Purchasing and Inventory at Prime Motors - Case Study Example

Purchasing and Inventory at Prime Motors Name: Instructor: Institution: Course: Date: Executive Summary The decision how much stock should be kept in a business firm sometimes raise difficulties and challenges. Balancing and managing stock capacities or purchases, alongside their demands, in different seasons are challenging, especially where a firm deals with multiple brands. Prime Motors is currently experiencing inventory and purchases management challenges, which is resulting from the varying demand trends of different parts and materials. The company foresees complication in the near future if such problems are not resolved. Therefore, the company needs to determine the clear demand trend of every material and brand through proper market assessment and evaluation. This market investigation will likely to provide information necessary for determining what capacity of which brand and material should be kept at a particular time of the year. With the market information and strategies such as perpetual inventory control, real counting piece and “looking it over”, Prime Motor can be able to maintain and manage inventories and purchases and reduce cost of operation, which consequently result in maximised profitability in every season. Also, it will enhance capacity and facility utilisation. Introduction One of the critical decisions in a business firm is the much stock to keep on track. It's the largest asset of a business organization. They help in the budgeting and some of the very crucial decisions to be made in an organization like balancing the orders, running costs and the shortages. In the view of the Merriam- Webster Dictionary, the definition of inventory is the quality of goods or materials on hand. It is a list of property and equipment held in stock in a business organization. Inventory management, therefore, consists of specifying the quantity and the quality of the goods in stock. For effective inventory management, detailed understanding of what inventory management is critical. Purchasing, on the other hand, is an activity a business organization undertakes on a daily basis. It involves sourcing, buying, and delivery of the goods and services. This is the events that happen at the manufacturing and the business management. This may also be for the stocking purposes and after that resold for profit. This is an important department of an organization. This determines the profitability of the business by determining the price at which the goods and services are given out. It implies that protocols that are easy to understand and are the high need to be put in place. The purchase is not just buying but encompasses a broad range of operation addressing a need of an institution (Ombaka, 2009). Once there comes a difference in the purchases and inventory, matters the profitability and the usual functioning of a business firm must be affected. Black in her discoveries, she noted that the success of a business depends on the volume of the vehicles being sold and the rapid turnover of the inventory. Factually the customers are accessed to the large variety of selection. Purchasing different types of service parts and materials from different suppliers would affect the quality of the services. This may cause the Prime motors to hold the inventory. Although it may compromise the quality but then not every customer would go for most expensive goods and services. As a result, the business will not register a loss. Prime Motors will, therefore, meet the expected demands as in the chain of supply and demand must be considered. Customers will always expect to find goods and services when they need them. It is, therefore, important to stock up the inventories so as to meet the expectations of the customers. Such demand can cause an overcrowding of the inventories since its not predictable when the application will go high. Different supply lines will affect the purchases, especially with the major variable events in the year and the changing seasons. The inventories of the Prime motor must meet the seasonal demands. For instance, with the variations in weather and climatic conditions, the wear and tear of the vehicle parts varies. At some seasons some parts will get to be very expensive and also scarce on the market. The company has to adjust on its inventory to take care of this. Similarly, it's important to take advantage of price discounts in a business organization. During stocking Prime motors may purchase goods of different types and quality of various manufacturers and suppliers. By so doing, they get discounts on the bigger bulks. This happens to attract and also to maintain regular buyers. Although this is to the advantage of the company, it has to be done moderately to avoid overstocking that may cause inefficient buying which in turn may result in a failure of the business. Prime Motors has to consider holding the inventory so at to prevent issues from the fluctuating market price. Having a proper inventory system, it becomes easier to control the cost. Obtaining goods and materials from different suppliers, calls for this company to employ a very efficient inventory system. At this point, the business will be able to get quality discounts as they are aware of what