Introduction
Production and operation management is the process which puts together and converts various resources into products or services of a required standard in accordance to the policies laid out by the organization (Birou & Fawcett, 1993, p. 8). Viverra Motors’ main business is to market, service, diagnose and repair vehicles.
Production management relates to activities involved in manufacturing products. Since Viverra is not a manufacturing concern we are therefore interested in the operations management of this organization. Operations management is the coordination of the activities of the different departments in an organization to provide a certain service using the available resources efficiently and effectively (Jeff, 2010, p. 6).
Purchasing and inventory management are very important elements of operations management. Purchasing and inventory control cannot be separated as one requires the other in order to be effective (Jeff, 2010, p. 9).
Purchasing is the acquisition of equipments, raw materials, spare parts, tools or any other item required by a firm to produce a product or service to satisfy the needs of its customers. How significant this function is in an organization depends on the size and nature of business. In large organizations like Viverra Motors purchasing is the responsibility of the Purchasing Manager.
Purchasing decisions are critical as buying involves committing a substantial portion of the firm’s finances which in turn affects the working capital and cash flow position (Anna & Wynstra, 2003, p. 9). The main objective is to have a continuous supply of inputs and to minimize the total cost of final product. The Purchasing Manager needs to know what to buy, when to buy it, where to buy, the quality, quantity and the price.
Purchasing is becoming increasingly complex due to specialization and changes in technology. As technology improves highly sophisticated equipment will be required as well as retraining of the existing employees or hiring persons who are qualified for the task at hand (Cousins, 1996, p. 9).
There is therefore a need for more comprehensive policies and procedures. The design and organization of the purchasing function also determines to a large extent how the firm may interact with suppliers, the public and other relevant stakeholders (Cousins & Spekman, n.d.). How a firm operates internally affects in a significant way how it relates with the external environment.
Inventory is seen as the idle resource of a company. It can either be finished products held awaiting sale or inputs to be used in the production process. Inventory management involves determining what to order, when to order and how much to order while keeping investment as low as possible. An effective inventory management policy factors in demand, seasonal changes, customer’s preferences and quality when purchasing goods.
It helps the manager to balance the supply of goods with their demand to minimize shortages and ensure there is no overstocking. Shortages and overstocking have negative consequences on the firm’s profitability. Shortages lead to interruption in the production process and subsequent loss of sales. This may tie a substantial portion of firm’s capital in inventory (Cohen & Roussel, 2005, p. 16).
The importance of purchasing and inventory control is underestimated by most organizations. Some perceive them as routine activities which should be simple and less time consuming. What every manager and employee ought to know is that purchasing and inventory control are activities which have a great impact on the firm’s performance and proper policies and procedures should be developed to govern the process (Cousins, 1996, p. 6)
Purchasing and Inventory Management
Objectives of purchasing function. The main objective of purchasing is to ensure continuous supply of materials or products at the minimum cost possible. The objectives of the Purchasing Manager at Viverra Motors are as follows;
- To avail materials and parts at a minimum cost which will increase the firm’s profitability
- For Continuous servicing and repairing of vehicles. This minimizes interruptions in the service delivery which means customers’ needs are met in good time, hence improving customer relations will improve significantly as a result.
- To minimize the finances held in inventory. This will increase the asset turnover and the firm’s performance will improve.
- As a source for a number of suppliers to ensure alternative sources of supply. This gives the firm more bargaining power leading to better prices and the ability to meet emergencies
- Proper record keeping
- Establish and maintain good relations with suppliers. It is good for the firm’s reputation and could result in better terms and conditions of sale.
Basic principles of purchasing
An efficient purchasing policy at Viverra Motors should be governed by the following principles of best available price. The Purchasing Manager will seek to obtain the lowest possible price for the parts and materials. Negotiating with suppliers and planning ahead will go a long way in achieving this.
Secondly, the principle of the right quality should be adhered to. The parts and materials procured should adhere to the specific requirements as outlined by the user department. The quality to be procured should be easily available and reasonable in cost. Thirdly, a right timing should be considered. The manager is to provide the parts and materials to the respective departments at the right time. To achieve this he requires knowledge of the lead time of the various parts and materials.
Further, the right source of the inputs should be ensured. The manager will source for suppliers who are reliable and observed quality. A decision is also to be on which parts or materials to purchase from the car manufacturers or their certified wholesalers. For oils, lubricants and fan belts specific suppliers should be selected after careful evaluation.
