Letter of Transmittal
20 May 2010
Chief Executive Officer,
Dear Mr. Fabulous,
Enclosed is a copy of the analytical report which is a summary of my findings from the research carried out on the purchasing, supplies and inventory management of Grandiose Motors. This analytical report includes information on purchase management as well as supply chain and inventory management. It also includes recommendations for action which management should take to deal with the current problems the dealership is facing
This report will aid in the future management of production operations in the dealership with regards to purchase, supplies and inventory management.
I hope this report will be of value to you
Grandiose Motors is faced with the challenge of lack of storage space and constrained financial resources which are as a result of its purchase of the Auto supermarket. This has caused the General Manager of the dealership to have concerns about the purchasing, supplies and inventory management of the service parts and material flows in the supply chain.
An approach that can be used by Grandiose Motors to deal with the issue of storage space and also financial constraints and investment is to use the Just in Time approach of inventory management which uses the principle of having stock items when they are needed and having no stock when it is not needed. This approach has been known to effectively deal with the issue of storage space in the event a business such as Grandiose Motors finds itself with excess stock and no storage. It is also suitable in helping businesses to determine when the right time to purchase more materials is.
Grandiose Motors should therefore structure its purchasing, supplying and inventory operations around the Just in time approach so that it can be able to deal with the current situation it is in.
1.0 Introduction, Background and Scope
The problem under investigation in this report is the lack of storage space for the purchases that are made by the Grandiose purchasing department and the level of financial resources available to invest in parts and materials to be used in repair works. There are many different spare parts that have been kept on hand to service customer vehicles and for over the counter sale which have contributed to the problem of storage. The acquisition of the auto supermarket put a strain on the financial resources of Grandiose Motors since it also supported three different car lines at the same facility. The aim of this study is to find out what can be done about the purchase, supply and inventory of Grandiose Motors in order to address and alleviate the problems the dealership is facing currently.
The production and operations management filed has experienced substantial changes since the establishment of manufacturing products and services in the 19th century. In recent decades, these changes have been intensified having a great impact in the business sector. Soteriou in his studies conducted in 1999 notes the fundamental changes that have been observed in businesses with regards to production and operations management have been the increase in demand for quality, the emergence of new markets, time based competition and the internalization of the production line (Martins, Martins and Csillag, 2009).
2.0 Definitions and Theories on Production and Operations Management
2.1 Production and Operations Management
Kumar (2006) defines production and operations management as the process which combines and transforms various resources used in the production or operations system of an organization into value added products or services in a controlled manner as per the policies of the organization. This process is the part of an organization which is concerned with the transformation of inputs or raw materials
into the required outputs. The set of interrelated management activities which are involved in manufacturing certain products is referred to as production management.
Production and operations management concerns itself with the conversion of inputs into outputs using physical resources so as to provide the desired utilities to the customer while meeting the organizations objectives of effectiveness, efficiency and adaptability (Kumar, 2006). Production and operations management involves activities such as purchasing, supplies and inventory management.
2.2 Purchase Management, Supply chain and Inventory
Purchasing which is often referred to as procurement is the acquiring of raw materials, component parts and other items required by an organization in the production and operations process. Purchase management involves getting materials of the right quality, quantity at the right time for the right price from the right source (Monczka, Handfield, Guinipero and Patterson, 2008).
A supply chain is a network of connected interdependent organizations that are mutually and co-operatively working together to control, manage and improve the flow of material and information from supplier’s to the end users (Atiken, 1998 as cited by Christopher, 2005). It encompasses all activities associated with the flow and transformation of goods from the raw material stage to the output stage. Supply chain management is the systematic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses in the supply chain for the purpose of improving long-term performance of the company (Mentzer et al, 2001). Inventory is the stock of items that are kept by an organization to meet future production or manufacturing demands. Inventory is in the form of raw materials, spare parts, tool and equipment, partially completed products and items that are being transported (Monczka et al, 2008).
2.3 Theories on Production and operations management
Production operations management was strongly linked to the business management evolution. Buffa’s studies of 1980 suggested three steps of development in the production and operations area from the period after World War II. Throughout the 50s, when production management was referred to as industrial management, research areas mainly had predominant descriptive characteristics and the main research topics were related to the plant layout, production control and a description of how the production systems in a company operated ( Martins, Martins and Csillag, 2009).
Buffa (1980, as cited by Martins et al, 2009) proposed a research agenda for operations management with an approach to the practical world which concentrated on strategic issues such as capacity planning, technology choice, analysis of plant location and issues related to planning and control. More research into the field of production operations was conducted by Miller and Graham in 1981. Their research unlike Buffa, focused on the policies, operations, production control, service management and productivity within organizations. Cole studies carried out in 1998 (as cited by Martins et al, 2009) identified the resurgence of production operations management in the 80s as one of the main areas of Business Management with the emergence of issues related to quality control circles and Total Quality Management.
