Operations and Inventory Management Notes

Operations: An Introduction

• N4/5 Business Management
• Key areas: Finance, Understanding Business, People, Operations, Marketing

Learning Intentions

• Gain an overview of what operations is and what it involves.
• Learn about the different factors that come together under the heading of Operations.
• Begin exploring the different production methods available to businesses.

What is Operations?

• "Operations" is the name given to the process of turning raw materials into finished articles – products ready to be offered for sale to consumers.
• Quality and cost, and the balance between both lie at the heart of operations.
• Key Term: The Production Process

The Production Process

• Three main stages:
  • INPUTS: Raw materials purchased, Labour employed
  • PROCESSES: Production process starts
  • OUTPUTS: Finished product ready for purchase
• Depending on the type of product, there will be a mix of labor and machinery used.

Examples of Production Process (Baxters Soup)

• Illustrative examples of tinned soup production process with Inputs, Processes, and Outputs specified for various soup types.

Role of the Operations Department

• Inventory control (INPUT) - Purchasing raw materials as and when required, storage of inventory
• Choosing suppliers (INPUT) – considering which supplier to choose
• Methods of production (PROCESS) - Organising efficient methods of production
• Quality Issues (PROCESS) – ensuring products are of an acceptable standard
• Ethical Production (PROCESS) – recycling and choosing more efficient ways of producing
• Storage (OUTPUT) - Storage of the final complete product in warehouses or distribution centres ready to be delivered
• Distribution (OUTPUT) –methods of distributing the final product to the customer

Topics in Operations

• Suppliers
• Technology
• Inventory management
• Production methods
• Ethical & environmental
• Quality

Operations - Recap

• Overview of Operations:
  • inputs > processes > outputs
  • Labour intensive and Capital intensive production
  • Production methods
  • Technology in production

Learning Intentions (Suppliers & Inventory)

• Learn about the importance of suppliers in successful & efficient operations and explore how businesses choose the right one.
• Learn the importance of effective inventory management in managing operations
• Explore the methods businesses use to manage inventory

Selecting a Supplier

• A business has to buy materials from a supplier to be able to make something.
• Suppliers can have a huge effect on a business’s ability to produce a product or provide a service, so selecting the right supplier is essential.
• The department in a business responsible for buying in supplies is often called “Purchasing.”

Factors Influencing Supplier Selection (The Purchasing Mix)

• Price
• Location & transport costs
• Lead time
• Product quality
• Reliability
• Reputation
• Lead time: The length of time it takes from ordering supplies to them arriving.

The Purchasing Mix - Detailed Breakdown

• Cost of raw materials: The price charged by the supplier for raw materials.
• Quality of raw materials: How good the raw materials are. Poor quality raw materials will lead to high wastage due to quality rejects and quality problems in finished product which will impact customer satisfaction.
• Lead time / delivery time: How long it will take to receive the raw materials from when an order is placed
• Quantity of raw materials: How much raw materials are required
• Location of supplier: Where supplier is located? How far away? Proximity to good transport links?
• Reliability and reputation of supplier: Reliability: Will the supplier deliver when they say they will? What do people (other businesses) think of supplier?
• Storage space available: How much warehousing space the business has available to hold raw materials until needed

Inventory Management

• Raw materials are the different items needed to make something, usually purchased from a supplier.

What is Inventory?

• Inventory is often known as “stock”. The terms “Inventory Management” & “Stock Management” are interchangeable.
• It refers to the materials that a business holds necessary to produce a final product for the customer.
• A business will hold inventory (stock) in different stages of production:
  • INPUTS: Stocks of unused raw materials ready for production
  • PROCESSES: “Work in progress” Items being manufactured but not yet complete
  • OUTPUTS: Finished goods in storage (warehousing) or in transit to customer (distribution)

Inventory at Different Stages (Kettle Chips Example)

• INPUTS: Stock of raw materials held in storage awaiting production (potatoes, salt, sunflower oil, flavorings, empty packaging).
• PROCESSES: Materials in use along the production process (potatoes being peeled, sliced, fried, flavored, and sealed in packaging).
• OUTPUTS: Warehouse with a stock of finished product ready for dispatch to the customer.
• To achieve efficient operations, it’s critical that a business closely monitors and has tight control over how much inventory is at each stage of production.

