Purchasing and Inventory Management in Lancaster Motor Group - Case Study Example

Purchasing and Inventory Management in Lancaster Motor Group Author Course Tutor Date Table of Contents Table of Contents 2 1.0 Executive Summary 3 2.0 Introduction 3 3.0 Purchasing and inventory management 4 4.0 Inventory control 4 5.0 Purchasing concepts 5 5.1 The ABC approach 5 5.2 Safety stock 6 5.3 Inventory Turnover Rate 6 6.0 Weaknesses of PIM practices for Lancaster Motor Group 7 6.1 Lack of enough storage capacity 7 6.2 Undefined suppliers of spare parts 7 6.3 Mixture of after after-sale services parts and those to be sold 7 7.0 Supply-chain and Inventory management concepts 8 7.1 Just-in-Time and stockless inventory 8 7.2 Single versus Multiple Vendors 9 7.3 Lead Time 9 7.4 Inventory Accounting Systems 9 8.0 Recommendation 10 9.0 Conclusion 10 References 11 1.0 Executive Summary Purchasing and inventory management practices and policies are basic requirement in the all organizations in order to have an effective and efficient business operations. However, most organizations incur losses due to failure in controlling their purchasing and inventory handling behaviours. This report has discussed the best practices in purchasing and inventory management with focus on Lancaster Motor Group, a company seeking to expand its scope of operation through acquisition. The report begins by introducing the concept of purchasing and inventory management. It further presents the concept of inventory control and purchasing concepts which the company can use when dealing with different suppliers. Weakness of the company in the purchasing and inventory management are also discussed in the body of the report. The report later looks at the supply-chain and inventory management concepts where JIT and lead time concepts among others have been discussed and how the company can use to reduce investments and space requirements. The reports end with a recommendation to the company and conclusion. 2.0 Introduction According to Waters (2008) inventories play a major role in the functioning of business enterprises. It occupies the biggest potion in the company’s current assets. Inventories are physical articles owned by an organization and used in the production of finished goods ready for sale. Inventory can also be termed as short meaning the materials that are sold to the market or used either directly or indirectly by a company to manufacture its products. It includes items. The Lancaster Motor Group has conduct proper purchasing and inventory control practices that will help it achieve its growth strategies. Inventory management and control is very important in organizations and determines their success. This report presents the best purchasing and inventory control management practices which Lancaster Motor Group can adopt in order to implement its plan for growth successfully. 3.0 Purchasing and inventory management Right policies and procedures must be established by Lancaster Motor Group to help manage the purchasing and inventory systems in the company. The choice of suppliers the company uses to procure its inventory will definitely require application of different policies and procedures. Before making the decision to procure the inventory, the company is expected to access its suppliers to ascertain whether or not they can sustain the high demand for the company’s equipments. The company should be in a position to identify its expectations and establish strong relationships with its suppliers (Cachon and Fisher, 2000). A number of factors like inventory specifications, transportation and supplier qualification have to be considered when building these relationships. In order to meet the objectives of the company, the procurement department should consider the following: Clearly define the criteria for selecting the suppliers of the service parts and materials Identify the best price, considering the suppliers’ qualifications and credibility Carry out benchmarking to determine the right price, quality and reliability of the suppliers Determine the payment mode for each supplier depending on the nature of the contract 4.0 Inventory control Inventory control involves management of inventory in a way that meets the demands of customers by use of the lowest cost. An organization should know when the inventory is finished, when to make another order and in what volumes. An inventory system that is well managed considers factors like demand for the products, seasonal changes, variation in the pattern of use and examines the pilferage before a purchase is made (Gopalakrishnan, 2001). Since the Lancaster Motor Group conducts business with different suppliers, it should be guided by the inventory control objectives. Decisions on which supplier to use to procure spare parts and materials, and the policies to use depends on the goals of the company as far as inventory management and control are concerned. The company should be guided by the following inventory management objectives when purchasing its materials: Need to minimize investment in the inventory Balancing the demand and supply for spare parts and materials Found out the correct standard of customer service Keeping an updated system of inventory control Need to reduce the costs of procurement and carrying costs These objectives may not be realized concurrently, but the company can use to determine the kind of suppliers to engage in business with. The ultimate goal for inventory management is to strike a balance between inventory cost and the benefits it brings to the company (Cachon and Fisher, 2000). Therefore, the Lancaster Motor Group should use suppliers who are able to meet the aspirations of the company. When the company invests in inventory, other functions for money which could give bigger investments returns are lost. The best benchmark the company may use to determine the costs of its capital is by computing the current interest rates. Basing on the costs of capital, the company may decide whether or not to invest in the inventory and how much finance to use (Waters, 2008). 