Moreover, only the right quantity should be acquired each time. The manager will determine the right quantity to be purchased based on demand, season, availability of the parts and materials. An economic model such as Economic Order Quantity will be very instrumental in this process.
Also, the purchaser should have the right purchase attitude. The manager should maintain a good attitude towards the persons he interacts with along his line of business. He should also equip himself with the skills necessary to perform his duties. Further, the organization should enter into right purchase contracts. Policies and procedures are to be formulated for the different parts and materials. The policies and procedures, whether local or international, should not violate the inherent legal standards.
Also, the right transportation means should be used at all purchases made. The mode of transport is to be wisely chosen as transport costs contribute significant to the cost of the materials and parts. Importantly, the right place of delivery should be ensured. For this reason, the manager will clearly state the place of delivery for the various parts and materials to minimize on transport cost and handling costs. The following objectives of inventory management should be followed be the guiding factor.
- Minimize the investment in inventory.
- Maintain a balance between demand and supply.
- Minimize the costs involved in purchasing and holding the inventory.
- Maintain an up-to-date records of all inventory.
- Timely delivery of goods to customers.
- Increase asset turnover by efficient utilization of the working capital.
- Eliminate duplication of orders.
- Minimize losses caused by deterioration, damage.
Purchasing and inventory management
The current purchasing and inventory practices at Viverra are based on forecasts derived from historical demand data. The key factor under consideration was seasonality. Demand for the different parts and materials varied significant in winter, summer, autumn and spring.
A large number of different parts stocked in the premises. Some of the parts were used to service customer vehicles and others would be sold over the counter. Also, some parts and materials were purchased from a number of suppliers. Some were purchased from the car manufacturers or their certified wholesalers while others were purchased from any number of suppliers. Notably, the Purchasing function was decentralized. Each dealership purchased its own parts and materials depending on its requirements.
The weaknesses within the current purchasing and inventory management
Viverra combined strategic planning and the day-to-day running of the business. The CEO was worried about the continued availability of the right parts and materials and the amount of space available for storage of parts. This should not be a concern for the CEO. He should concentrate on planning for the future than worrying about daily activities.
Appointing of a Purchasing Manager which was necessitated by the new acquisition shifts the burden of purchasing from the CEO which will enable him to focus on strategic planning for entity competitiveness.
Viverra Motors lacks specific policies and procedures for procurement. Purchases based on historical demand data. Historical data is not enough in itself to determine the quantity to be purchased. Demand is affected by many factors one of them being technology which is constantly changing. The new acquisition will necessitate development of new policies and procedures which will be formulated based on scientific principles. Quantities to be purchased will be calculated using reliable models. This will ensure stock is held at optimal level.
Also, the company holds a lot of inventory. A large number of different parts and materials are held in the premises. This ties capital in inventory and puts a strain on storage space. The large stock also risks its damage, deterioration or obsolescence. The new acquisition will help ease the strain on storage space as some of the materials can be stored at the new premises. The parts and materials can also be shared across the dealerships thus eliminating the need for an individual dealership to hold much inventory.
Further, the company has not established specific suppliers from whom to purchase. Parts and materials were purchased from diverse suppliers. Acquisition from large number of suppliers does not allow for consistency which is essential in developing good relations with suppliers. The firm may not take advantage of low prices or preferential treatment from the supplier. The purchasing Manager should select specific suppliers after careful evaluation.
Also notable, Purchasing is decentralized. Each dealership operates autonomously. They lose out on the advantages associated with centralized purchasing. The new acquisition will provide room for sharing some of the resources since it deals with different makes of cars. Due to its large size it would be viable to centralize purchasing accruing economies of large scale to the organization. It will also reduce the amount of labor required in the purchasing process.
The Variations in purchasing and inventory management policies and procedures
Firstly, different methods of inventory control exist in the dealerships. The method of controlling inventory will differ in the dealerships depending on the nature of materials and the size of the dealership. The inventory control method adopted should be specific to the needs of the dealership.
Another area which differ is the in the selection of supplier. Each dealership markets a different make of a car. This requires that each dealership established its own customized procedure for selecting the suppliers since the parts and materials required may be different.
Also, coding which involves assigning digits to an item for identification purposes has not been consistently followed (Wouters, et al., 2007, p. 230). Different codes should be used for parts and materials distinctions. Each code should identify a specific item. The coding system adopted should be unique to each dealership.
