Improving the efficiency of purchasing stock does not have to be difficult. It may simply be improving the planning stage to more clearly define the goods required, time frames and performance measures.
- What should be ordered?
- How much should be ordered?
- When should you order and reorder?
- How should you place the order?
- How do you check goods received?
A planned approach to purchasing stock means deciding upon a number of key issues.
What to order
There is no magic formula to make the right decision on what to buy. However, when planning what to order the following points can guide you.
Your target market
You must know the needs of your main customers and keep them in mind.
Again, what are your customers’ needs? You should not be paying for a higher quality standard than is necessary.
Your sales forecast
Match your stock lines to forecasted sales to avoid ‘stock-outs’ and consequent lost sales or dissatisfied customers
Most businesses have some seasonal component and you will often have to buy ahead to ensure supply.
How much to order
Restaurant owners and caterers often ask, ‘Is it better to buy in bulk or to order as I need it?” There are advantages and disadvantages to both methods.
Some restaurant owners and caterers order more frequently and in smaller quantities, a necessary procedure for stocks that have a short shelf life, eg perishable foods. If there is a lack of storage space and goods are available from suppliers at short notice, then this method can be satisfactory. Below are advantages and disadvantages
Purchasing for very short periods makes it easier to calculate requirements.
Reduces the amount of money tied up in stock.
Reduces risk of deterioration or obsolescence.
Avoids a loss if there is a reduction in prices.
Lower storage and insurance costs.
Smaller stocks could lead to customer ‘walk-outs’ if deliveries are not received in time.
Buying in smaller quantities may lead to loss or reduction of discounts.
Higher freight costs because of more deliveries.
Receiving and handling over-heads are increased by many small orders.
Production schedules may be disrupted by delivery delays.
You can be attracted to bulk-buying because of the apparent benefits. Quantity discounts or advertising subsidies are sometimes offered by suppliers as an inducement to place large orders. Bulk-buying often appears to be, and in fact may be, an attractive proposition. However, it loses its attraction if the goods cannot be resold quickly.
When to order
So far we have assumed that there are no time lags in deliveries, that suppliers always supply on time, and that we only need to check our stocks and order infrequently. This ideal situation rarely exists. To balance your commitment to cutting stock carrying costs against the possibility of a stock-out you will need to consider the timing of your orders carefully. To minimize carrying costs it would be ideal if new orders arrive just as old stock runs out, with safety stock ensuring that you can cope if supplies are delayed.
Delivery time is the time it takes for the supplier to fill your order and transport it to your business. Your stock records maintain a history of your dealings with suppliers and can help you assess their reliability. Where possible you should negotiate precise delivery times when you place the order.
As mentioned previously, this is the amount of stock you may wish to carry in excess of requirements to protect you against unforeseen delays in delivery and allow for potential sales increases. How much safety stock to keep will depend on your experience with your suppliers.
How to place an order
An appropriate method of ordering is to use a purchase order form developed specifically for your business. This is preferable because a purchase order form has a number of functions other than just informing the supplier that you wish to purchase goods.
A Purchase Order Form:
- Precisely identifies requirements
- Forms the basis of a contract
- Supplies information for record keeping.
It is important to identify your precise requirements and to include your written terms and conditions on the form. This will overcome any confusion as to the exact details of the order and will be a reference if there is a dispute.
The purchase order form also creates the basis of a contract. When making a purchase it is unwise to rely on verbal agreements. While verbal agreements can constitute valid contracts, they are difficult to enforce legally.
The purchase order form also provides information for record keeping. This includes checking deliveries against orders, giving a record of what has been ordered, and ensuring that bookkeeping information is collected.
All businesses make purchases of one kind or another whether it is raw materials or simply office supplies. Understand purchasing and stock control – manage this asset and free valuable capital.
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