Managing Purchasing and Inventory

Managing Purchasing and Inventory

Back to Table of Contents

Managing Purchasing and Inventory Managing Purchasing and Inventory

2

Chapter 15

Managing Purchasing Managing Purchasing and Inventoryand Inventory

Purchase Planning and ManagementPurchase Planning and Management

Inventory ManagementInventory Management

15.1

15.2

Managing Purchasing and Inventory Managing Purchasing and Inventory

3

Describe the importance of planning purchases.

Identify factors that affect purchasing.

Section 15.1 Purchase Planning and Management

15.1

Managing Purchasing and Inventory Managing Purchasing and Inventory

4

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

15.1

Managing Purchasing and Inventory Managing Purchasing and Inventory

5

purchasing

model inventory

vendors

trade discount

Section 15.1 Purchase Planning and Management

15.1

quantity discount

cash discount

secured funds

invoice

Managing Purchasing and Inventory Managing Purchasing and Inventory

6

Planning Purchases

Purchasing decisions mean the difference between success and failure for the entrepreneur.

purchasing also known as procurement, the buying of all the materials needed by the organization

Section 15.1 Purchase Planning and Management

Managing Purchasing and Inventory Managing Purchasing and Inventory

7

Developing a Model Inventory

As a beginning entrepreneur, after identifying your inventory needs, it is helpful to set up a model inventory.

model inventory a target inventory of what a business thinks it will need to keep in stock

Section 15.1 Purchase Planning and Management

Managing Purchasing and Inventory Managing Purchasing and Inventory

8

Developing a Model Inventory

When you are in business, you can rely on regular input from vendors.

vendors businesses that sell inventory to merchants

Section 15.1 Purchase Planning and Management

Managing Purchases

Section 15.1 Purchase Planning and Management 9

Key Factors That Affect Purchasing

Selecting

Buying

Timing

Choosing

Getting

Receiving

Selecting the right quality

Buying the right quantity

Timing your purchases

Choosing the right vendors

Getting the right price

Receiving and following up on purchases

Choosing the Right Vendors

10

Considerations in Vendor Selection

Reliability

DistanceService

Section 15.1 Purchase Planning and Management

Managing Purchasing and Inventory Managing Purchasing and Inventory

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 discount a discount from the list price of an item allowed by a manufacturer or wholesaler to a merchant

Section 15.1 Purchase Planning and Management

Managing Purchasing and Inventory Managing Purchasing and Inventory

12

Getting the Right Price

An entrepreneur may be able to take advantage of a quantity discount or a cash discount.

quantity discount a discount that a vendor gives to a buyer who places large orders

Section 15.1 Purchase Planning and Management

cash discount an amount deducted from the selling price for payment within a specified time period

Getting the Right Price

Section 15.1 Purchase Planning and Management 13

Dating Terms

Early payment

Advance dating

Extra dating End-of-month

(EOM) dating

Receipt-of-goods (ROG)

dating

Managing Purchasing and Inventory Managing Purchasing and Inventory

14

Getting the Right Price

Until you establish a good working relationship, your new vendor may request secured funds.

secured funds a 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

Managing Purchasing and Inventory Managing Purchasing and Inventory

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.

invoice an itemized statement of money owed for goods shipped or services rendered

Section 15.1 Purchase Planning and Management

Managing Purchasing and Inventory Managing Purchasing and Inventory

16

1. Describe the importance of planning purchases.

Section 15.1 Purchase Planning and Management

Making smart spending decisions can result in better values for customers and larger profits for the business.

15.1

Managing Purchasing and Inventory Managing Purchasing and Inventory

17

2. Identify factors that affect purchasing.

Section 15.1 Purchase Planning and Management

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.

15.1

Managing Purchasing and Inventory Managing Purchasing and Inventory

18

Explain inventory procedures used by small business.

Explain the importance and types of inventory control.

Section 15.2 Inventory Management

15.2

Managing Purchasing and Inventory Managing Purchasing and Inventory

19

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

15.2

Managing Purchasing and Inventory Managing Purchasing and Inventory

20

financing cost

opportunity cost

storage cost

insurance cost

shrinkage cost

Section 15.2 Inventory Management

15.2

obsolescence cost

warehousing

lead time

usage rate

safety stock

Managing Purchasing and Inventory Managing Purchasing and Inventory

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:

Section 15.2 Inventory Management

financing

opportunity

storage

insurance

shrinkage

obsolescence

Managing Purchasing and Inventory Managing Purchasing and Inventory

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

Managing Purchasing and Inventory Managing Purchasing and Inventory

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

Section 15.2 Inventory Management

storage cost the cost associated with renting or buying space needed to store inventory

Managing Purchasing and Inventory Managing Purchasing and Inventory

24

Inventory Management

A business with sound inventory procedures can reduce insurance cost and shrinkage cost.

insurance cost the cost associated with insuring inventory

Section 15.2 Inventory Management

shrinkage cost the cost associated with the loss of inventory items that are broken, damaged, spoiled, or stolen

Managing Purchasing and Inventory Managing Purchasing and Inventory

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

Managing Purchasing and Inventory Managing Purchasing and Inventory

26

Planning Inventory

There are two steps involved in determining the amount of inventory you need:

Section 15.2 Inventory Management

1. Calculate the supply you need.

2. Calculate the inventory investment.

Managing Purchasing and Inventory Managing Purchasing and Inventory

27

Inventory Control

Inventory control systems include:

Section 15.2 Inventory Management

visual inventory system

perpetual inventory system

partial inventory system

just-in-time (JIT) inventory system

Managing Purchasing and Inventory Managing Purchasing and Inventory

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

Warehousing

Section 15.2 Inventory Management 29

Warehouse Operations Areas

Receiving and shipping docks

Bulk storage areas

Staging areas

Assemblyareas

Packingareas

Pickingrows

Management office and

lockers

Managing Purchasing and Inventory Managing Purchasing and Inventory

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:

Section 15.2 Inventory Management

periodic reordering

nonperiodic reordering

Managing Purchasing and Inventory Managing Purchasing and Inventory

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

Managing Purchasing and Inventory Managing Purchasing and Inventory

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

Managing Purchasing and Inventory Managing Purchasing and Inventory

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

Section 15.2 Inventory Management

safety stock a cushion of products or materials that prevents a business from running out of inventory while waiting for an order

Managing Purchasing and Inventory Managing Purchasing and Inventory

34

1. Explain inventory procedures used by small business.

Section 15.2 Inventory Management

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.

15.2

Managing Purchasing and Inventory Managing Purchasing and Inventory

35

2. Explain the importance and types of inventory control.

Section 15.2 Inventory Management

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.

15.2

Managing Purchasing and Inventory Managing Purchasing and Inventory

36Section 15.2 Inventory Management 36

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.

Internet Purchasing

Managing Purchasing and Inventory Managing Purchasing and Inventory

37Section 15.2 Inventory Management 37

Tech TermsB2B 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

Managing Purchasing and Inventory Managing Purchasing and Inventory

38Section 15.2 Inventory Management 38

Tech Termsprivate 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

Managing Purchasing and Inventory

Managing Purchasing and Inventory

Back to Table of Contents

End ofEnd of