Key Terms (Inventory Management)

• Lead Time: time between order and delivery
• Inventory: stock held by a business
• Work in progress: items being manufactured but not yet complete
• Raw materials: unused materials ready for production
• Inventory Management: overseeing and controlling inventory levels

Why is Effective Inventory Management Important?

• Inventory represents a large investment by the business.
• Inventory management is a balance between ensuring sufficient stock is available for production and limiting the expense of holding excessive stocks

The Importance of Managing Inventory

• Balance between being under-stocked and over-stocked.

Overstocking

• Costs:
  • Money is tied up in stock so it cannot be invested elsewhere.
  • Storage costs such as warehousing & security will be high.
  • Stock in storage is more likely to go out of date or become obsolete.
• Benefits:
  • Plenty of inventory ensures production can always run and customer orders can be met.
  • Unforeseen problems or unexpected orders are easier to manage.
  • Take advantage of bulk-buying discounts.

Understocking

• Costs:
  • High-risk of running out of inventory which will impact on production being able to run.
  • Customer orders may not be fulfilled on time and a bad reputation may be a consequence.
• Benefits:
  • Less stock means lower storage and warehousing costs.
  • Money is not tied up in stock so can be invested elsewhere in the business.
  • Stock is less likely to go out of date.
  • Less vulnerable to external changes in tastes/trends.

Inventory Control Chart

• Diagram illustrating inventory levels over time, including:
  • Maximum level
  • Reorder point
  • Reorder quantity
  • Lead time
  • Buffer stock

Inventory Management Systems

• Businesses invest a great deal of effort in tracking and monitoring the stocks they hold.
• Tracking and ordering process is often automated through the use of computer databases & spreadsheets and EPOS systems
• Using technology for stock management allows stock to be managed more efficiently than by hand as no human error, also allows paper free, which is good for the environment

Effective Inventory Management System

• An effective inventory management system will:
  • Anticipate running out of stock in time to re-order
  • Ensure raw materials available when needed
  • Enable efficient and fast re-ordering from suppliers (often automated by computer)
  • Ensure that customer orders are fulfilled (on time)
  • Allow the production line to run
  • Minimise space required to store stock
  • Minimise money tied up in stock

Inventory Management System - Key Terms

• Maximum inventory level: The highest amount of stock held. This may be due to limits on space available to hold stock or the maximum that is affordable (carrying high levels of stock is expensive and eats in to financial resources)
• Minimum inventory level
• Reorder level / reorder point
• Buffer stock / inventory
• Re-order quantity
• Lead time

Computerised (or Automated) Inventory Control systems

• Businesses rely on a computerised inventory control system where barcodes are used on products to track materials and relay information about sales to the warehouse via a database.
• When the inventory reaches a set level or trigger point the business will be alerted to reorder and restock the levels of inventory.

Automated Inventory Control systems

• Barcodes are used on products (and inventory) to relay information about sales to the warehouse via a database.
• When the inventory reaches a set level or trigger point the business will be alerted to reorder and restock the levels of inventory
• Some bigger manufacturers (not all!) may even have their inventory management databases connected to retailers EPOS (Electronic Point of Sales). As soon as a product is sold in a shop and the barcode scanned, this alerts the manufacturer that more of that product is needed to replenish the retailer.

Advantages & Disadvantages of Automated Inventory Control

• ADVANTAGES
  • Database keeps balance of Inventory
  • Linked to EPOS – when goods are purchased the computer system will automatically reorder goods
  • Accurate and constant monitoring of inventory - limits theft
  • Can highlight buying trends
• DISADVANTAGES
  • High equipment costs
  • Cost of training staff
  • Might break down and will be costly to repair.