Purchasing Inventory

Inventory Management

Inventory management is primarily about specifying the quantity and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to maintain the regular and planned course of production and to manage the risk of running out of materials or goods for sale. The scope of inventory management also involves stock replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, returns and defective goods, and demand forecasting .

Clothing Retailers Should Have Sufficient Inventory On Hand

Inventory purchases should be carefully managed to prevent overstocking merchandise or having inventory shortages.

There are four basic reasons for keeping an inventory:

1. Time: The time lags present in the supply chain, from supplier to user at every stage, require that businesses maintain certain amounts of inventory to use in this lead time.
2. Consumption: Inventory is to be maintained for consumption during variations in lead time. Lead time itself can be addressed by ordering a specified number of days in advance.
3. Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply, and movements of goods.
4. Economies of scale: The idea of "one unit at a time, at a place where a user needs it, when they need it" tends to incur lots of costs in terms of logistics. So bulk buying, movement, and storing brings in economies of scale and creates inventory.

Purchasing

Purchasing refers to a business or organization acquiring goods or services to accomplish the goals of its enterprise. Companies generally use operating funds to finance their purchasing program. Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process. These departments can be purchasing, receiving, and accounts payable; or engineering, purchasing, and accounts payable; or a plant manager, purchasing, and accounts payable. Combinations can vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved.

Historically, the purchasing department issued purchase orders for supplies, services, equipment, and raw materials. Then, in an effort to decrease the administrative costs associated with the repetitive ordering of basic consumable items, "blanket" or "master" agreements were put into place. These types of agreements typically have a longer duration and increased scope to maximize the quantities of scale concept. When additional supplies were required, a simple release would be issued to the supplier to provide the goods or services.

From time to time, an organization will "shop" for suppliers through the process of bidding. When selecting bidders, an organization identifies potential suppliers for specified supplies, services, or equipment. These suppliers' credentials and history are analyzed, together with the products or services they offer. The bidder selection process varies from organization to organization, but can include running credit reports, interviewing management, testing products, and touring facilities. Organizational goals will dictate the criteria for the selection process of bidders. It is also possible that the product or service being procured is so specialized that the number of bidders are limited and the criteria must be very wide to permit competition.

Negotiating is a key skill in purchasing. One of the goals of purchasing inventory is to acquire goods at the most advantageous terms for the buying entity (the "Buyer"). Purchasing agents typically attempt to decrease costs while meeting the Buyer's other requirements, such as an on-time delivery and compliance to the commercial terms and conditions (including the warranty, the transfer of risk, assignment, auditing rights, confidentiality, remedies, etc.).