Free «Purchasing and Inventory Management» Essay Sample

The issue of purchasing management is directly related to inventory management. After addressing such issues as what to order, there follow decisions relating to how much to buy (in particular about volumes and frequency of deliveries). In accordance with this, it is necessary to determine how much of each resource should be in the form of certain reserve to minimize the risk of interruption of the production process due to the lack of resources for production, as well as to provide a rhythmic production between resource supply moments. A qualified purchasing and inventory management is an integral part of the successful business. Companies around the world try conduct purchasing and inventory management, but only few are able to carry out it properly. IKEA is a great example of such company. Thus, this paper explores purchasing management and inventory management and their peculiarities, analyzes their problems and ways for improvement and optimization, as well as reveals purchasing and inventory management in IKEA to understand what it is and how to conduct such management properly to be successful.

Purchasing Management

In general, purchasing is acquisition of materials and raw materials of the required quality at the lowest possible prices. The purpose of purchasing management is to meet needs in materials and raw materials with maximum economic efficiency (Monczka, Handfield, & ‎Giunipero, 2015).

According to the survey of 175 companies by Carr and Pearson (2002), purchasing management positively influences the firm’s financial performance in both small and large companies. Purchasing management also affects the success of a new product introduction. This report shows that a link exists between implementation of strategic purchasing management and achievements of the firm’s comprehensive goals. The majority of companies admit significance of strategic purchasing as they spend a big part of their sales on bought resources (Carr & Pearson, 2002).

Effective purchasing management involves 8 R’S: to buy materials at the right quality, in the right quantity, from the right source, at the right price, delivered at the right place, at the right time, with the right mode of transport, and with right contract (Monczka et al., 2015).

In contemporary conditions, a market dictates the necessity to increase efficiency of the purchasing process as using such optimization it becomes possible to reduce production costs significantly, thus getting maximum profit. In difficult competitive conditions, not only price plays an important role, but also product quality, delivery terms, and payment methods (in fact, the installment, etc.) are important. Therefore, it is not necessarily that the choice will fall on the cheapest option. Preference can be given to the most qualitative goods with the most favorable concomitant conditions. As for the system of the purchasing management, there is also space for creativity. A literate system will help to select the most efficient supplier, reduce the interval between the need for raw materials and their purchase, reduce inventory, and establish a high-speed exchange of information between all stakeholders of the purchase (Monczka et al., 2015).

There must be considered several things when forming a purchasing strategy. First of all, it is necessary to determine which products are better to buy outside and which are probably more profitable to produce (with compliance with the appropriate quality). Then, it is necessary to develop a schedule of desired supplies (in order to ensure a minimum period of turnover of goods) and a schedule of payments. The clarified schedule should take into account correspondence between the delivery time and the need for raw materials (commodities). Naturally, the quality of products purchased should be constantly monitored and timely management decisions must be made to support the system in balance because such factors as the suppliers’ price and production capacity may vary over time (Monczka et al., 2015).

When there are small amounts, it is possible to keep all information on purchases in a head. In terms of a large company, even the most genius managers will not cope with it. Here, the information technology comes to the aid. Using a single database of purchases, it is possible to perform analysis of purchases made, to monitor the state of current purchases, to perform various groupings of nomenclature or suppliers by the necessary criteria, and most importantly to plan further activity on the basis of these data (Monczka et al., 2015).

Inventory Management

In current conditions of constant change of the inventory nomenclature, effective management of production is not possible without operational planning and control of reserves of raw materials and finished products, thereby reducing overall costs of the company (Muller, 2011).

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An inventory management system is a set of rules and parameters that determine the moment of time and the volume of product purchases for restocking. There are several parameters of inventory management system: a point of order (a minimum (control) level of product inventories with achievement of which it is necessary to replenish them), a normative level of inventories (the estimated volume of stocks that is achieved during the next procurement), the volume of a single purchase, frequency of procurement (duration of the interval between two possible purchases of products, scilicet the frequency of products replenishment), and a reloadable number of products (at which the minimum stock holding costs are achieved in accordance with specified costs of replenishment and the opportunity costs of invested capital) (Muller, 2011).

Generalized and consolidated information on stocks is a prerequisite for maintaining a trade balance, ensuring timely market demands, and minimizing total logistics costs. It will also allow to receive information about a planned date of realization of warehouse operations, posting and disposal of goods, documents (orders, invoices) on which these operations will be made, quantitative characteristics of posted or disposed products, orders of customers or departments to suppliers and production, on the basis of which credit and debit trade documents are formed, as well as about deviation of commodity stocks from monitored parameters (Muller, 2011).

Searching for a compromise between the required time of order fulfillment increases the time of production. Hence, companies usually decide to overestimate the volume of stocks, which will inevitably lead to increased spending on storage (Muller, 2011).

