4.5.1 MAKING OPERATIONAL DECISIONS TO IMPROVE PERFORMANCE: MANAGING INVENTORY AND SUPPLY CHAINS AQA Business 4 DECISION MAKING TO IMPROVE OPERATION AL PERFORMAN CE Take any product that you have with you today. It might be an item of clothing, piece of equipment or personal object such as a phone. Write a list of all the suppliers that would have contributed to producing that item. Don’t just list the suppliers that would have provided materials to the manufacturer but try to go as far back down the supply chain as possible.
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4.5.1 M AKING OPERATIONAL DECISIONS TO IMPROVE PERFORMANCE : MANAGING INVENTORY AND SUPPLY CHAINS AQA Business 4 D ECISION MAKING TO IMPROVE OPERATIONAL.
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4.5.1 MAKING OPERATIONAL DECISIONS TO IMPROVE
PERFORMANCE: MANAGING INVENTORY AND
SUPPLY CHAINS AQA Business
4 DECISION MAKING TO IMPROVE OPERATIONAL PERFORMANCE
Take any product that you have with you today. It might be an item of clothing, piece of equipment or personal object such as a phone.
Write a list of all the suppliers that would have contributed to producing that item. Don’t just list the suppliers that would have provided materials to the manufacturer but try to go as far back down the supply chain as possible.
4 .5 .1 MAKING OPERAT IONAL DECIS IONS TO IMPROVE PERFORMANCE:
MANAGING INVENTORY AND SUPPLY CHA INS
In this topic you will learn about
Ways and value of improving flexibility, speed of response and dependability
How to manage supply to match demand and the value of doing so
Influences on the amount of inventory held
Influences on the choice of suppliers
How to manage the supply chain effectively and efficiently and the value of this
The value of outsourcing
MANAGING INVENTORY AND SUPPLY CHAIN
Suppliers are those people responsible for providing resources to businesses
Farmer supplying wheat to Kellogg's or beef to Asda
Component manufacturer supplying bolts to a furniture manufacturer
Electricity company providing power to a theatre
Fashion designer providing their summer range to a boutique
Regardless of the nature of a business they will have goods and services provided to them from another business (B2B)
Most businesses will work with many suppliers
The supply chain is all of the resource providers throughout every stage of operations
Inventory is the number of goods held in stock including raw materials, work in progress and finished goods
MANAGING INVENTORY AND SUPPLY CHAIN
Flexibility is the ability to respond to change To meet a sudden increase or decrease in demand Change an aspect of the product to meet changing
consumer tastes Respond to erratic demand
Seasonality Fashion
Flexibility can be improved through managing inventory and supply chain management
Good relationship with suppliers to respond quickly to changing needs
Just in time operations Technology to quickly change re-order levels
FLEXIBILITY
A trend in increased flexibility is the ability of firms to use mass customisation
Mass customisation is the ability to tailor goods made in bulk to meet the requirements of individual consumers
Managing stocks efficiently: Stock can be used to fill differences between
production output and demand
The amount of stock held will depend upon : the business’ attitude to risk
the importance of speed of response as an operational objective
speed of change within the market
nature of the product e.g. perishable or long lasting
INVENTORY CONTROL CHARTS
A management tool used to control and monitor the flow of stock This gives a visual representation of:
Lead time The time it takes between placing an order and receiving
delivery The greater the lead time the higher the minimum
inventory level Lead time can be measured on the horizontal axis of an
inventory control chart as the distance from re-order level to minimum inventory level
Re-order level The level of inventory which triggers an order, this may be
done automatically by a computerised system The re-order level will be determined by both the lead time
and the minimum inventory level
INVENTORY CONTROL CHARTS
This gives a visual representation of: Buffer level of inventory
Stock held by a business to cope with unforeseen circumstance e.g. sudden increase in demand, break down in supplies
When a business reaches its minimum inventory level it is left just with buffer inventory
A business operating a just in time system will have zero buffer inventory
Re-order quantities The point at which an order for new inventory is placed, this
will be dependent on buffer level of inventory and lead time A computerised stock control system will automate this
process so that when stock reaches this level an order is automatically sent to a supplier
Inventory control chartIn
vent
ory
leve
l
Number of Weeks0 5 10 15 20 25 30 35
Maximum inventory level
Minimum inventory level
Re-order level
Inventory levels fall as it is used
When it reaches this level more inventory is ordered either manually or automatically
New inventory is delivered
Lead time – the time from placing the order to getting the delivery Buffer inventory – held
in case there is a problem with delivery of new stock or a sudden increase in demand
BUFFER STOCK
Advantages of holding buffer stock
Can meet customer demand
Quickly respond to increases in demand
Continue with production even if a problem with stock deliveries
Disadvantages of holding buffer stock
Money tied up in holding stock
Costs associated with stock holding e.g. storage, staff, insurance
Risk of waste e.g. out of date, damaged or obsolete
Should all businesses hold buffer stock or does it depend on the nature of the business?
