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The Current Purchasing and Inventory Management and its Attributes

Discuss about the Brisbane Outdoor Power Center.

Well known for its garden equipment Brisbane Outdoor Power Center has grown over the years as a reliable supplier. Established at Mt Gravatt in 1985, the company has expanded to include two branches at Strathpine and Ipswich. Though the company was under the name of Donald Saxon, the branches operated as a separate entity and they were opened only as a going concern. This led to a single company diverge into three smaller companies each having their own set of end to end operations. Each of these branches was led by their own manager and was later taken over by Ms. Green. Ms. Green has now realized that though the branches maintained amicable relations their supply chain management especially their purchasing and inventory management could be aligned to be more efficient and productive. The below report is an analysis to understand the current processes in the company and suggest appropriate steps to improve the same.

The company has three branches, each operating as a separate operating entity. This means that each of the branch has its own procurement, inventory, customer management, sales, finance division and so on. The current processes for purchase and inventory management in specific are as below.

  1. All the three companies have their own purchasing department, meaning that each of the company has its own set of suppliers (Chen, 2012).
  2. There is a high chance that the company is purchasing the same equipment from the same vendor as different entities (Clegg, 2013). It often happens that vendors have payment terms that define that on purchase of huge quantity more discount is given. At Brisbane Outdoor Power Center this opportunity is being missed as the purchase is made by separate procurement teams.
  3. One branch may know a better vendor for a particular product than the other branch. This would result in a difference in the quality of the same product over different branches.
  4. There is no central repository or master data of the vendors.
  5. Separate Purchase orders, Goods receipt are maintained for each of the company and no common point of contact is present (Francis, 2014).
  6. Though each of the branch may several common products, each branch has its own set of work in progress and final goods.
  7. Inventory is spread over three different places and may contain the products that is required by another branch (Brandenburg, 2014)
  8. There is cumulative understanding of the total inventory worth.
  9. Transporting of products from one branch to another branch results in additional costs and may sometimes lead to loss of sales.
  10. The branch has its own dedicated space for inventory.
  11. Demand forecasting and inventory replenishment is done separately at separate branches (Zangiski, 2013).

Every system has its own set of advantages and disadvantages. Hence, it is crucial to analyze the same before deciding to revamp the current system.

  1. There is huge list of suppliers available that can be shared amongst the branches.
  2. Each branch is aware of the supplier who can provide special equipment that is heavily demanded in that area, like the ride on mowers in Ipswich. Hence, locality wise supplier is always available to the branch
  3. Inventory is small since it is maintained individually for each of the branch and hence is easy to maintain (Weele, 2014).
  4. The procurement and inventory management can be done through simple book keeping given the small size of inventory and the limited procurement done by each branch
  5. The chances of maintaining excess inventory are low due to the size of the inventory, as the stock would be maintained for a small customer segment that is usually local to the branch (Rushton, 2014).
  6. A strong bond between the local vendors and the company’s branches exist. In case of an unexpected demand the branches know which local vendor would be able to provide necessary equipment.
  7. Demand planning can be effectively done as analyzing smaller sales samples is easier (Solyalı, 2015). Also, each branch would be aware of when they would see a seasonal high and hence would be able to stock up accordingly.
  8. The branch stocks only those products that are in heavy demand in their locality and hence unnecessary products are not stocked. Thereby localizing their manufacturing and procurement.

There is no single repository of suppliers. This would mean that the same company is buying from the same supplier as different entity resulting in additional costs due to transport and losing quantity based discounts (Bromiley, 2016).

The payment terms negotiated with the vendors are based on the small inventory and supply maintained by each individual branch. When purchased in bulk much better terms can be negotiated.

The chances of too much of the same product may be maintained at each inventory resulting in overall excess stock. This would happen especially in case of smaller spare parts (Bowersox¸2013). For example say a specific nut is used in all the products. Each inventory would maintain excess of these nuts to make sure that they are always available. At a company level, this would mean that the nuts are quantity of nuts stocked up is higher than actually required.

One branch may periodically order a product from a vendor which is available at another branch as buffer stock, thereby making unnecessary purchases (Chicksand, 2012).

The Pros and Cons

The overall purchasing inventory management costs are high since they are maintained as three different entities.

Same parts may be sold at different prices by different vendor. This would mean that one branch may be aware of a vendor who sells a particular part at the cheapest price but the same is not being communicated across branches increasing the cost of production (Dekker, 2013).

The amount of working capital invested in the inventories when totaled at a company level is significantly high when operating separately which can be brought down by simply integrating the process.

Managing the finances of each of the branches and then compiling them as one especially on the supply side is a tedious task (Sterman, 2015).

Supply chain management when implemented at a company level in the most efficient manner would make the entity highly productive. This system integrates all the functions that are a part of operations starting from purchase requisition to customer invoicing making the flow of the operations seamless (Seuring, 2013). A competitive supply chain management would reduce the production cost significantly thereby reducing the cost of each good, indirectly increasing the profitability of a company. It is always advantageous to invest in a procurement and manufacturing system than investing in a marketing strategy as the former would curb costs at the very beginning of the production cycle (Christopher, 2016).

Supply chain also helps the organization to have a clear understanding of the demand there by increasing the chances of an effective demand forecast. This would in turn influence the all the operations in the supply chain flow. Also, the concept ensures that a clear understanding of the location, status and production time of the material. Some of the key SCM concepts that can be applied are inventory and purchasing management.

