Chapter 7

Question 1

How do businesses achieve an optimal level of inventory

Answer 1

-Through inventory control
-By determining inventory quantities
-Through inventory control systems

Question 2

Activities of the purchasing function

Answer 2

1. Select suppliers
2. Arrange and purchase transport for incoming materials
3. Decide on the acceptability of purchasing prices and negotiate them
4. Determine the quantity of material, product or services needed
5. Determine the acceptability of the quality
6. Expedite the delivery of materials, products or services
7. Control inventory

Question 3

The importance of the purchasing function

Answer 3

Any business aims to ensure that purchasing is done right so that the business makes a profit

-Purchasing contributes to successful marketing.

-Just-in-Time principle: If a business will receive the required amount of materials when it needs to be able to manufacture and so there’s enough for customers

Question 4

Managing the purchasing function

Answer 4

-Planning
-Organising
-Leading
-Controlling

Question 5

Planning in the purchasing function

Answer 5

Its a function and should, therefore, support the overall business planning

The overall business objectives should be supported by the overall purchasing objectives.

Planning should be made in consultation with other areas because the plans of marketing, operations and financial functions affect the planning of the purchasing function

Question 6

Organisation in the purchasing function
(Centralized purchasing function)

Answer 6

Its done by one purchasing department

Benefit:
The standardisation of purchasing materials and purchasing procedures which has cost advantages

A greater volume of materials of one kind purchased from a supplier results in lower inventory levels, lower prices and better supplier relations

Question 7

Organisation in the purchasing function
(Decentralized purchasing function)

Answer 7

Each branch pertains their own purchasing

Its suitable for geographically dispersed businesses whos purchases are made from local suppliers

Benefit:
Purchasers have closer contact with customers and local suppliers

Question 8

Organisation in the purchasing function
(Combination purchasing function)

Answer 8

Its a useful middle course

Centralized purchasing function purchases common requirements, enters into long term contracts on behalf of the business and evaluates the performance of decentralized purchasing

Decentralized purchasing provides for special needs and small purchases. Purchasers report directly to the branch manager but operate within the parameters of policy laid down by centralized purchasing function

Question 9

Control in the purchasing function

Answer 9

Control = a management task to determine whether objectives have been reached and performance has been improved

It may be done by means of performance evaluation

Question 10

Key performance indications (KPI)

Answer 10

These are used to gauge the efficiency of purchasing activities

Price: Comparing actual prices with planned or market prices and the amount/number of discounts negotiated

Supplier performance: Determining the number of rejected orders, orders received late and number of times it was necessary to speed up orders

-Timeliness: Determining the amount of orders indicated as urgent, number of interruptions of operations and number of purchases lost

Cost Savings: Comparing costs with those of previous periods and expressing administrative purchasing costs as a % of the monetary value of purchases

Question 11

Key performance indications (KPI) 2

Answer 11

Inventory holding: Calculating inventory turnover, inventory loses and obsolescence of inventory

Relationship performance with suppliers: Using supplier survey

Relationship with other functions: Monitoring the diligent execution of requests to the purchasing function

Workload: Looking @ the number of orders and requisitions

Question 12

Classification of inventory

Answer 12

1. Manufacturing industries
2. Retail industries
3. Services industries

Question 13

Classification of inventory used withing retail industries

Answer 13

-Raw and supplementary materials
Goods used to manufacture the finished products that will ultimately be sold

-Semi-Finished goods
Goods in which an investment of raw and supplementary materials

-Finished goods:
Goods that have been through full manufacturing and production cycle and ready to be sold to end users

Question 14

Discuss the retail industry

Answer 14

It deals with only finished goods
Goods are bought from manufacturers and suppliers and are offered in a convenient way

Question 15

Discuss the service industry

Answer 15

It cant be acquired, stored or sold as physical inventory

Question 16

The purchasing cycle

Answer 16

1. Determine the need
2. Select suppliers
3. Determine the price and conditions
4. Place order or contract
5. Manage, expedite and follow up
6. Receive goods
7. Handle error
8. Pay suppliers
   9.Close order

Question 17

Define quality

Answer 17

The features and characteristics of a product that satisfies a specific need

Question 18

What is the right quality

Answer 18

Quality that’s purchased at the lowest price which satisfies a specific need and performs the function for which it was purchased

Question 19

Methods to determine quality

Answer 19

Specifications
Standardisation

Question 20

Discuss Specifications

Answer 20

Its a description of non-standard materials that can perform certain functions

dimensions such as tolerances, workability, uniformity and chemical composition can be used to draw specifications

Question 21

Discuss Standardisation

Answer 21

Its the process of making materials, methods, practices and techniques uniform

It implies that the characteristics of items have to comply with a specific minimum acceptable standard, but at the same time, the types, sized and grades of items are limited

Question 22

Other forms of quality definition

Answer 22

Market grades, brands, SABS, samples

Question 23

Inventory control objectives

Answer 23

A scientific actual model to simplify purchases must be created

-There should be a reduction in possible losses as a result of obsolescence and incorrect or excessive purchases should be

Question 24

Determining inventory quantities

Answer 24

-Keeping inventory is essential
The costs involved in acquiring, storing, marketing and selling of inventory is unavoidable

Question 25

Define economic order quantity (EOQ)

Answer 25

The correct amount of applicable inventory at the right price and best possible inventory carrying costs

Question 26

Supplier selection process

Answer 26

1. Compile a list of possible suppliers
2. Shortlist
3. Select specific supplier
4. Evaluate performance
5. If poor seek new supplier, if good then shortlist

Question 27

What is break-even analysis

Answer 27

A technique for determining the volume where :
total income = total expenses
or
total cost to produce = total cost to buy

Question 28

Define Holding cost

Answer 28

the cost involved in renting storage
facilities, warehouse equipment,

Question 29

Carrying cost can be divided into:

Answer 29

• Direct inventory-carrying cost

-Indirect inventory-carrying cost