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Nowadays, there is a very popular a model of working with the inventory at input (raw material) and output (finished products) of the enterprise. However, the problem with this model is the need for a constant supply of raw materials and a presence of stable sales channels. In terms of a required quickly response to changing market conditions, such model becomes ineffective. To solve such problems, it is necessary to take into account volume and interval of replenishment, but in a constantly changing market there is a need to alternate frequency and magnitude of supply (Muller, 2011).

There are several models of inventory management. The first one concerns a fixed size of the order. It is used mainly when there is a large loss due to the lack of stock, the high cost of inventory storage, the high cost of goods that are ordered, a high degree of uncertainty of demand, availability of price discounts depending on the amount that is ordered, and supplier-imposed restrictions on the minimum size of supplies party. The second one is a model with a fixed interval of time between orders. It is used mainly when delivery conditions allow varying volume of the order, costs of the order and delivery are relatively small, and the loss from a possible deficit is also relatively small. The third model has a specified periodicity of replenishment to a specified level. It is used when there are significant fluctuations in consumption. The last model is the “Maximum – Minimum” model. It is used when costs of inventories accounting and costs of ordering are so large that they become comparable with losses from stock shortages (Muller, 2011).

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Purchasing and Inventory Management at IKEA

Purchasing and inventory management and all associated operating activities are fundamental functions in the business. If such a global company as IKEA does not pay much attention to it, it will certainly entail high costs and long lead times and the quality of its products and services will suffer. Therefore, IKEA has become so successful not only because of products it offers, but also due to effective management, in particular, its purchasing and inventory management.

IKEA is a transnational corporation, one of the world largest trading networks, and the company-distributor of home furnishings and furniture founded in Sweden, specializing in production, delivery, and sale either in its more than three hundred retail stores in 37 countries or by mail order. It is number 41 in the Forbes list of brand value. Its total sales per year reach 35 billion dollars (Lu, 2014).

The purchasing management of IKEA is based on the fact that it does not purchase items, but creates each item itself. In the development of the IKEA’s product range, there are engaged employees of IoS (Division for the development of the range) (Lu, 2014). The range includes around 9,500 articles. The basic principle of the work of designers, commodity producers, and buyers is the focus on low price, which makes convenient and practical furniture available to everyone. In general, the company has 12 in-house designers and near 70 external designers who work under the contract. New products that IKEA’s designers and external designers develop are considered in terms of functionality, transport efficiency, quality, environmental friendliness, and low prices already at the stage of the sketch. IKEA uses very few materials, but still its items are of high quality and long durability. By using a small amount of materials, IKEA reduces expenditures on transportation and gets suitable supplier prices. It is in the IoS (Division for the development of product range) where products get their own unique names such as Bill and Klippan. All IKEA’s products get their names in accordance with a strictly defined system: tissues and curtains are named with female names, carpets are named after Danish settlements, while armchairs and sofas are named after Swedish settlements. Additionally, a production group Swedwood as a part of IKEA is engaged in the production of wooden furniture and accessories. Swedwood has 35 plants in 9 countries (Lu, 2014).

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Moreover, there is no waste when developing IKEA’s products. Pieces of tissue remaining after cutting FAMNIG, pillows in the shape of a heart, are used in the manufacturing of small pillows FAMNIG. The company orders countertops in a factory producing doors. Due to the fact that in the production of cups BANG used dyes only of light colors are used, the company not only reduces the cost of the product, but also avoids a negative environmental impact (Lu, 2014). The IKEA’s product development process is largely determined by production and technological capabilities. Concern about reduction of the cost is a must at any stage, starting with a sketch of the future product. In many cases, the price of items is determined at the very beginning of their development. Designers and developers of the product range often work on a new product with the manufacturer. It is at this stage that it becomes clear how to better use the existing experience of the supplier and its production potential. IKEA has a good opportunity to purchase raw materials at competitive prices, winning them by ordering large amounts. However, most fully its potential can be used only by working in close contact with manufacturers. Large volumes provide a large turnover. Large volumes are an important factor in maintaining low prices. When IKEA reduces its prices, more people are able to acquire its products. The low price is the result of a methodical and systematic approach, which is used at any stage of activities, from the designer’s design and throughout product development, manufacturing, distribution, and retail sale directly to the buyer’s home (Lu, 2014).