Just in time purchasing and just in time manufacturing is an effective SCM concept that can substantially reduce overstock and understock inventory issues. Through this concept the procurement is done based on the overall demand with crisp deadlines meaning that the inventory is stocked with the right quantity of raw material, work in progress materials and finished goods.

Inventories can be designed to be transit inventories or buffer inventories and with efficient demand planning the same can act as shock absorbers (Coyle, 2016). This would also make the inventory costs significantly less as stocking happens with respect to a JIT system and an excess of only shock inventory is maintained. This system also handles the bull whip effect which usually occurs due to the inefficiency in identifying customer demand which usually has a higher impact on the procurement and manufacturing activities than the sales activities. For all this to be possible it is crucial to have a central repository for procurement and inventory management.

Supply Chain Management Processes

With the advent of technology, the process of integration has become much easier. Central data can be easily maintained by creating master data that can be stored and accessed quickly. The best solution for a company of the size of Brisbane Outdoor Power center would be pick up the ERP software solutions. Enterprise Resource Planning is a boon to manufacturing companies specifically as it has to the ability to scale depending on the functions and business of the company.

The below are the recommendations and plan of action for the company to implement.

Contact a ERP solution company (Example SAP, oracle etc.) and implement purchasing and inventory modules

Communicate to all the branches and collect data related to all the vendors including their address, payment terms, discounts offered, products sold, quality of the product, maximum selling capacity and so on.

Feed this data into the ERP.

Segregate the vendors based on material sold and locality.

Create a purchasing department that is centralized and procures for all the branches

Whenever there is a requirement each branch would request this department to procure items and would not procure themselves.

The procuring department will then select the vendors and send all of them a quote based on the purchase requisition. This would help understand the suitable vendor.

All goods are stored at a central repository and each branch is supplied with those goods that are specifically sold locally.

Whenever there is a demand, the procurement team check in the system for the availability of the goods in the inventory and in the absence of the same, procurement is done.

ERP has the ability to identify potential vendors based on the buying and pricing patterns and hence the system can select the appropriate vendor.

With the help of the ERP system, the inventory department can keep an easy track of material movement. The transport cost is substantially reduced as procurement happens at a central level.

All the employees have to be trained in the ERP technology to ensure all its features are used to the advantage of the company.

Several manufacturing companies have already implemented ERP systems as they are simple to use and have a seamless integration with all the operations a company performs. This would also mean that the company can opt for several other modules such as CRM, Finance and customer service based on the demand and make use of the efficient integration and reporting facilities provided by ERP.

Recommendations

Conclusion

It is crucial to understand the various operations of the organization to run it efficiently. Having central systems for various operations of the organization would ensure an integrity and a clear flow of the workflow in the company. This would also reduce the cost of production there by bring the cost of the good further influencing the profitability. Supply chain concepts when implemented with an efficient ERP system can be highly beneficial not only for purchasing and inventory management but for all the operations of a company.

References

Bowersox, D. J., Carter, P. L., & Monczka, R. M. (2013). Materials logistics management. International Journal of Physical Distribution & Logistics Management.

Brandenburg, M., Govindan, K., Sarkis, J., & Seuring, S. (2014). Quantitative models for sustainable supply chain management: Developments and directions. European Journal of Operational Research, 233(2), 299-312.

Bromiley, P., & Rau, D. (2016). Operations management and the resource based view: Another view. Journal of Operations Management, 41, 95-106.

Chen, X., & Simchi-Levi, D. (2012). Pricing and inventory management. The Oxford handbook of pricing management, 784-822.

Chicksand, D., Watson, G., Walker, H., Radnor, Z., & Johnston, R. (2012). Theoretical perspectives in purchasing and supply chain management: an analysis of the literature. Supply Chain Management: An International Journal, 17(4), 454-472.

Christopher, M. (2016). Logistics & supply chain management. Pearson Higher Ed.

Clegg, B., MacBryde, J., & Dey, P. (2013). Trends in modern operations management. International Journal of Operations & Production Management, 33(11/12).

Coyle, J. J., Langley, C. J., Novack, R. A., & Gibson, B. (2016). Supply chain management: a logistics perspective. Nelson Education.

Dekker, R., Fleischmann, M., Inderfurth, K., & van Wassenhove, L. N. (Eds.). (2013). Reverse logistics: quantitative models for closed-loop supply chains. Springer Science & Business Media.

Francis, M., Fisher, R., Thomas, A., & Rowlands, H. (2014). The meaning of ‘value’in purchasing, logistics and operations management. International Journal of Production Research, 52(22), 6576-6589.

Rushton, A., Croucher, P., & Baker, P. (2014). The handbook of logistics and distribution management: Understanding the supply chain. Kogan Page Publishers.

Seuring, S. (2013). A review of modeling approaches for sustainable supply chain management. Decision support systems, 54(4), 1513-1520.

Solyalı, O., Cordeau, J. F., & Laporte, G. (2015). The Impact of Modeling on Robust Inventory Management Under Demand Uncertainty. Management Science, 62(4), 1188-1201.

Sterman, J., Oliva, R., Linderman, K., & Bendoly, E. (2015). System dynamics perspectives and modeling opportunities for research in operations management. Journal of Operations Management, 39, 1-5.

Weele, A. J., & Raaij, E. M. (2014). The future of purchasing and supply management research: About relevance and rigor. Journal of Supply Chain Management, 50(1), 56-72.

Zangiski, M. A. D. S. G., de Lima, E. P., & da Costa, S. E. G. (2013). Organizational competence building and development: Contributions to operations management. International Journal of Production Economics, 144(1), 76-89.

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