they are to buy from the suppliers and manufacturers. This is an essential in deciding the sources of your good and materials. Sometimes the Prime motors may hold inventory which is more than the stock at hand as they anticipate any future event or change in market situations. For example, expecting an increase in demand should result in an increase in the price which may be to the benefit of the firm. Therefore, the Prime motors will have avoided excess overtimes as a result of growing demand and also the hiring cost. Public organization simplifies the problems related to its sector (Trionfetti, 2000). Black has to employ various methods of supervising the business inventory. The success of the Prime motors depends on how well Black can maintain her inventory. The records from the inventory control system are, and indicator and they need attention and action. The inventory is controlled by three methods. Perpetual Inventory Control It's the most common method of controlling inventory is the perpetual inventory control. Being the most efficient of keeping count, its also more costly. Complete data of all the items in the firm are saved on each item. Any alterations on the price are made with each transaction. This provides an inventory balance as well as the receipt for the sale. The actual sale is subtracted to show the quantity at hand. Real Counting Piece Its also another method of controlling inventory. Inventory is counted one item after another in this method. Many business firms don’t use this type of method because it is very tiresome and involving. In this tiring and monotonous task, a lot of errors are made.  It is not a very effective way of inventory supervision and control. “Looking It Over” The name itself describes this method. It is the cheapest way of managing and supervising inventory. This method is prone to a lot of errors. It is not possible to identify the inventory levels clearly. It is not easy to note the exact picture of the items to be ordered and the ones getting overstocked. It is not an accurate way of inventory evaluation.   Traditionally, inventories of even raw materials, finished goods, and materials and all related materials were kept. This was to be a substitute of the possibility of the running out of any needed items. However, its noted that large buffers are expensive and as a result, many companies have resolved into production and inventory management. Raw materials are therefore purchased and produced in time simultaneously at each stage of the manufacturing process. Consequently, considerable cost savings are realized as inventory levels are reduced. This minimizes the cost of stocks supervision. The inventory management, therefore, seeks to counter the cost of ordering goods and materials against the cost storing the inventory. The inventory has to be kept as low as possible therefore inventories holding costs are considered as a loss. Inventories are therefore to be made in small quantities. The combination of financial and service history, the reporting system drew attention to clinics and programs that had important indicators and opened up the root causes (Vian and Collins 2006). As for the purchases, it is proper to think and calculate the cost of ownership. Apart from the purchase price, time and resources pumped into realizing ownership must be considered. Understanding the procedures and steps involved in the procurement brings an understanding of the real situation of your business. (Baily et al. 2004) Prime Motors suffer from lack of proper directions, no open, healthy competition and more of the training is to be imparted to the personnel. Their contract delays, is as a result of lack of competition in the awards of the public tenders which has created a perception in the minds of people In the case of Prime motors for example, (World Bank 2007) This has significantly affected the development of the nation sector. Prime Motors has to take care of such happenings. Black has to implement Purchasing strategies so as to create profitable purchases decisions from a group many suppliers who may deliver quality goods within favourable terms and conditions. These procedures may include such choices like making savings on purchases using one provider. As a result, the supply will come from one location. Otherwise, the Prime motors may decide to take a single source of supply with excellent services.  According to Charles Dominic (2006), a big deal is for the business firm to blend its operational tools under one cover called supply chain management. The most important functions that are merged in this case are purchasing and inventory management. Therefore Ms. Black, its of great importance that you and the entire Prime motors personnel must understand inventory principles so as to remain relevant. To ensure continuity of supply in the firm you must be aware of the inventory you have on hand. This is helpful in the unpredictable season. This amount of the inventory is called safety stock. No specific formula is applied in the calculation of thee safety stock although Purch Tips in the 86th Edition suggests a reverse in the calculation of risk It is of importance to consider the time for recording the inventory. Usually, this is the time when the goods and materials are reduced to a particular