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Concerning purchases of raw materials that IKEA also makes, it has 46 purchasing offices in 32 countries in total. Employees of each office control the process of production of IKEA’s products at factories of its suppliers. It gives them the ability to check in practice new ideas, negotiate lower prices for the products, control their quality, as well as observe social and living conditions and working conditions in factories of suppliers. Near 1,300 suppliers operate in 53 countries (Lu, 2014). The proximity to suppliers is the key to a profitable long-term cooperation. The path that products go from the suppliers’ factories to buyers’ homes should be as short as possible, as well as being cost-effective and environmentally friendly. Effective distribution of products guarantees their low price. 28 distribution centers in 16 countries are responsible for the supply of goods to IKEA stores (Lu, 2014).

The inventory management in IKEA is the best example of a proper, coordinated, and efficient work. IKEA combines retailing and warehousing. Each IKEA store has a warehouse indoor. Customers can look over products on the showroom floor. They take items on their own right from their location where items are at such a height that an average individual can reach them. Hence, customers take the item, buy it, and take it home. However, additional items are located higher at these locations. Every night, the inventory is put on lower slots (elevators and jacks for pallets are not utilized when the store is open). Near one-third of the stocks is located on lower slots outside of the warehouse. IKEA strives to provide constant availability of goods in stock and therefore has increased inventories. In warehouses, there are located items of big sizes that customers cannot pick up without employees’ help. As long as the company wishes to have more self-service, it works on reducing the quantity of items that are big in size (Lu, 2014).

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IKEA uses “cost-per-touch” inventory management strategy. The point is to make customers choose the needed item and retrieve it from shelves on their own. The company is convinced that the more customers touch the item, the more expenditures are saved. In other cases, products are ordered, shipped, moved from the transport to the warehouse, and then delivered to the customer’s home or to auto. All stages need costs. Hence, if the product is touched less except by customers, more costs will be saved. Thus, IKEA minimizes its costs by allowing customers to do everything within a store by themselves (Hiiemaa, 2015).

IKEA also uses in-store logistics. The company employs in-store logistics staff to carry out the inventory management within stores. There is an in-store logistics manager whose responsibility is the ordering process. There is also an in-store goods manager whose responsibility is the material handling logistics in every company’s store. The logistics personnel, in general, is responsible for monitoring and recording of deliveries, careful checking of delivery notices, sorting and separation of goods, and their getting off to the right sales area or specially assigned locations of overstocking. In general, the personnel provides an effective flow of products in the company’s stores, which is important for keeping high volumes of sales and increasing customers’ loyalty (Lu, 2014).

These managers utilize an inventory restocking management process patented by IKEA to correspond to the level of stocks reorder points and reorder products within the store. It is called “minimum-maximum settings.” There are established two factors for every item: minimal quantity of items accessible before reordering and maximal quantity of items to order simultaneously (Hiiemaa, 2015). Taking into consideration that all IKEA’s stocks are put in stores only at night, this minimum-maximum system is based on the amount of items that would be realized from reserves within one or two days. It meets the customers’ demand and minimizes the number of orders of too few or too many items. It also makes the store’s stocks ready to meet customer demand, reducing the value of lost sales. By utilizing minimum-maximum settings, in-store logistics managers are able to get information about what was sold through the POS’s data, as well as getting information through the warehouse management system data about the amount of inventory that came to stores from shipping or distribution centers. Based on this information, managers can predict the volume of sales for several days and order an appropriate quantity of items to the store. Despite the universality of the system, unfortunately, it does not allow to forecast in a new region where a store is to open or has recently opened and sales history does not exist yet. If the predicted volume does not match, managers will count the inventory themselves. IKEA is convinced that minimum-maximum settings provide right items at lower costs in stores more accurately than traditional prognostication and restocking process that other retailers utilize (Lu, 2014).

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In addition, IKEA uses high-flow facilities (oriented on 20% of stock-keeping units that have 80% of the volume) and low-flow warehouses. In IKEA’s high-flow warehouses, everything is automated with the best machinery to reduce the costs-per-touch. Items that are kept in the low-flow warehouses are not popular so that all processes there are done by people because they will not be touching or moving the stocks frequently (Lu, 2014).

Conclusion

In conclusion, the purchasing and inventory management is one of the most important things that lead to the business success. Purchasing and inventory management are linked together. It is necessary to give off such amount of money to reach the equilibrium of sales and stocks and a planned degree of profitableness. This requires appropriate organizing and management of operations associated with inventory, orders, purchases, as well as sustentation of stocks and sales. The great example of successful purchasing and inventory management is IKEA. It produces all items on its own, utilizing few materials and not leaving waste, which allows reducing prices without lowering quality. It also keeps close relations with its suppliers, which provides the company with raw materials at low prices. In addition, IKEA combines retail and warehouse processes by exposing inventory in stores and uses cost-per-touch inventory tactics, in-store logistics, max/min settings, and high-flow and low-flow warehouse facilities. All this allows IKEA to be competitive among retailers and remain one of the most successful companies in the world.

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