Chapter 12

12.2 – Inventory management and operation

Identify way to control inventory and minimize inventory cost

- Represents a major financial investment by firms

Objectives of inventory management

- Objective: to have the right goods in the right quantities at the right time and place
- More specific sub goal of inventory control: ensuring continuous operation, maximizing
sales, protecting assets and minimizing inventory investments
- Delay caused by lack of material or parts can be costly
- Sales can be maximized by completing production in a timely manner and by stocking an
appropriate assortment of merchandise in retails stores and wholesales establishments.
- Protecting inventory against theft, shrinkage, and deterioration and minimizing
investment costs likewise contribute to operational efficiency and business profits.

Inventory cost control

- Maintain inventory at optimum level – the level that minimizes stockout and eliminates
excess inventory – save money and contributes to operating profit.

- Traditional inventory management method is economic order quantity (EOQ) – Simple

index that determine the purchase quantity of an item that minimize total inventory
cost.

- More advanced method – Statistical inventory control – accommodates the variability of

supply and demand using a targeted service level – this method allows you to determine
statistically the appropriate amount of inventory to carry and it is easier to use.

- Tools require for this computation are built into many inexpensive, of the shelf business
software packages that work for small firms, such as Microsoft dynamic GP or SAO

- Inventory cost are affected by both the cost of purchasing and the cost of carrying
inventory – that is

- Total inventory costs = total carrying costs + total ordering costs

- Total carrying cost = storage cost, insurance premiums, the cost of money tied up in
inventory and losses due to spoilage, obsolesces or shrinkage

- Carrying cost increase inventory increase

 - Ordering cost: include expenses associated with preparing and processing purchase
orders and expense related to receiving and inspecting the purchased items.

- The cost of placing an order is fixed cost; therefore, total ordering cost increases as firm
purchase smaller quantities more frequently.

- E0Q lowest point on the total cost curve it intersects with carrying cost and ordering
cost

ABC Inventory Analysis

- Some inventory is more valuable or more critical to firms’ operations than others
- Managers should attend most carefully to those inventory items entailing the largest
investment
- ABC methods classifies inventory items into 3 categories based on dollar velocity
(purchase price* annual quantity consumed)

- Category A = holds few high value inventory items that accounts for the largest
percentage of total dollar or otherwise critical in the production process and therefore
deserve close control – might be monitored by the inventory system.

- Category B = holds item that are less costly but deserve moderate managerial attention
because they still make up significant share of the firm’s total inventory investment.

- Category C = contains low cost or non-critical items, such as paperclips in an office –

carrying cost of such items are not large enough to justify close control
Just in time Inventory system
- Attempts to cut inventory carrying cost by reducing inventory to an absolute minimum

- In japan, Kanban, the just in time system has led to cost reduction

- New items are received, presumably just as last items of that type from existing
inventory is placed into service.

- Important to note though that adoption of just in time system necessitates close
cooperation with suppliers.

- Supplier location, production schedules, and transportations schedules must be

considered as they all affect a firm’s ability to maintain material.

- Benefits – just in time management go beyond reducing in house inventory and creating
a healthier balance sheet

- The ultimate objective of this method is a smooth and balanced system that responds
nimbly to market demand.

- Problem = which arises when delay or mistake occur – may result interrupted production
or unhappy customer

- Just in time inventory works well for business that has predictable on-going demand for
inventory items and where there are backup suppliers that can be called upon if supply
problem encountered.

Inventory records keeping systems

- Need for record keeping

- Manufacturer are concerned with 3 broad categories (raw material, supplies, finished
good)
- Small firms should emphasise simplicity in their control method – too much control is
unnecessary
- In small business inventory record are computerized
- Large variety of software’s programmes are available for this purpose the manager in
consolation with the firms accounting adviser to select the software’s
- Physical inventory system – depends on an actual count of item on hands – physical
unit such as pieces, litres, gallon and boxes

- Other use cycle counting, scheduling different segments of the inventory for counting at
different time during the year.
 - Perpetual inventory system – provides ongoing current record of inventory – not
physical however physical count of inventory should be made periodically to ensure the
accuracy of system and to adjust factor such as theft.

12.3 Operation management and Quality

Explain how operation management can contribute to products and service quality

 Quality can be defined as the characteristics of a product or service that determine its
ability to satisfy stated and implied needs.

 The operation process establishes a level of quality as a product is produced or as a

service is provided.

 Quality is determined by customer and entrepreneurs must understand their customer

definition of quality.

 Small business manager must also direct special attention to achieving superior
products or service quality.

 Total quality management (TQM) – Aggressive effort firm to achieve superior quality –
implies an all-encompassing, quality focused management approach that is customer
driven, emphasizes organizational commitment and focus on a culture of continuous
improvement.

The Customer Focus of Quality Management

 A concrete customer focus is the driving force behind successful quality programs

Customer Expectations

 Quality is ultimately determine by the extent to which a products or service satisfied

customer need and expectations.

 Customer with product quality – when purchasing a digital camera

 Customer concerned with service quality – when getting nails done

Customer feedback

 Employees have direct contact with customers can serve as the eye and ears of business
in evaluating existing quality levels and customer needs.
  Employees are seldom trained or expected to obtain information about customer
quality expectations.

 The market research method of observation, interviews and customer survey can be
used to investigate customer views regarding quality

 One method of comparing how a firms performs on the dimension of quality is bench
marking which is the process of identifying the best products, services and practices of
othe business.

 Simple type of bench marking owner eat in competitors restaurant

Tools and techniques of quality management and control

 Developing practical procedures for training employees, inspecting products and

measuring progress toward quality control

Employee Participation

 Employee who works carefully produce better quality products than those who work
carelessly.

