Unit 5 - Fun with Finance
Learning Target 2: I can explain purchasing and inventory control
Successful businesses know that it is not what you sell your product for that matters but rather what you buy it for. Purchasing is the acquisition of goods and services for a business in order to reach its objectives. Purchasing is a cost saving function of a business that has an overwhelming impact on the bottom line. In order to make money a business must spend money and purchasing can account for up to 50% of sales. More money is spent by a business by purchasing that any other expense category.
There are different types of purchasing. The first type is buying for resale, here a business purchases a product to resale to others. It can resell to customers like a Target or it can resell to other businesses like Coca-Cola. If you think about it, it is very unlikely you are buying a Coca-Cola from Coke but rather a restaurant or convenience store. Coca-Cola would be classified as a wholesaler for this example. Target is classified as a retailer in the above example since it sells to customers, generally speaking. There are some businesses that are both retailers and wholesalers such as Costco and Sam’s Club.
The next type of purchasing is buying for transformation. A perfect example of this is people who go estate sales and purchase items such as wood from old barns and use it to make a table or headboard. Another example of this is when a person from Starbucks goes to Columbia to find the best coffee beans to buy so Starbucks can make the best coffee possible. This type of buyer is often called an industrial buyer. Industrial buyers need to know everything about the product in order to make the best buying decisions.
The final type of purchasing is buying for business use. Individuals called purchasing specialists buy items such as desks, chairs, staplers, uniforms, etc… for the business. The difference between a purchasing specialist and an industrial buyer is the items the purchasing specialist buys won’t be resold or used to make another product. With that being said, the purchasing agent’s role is extremely important in making sure the business run efficiently.
The ultimate goal and purpose of purchasing is to acquire the right goods and services from the right suppliers at the right price, in the proper quantity, at the necessary quality, and with acceptable payment and delivery terms. To do this a business must prevent interruptions in the making of and distribution of the product, reduce time to produce the product, eliminate wasted supplies and keep inventory levels a reasonable level.
Purchasing to minimize the amount of money tied up in inventory is an ongoing battle for industrial buyers. Each business is going to have different inventory levels for each product line at which they use to determine when to replenish. Paralleling they purchasing department must also be constantly monitoring how quickly the inventory is sold during a given time also known as stock turnover.
Businesses have to decide if they want to have a lot of inventory or replenish inventory as sales are made. If you sell a lot of non-trendy items such as shoe laces you may decide to have a lot of inventory on hand. If you sell fruit you will definitely want to use just in time inventory to replenish the goods sold. There are some obvious trade offs one must consider. If you have a large amount of inventory that costs a lot more money than just in time inventory. What if consumer preferences change and now you’re stuck with a lot of product you cannot sell. With just in time inventory there may be a delay in receiving the goods after they sell out which could lead to decreased customer satisfaction