The buffer stock
method of stock
control is sometimes called “Just
in Case”.
Can you explain why?
TEST YOURSELF
SuperDenim is an online retailer of designer Japanese denim. It imports jeans directly from Japan and sells them over the internet. SuperDenim prides itself on a high level of customer service.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 150
20
40
60
80
100
120
140
160
No. of weeks
Inve
ntor
y le
vels
Max. level
Re-order level
Min. level
1. Using the diagram opposite, what is the:
a) Buffer level of inventoryb) Re-order quantityc) lead time?
2. Explain one possible benefit of SuperDenim operating this method of stock control.
3. State one advantage and one disadvantage to SuperDenim of switching to a Just in Time (JIT) method of stock control. For each, explain one likely effect on the business.
INFLUENCES ON CHOICE OF SUPPLIERS
Before choosing suppliers businesses should set criteria for the selection process, identifying what are the most important factors for them
These may include:
Price
Payment terms
Quality
Capacity
Reliability
Flexibility
INFLUENCES ON CHOICE OF SUPPLIERS
Price is often a key consideration in choosing a supplier
Keeps unit costs low
Can either pass on savings to consumer in the form of lower prices or
enjoy higher profit margins
Businesses must however be careful that lower prices do not mean sub standard quality
Value for money is important
Larger businesses are often able to exert pressureon smaller suppliers to secure low prices
INFLUENCES ON CHOICE OF SUPPLIERS
It is common place for suppliers to offer credit to its customers i.e. the option to receive the goods or service now but pay at an agreed point in the future
Payment terms will vary depending upon the relative sizes of the firms and also nature of the product or service
Payment terms can be
In advance
Upon delivery
Pre agreed credit terms e.g. 30 days
Payment Plan i.e. payment in stages
A business may wish to choose a supplier with generous payment terms in order to help their own cash flow
INFLUENCES ON CHOICE OF SUPPLIERS
When choosing a supplier for a component, quality will have a direct effect on the quality of the finished product
One poor quality component will affect the whole product A top chef working with a poor quality steak will not be able to achieve
the quality of meal he/she could with a quality steak
A pair of jeans with a poor quality zip will devalue the quality of the jeans
The quality may also impact upon the operational efficiency Need to rework manufactured goods
Cause breakages to machinery
Take longer to handle
In retail the quality of the stock will directly influence the reputation and image of the store
A poor quality product can damage the image of the retailer more than the actual manufacturer. Why is this?
INFLUENCES ON CHOICE OF SUPPLIERS
The importance of capacity and reliability Is the supplier able to produce enough to meet demand
Consistent quality? Correct quantity? On time?
Can the supplier be trusted to deliver the order On time? Accurately?
If not then how will this influence operations Stoppages in production? Empty shelves? Letting down customers?
Why might a business choose
tobuy stock of one item from more
than one supplier?
MANAGING THE SUPPLY CHAIN
Establish criteria for selecting suppliers
Identify procurement needs
Produce a policy for dealing with suppliers including:
Terms and conditions
Responsibility and decision making
Any vetting required
Degree of involvement
Code of conduct
Ethical requirements
THE VALUE OF MANAGING THE SUPPLY CHAIN – IN PAIRS
Identify 6 operational objectives For all six plus the ability to match supply to demand explain the value of managing the
supply chain
Operational objectives Managing the supply chain
Matching supply to demand
4 .5 .1 MAKING OPERAT IONAL DECIS IONS TO IMPROVE PERFORMANCE:
MANAGING INVENTORY AND SUPPLY CHA INS
In this topic you have learnt about
Ways and value of improving flexibility, speed of response and dependability
How to manage supply to match demand and the value of doing so
Influences on the amount of inventory held
Influences on the choice of suppliers
How to manage the supply chain effectively and efficiently and the value of this