feedback.

• Send invoice ASAP.

Collecting Accounts Receivable

• Contact before sending invoice.

• Keep a close watch on customer’s fortunes.

• Immediately contact on any delayed payment.

• Be firm

• Allow a customer to graduate in his credit ratings with you.

Managing During Disasters

• Identify risks

• Reduce risks

• Plan

• Train

• Getting back to business

Seasonal Businesses

• Seasonal businesses try to cut costs during the off season. The easiest way to do that is to cut down operations is seasons of low demand. By design some seasonal businesses have low installed capacities but create additional capacities for the season. E.g. restaurants putting in additional seats during a festive occasion are common sight in all major cities.

• Many businesses which close down during the off season depend on temporary labour and sometimes even the infrastructure is leased for a short time only. Clothes exhibitions that spring up in temporary shamianas (tent) are also another familiar sight in all cities.

• The off season is a very good time to carry out routine maintenance and repair work.

• In case the business is doing very well, the off season is a good time to plan and execute expansion plans.

• In case the goods can be stocked, the fallow time in the off season can be use to smoothen out the production schedule. So the entire year can be used to plan out production, which is ultimately sol within a short time.