3.0 Purchase Management and Inventory
3.1 Policies and Procedures
During the negotiation of a purchasing contract agreement or when changing form one vendor to another, policies and procedures that must be addressed include issues such as defining a standard agreement where standard terms are applied across all suppliers, discuss how the replenishment program should function by trying to anticipate events that could affect inventory management, defining a standardized process for sharing production and forecast information that should result in maintaining a lower inventory, communicate joint metrics clearly with the supplier of the raw materials by using various metrics such as fill rate, quality rate, inventory turns, lead times and forecast accuracy, identifying a team of executives that will represent the buyer and supplier, considering the suppliers scorecard when renewing their contract, keeping contract and price terms up-to-date, defining a process to support a smooth transition from one replenishment program to another, negotiating with suppliers to maintain sufficient inventory levels to be able to support changes in supply and demand (Sabri, Gupta and Beitler, 2007).
Grandiose Motors purchased its materials based on forecasts derived from historical demand data with factors such as the season and weather patterns playing a major role in determining which parts the company was going to buy. Such factors were likely to affect the purchase and inventory policies in the event the selected supplier lacked air-conditioner parts during the summer period when they would be in great demand or stronger batteries for the winter season.
Their forecast schedule was in line with the replenishment program policy which requires anticipation of future events that could affect the purchase and management of inventory within the company. This is because their forecasts were adjusted for special vehicle sales and service promotions which increased the need for raw materials and spare parts that were going to be used to prepare new cars and service cars bough by customers previously.
The policies and procedures would also differ because each of the four dealerships purchased their own service parts and materials from different suppliers. This means that each dealership deals with a different supplier from that of the other dealership.
The suppliers might offer one dealership products that are different from those bought by the other dealership. This creates a situation where cars bought from one dealership cannot be serviced in any of the other three dealerships because the vehicle spare parts will be different given they are bought from different suppliers. This can be evidenced by the fact that it purchases materials such as oil, lubricants and fan belts from different suppliers.
Automobile procurement policies require choices of single, sole or multi-source suppliers. The advantage of having multiple suppliers is that the vehicle dealerships and the manufacturer of the spare parts will not be dependent on only one supplier (Toomey, 2003).
3.2 Supply chain and inventory management concepts
Supply chains encompass the business activities that are needed to design, produce, deliver and use a product or service. Businesses depend on their supply chains to provide them with what they need to survive (Hugos, 2006). Li (2007) defines a supply chain as all the activities that a business undertakes to fulfil its customers demand and requests. These activities are associated with the flow and transformation of goods from the raw materials stage to the end product. Li (2007) identifies four stages in the supply chain and they include the supply network, the internal supply chain which is the manufacturing plants, distribution systems and the end users. Moving up and down the stages are the four flows which are material flows, service flows, information flows and funds flow.
Toomey (2003) describes supply chain management as the processing of raw materials to the ultimate consumption of the finished product linking across supplier-user companies. He states that production and inventory management must be synchronized across the entire supply chain. Such synchronization requires engineered and controlled flow of information from the customer to the raw materials. Supply chain management is a set of synchronized decisions and activities that are utilized to efficiently integrate suppliers, manufacturers, warehouses, transporters, retailers and customers so that the right product or service is distributed at the right quantity, to the right location and at the right time. The objective of supply chain management is to achieve a sustainable competitive advantage (Li, 2007). The supply chain management concept arose in the late 1980s and it came into use in the 1990s. Before that time, companies used terms such as logistics and operations management to deal with supply issues and management (Hugos, 2006).
Inventory Management as defined by the American Production and Inventory Society is the branch of business management that is concerned with planning and controlling inventories. The role of inventory management is to maintain a desired stock level of specific products or items that are needed by a business such as Grandiose Motors. The systems that plan and control inventories should be based on the product, customer and the manufacturing process. The cost of maintaining inventory throughout the entire process is a hidden cost but it nevertheless becomes part of the product cost (Toomey, 2003).
To deal with the issue of reducing investment and space requirements in Grandiose Motors, an approach that can be incorporated is the just in time management approach which is also referred to as JIT. This concept can help the dealership with its problems because it operates on the principle that companies have items when they are needed and none when they are not needed (Wild and Wild, 2002).
Conventional approaches to inventory management suggest that stock exists because items have been bought before they are required as is the situation with Grandiose. It is normally uncertainty or overcaution that causes inventory.
The JIT approach incorporates techniques such as tight inventory control, cost reduction, logistics, effective process planning and material requirements planning. The elements of JIT are the techniques that are to be developed such as supplying what is required, supplying the quality required, reducing the lead times, organizing effectiveness and using all the expertise available (Wild and Wild, 2002).