5.0 Purchasing concepts Procurement of inventory in the company requires the purchase department to understand some of the concepts related to purchasing. The concepts help in purchasing the right materials at the right time and in the right quantities (Quayle, 2006). They may also guide the company when to use particular suppliers whenever it wants to procure inventory. Some of the concepts that can guide Lancaster Motor Group to pursue its expansion strategy include the ABC approach, safety stock and the inventory turnover rate. 5.1 The ABC approach This is an inventory classification system that groups materials according to volume of sales in order to determine the items that contribute to larger proportion of sales, and those that can be used in inventory management. Labelling the inventory A, B and C helps the company to identify the items with much importance compared to the rest. Depending on the importance of an item, the company will want to use the more reliable suppliers so as to avoid delays in the supply of such an item when it runs out of stock (Quayle, 2006). Less important or materials with low demand may be allocated to suppliers who may not be able to meet the deadline for the company. 5.2 Safety stock According to Monczka, Handfield and Giunipero (2008) the company should always maintain a safety stock. This is the extra volume of inventory maintained to prevent the company from possible stock-outs. It helps in controlling the procurement of materials. Such stock should be maintained when the company is not sure of the demand for the spare parts or the lead time or sometimes both. The safety stock for suppliers who are not reliable must always be high to avoid disappointments when the materials get finished and the demand for such materials is high. Especially when the suppliers are located far from the company and it may take several days to supply the materials; it is always good to maintain high safety stock. However, for suppliers who can reach within a short time and less logistics are involved in procuring their materials, keeping less safety stock may not be very risk. Nevertheless, it is advisable to maintain safety stock at all the time. 5.3 Inventory Turnover Rate The turnover over rate for inventory is an effective way of assessing how effective is the inventory control and management system of a company. This is the rate at which inventory is used and replaced at a given period of time especially one year. When the rate of inventory turnover is high it implies that the level of materials usage is high comparative to total inventory in stock while when the inventory turnover rate is low, it implies that the materials are not utilized at the required rate comparative to the average inventory in stock (Christopher and Peck, 2004). Lancaster Motor Group should assess inventory turnover rates for all its suppliers in order to identify which suppliers it is likely to engage with in business quite often. Suppliers whose materials and spare parts have low turnover rate imply that the company will not constantly engage them in business. However, those suppliers whose materials have high turnover rate imply that the company has to maintain very close relationship in order to receive the supplies on time to avoid inconveniencing customers due to frequent stock-outs. 6.0 Weaknesses of PIM practices for Lancaster Motor Group 6.1 Lack of enough storage capacity Lancaster Motor Group has expanded its operations and requires adequate space to keep is spare parts and other materials. Markovic admits that the demand for the spare parts has gone up and there is need to bring them together. The company may fail to meet the demand for its customers if it does not establish enough storage facility especially that its plans for another acquisition. Lack of enough space limits the company from procuring many parts which are highly demanded. The management of Lancaster Motor Group has failed to manage the demand and its capacity and this may lead to customer dissatisfaction. The company faces a great challenge as it expands its operations since it may not be able to accommodate the needs of the growing market. Therefore, the company has to create enough space for storing the parts to be able to register high sale returns. 6.2 Undefined suppliers of spare parts A company like Lancaster Motor Group should be able to identify and understand the type of suppliers it conducts business with. It is very unfortunate that the company purchases some of its spare parts and materials like lubricants, fan belts and oils from any suppliers. This is as indication that the procurement section lacks proper procedures and practices when making purchases. Lack of specific suppliers for the mentioned materials may result to the company purchasing faulty products, and this may affect the reputation of the company as far as consumer satisfaction is concerned. This will also affect the company’s acquisition program since there is need to have reliable suppliers which the company has to rely on the supply of parts and other materials. With this kind of arrangement, it will be difficult for the company to satisfy the needs of its customers, and even reach its strategic goals. 6.3 Mixture of after after-sale services parts and those to be sold Another weakness with the inventory management for Lancaster Motor Group is failure to distinguish between the parts to sale on the counter and those to use in the after-sale service. This may make it difficult to establish how much finances and returns are attached to the two areas. Considering the fact that the company has grown, it is necessary that it develops the store for keeping parts used in servicing customers’ vehicles separate from the parts and materials to be sold. These stores should be assigned different people to manage in order to enhance accountability. 7.0 Supply-chain and Inventory management concepts Supply-chain is the process through which products move from the place of production through distribution up to the final consumer. Procurement departments are usually concerned with the type of materials they want to purchase and when to purchase such materials. They are also concerned with establishing good relationships with their suppliers in order to reduce the supply management costs. Lancaster Motor Group can eliminate the problem of storage space by use of an appropriate supply-chain and inventory management practices. 