1. Chapter Sixteen Purchasing, Inventory Management, and Distribution

2. Chapter Focus Outline the importance of purchasing and its procedures. Discuss the three main concerns in selecting a supplier. Calculate how much inventory you need and when. Describe the methods of inventory control.

3. Purchasing Guidelines (1 of 2) Are you using the proper sources of supply? Are you taking advantage of all purchase discounts? How do you determine minimum inventories and reorder points? Have you run out of raw materials or finished goods? What is the record of your current suppliers for quality, service, and price? page. 424a

4. Purchasing Guidelines (2 of 2) Are you using minimum quantities or economic ordering quantities? What are your inventory holding costs? Do you know your optimum average inventory? Does it guide your purchasing policy? Could you improve your purchasing to increase profits? What is your inventory turnover ratio? How does it compare with the industry average? page. 424b

5. PURCHASING SOURCES Direct (phone, WWW, mail) Wholesaler (Associated Wholesale Grocers) Sales rep (represents several suppliers) Trade show (place orders with parent companies and reps) Liquidator (re-sells liquidated, overrun and special buy merchandise Cooperative (True Value, ACE, etc.)

6. SELECTING SUPPLIERS Make or buy decision Investigating potential suppliers Deciding between single-source and multiple source suppliers

7. INVENTORY CONTROL SMALL BUSINESSES Staying in stock-reorder when: –Run out –Periodic inventory –Anticipated sales –When sales person calls

8. ABC Inventory Investment Classification CLASSIFICATION 60-80% 10-40% 5-15% Table 16-1 PERCENTAGE OF TOTAL INVENTORY INVESTMENT A (high dollar volume) B (moderate dollar volume) C (low dollar volume)

9. INVENTORY CONTROL WAL-MART Scanner checkout Each sale instantaneously reported to distribution center, supplier & home office Distribution center fills order overnight Supplier ships to distribution center Wal-Mart manager can special order

10. INVENTORY CONTROL SMALL BUSINESS Maximizing inventory turns –Get rid of the “dogs” Holding costs Tarnishes image –Replace with new fast-moving inventory New product Seasonal product Special buy

11. Economic Order Quantity Annual Cost $ EOQ Total Annual Inventory Costs Annual Holding Costs Annual Ordering Cost Quantity Ordered Fig. 16-3

12. INVENTORY CONTROL ECONOMIC ORDER QUANTITY

13. Inventory Cycles 100 90 80 70 60 50 40 30 20 10 1 2 3 4 5 6 7 8 9 10 11 12Weeks Reorder Quantity Lead Time Fig. 16-2 Inventory Cycle Reorder Point

14. JIT and Traditional Inventory Comparison JIT INVENTORY Table 16-2 TRADITIONAL INVENTORY Small orders/frequent deliveries. Single-source supplier for a given part with a long-term contract. Suppliers expected to deliver quality product, delivery performance, and price. No rejects acceptable. Objective of bidding is to secure the highest-quality product through long- term contract. Less emphasis on paperwork. Delivery time and quantity can be changed with direct communication. Large orders/infrequent deliveries. Multiple sources of suppliers for same part with partial or short-term contracts. Suppliers expected to deliver acceptable level of product quality, delivery performance, and price. Objective of bidding is to find lowest possible price. Requires more time and formal paper- work. Changes in delivery time and quantity require new purchase orders.

15. INVENTORY CONTROL SMALL BUSINESS “Shrinkage” –A problem because of Infrequent inventories Failure to compare inventories to records Failure to implement detection devices Failure to get employees involved

16. INVENTORY MANAGEMENT WAL-MART Shrinkage minimized because of –Detection devices Overhead cameras Magnetic detection Greeter and “goodbyer” –Associate involvement Bonus for meeting shrinkage target Bonus for meeting net profit target

17. DISTRIBUTION SMALL BUSINESS From supplier –Reliable –Quickly –Economical