Managing a Business free essay help Excel coursework help

Group project Introduction A business’ success is largely dependable on the relationship it has with its supplier. To know the role the suppliers and competitors play, the company is required to obtain performance related information about prospective suppliers and competitors that the company may require to continue business successfully. This report will discuss what kind of information a company requires. Firstly, it will provide information on elements that are factored into the supplier selection criteria.

After that, it will discuss the approaches of ordering quantity and of determining the costs associated with ordering from the suppliers. This report will show a recapitulation of management systems which help promote inventory management. Selecting suppliers To manage a business and to achieve business goals, it’s imperative to find the best possible supplier available. An introspection of the supplier cost will improve efficiency. Dealing with a customer includes cost of purchasing, holding inventory, poor quality and delivery failure.

These are classified as the total costs of ownership. Activity-based costing could be used to calculate the total cost of ownership, giving a more accurate allocation of supplier costs. The three levels of supplier activities and activity costs are unit level activities, order level activities and supplier level activities. Sequentially, to calculate the total cost of ownership the company must firstly understand and analyze the activities that were influenced by suppliers, calculate the cost per unit of the activity driver and find the activity drivers itself.

After the calculation of the total costs of supplier-related activities for the year, we can finally determine the total cost of ownership. Evaluating Supplier’s performance The Supplier Performance Index (SPI) which is the ratio of total supplier activity costs against the total purchase price (Langfield-Smith 2009) is basically a measurement tool by which suppliers are chosen by evaluation. In order to calculate the SPI the total cost of ownership and the original purchase price must first be gauged.

This allows companies to choose better suppliers with lower prices and as a result to provide customers with cheaper and better quality products. A good way of measuring supplier performance is by exclusively focusing on assuring that the products match customer value and are of quality. Moreover, this measurement system provides a good communication among suppliers and purchasers for reducing cost and increasing product quality. Nevertheless, the SPI does not evaluate the supplier performance via criteria other than cost.

The cheapest price, along with reliability in the delivery time, product quality, performance history, organizational change and relationship itself are the factors considered when selecting a supplier. They are not irrefutable. Apple Inc. ’s annual report demonstrates that certain key components are provided by single or limited sources (Apple Inc. , 2010). Mainly due to Apple Inc. ’s concern regarding quality of raw materials and only select reputable suppliers. Their passion for using high quality materials may cause delivery and quantity problems. Since Apple Inc. produces customized products, supplier selection becomes even more defined.

Especially when few suppliers can provide customized components. Ordinarily, supply and demand relationships are based on two rules; demand influences supply and supply influences price. An illustration of the aforementioned statement in effect, the supplier cannot meet company demand requirement so the price may rise, a derivative may come in the form of late shipment of resources. As a result, company’s financial performance is affected. Inventory management Once supplier selection is complete, the amount to order is then decided. During the order, there are three main cost criteria: shortage cost, ordering cost and carrying cost.

Shortage cost is the cost when running out of inventory, ordering costs are related with the order itself and receiving, carrying cost is the cost of carrying or holding the inventory, usually storage cost and insurance cost. In order to reach the optimum order size, finding the balance point between ordering cost and carrying cost becomes a key factor. The Economic Order Quantity (EOQ) model makes it attainable. The EOQ model allows the calculation of inventory reordering point (ROP). This points out the level of inventory on hand and when to reorder from suppliers.

Understanding the ROP is essential and critical for managers, as it prevents inventory shortage, affecting the incurrence of shortage cost. In the case Apple Inc. , having limited suppliers also mean an obvious risk of supply shortages. Understanding ROP and safety stock is essential for the company. The safety stock – extra inventory to cover above-average usage, further more preventing shortage cost are a few other things an ideal manager would need to know. The carrying cost and order cost also differentiate if the manager uses different inventory and production system.

A good example will be Just-In-Time (JIT) system. JIT, in brief, deals with purchasing raw materials when they are required, ordering small quantity yet frequently. Contrary to the usual bulk purchasing, JIT has a high ordering cost but low carrying cost. JIT’s plus points are the ability to reduce carrying cost, is less exposed to impairment cost, has high cash flow and there is an improvement in production efficiency provided the assumption on existence of constant and reliable suppliers and powerful customers, which most small firms cannot cope with it.

The bulk purchasing method is for those who prefer the uncertainties of demand, purchase discounts and avoid high ordering cost. Conclusion Information on suppliers are essential factors of a company’s yearly report. With this information, the company can calculate the SPI, allowing the manager to make a context sensitive decision in order to fulfill supply requirements. Background information is also important as it can provide a more elaborated view of potential suppliers, their reliability.