7.1 Just-in-Time and stockless inventory The just-in-Time concept means that materials are purchased just before they needed by customers. A company that practices JIT makes orders for its materials and receives such materials immediately without storing them. This means that the warehouse or the store remains without any materials or goods. Some organizations have introduced programs related to JIT called stockless inventories, whereby supplies are bought from the one source and usually have direct market (Lysons and Farrington, 2006). Lancaster Motor Group should use this type of inventory management since it has inadequate space to stock its spare parts and materials. When the company uses the JIT and stockless inventory system, it should ensure a sophisticated management for smooth flow of materials between the suppliers, the company and the final users. The company should also use computers to facilitate the process of inventory control and to reduce on hand quantities. They are also useful in generating reorders automatically which reduces time wastage and increases accuracy. However, the company should use this concept on particular items whose demand is predictable. When effectively implemented, the concept can create a good relationship between the company and suppliers, and may buy the materials at reduced unit price because of large volume purchases. Although the company may safe on space by use of the JIT concept, the payments for value-added services paid to suppliers may remain (Tan, 2001). 7.2 Single versus Multiple Vendors The ultimate goal for the procurement function is to purchase the right supplies, in the right quantity, right quality, from the right source, at the right price and at the right time. Therefore, the company should decide to use a single supplier or multiple suppliers. Each has its own advantages and disadvantages (Cachon and Fisher, 2000). For instance, a single source will provide better pricing since purchases are made in big volumes. However, for the purposes of utilizing the small space, it is advisable for the company to use multiple sourcing. When the company has several suppliers, it may not fall in a crisis in case of shortage of materials, and it may apply the concept of JIT without experiencing complications in the supply of the materials and parts. 7.3 Lead Time Waters (2008) argues that in order for the company to satisfy the demand for its parts and materials, it has to perform accurate estimates for inventory required and the timing of demand. The company should also know the time it takes for placed orders to be delivered on the premises. Understanding the extent to which the demand for materials and lead time varies is important for an effective inventory management. When the variability id bigger, additional stock should be replenished to avoid shortages. This concept will help Lancaster Motor Group to manage its inventory in a manner that it uses the small space available. Therefore, the company should understand very well lead time for its inventory, and this can prevent overstocking of materials and only orders when necessary. However, this concept should be used carefully by the company since when not accurately applied may result to serious shortages, hence loss to the company. 7.4 Inventory Accounting Systems These systems are either perpetual or periodic depending the company policies. The periodic accounting system requires that inventories are counted after specific time. It could be on daily, weekly or monthly basis in order to ascertain how much order foe materials to make. Orders for different orders are made at the same time and this reduces processing costs. On the other hand, a perpetual system of inventory control keeps track of materials removed from the store, and this gives a clear picture of the amount of materials left in the store (Minner, 2003). In this approach, when on hand materials gets to a predetermined level, a fixed volume of material is reordered. A perpetual system enables the company to identify its economic order size. Therefore, the Lancaster Motor Group can Inventory Accountings Systems to eliminate fears of having less space to stock its spare parts and materials. Keeping control of materials usage provides room to plan for the replacement on time without waiting for the materials to run out of stock. It may not serve the company good to purchase large stocks of materials without considering the rate at which materials are used. 8.0 Recommendation Purchasing and inventory management is important for effective performance of organizations, and therefore management should take is seriously if they have to achieve a competitive advantage. In order for Lancaster Motor Group to succeed in the expansion strategy, it should consider the following recommendations: It should utilize the minimum space available by applying the best purchasing and inventory management practices like JIT It should clearly define its suppliers in order to have reliable sources of spare parts and materials It should use a computerised inventory control system to help in controlling the procurement and storage of materials 9.0 Conclusion In conclusion, depending on how an organization manages its inventory, it will be able to meet the demands of its customers on time. As indicted in the report, good purchasing and inventory management practices are attained when supplies are availed on time to avoid inconveniencing the end users. Organizations should aim at maximising the sale returns and minimize the costs associated with procuring materials. References Cachon, G. P., & Fisher, M 2000 "Supply chain inventory management and the value of shared information", Management science, 46(8), pp.1032-1048. Christopher, M., & Peck, H 2004 "Building the resilient supply chain", International Journal of Logistics Management, The, 15(2), pp.1-14. Gopalakrishnan, P 2001 "Purchasing and materials management", Tata McGraw-Hill Education. Lysons, K., & Farrington, B 2006 "Purchasing and supply chain management", Ft Press. Minner, S 2003 "Multiple-supplier inventory models in supply chain management: A review", International Journal of Production Economics, 81, pp.265-279. Monczka, R. M., Handfield, R. B., & Giunipero, L. C 2008 "Purchasing and supply chain management", South-Western Pub. Quayle, M 2006 "Purchasing and supply chain management: Strategies and realities", Idea Group Publishing. Tan, K. C 2001 "A framework of supply chain management literature", European Journal of Purchasing & Supply Management, 7(1), pp.39-48. Waters, D 2008 "Inventory control and management", John Wiley & Sons. Read More