Managing
Purchasing and
Inventory
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Chapter 15
Managing Purchasing and Inventory
Managing Purchasing
and Inventory
15.1
Purchase Planning and Management
15.2
Inventory Management
2
Managing Purchasing and Inventory
15.1
Describe the importance of planning purchases.
Identify factors that affect purchasing.
Section 15.1 Purchase Planning and Management
3
Managing Purchasing and Inventory
15.1
Businesses need to get the best possible
products or materials for the price.
Making smart spending decisions can result in
better values for customers and larger profits for
the business.
Section 15.1 Purchase Planning and Management
4
Managing Purchasing and Inventory
15.1
purchasing
model inventory
vendors
trade discount
Section 15.1 Purchase Planning and Management
quantity discount
cash discount
secured funds
invoice
5
Managing Purchasing and Inventory
Planning Purchases
Purchasing decisions
mean the difference
between success and
failure for the entrepreneur.
Section 15.1 Purchase Planning and Management
purchasing also
known as procurement,
the buying of all the
materials needed by the
organization
6
Managing Purchasing and Inventory
Developing a Model
Inventory
As a beginning
entrepreneur, after
identifying your inventory
needs, it is helpful to set
up a model inventory.
Section 15.1 Purchase Planning and Management
model inventory a
target inventory of what
a business thinks it will
need to keep in stock
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Managing Purchasing and Inventory
Developing a Model
Inventory
When you are in business,
you can rely on regular input
from vendors.
Section 15.1 Purchase Planning and Management
vendors businesses
that sell inventory to
merchants
8
Managing Purchases
Key Factors That Affect Purchasing
Selecting the right quality
Buying the right quantity
Timing your purchases
Choosing the right vendors
Getting the right price
Receiving and following up on purchases
Section 15.1 Purchase Planning and Management
9
Choosing the Right Vendors
Considerations in Vendor Selection
Reliability
Service
Section 15.1 Purchase Planning and Management
Distance
10
Managing Purchasing and Inventory
Getting the Right Price
Contact several vendors to
find the best price.
A purchase discount, such
as a trade discount, can
affect prices.
Section 15.1 Purchase Planning and Management
trade discount a
discount from the list price
of an item allowed by a
manufacturer or
wholesaler to a merchant
11
Managing Purchasing and Inventory
Getting the Right Price
An entrepreneur may be
able to take advantage of a
quantity discount or a
cash discount.
quantity discount a
discount that a vendor
gives to a buyer who
places large orders
cash discount an
amount deducted from
the selling price for
payment within a
specified time period
Section 15.1 Purchase Planning and Management
12
Getting the Right Price
Dating Terms
Early
payment
Advance
dating
Section 15.1 Purchase Planning and Management
Extra dating
End-ofmonth
(EOM)
dating
Receipt-ofgoods
(ROG)
dating
13
Managing Purchasing and Inventory
Getting the Right Price
Until you establish a good
working relationship, your
new vendor may request
secured funds.
Section 15.1 Purchase Planning and Management
secured funds a form of
guaranteed payment, such
as a credit card, a
cashier’s check, a wire
transfer, or cash
14
Managing Purchasing and Inventory
Receiving and Following
Up on Purchases
When you receive a
shipment from a vendor, it
should be accompanied by
an invoice, indicating size,
cost, selling price, and other
similar information.
Section 15.1 Purchase Planning and Management
invoice an itemized
statement of money owed
for goods shipped or
services rendered
15
Managing Purchasing and Inventory
15.1
1. Describe the importance of planning
purchases.
Making smart spending decisions can result in
better values for customers and larger profits for
the business.
Section 15.1 Purchase Planning and Management
16
Managing Purchasing and Inventory
15.1
2. Identify factors that affect purchasing.
Factors that affect purchasing are selecting the
right quality, buying the right quantity, timing the
purchases, choosing the right vendors, getting
the right price, and receiving and following up on
purchases.
Section 15.1 Purchase Planning and Management
17
Managing Purchasing and Inventory
15.2
Explain inventory procedures used by small
business.
Explain the importance and types of inventory
control.
Section 15.2 Inventory Management
18
Managing Purchasing and Inventory
15.2
An entrepreneur’s main profit stems from the
sale of inventory.
He or she needs to keep careful control over
this valuable asset.
Section 15.2 Inventory Management
19
Managing Purchasing and Inventory
15.2
financing cost
opportunity cost
storage cost
insurance cost
shrinkage cost
Section 15.2 Inventory Management
obsolescence cost
warehousing
lead time
usage rate
safety stock
20
Managing Purchasing and Inventory
Inventory Management
When you keep too much inventory on hand, the
cost of inventory can increase by as much as 25
percent. Added costs include:
financing
opportunity
storage
Section 15.2 Inventory Management
insurance
shrinkage
obsolescence
21
Managing Purchasing and Inventory
Inventory Management
Financing cost on excess
inventory can impact the
prices businesses charge
customers.