 Never buy goods produced on Monday or Friday – that workers lack commitment on
their work and are especilaaly care less prior or after weekend

 Led manager to seek ways to actively involve employees in quality management efforts

 Many business impremented work teams and empowerment of employees as

approaches to building employee involvement in work place

 Work teams monitor the quality level of work and take any steps necessary to continue
operating at proper quality level.

 A quality circle consists of a group of employees usally dozen or few , they meet on a
company time typically about once a week to to identify and anaylze and solve work
related problem particularly those involving product or service quality.

The Inspection Process

 Managments traditional method of maintain product quality is inspection

 Which consists of scrutinizing a part or paroduct to determine wheater or not it is

acceptable.
  Inspector typically uses gauges to evaluate important quality variables.

 For effective quality control the inspector must be honest, objective, and capable of
resisting pressure from shop personnel to pass borderline cases.

 To evaluate service quality : follow up calls to customer of an auto shop for examples

 Quality is free – Rely on vigilant employees and an audible alarm

Statistical Methods of Quality Control

 Using statistical methods of quality control – can often make controlling products and
service quality easier, less expensive, more effective.

 Using statistical analysis – properly qualified employees or outside constulant must be

available.

 Acceptance sampling – involves taking random sample of products and measuring them
against predetermined standards.

 Suppose, small firms receives a shipment of 10,000 parts from suppliers – Rather then
10,00 0 parts evaluation purchasing firm might check the acceptability of a small sample
of parts and generalize about the acceptability of entrie order

 But the smaller size may have defective parts.

 Large sample reduces this risk

 Control Chart : graphically shows the limits for the process being controlled.

 Its is possible to tell wherater a process is under control or out of control

 Controll chart uses variables or attribute inspection

1) Attributes : are products or service parameters that can be counted as being either
present or abset.

2) Variable : are measured parameters that fall on a continuum such whight or length –
if large cashew can has minimum 900 gram – inspector can judge the product
acceptable if it weight falls within range of 907 to 925 grams.
Quality Management in Service Buisness

 6 factors positively influence customer perception of service quality

1) Being on target – meet customer expectation

2) Care and concern – be empathetic . tune in to customers situation, frame of mind and
needs.
3) Spntaneity : Empower service providers to think and respond quickly.
4) Problem solving : train and encourage service provider to be problem solvers. – positive
response will stay in customers mind
5) Follow up
6) Recovery – customer experiencing problem often have low expectation – speddy
solution is good.

12.5 Purchasing Policies and Practices

 Disucss the importance of purchasing and nature of key purchasing policies.

The Importance of Purchasing

 Quality of a finished product depends on the quality of raw materials used.

 Well managed production process is used excellent product will results.
 Acquisition of high waulity merchandise make retailers sale to customer easier and
reduces the number of necessary markdowns and merchandise returns.
 Purcahsing also contributes to profitable operation by ensuring that goods are delivered
when they are needed.
 In retail business – merchandise not received on schedules may mean loss of sales and
loss of permanent customer.

Making or Buying

 Make or buy decision are important for small manufacturing firms

 Some reasons for making component parts rather than buying

1) Supplies are assured – with fewer delays

2) Secret design may be protected
3) Expense reduces – transportation cost and outside supplier selling expense and profit
4) Close coordination and control of toal production process
5) Higer quality

 Why buy ?

1) Outside may be cheaper

 2) Additional space, equipment personnel skills and working capital might be un un
necessary
3) Less diversified managerial experience and skiils are required
4) The risk of equipement obsolescne is transferred to outisders .

Outsourcing

 Buyign products or service from other business firm is known outsourcing

 Reduce cost by working with outsider suppliers specializing in particular type of work

 Small business usally outsource are usally lack of skills to do certain tasks or not enough
work of certain activity.

 Only done for non core activities of a firm – by hiring employees to do work and
managing the process internally.

Diversfying sources of supply

 Small firms often must decide whether its is desirable to use more than one suppliers
when purchasing a given item

 However several suppliers might be involved when a firm buys a component parts to be
used in hundred of products

 Why firm might prefer one supplier

1) One supplier might give outstanding quality

2) Discounts to buy many
3) Order may be small
4) Purchasing firm as good customer might get fast dleviry, management advice

 Why might firm diversify with suppliers

1) Might get best price from one and good quality to another
2) Insurance that no interruption

Relation ships with suppliers

 Small company is one among dozens hundered buying from that suppliers

 Small business should observe this purchasing practice

1) Give sales representative a prompt, courteous hearing

 2) Avoid abrupt cancellation
3) Avoid asking special concession or unusal discoutns
4) Cooperate with supplier by making suggestions for products improvements and cost
reduction
5) Provide courteous resoable explantion when rejecting bids, and making fair
adjustment

 Relation ship can be damaged by one ill act

 There is a trend to closer linkages between suppliers and customers
 Electronic Data Interchange (EDI) – Order are placed and tracked via electronic
communication, received by customer and logged into the computer, which then
approved the transfer of funds electronically from the customer to supplier in
payament.

 EDI – eliminates the need to re-enter order and billing data and speed information
exchange between companies

Developing Strategic Alliance

 Strategic Alliances – an organizational relationship that links two independent business

entities in a common endeavour

 A strategic alliance is an arrangement between two companies to undertake a

mutually beneficial project while each retains its independence. The agreement is
less complex and less binding than a joint venture, in which two businesses pool
resources to create a separate business entity.

Using Information system

 By computers new business software and internet links with supplier and customers.
 Forrester research has shown that AP electronic invoicing and porcesisng can cut cost of
an invoce process by 75 percent.