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Viverra Motors Company has been in operation for more than fifteen years. With the present acquisition of a new automotive dealership, the overall growth of the company is anticipated. Therefore, it is necessary to review the current purchasing and inventory management system to ensure they are in line with the increase in size and reputation of Viverra Motors. Viverra Motor can use different supply chain management techniques and inventory control models to cater for the increasing needs of the company as a result of its growth to four dealerships.

Centralization of the purchasing system will reduce costs and will also ensure standard materials and parts are bought. This will enable the company maintain its reputation of producing high quality products.

Inventory control models such as economic order quantity (EOQ) will also result to reduction in total cost of inventory. This will also ensure that cases of stock outs do not occur since the optimal safety stock will be determined.  JIT purchase system may also be used since space is a constraint in this case. For this to work for Viverra Motors, the company has to have reliable suppliers and not sourcing from any supplier.

Production or operations management is the procedure which converts various inputs used in the manufacture of goods and services of the firm into output. This is a value added product in a restricted manner as per the regulations and policies of the organization. Production management refers to management activities involved in manufacturing a product while operations management is used when referring to rendering of services.

Viverra Motors is offering different services to its customers such as after sales services, repairs and also sale of spare parts. It is not involved in any manufacturing activities; therefore, the management activity is operations management.

The company has four dealerships in its network of which three sell one brand each and the fourth sells all the three brands. The acquisition of the dealership which sells the three brands has led to growth of Viverra Motors; therefore, need to review the purchasing and inventory policies and procedures. The problems facing the company are inadequate space to store its inventory and inadequate finances. To solve these problems purchasing and inventory management policies and procedures need to be reviewed.

Current purchasing system

Viverra Motors purchasing system is currently decentralized. The dealerships purchase different service parts and materials from different suppliers, and this will lead to differences in purchasing and inventory management policies and procedures.

Purchasing from different suppliers is as a result of the need to have a variety of spare parts and materials required in order to offer the service and repairs to customers without interruption. The management has to ensure that the appropriate materials and parts are available at the appropriate time. Viverra Motors management has to ensure that purchasing policies and procedures change to fit the changes in the firm. As a result of having different suppliers, the firm might face problems such as.

1. Increased cost of monitoring suppliers. When products are sourced from a variety of domestic and international supplier, problems affecting these suppliers will also affect the firm’s financial performance. There is the cost incurred to ensure that all suppliers comply with relevant laws such as environmental laws. Some cost is also incurred in ensuring that the goods are of exceptional quality and are available at the appropriate time.

2. Parts and materials may be of low quality standards since it is difficult to countercheck all the parts and products.

3. Parts and materials delays since the suppliers are new, and Viverra Motors may find it difficult to rely on them.

To rise above these problems, the company must change its purchasing procedures and policies to include measures such as getting into written contracts with suppliers. Regarding the quality of parts, materials and time of delivery, monitoring of suppliers stability beyond available financial data to include factors such as potential disruptions in production. This will help in creating strategic supplier relationships for the long-term and creating integrated supplier networks.

Inventory policy

The inventory policy will also change to cater for the increased inventory. Increase in inventory will affect holding costs, ordering cost and can also affect purchasing costs where some suppliers offer discounts. Management of Viverra Motors must ensure that the inventory policy only keeps enough inventories to ensure no stock out costs, and they have maintained enough working capital. The operations manager, therefore, needs know the safety stock required and lead time. Failure to update purchasing and inventory policies may result to failure of Viverra Motors in the future despite the growth it is experiencing at the moment.

Weaknesses

The main weaknesses of Viverra Motors are the decentralized purchasing system and poor inventory control system. There is a decentralized system of purchase of materials. Each dealership acts autonomously. Purchases by the dealerships are based on forecasts that are derived from historical data. Historical data accounted for factors such as seasonality and left out other factors such as changes in consumer tastes and preferences, political stability, inflation and others.

Large amount of inventory had to be held. Materials and parts for different uses were also put together. This led to holding up of capital that could be invested in other productive areas. This can also lead to working capital problems. Materials were also purchased from different suppliers. This could affect the quality offered by the firm.

Failure to plan on the appropriate level of inventory especially the materials required during different seasons and failure to dispose the slow moving materials, Since these parts will create room for the incoming merchandise.

Effect OF The New Acquisition ON The Weaknesses

The acquisition of the auto supermarket dealership will make the situation worse. The new acquisition is putting strain on the finances which are limited as a result of excess investment in stock. The new acquisition will also require additional space, which is a limited factor in this case.

Supply chain and inventory management

Supply-chain and inventory management concepts can help Llw Gwych reduce investment and space requirements, and maintain adequate service levels by making use of operations management models such as inventory models, forecasting models and Material movement charts.

Centralization

Centralization is when the purchasing function is authorized to a single department. All purchases are done by an officer in charge of purchases. Centralization of supply chain can ensure that materials and parts are bought at low prices. This will reduce the high cost of purchasing. Materials management is concerned with purchase, control and use of materials. The centralized system will have the following advantages to the company.

1. Centralized purchasing ensures that duplication does not occur, so buying cost is reduced.

2. The other departments are relieved from the work load involved in purchasing. This enables employees to concentrate in other fields.

3. Transportation and carrying cost are reduced; therefore, they become economical, since purchases by the firm are made in large quantities.

4. Trade discount will be allowed by suppliers due to bulk procurements.

5. Purchasing records are stored in a central place. This results to the economy in record management and supervision is done by one person.

