3.4.5 Making operational decisions to improve performance: managing inventory + supply chains

Cheaper supplies - higher profit margins. Price charged key factor in relationship between firm + suppliers.

Large purchases may be able to dictate prices to supploiers as quantities they purchase may account for most of supplier's output - huge amount of power to buyer. 

Small businesses, limited purchasing power, supplier dictates price. Lower the purchase price, lower buyer's variable costs, higher gross profits.

Liekly to be trade-off between price charged by suppliers + quality of supplies. Cheapest supplier - poor rep for quality.

Choosing supplier w/ quality problems -> operational problems. Machinery breakdowns, poor-quality output. Can lead to worsening customer complaints, guarantee claims or rep. 

Cheapest supplier - LT problems for business.

Supplies at right price + high quality may be of little use if arrive late. Reliability important. Failure to deliver on time can stop manufacturing process/leave shop shelves empty. 

Reliability easy to assess once business started working w/ them. However, new business/business sourcing new supplies may need to rely on word-of-mouth reputation to inform choice.

May be needed from suppliers. Firms selling fresh produce need to ensure using suppliers can supply + deliver frequently. 

Firm using JIT will need frequent deliveries to feed production system w/o holding stock. For firms like this, makes sense to look for local supplier - more likley to be willing to deliver w/ greater level of frequency.

Some need to find supplier w/ capacity to cope w/ widely varying orders. Businesses selling products w/ erratic demand patterns caused by changes in weather/fashion, need to find flexible suppliers. 

Probably most common scenario to ensure suppliers have space capacity to cope w/ sudden rush orders.

Key to supplier flexibility is short lead time ( not too long a period between placing order + receiving delivery.

Most business transaction on credit. Gives time for goods to be sold, providing cash to make easy to pay bill. Small start-ups struggle to get same terms. Supplier will want to be paid in cash until new business shown it can survive + pay bills. New small firm has to pay up front, placing extra strain on cash flow. Shouldn't be problem as long as built into start-up cash-flow forecast.

Working together on new product development: Involves many consideration eg how product will be manufactured + what materials will be used. Launching - careful production planning, ensures consumers get hold of new product marketing dept told them about. Suppliers major role in developing + launching. Many firms work w/ suppliers from earliest stage of development.

Flexibility - Strong relationship w/ supplier - willing to make special deliveries if business running low on stock. May allow flexibility on payment. Could be lifeline for small firm. No supplier likely to sustain this for long period.

Sharing info to improve efficiency of supply chain: Large businesses - sophisticated IT systems - direct links between tills + suppliers. Eg Cadbury knows at any hour of day how many Twirls selling in supermarkets. Allows Cadbury to plan production levels. Supermarket can allow Cadbury to make decisions about how much stock to produce + deliver on basis of info receiving.

Getting outside company to produce for you. Valuable when predictable peaks in workload/'non-core' operations outsiders could do better. May be in part - used as top-up for when demand exceeds original factory's ability to supply.

Disadvs - jobs lost w/in original company - risk expertise lost. Makes it harder to bring work back in-house.

Risk contractor cares little for 'your' customers + rep. Important to get contractor to sign service agreement that shows quality standards required.

Give extra flexibility to employer. Can be hired on fixed term contracts - last no longer than busy periods. PT staff can be hired w/ contracts inc flexible working hours, offering employers chance to call them in during busy periods.

'Zero-hour contracts'. Promise staff no hours of work, but employers give work based on availability + if they need them, can call them in. Huge benefits to employers, none to employees. 

Use of temp + PT staff -> reduced fixed salary costs, therefore reduces b/e point to level that's sustainable during quiet periods. However, motivation, quality + customer service issues may arise w/ workforce - may feel only loosely engaged w/ company.

Important feature of modern ops management - recognises customers go to producer offering as close to tailor-made product as possible - 'mass customisation' - production lines that combine cost efficiency of mass production w/ flexibility of tailor-making to customer's specific requirements. 

Eg Mercedes UK website - Car Configuration button - allows customers to specify precise requirements - build into car at factory.

Too much inventory:
 - Opp costs: holding firm's wealth in stock prevents it using its capital in other ways, which could dent competitiveness.
 - Cash low problems: holding wealth as stock may be slow moving as may be insufficient cash to pay suppliers.
 - Increased storage costs: as well as rental cost, higher stock value, higher cost of insurance.
 - Increased finance costs: if capital needs to be borrowed, interest rate will be significant added annual overhead.
 - Increased stock wastage: more stock held, greater risk of going out of date.

Too little inventory:
 - Lost orders, if urgent customer orders can't be met b/c too little finished goods stock.
 - Worker downtime if essential components have been delayed from arriving from suppliers (+ v low buffer stock been used up already).
 - Loss of firm's reputation + any goodwill been able to build up.

Line graph. Looks at level of stock in firm over time. Managers can see how stock levels are changing + act quickly if slow sales -> excessive stock levels.

On chart, 4 lines, represent levels described below:
 - Stock levels: shows how stock levels changed over time period. Stock used up, level of stock graduall falls. When delivery made, stock level leaps up in vertical line. Greater rise in vertical line, more stock has been delivered.
 - Maximum stock level: shows largest amount firm willing or able to hold in stock.
 - Reorder level: 'trigger' quantity. When stocks fall to this level, new order sent to supplier. Level reached before delivery (shown by vertical part of stock level line) - b/c supplier need some 'lead time' to process order + make delivery.
 - Minimum stock level: Called 'buffer stock'. Firm will ant to keep min level of stock, so will have smth to fall back on if supplies fail to arrive in time or if sudden increase in demand.

Give managers clear picture of how things changed, show what questions to be asked.

Needed just-in-case smth goes wrong eg if selling ice creams and weather suddenly good, likely to run out - will need buffer stock. Min number in stock just in case. 

Companies would like to hold zero buffer stocks, but only possible if customers place orders + are willing to wait for delivery. Most companies need to set buffer stock level + make sure reorder early enough so little/no chance of running out.

Time between order placed + supplies delivered. Might be months if supplier company based in China + stock too heavy to be flown to Britain. British company may have to hold some of this in stock as takes long time to get more. 

Component may be made locally, available in hours, available from multiple suppliers. If so, may only be necessary to have one day's worth of supplies in stock.

When level of inventory falls due to sale/usage of stock, may start to approach buffer stock level. Re-order level must be set, taking rate of usage into account, lead time for stock item + level of buffer stock.

How much stock to order at any one time - re-order level. Large orders only need to be made occasionally to keep sufficient stock levels. Smaller orders placed more regularly.