Further, training of personnel servicing the cars should be specially designed for each dealership depending on the different makes of the car dealership markets. This would reduce wastage that would have occurred had the personnel been left alone to experiment. Moreover, equipment management can need to be improved. Servicing and repairing different makes of cars may require different type of equipment. Different types of equipment may be required for the different dealerships.
Conclusion
The importance of the purchasing and inventory control function in an organization cannot be underestimated. Its impact of the firm’s profitability is great. The perception of this function is changing over time (Mummalaneni, 1990, p. 8). Therefore policies and procedures should be put in place to ensure efficient and effective procurement and utilisation of inventory. Costs associated with purchasing of materials can be reduced significantly by proper planning. (Cohen & Roussel, 2005, p. 21)
Recommendations on Efficient inventory Management
Viverra should use an effective inventory control model. This model helps the Purchasing Manager to determine what quantities to order and when to order.
It reduces chances of running out of inventory or of holding more inventory than is necessary. The company should also ddevelop a wide supplier base as well as maintain good relations. This will allow for price comparisons and ensure emergences are catered for efficiently. Good relations should be developed and maintained as they could account for special prices or discounts.
Further, there should be special purchasing systems which should be used consistently. For example, a blanket order system can be adopted. This would involve Viverra entering into an agreement with a supplier to provide a certain quantity of parts at a specified price over a period of time.
This cushions Viverra against price changes which may occur as a result of increased demand. Quantity discounts will be enjoyed under this system. It will also reduce paperwork involved in the purchase process since fewer purchase orders will be issued.
Further, Viverra should maintain zero stock levels. In this case, Viverra could decide to hold zero stock of the parts affected by seasonal changes. The supplier could hold them on behalf of the firm until the demand for them arises. The firm will not have capital held up in idle stock.
It will also save on storage space and reduces chances of parts and materials becoming obsolete while in the firm’s premises. Moreover, the company should restructure plant and premises layout. The Purchaser manager should ensure goods are stored in a way that maximize on the available space. He could also consider restructuring the layout of the store to accommodate more parts and materials.
Also, the company should practice a centralized purchasing. All purchasing activities could be done at the new acquisition. The firm will enjoy economies of large scale which makes the inventory relatively cheaper. It will also save on space since materials will be sent to the dealerships from a central store as need arises.
Further, a department dedicated to receive purchases should be established. The persons responsible for receiving will sign the documents after checking all items against the delivery note and Purchase order initially placed for the materials and parts. Further, Viverra should keep proper records and an updated inventory database.
All records pertaining purchases should be well kept and the database updated accordingly to reduce chances of overstocking or running out of materials. Also, the organization should maintain a periodic inventory check. A Physical count of parts and materials should be carried out within a certain period of time.
Any discrepancies reported and accounted for. This will bring the Purchasing Manager up-to-date with the level of inventory. The practice of effective supplier evaluation can help choose the best supplier. Suppliers should be evaluated regularly to check on prices, quality and service delivery. This ensures the firm is getting value for the money paid to suppliers (Cousins 1, 1999, p. 12).
References
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Birou, M. L. & Fawcett, E. S., 1993, ‘International Purchasing: Benefits, Requirements, and Challenges’, Journal of Supply Chain Management,vol. 29 no.2, pp. 27-37.
Chopra & Meindl, 2010, Supply Chain Management. 4th edition ed. Chicago: Pearsons Publishing Press.
Cohen, S. & Roussel, J., 2005, Strategic supply chain management – The five disciplines for top performance. 2nd ed. New York: McGraw-Hill Companies, Inc.
Cousins 1, P. D., 1999, Strategic Supply: Report on trends and developments in Supply Management, Bath: University of Bath.
Cousins, D. P. & Spekman, R., 2009, Strategic Supply and the Management of Inter and Intra Organisational Relationships. Web.
Cousins, P. D., 1996. Strategic Supply: Report on trends and developments in Supply Management, Bath: University of Bath.
Jeff, B., 2010, ‘Fundamentals of Purchasing and Inventory Management’, A Journal of Purchasing & Inventory Control,vol. 51 no.1, pp. 3-9.
Mummalaneni, V., 1990, ‘Determinants of source loyalty in buyer-seller relationships’, Journal of Supply Chain Management, vol. 29 no. 6, pp. 6-16.
Wouters, M., Jarwaarde, V. E. & Groen, B., 2007, ‘Supplier Development and Cost Management in Southeast Asia-Results from a Field Study’, Journal of Purchasing and Supply Management, vol. 13 no. 4, pp. 228-244.