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

Is mass customisation the future of retail?

Mass customisation at Nike.

MANAGING INVENTORY AND SUPPLY CHAIN

Speed of response To meet customers needs within a set time period

e.g. delivery times Ability to make changes to products to reflect

changing consumer tastes This will only be achievable if inventory levels are

low and suppliers can change order sizes and components quickly

Dependability A business operating a just in time system will be

reliant on suppliers to deliver the right quantity and quality on time to ensure supply meets demand

MANAGING SUPPLY TO MATCH DEMAND

To meet operational objectives and achieve customer satisfaction it is important to match supply to demand

This can be difficult if demand fluctuates e.g. seasonality, change in trends

This can also be difficult if there are potential threats to the ability to supply e.g. industrial action, delay in supplies

MANAGING SUPPLY TO MATCH DEMAND

Ways of matching supply to demand include:

Outsourcing – the practise of the services of other organisations to complete all or parts of the manufacturing process

The value of outsourcing includes: Provides flexibility in supply Can increase capacity without high capital

expenditure Can buy in expertise

However Quality must be maintained Sub-contractor will also want to be making a profit

MANAGING SUPPLY TO MATCH DEMAND

Use of temporary and part time employees Temporary employees are contracted to work for a business for a specified

period of time e.g. 3 month

Part time employees are contracted to work less hours than a full time employee e.g. 3 days a week

The benefits of using temporary and part time workers include: Flexible workforce

Better able to match supply to demand

Not tied into paying workers when they are not being used to their full potential

However there are issues Recruitment and training costs may be high and not seen as value for money

when employees are only with the business for a short period of time

May be more transient

May lack commitment

CLASS DISCUSSION

Should businesses be allowed to use zero hour contracts to increase flexibility?

MANAGING SUPPLY TO MATCH DEMAND

Producing to order Supply is only triggered by specific demand i.e. as an

order is received the goods are produced to match the order

Requires high levels of flexibility One benefit is that cash is not tied up in holding

inventory

Why do stock shortages seem to be a common theme at Christmas?

INFLUENCES ON THE AMOUNT OF STOCK HELD

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

The value of outsourcing