Inventory and Purchasing Management: Optimizing Costs and Efficiency
Direct Forces
These environmental factors directly impact a firm’s suppliers, customers, and competition. Resource providers supply inputs to the organization, which then processes them to create the final product or service. Customers or consumers are the recipients of this product. Competition arises from other companies in the market selling similar services, with varying degrees of variety.
Indirect Forces
Factors such as technology, economics, politics, laws, cultural norms, social trends, and international aspects indirectly influence businesses. Currency fluctuations, inflation, economic alliances, political conflicts, technological advancements, and scientific breakthroughs all have an impact. Regional characteristics, religious customs, fashions, and language also play a role.
Fixed and Variable Costs
Fixed costs remain constant within a relevant range of production volume and are time-dependent. Examples include salaries and building rent. Variable costs change proportionally with production or sales volume, such as materials and sales commissions.
Inventory Costs
Cost to maintain includes insurance, rent, and the opportunity cost of investment, which are assumed constant. Cost to order encompasses administrative expenses associated with purchase orders, receiving goods, and billing. Total cost is the sum of maintenance and ordering costs. The optimal lot size minimizes total cost, occurring where the cost to maintain (CM) equals the cost to order (CO).
Financial Metrics
Contribution margin is the amount remaining after deducting variable costs from sales revenue. Margin of safety is the maximum percentage decline in expected sales that still allows for profit. The break-even point is where revenues equal costs, resulting in no profit or loss.
Cost Variables
- c = unit cost
- i = maintenance cost rate
- S = estimated demand
- o = unit order cost
- d = supplier delay
- Q = optimal batch size
- Q/2 = average inventory
- c * i = maintenance cost per unit
- S/Q = optimal number of orders
- V = daily sales volume
Purchasing Management
Purchasing management encompasses activities to efficiently meet needs at minimal cost, with the right quality, and on time. Key features include:
- Identifying needs
- Analyzing purchase alternatives
- Negotiating with suppliers
- Placing and tracking orders
- Receiving, storing, and recording goods
- Delivering supplies for use
Effective Purchasing and Inventory Management
Effective management ensures the smooth flow of supplies and materials for production and the timely delivery of finished products to customers. Key parameters for measuring effectiveness include:
- Regulated purchase price
- Minimum inventory levels
- Alternative supply sources
- Researching new materials
Collaboration with Other Departments
- General Management: Sets policies, procedures, and analyzes trends.
- Production: Provides information on deadlines, raw material costs, quality, and supply sources.
- Finance: Sets financial policies, funding requirements, and budgets.
- Receiving and Storage: Manages logistics, space requirements, and delivery schedules.
- Accounting: Controls inventory, costs materials, and values purchases.
Purchasing Management Activities
- Continuous market analysis
- Demand forecasting and budgeting
- Optimizing purchasing decisions (e.g., optimal lot sizes)
- Maintaining inventory records
- Quality control
Purchasing Management and Competitiveness
Effective purchasing management aims to acquire goods at lower prices and higher quality, contributing to a competitive market position.