The JIT approach has been adopted by some sectors of the manufacturing industry originally as a space efficient method of production. In warehousing and storage, it is important to apply this approach where it is the easiest to use. This technique can be used in the storage of items that have a high usage, are more consistent with consumer demand patterns and have significant benefits from inventory reduction.
Grandiose can split the inventory to be sold into two types which are those controlled conventionally and those that will use the just in time approach. This will mean that the major stock will be controlled by JIT while the wide variety of low turnover inventory items will be controlled by conventional techniques (Wild and Wild, 2002).
Inventory control has to work under the conditions that have been imposed by the market. The Grandiose situation can be improved by the JIT approach which gives the potential to improve inventory by shortening supply lead times. By working with a dedicated and committed supplier the lead times can be changed when the supplier and grandiose work together to share the risk of stock handling. Lead times occur as a result of queuing, product distribution and the amount of time it takes to process or manufacture the parts (Wild and Wild, 2002).
Since the just in time demand is frequent, the effects of this will cause only minor stockholding and delays that are in the form of days. Having smaller stocks will enable the supplier to meet the small daily fluctuations of the customer effectively and efficiently. To be able to set up and effective JIT supply the supplier needs to have regular demand for the spare parts in order to estimate the average demand rate, the supplier also needs a good estimation of the long term demand.
The operational benefits that arise from using the just in time approach include inventory investment, easier forecasting which reduces the chance of having slow moving stock, better flexibility in inventory management, wastage of materials is eliminated, the supply to order technique is used instead of the provision for stock method, simplified administration with regards to inventory handling (Wild and Wild, 2002).
The approach supports the continuous output of a variety of different items which in turn creates a variation of raw materials going through the various production and distribution processes. It has had a major impact in the manufacturing industry by reducing the lead times which have changed the whole aspect of inventory control.
For some suppliers and supply chains, using this approach is natural because of the nature of products that are involved. Car dealerships together with retails shops find it important to hold stock so that the customer can have a choice of several options.
Apart from the approach being used for space saving, it also provides financial benefits. The approach can be able to lower the stock on profits of a company or business.
4.0 Recommendations and Conclusion
Grandiose Motors should place more focus on the Productions and Operations part of the business. The number of problems faced by the dealership such as the continued availability of the right materials, lack of storage space, the use of different supplies, the amount of inventory that has been kept at hand, all has to do with operations management.
To deal with the current problem lack of storage space for parts and lack of finances to purchase and invest in more parts, materials, Grandiose should incorporate the Just in Time method of handling issues that are related to the purchasing, supply and inventory functions.
This approach offers Grandiose the opportunity for having low inventory, improving on its operating conditions, dealing with the supply of materials and parts and identifying the benefits of having low inventory. Incorporating this approach will allow the dealership to have a stable market, good quality inventory and supplies management, reliable and dependent suppliers and a fast cycle of dealing with stock held by the business.
In conclusion the JIT approach ensures the best practice in inventory control which results in the improvement of the quality of inventory and supplies. It also enables the organizing flow function. The management at Grandiose should incorporate this approach to be able to deal with both the short term and long term stock problems that might arise in the dealership.
List of References
Kumar, S.A. (2006) Production and operations management. New Delhi: New Age International Publishers.
Mentzer, J., DeWitt, W., Keebler, J., Min, S., Nix, N., Smith, C. and Zacharia, Z. (2001) Defining supply chain management, Journal of Business Logistics, vol. 22, no. 2, pp. 1–25.
Christopher, M. (2005) Logistics and supply chain management: creating value-adding networks, 3rd Edition, United Kingdom: Pearson Professional.
Martins, G.S., Martins, M.E. and Csillag, J.M. (2009) The structure of the production and operations management field: a social network analysis in Brazil. POMS 20th Annual Conference. Orlando, Florida, USA.
Sabri, E.H., Gupta, A.P. and Beitler, M.A. (2007) Purchase order management best practices: process, technology and change management. United States: J. Ross Publishing. Pp 54-55
Monczka, R.M., Handfield, R.B. and Guinipero, L. (2008) Purchasing and supply chain management. United States: South Western Cengage Learning. Pp 8, 587
Toomey, J.W. (2003) Inventory management; principles, concepts and techniques. United States: Kluwer Academic Publishers
Hugos, M.H. (2006) Essentials of supply chain management. Canada: John Wiley and Sons
Li, L. (2007) Supply chain management: concepts, techniques and practices enhancing value through collaboration. Singapore: World Scientific Publishing Co. P 215
Wild, A. and Wild, T. (2002) Best practice in inventory management. Great Britain: Elsevier Science Ltd.P. 59-77