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The topic of report is an evaluation of purchasing and inventory function, policies and procedures for Dealership network of Grandiose Motor Dealership. I'm going to start with a general overview and then focus on each one of dealership network's purchasing function, management of the service parts and the materials flows in the supply chain presented. Any problems identified within the program will be highlighted and analysed.
Operations management is an area of business concerned with the production of goods and services, and involves the responsibility of ensuring that business operations are efficient in terms of using as little resource as needed, and effective in terms of meeting customer requirements. It is concerned with managing the process that converts inputs (in the forms of materials, labour and energy) into outputs (in the form of goods and services).(Ackoff R, 1957)
Operations traditionally refers to the production of goods and services separately, although the distinction between these two main types of operations is increasingly difficult to make as manufacturers tend to merge product and service offerings. More generally, Operations Management aims to increase the content of value-added activities in any given process. Fundamentally, these value-adding creative activities should be aligned with market opportunity (see Marketing) for optimal enterprise performance.(Ackoff R, 1957)
Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods.(Handfield R, 1993) The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment.(Handfield R, 1993) Other definitions of inventory management from across the web: Involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check.(Handfield R, 1993) Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Today, operation management of a company should look beyond an internal view (Slack, Cambers & Johnston 2004, p161) as Grandiose Motors buys a lot of services parts from outside specialists.
This report will provide recommendation to the senior management with respect of purchasing and inventory function of the company. It also states the differences in purchasing and inventory management policies for different types of parts and states the supply chain theories that helps reduce investment and space.
Recommendations for Structuring Purchasing & Inventory Functions
The basic functions of purchasing and inventory are planning, controlling and scheduling.
Improve the Current Material requirements planning
Material requirements planning is a production planning and inventory control system used to manage manufacturing processes. Over the past decade there has been a growing realisation of the important contribution that purchasing and supply management can have on firm performance. Many organisations have shifted their view of the purchasing function from one of tactical support and toward being a strategic capability (Ellram and Carr, 1994 ).
Whilst both academics and practitioners agree that efficient and effective supply chain management can lead to sustainable competitive advantage, there appears to have been little empirically based research on what might be the optimal design configuration and level of maturity of purchasing to achieve these benefits.
An Material requirements planning system is intended to simultaneously meet three objectives:
Ensure materials and products are available for production and delivery to customers.
Maintain the lowest possible level of inventory.
Plan manufacturing activities, delivery schedules and purchasing activities.
Good purchasing and inventory management depend on accurate prediction of customers demand. By this, the company knows when to place purchase order and how many parts should purchase.
Prepare for Uncertainty
For example, if you do not know whether it will rain tomorrow, then you have a state of uncertainty. If you apply probabilities to the possible outcomes using weather forecasts or even just a calibrated probability assessment, you have quantified the uncertainty. Suppose you quantify your uncertainty as a 90% chance of sunshine.(Wang G, 1990) If you are planning a major, costly, outdoor event for tomorrow then you have risk since there is a 10% chance of rain and rain would be undesirable. Furthermore, if this is a business event and you would lose $100,000 if it rains, then you have quantified the risk (a 10% chance of losing $100,000). These situations can be made even more realistic by quantifying light rain vs. heavy rain, the cost of delays vs. outright cancellation, etc.(Wang G, 1990)
The dealership should prepare for any uncertainties and variables because every forecast has marginal error. Unexpected demand and variables of purchasing can have impact on inventories and affect the service level (Gardiner 2006, p.144)
Science Using Management Information System For Business
At the start, in businesses and other organizations, internal reporting was made manually and only periodically, as a by-product of the accounting system and with some additional statistic(s), and gave limited and delayed information on management performance. Previously, data had to be separated individually by the people as per the requirement and necessity of the organization. Later, data was distinguished from information, and instead of the collection of mass of data, important, and to the point data that is needed by the organization was stored.(Nguyen D, 1998)
Early on, business computers were mostly used for relatively simple operations such as tracking sales or payroll data, often without much detail. Over time these applications became more complex and began to store increasing amounts of information while also interlinking with previously separate information systems. As more and more data was stored and linked man began to analyze this information into further detail, creating entire management reports from the raw, stored data. The term "MIS" arose to describe these kinds of applications, which were developed to provide managers with information about sales, inventories, and other data that would help in managing the enterprise. Today, the term is used broadly in a number of contexts and includes (but is not limited to): decision support systems, resource and people management applications, ERP, SCM, CRM, project management and database retrieval application.(Nguyen D, 1998)
Business should tightly control the purchasing function as its decision on volume and ordering time will affect the location and stock levels of inventory. And the location and stock levels of inventory ill affect quality, flexibility and lead times. Incorrect and delay information will result inventory in wrong place and place time (Gardiner 2006, p.18).
Modern business information system (BIS) can provide real time control and measurement for both procurement and inventory department (Kroenke 2009, p.67). How much parts should be ordered and when them should be order can computerized by stock control system. Then the dealership should use an transaction monitor device to record the position, status and possibly values of the stocks. Finally, inventory control system can generate regular reports of stock value for different items. It can also record the number of stock-outs or the number of incomplete orders (Slack, Cambers & Johnston 2004, p.436).