This method also has weaknesses which should also be considered to ensure that their effects do not offset the benefits. The disadvantages include; delays as a result of centralized purchasing because requirements are sent to one department there may be misunderstanding between purchasing department and the other departments since the purchasing department may not get the exact requirements, if the dealerships are located in different places, this method may lead to increase in transport costs. This is because of the cost involved to send the materials and parts to different locations.

This would fit Viverra Motors since it is a large organization. This will ensure that the company maintains the quality of its products and services since the materials can be easily inspected to ensure it fits the needs of all the departments.

EOQ Model

This is the economic order quantity. Z.-J. M. (2011). At this quantity, ordering cost is equal to holding costs. The objective of inventory decisions is usually to minimize total inventory costs to the company. Costs are ascribed to all elements which are of interest in reaching its inventory decisions (e.g. purchasing costs, stock out costs etc.), and solutions, are derived based on these costs. Stochastic Models can be used in this case since parameters (particularly demand and lead time) are not known with certainty, but follow known probability distributions (i.e. risks). Inventory model will help in ensuring that optimal funds are invested in purchasing parts and materials and also the least storage cost is incurred. Inventory model will ensure that material handling cost is reduced.

The company should consider changing its inventory control system to ensure that maximum stock is held at least cost possible. The firm can use the EOQ model where the optimal level of inventory is calculated. The safety stock is also calculated by use of probabilities to determine the optimal reorder level. This will ensure that the total cost of inventory is minimized, and stock out costs does not occur, as a result, lack of materials or parts demanded at any given time.

Due to uncertainties involved the company has to consider the level of safety stock to hold. It will maintain a level of safety stocks for raw materials and finished goods stocks. The safety stocks are the amount of stocks that are carried in excess of the expected use during the lead time to provide a cushion against running out of stocks. Thus, the safety stock is computed as reorder point plus the average usage during the lead time.

Reorder point average usage during lead time safety (buffer) stock.

Relevant costs of EOQ model

The relevant costs that should be considered when determining optimum inventory levels can be classified into two categories (Anderson 2010):

i. Ordering costs.

ii. Holding (Carrying) Costs.

I.e. TC = Ordering Costs + Holding Costs

Ordering costs are incurred in getting purchased items into the company’s inventory or stores, and usually consist of clerical costs of making the purchase requisition. Issuing of a purchase order, follow-up action, receiving the goods, inspection for quality control, placing goods in stores, paying vendors (suppliers).

Holding costs are costs incurred because the firm has decided to maintain inventories. They usually consist of Insurance costs, Warehouse and storage costs, Material handling costs, Costs of obsolescence.

Total Ordering Cost = Total demand for period x Ordering Costs per period

Quantity Ordering = DO /Q

Total Holding Costs = Quantity Ordered x Holding Costs per unit = Q H /2

Therefore, total relevant costs (TC) for any order quantity can be expressed as:

TC = (DO/Q) + Q H/2

We can determine a minimum of this total cost function by:

i. Differentiating the above formula with respect to Q and setting the derivative (1st) equal to zero.

dTC/dQ = (-DO/Q2)+ H/2 = 0

Q is the economic order quantity.

Centralized purchasing system and inventory system that ensures there is optimal safety stock during lead time will increase customer satisfaction. The company’s image and reputation will remain high.

JIT Purchasing Arrangements

Seasonal purchases will also be carried out for inventory that is used on a seasonal basis. Just in time purchasing (JIT) system can be used in this case.

Viverra Motors can also use just in time purchase method where some materials may be bought at the time required. This will be more appropriate for the seasonal parts and materials, materials needed in different seasons of the year e.g. winter can be purchased when the time arrives instead of holding them for a whole year. This will eliminate storage costs and the available space can be used for materials and parts that have a high stock out costs. These are continuously needed for the day to day activities of the company.

JIT philosophy includes adapting JIT purchasing techniques where materials are delivered immediately before their use (Drury 2006). Stocks can be out to a minimum by arranging with suppliers for more frequent deliveries. Considerable savings in material handling expenses can be obtained by requiring suppliers to inspect materials before their delivery and guarantee their quality.

This improved services are obtained by giving more business to fewer suppliers and placing long tern purchasing orders; therefore, the suppliers has an assurance of long term sales and can plan to meet this demand. Other advantages that the company will get as a result of using this method will include; substantial savings in factory space, large quantity discount, savings in time from negotiating with fewer suppliers and reduction in paper work arising from issuing (long term orders) to a few suppliers rather than individual purchase order to many suppliers.

Recommendations

Viverra Motors dealership network needs to structure their purchasing and inventory functions to ensure that the available space is used appropriately, and funds are invested where their returns are high. These would include;

• Centralization of Purchasing Function

• Use of economic order quantity model to ensure that the reorder level includes optimal safety stock.

Supply chain management is a vital, strategic feature for enhancing a firms effectiveness and for ensuring achievement of organizational goals, which includes enhanced competitiveness, improved customer care and high profitability” (Gunasekaran 2001, p. 71). The key goals of SCM are to reduce non-value-added actions and related investment cost as well as operating cost, enhanced customer responsiveness and increased performance and price competitiveness (Stewart 1995). Effective supply chain management will enable the firm achieve and sustain competitive advantage.

JIT purchase will be an appropriate method of inventory management when some materials are not needed continuously. This helps reduce holding costs and save on space and also invest the funds elsewhere they can earn more interest. EOQ model will also ensure that the appropriate reorder level is used so as to have optimal safety stock.

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