Section 15.2 Inventory Management
financing cost the cost
of interest paid to borrow
money
22
Managing Purchasing and Inventory
Inventory Management
A business can incur
opportunity cost and
storage cost by keeping
too much inventory.
opportunity cost the
cost associated with giving
up the use of money tied
up in inventory
storage cost the cost
associated with renting or
buying space needed to
store inventory
Section 15.2 Inventory Management
23
Managing Purchasing and Inventory
Inventory Management
A business with sound
inventory procedures can
reduce insurance cost and
shrinkage cost.
Section 15.2 Inventory Management
insurance cost the cost
associated with insuring
inventory
shrinkage cost the cost
associated with the loss
of inventory items that are
broken, damaged,
spoiled, or stolen
24
Managing Purchasing and Inventory
Inventory Management
A business must closely
monitor inventory turnover
rates in order to control
obsolescence cost on
items that remain in
inventory too long.
Section 15.2 Inventory Management
obsolescence cost the
cost associated with
products or materials that
become obsolete while in
inventory
25
Managing Purchasing and Inventory
Planning Inventory
There are two steps involved in determining the
amount of inventory you need:
1. Calculate the supply you need.
2. Calculate the inventory investment.
Section 15.2 Inventory Management
26
Managing Purchasing and Inventory
Inventory Control
Inventory control systems include:
visual inventory system
perpetual inventory system
partial inventory system
just-in-time (JIT) inventory system
Section 15.2 Inventory Management
27
Managing Purchasing and Inventory
Warehousing
Warehousing operations
can occur in dedicated
structure or an assigned
space within a structure.
Section 15.2 Inventory Management
warehousing the act of
holding and handling
goods in a warehouse
28
Warehousing
Warehouse
Operations
Areas
Picking
rows
Receiving and
shipping docks
Packing
areas
Management
office and
lockers
Assembly
areas
Bulk storage
areas
Staging
areas
Section 15.2 Inventory Management
29
Managing Purchasing and Inventory
Reordering
To maintain proper inventory levels, you need to
decide when and how much to reorder.
The type of inventory you keep determines which
reordering system is best for you:
periodic reordering
nonperiodic reordering
Section 15.2 Inventory Management
30
Managing Purchasing and Inventory
Reordering
Products or raw materials that are inexpensive,
used often, and easy to get should be reordered
periodically.
A sandwich shop might restock bread daily.
Section 15.2 Inventory Management
31
Managing Purchasing and Inventory
Reordering
Lead time must be
considered for inventory
that is suited to nonperiodic
reordering.
Section 15.2 Inventory Management
lead time the gap in time
between placing an order
and receiving delivery
32
Managing Purchasing and Inventory
Reordering
When using a nonperiodic
reordering system,
inventory needs must be
projected so that usage
rate can be calculated and
safety stock is available.
Section 15.2 Inventory Management
usage rate how quickly
inventory will be used in a
given period of time
safety stock a cushion
of products or materials
that prevents a business
from running out of
inventory while waiting for
an order
33
Managing Purchasing and Inventory
15.2
1. Explain inventory procedures used by small
business.
Inventory procedures include planning to determine and
maintain inventory levels that are neither too large nor too
small. Inventory procedures encompass the control of
inventories after they are purchased and before they are
sold. Many small businesses use inventory control systems
to track inventory.
Section 15.2 Inventory Management
34
Managing Purchasing and Inventory
15.2
2. Explain the importance and types of
inventory control.
There are four types of inventory control: visual,
perpetual, partial, and just-in-time. Regardless of which
system is used, a business should conduct periodic
physical inventory counts so that inventory levels are
neither too small nor too large.
Section 15.2 Inventory Management
35
Managing Purchasing and Inventory
Internet Purchasing
Online purchasing communities allow businesses to bid on
or sell products and services and negotiate for the best
possible prices.
E-procurement, business-to-business communities, and
public and private exchanges have changed business
purchasing procedures.
Section 15.2 Inventory Management
36
Managing Purchasing and Inventory
Tech Terms
B2B community
an electronic marketplace where companies can bid on products and
services or offer their services up for bid
e-procurement
the business-to-business purchase and sale of supplies and services
over the Internet
Section 15.2 Inventory Management
37
Managing Purchasing and Inventory
Tech Terms
private exchange
an exchange that is operated for exclusive use of a single company,
for example a company that sets up an exchange to deal with vendors
for all the parts and services it uses each day
public exchange
a business-to-business network open to any company that wants to
take part; there is usually a fee to join the exchange
Section 15.2 Inventory Management
38
End of
Managing
Purchasing and
Inventory
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