level. This level is referred to as reorder point which is determined by the following formula. ROP = SSQ + (QUD x ALT) Where, ROP = Reorder Point SSQ = Safety Stock Quantity QUD = Quantity Used Daily ALT = Average Lead Time (Dominic 2006) Charles (2006) continues to state that it is important to know the quantity to order. The economic order quantity is determined by a mathematical formula. This equation strikes a balance between the expenditure in acquiring the goods and materials and the cost of the existing inventory. This simply means that ordering a large quantity at low intervals, the average cost of acquisition will automatically be low but the inventory costs will be high. Likewise, as you place small quantity orders frequently, the inventory costs will automatically be low. The cost of acquisition will be high due to the more resources used on making orders. Consequently, the economic order quantity is the order quantity which reduces the sum of the two costs. I recommend an inventory manager for the Prime Motors Company. They have a responsibility and in most cases require daily monitoring. This is personnel in charge of the inventory in the firm. The inventory manager leads the workers to stock taking and arranging them well in the stores. This is personnel who work with time ensuring that deliveries are made on time and that the stock does not get off the firm. It is the duty of an inventory manager to find suppliers who will provide the firm with required goods and materials for profitability. He has the responsibility to evaluate the vendors before making orders. It is his duty to maintain a good working relationship between the firm and the suppliers in case of delayed deliveries. Finding the suppliers who are willing to provide goods with favourable costs is part of his responsibilities. Inventory managers take responsibility of making the inventory documentation. All the details of the inventory must be captured. It helps in monitoring the stock and also to avoid losses Many firms have independent purchasing departments that handle the suppliers when placing orders. But in small companies, the inventory manager may take this responsibility in addition to his other duties. An inventory manager should have all the records at hand to be able to know when the stock is running low and when he has a large inventory enhancing the correct measures to address the issues at hand. To accommodate easy purchase and inventory management, and reduce the cost of operation, Prime Motors should also properly manage their capacity and location well. It becomes relatively difficult to manage inventories and capacity in a company that sell multiple brands. However, Kumar and Suresh (2009) suggest that a company dealing with many different brands should consider employing the performance of the brands separately within a short period. Maintaining the demand information parts of each brand make it easy to assess and evaluate what capacity of a particular brand should be kept for at a specific time. Not every brand has high demand at all times of the year. Different brands have different times of their increased demands. Prime Motors experience demand of different parts and materials differently within a season. Therefore, it is imperative to maintain inventory of the demanded product depending on the likelihood of their demand. For instance, the capacity of parts and materials require during winter, summer, and other seasons, should only be increased when their demands show increasing trend. Therefore, the company should employ short-term strategy of capacity planning. This method saves space and the facilities (NIADA 2002); Kumar and Suresh 2009). In conclusion, Prime Motors must understand that the inventory should be taken good care of. As a manager, it is essential to comprehend the concept of a good inventory management. Managers must be familiar with it and its application. The best way for the Prime Motors to manage its activities into a higher notch is by starting with its inventory. This can be facilitated through obtaining market information about the changing demands of every brand and material; knowing which to stock in which season, and in what capacity. References Anonymous. Successful Small Business Management. Los Angeles Times, January 20 1980 Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (1994). p. 407 http://www.inventorymanagement.com/imijita2.htm Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (1994). p.13, p.14, p.218, p.407 Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (1994). p.13-14, p. 407,p.218 ) Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (1994). p.407 http://www.ainet.com/opt/csus/invntory.htm Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (1994). p.13-14, p. 407,p.218 Galloway R, Principles of Operations Management, Routledge Hill T, Production/ Management Operations, Prentice Hall, 1991 National Independent Automobile Dealers Association (NIADA), 2002. Dealership Internal Control Manual. Page Publications. Kumar, A.S. & Suresh, N, 2009. Operation Management. New Delhi: New Age International (p) Ltd., Publishers. Saunders, Strategic Purchasing and Supply Management, Pitman Slack N, Chambers S, Harland C, Harrison A and Johnston R, Operations Management, Pitman, 1995 Read More