Changing Purchasing & Inventory Policies and Procedures
Purchasing refers to a business or organization attempting to acquire goods or services to accomplish the goals of the enterprise.(Germain R, 2000) In business management, inventory consists of a list of goods and materials held available in stock.(Womack P, 1996)
The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer.(Germain R, 2000) As opposed to "keep full" systems where a retail consumer would like to see full shelves of the product they are buying so as not to think they are buying something old, unwanted, or stale; and differentiated from the "trigger point" systems where product is reordered when it hits a certain level; inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view.(Germain R, 2000)
One early example of inventory proportionality used in a retail application in the United States is for motor fuel.(Germain R, 2000) Motor fuel (e.g. gasoline) is generally stored in underground storage tanks. The motorists do not know whether they are buying gasoline off the top or bottom of the tank, nor need they care. (Germain R, 2000)Additionally, these storage tanks have a maximum capacity and cannot be overfilled. Finally, the product is expensive. Inventory proportionality is used to balance the inventories of the different grades of motor fuel, each stored in dedicated tanks, in proportion to the sales of each grade.(Germain R, 2000) Excess inventory is not seen or valued by the consumer, so it is simply cash sunk (literally) into the ground. Inventory proportionality minimizes the amount of excess inventory carried in underground storage tanks.(Germain R, 2000) This application for motor fuel was first developed and implemented by Petrolsoft Corporation in 1990 for Chevron Products Company. Most major oil companies use such systems today.
Supply Chain and Inventory Management Concept
Supply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). Supply Chain Management spans all movement and storage of raw materials , work-in-process inventory, and finished goods from point of origin to point of consumption ( supply chain ).
For Grandiose Motor, Inventory is very expensive to manage. Services parts in the supply chain are considered as inventory investment as ordering and transporting parts from suppliers also cost moneys. A large amount of capital is also invested in holding and storage space. Furthermore, large amount of stock would result in increase delivery errors and the need of man power to manage them (Gardiner 2006, pp. 239, 244-245).
Ideally, the 'correct amount of inventory' is sufficient to satisfy customer demand. However, by decreasing inventory, the service level may be too low and lead to service delay and customer complaints (Gardiner 2006, pp. 242, 247).
Supply chain management must address the following problems:
Distribution Network Configuration: number, location and network missions of suppliers, production facilities, distribution centers, warehouses, cross-docks and customers.(Womack P, 1996)
Distribution Strategy: questions of operating control (centralized, decentralized or shared); delivery scheme, e.g., direct shipment, pool point shipping, cross docking, DSD (direct store delivery), closed loop shipping; mode of transportation, e.g., motor carrier, including truckload, LTL, parcel; railroad; intermodal transport, including TOFC (trailer on flatcar) and COFC (container on flatcar); ocean freight; airfreight; replenishment strategy (e.g., pull, push or hybrid); and transportation control (e.g., owner-operated, private carrier, common carrier, contract carrier, or 3PL).(Womack P, 1996)
Trade-Offs in Logistical Activities: The above activities must be well coordinated in order to achieve the lowest total logistics cost. Trade-offs may increase the total cost if only one of the activities is optimized. For example, full truckload (FTL) rates are more economical on a cost per pallet basis than less than truckload (LTL) shipments. If, however, a full truckload of a product is ordered to reduce transportation costs, there will be an increase in inventory holding costs which may increase total logistics costs. It is therefore imperative to take a systems approach when planning logistical activities. These trade-offs are key to developing the most efficient and effective Logistics and SCM strategy.(Womack P, 1996)
Information: Integration of processes through the supply chain to share valuable information, including demand signals, forecasts, inventory, transportation, potential collaboration, etc.(Womack P, 1996)
Inventory Management: Quantity and location of inventory, including raw materials, work-in-progress (WIP) and finished goods.(Womack P, 1996)
Cash-Flow: Arranging the payment terms and methodologies for exchanging funds across entities within the supply chain.(Womack P, 1996)
Supply chain execution means managing and coordinating the movement of materials, information and funds across the supply chain. The flow is bi-directional.
According to Gardiner (2006, p.13), if an activity is not adding value to the operation process, it is adding costs so reduces profit margins of the dealership. Therefore the basic principle of supply chain and inventory management concept is 'to achieve a delicate balance point of having and not having inventory' - which it help the Dealership Network to reduce investment and space requirements whilst maintaining adequate service levels.
It is recommend that Grandiose Motors Dealership should adopt a systematic approach in managing purchasing and inventory function.
There should be a forecast system to support accurate purchase and a flexible responsive chain to deal with unexpected demand. A comprehended business information system would help the dealership to discriminate different parts with different function. This system can also give the dealership a better understanding about inventory on hand. It can also monitor current service level and make sure the service delivery times are within the promised range.
By integrate the Theory of Constraint to the long term strategy planning, the dealership would be able to identified problems thus implement suitable solutions. The aims of operational management system are to continue improve the financial structure by gradually reducing inventory investment and storage spaces.
Finally, summaries this report with a conclusion, restating the points analysed in the discussion section.
This analytical report makes recommendations for Grandiose Motors for structuring the purchasing and inventory functions.
It also analysis how might the purchasing and inventory policies and procedure differ as the dealerships purchase different types of services parts and materials.
The final part of discussion provides how theoretical concepts can assist the company to reduce investment and space requirements whilst maintaining adequate service levels.
It proofs that by adopting systematic view, that the company can gradually reduce investment and improve services. It benefits the dealership in long term.