3.2.1 Just in time and just in case

Just in time

1. Small, frequent deliveries: orders are timed to match what is being made or sold that day, rather than sized to fill a warehouse.
2. Almost no stock is held. Materials go straight into production and finished goods go straight out, so there is no pile of stock sitting between the stages.
3. Suppliers must be reliable. With no spare stock to fall back on, a supplier who is late by a few hours stops the business working.
4. Demand must be known accurately. The business has to tell suppliers what it needs and when, which takes good record-keeping and close communication.

Just in case

1. A buffer is always kept. The business sets a minimum level of stock it aims never to fall below, and reorders before it gets there.
2. Orders are larger and less frequent. Buying in bigger quantities means fewer deliveries to organise and pay for.
3. It protects against a surge in demand. If a product is suddenly popular, the stock is already there to sell, so no sale is turned away.
4. It protects against a late delivery. Production and selling carry on from the buffer while the business chases the supplier, so a supply problem never reaches the customer.
5. This suits a business with unpredictable demand or suppliers it cannot fully depend on, such as a builders' merchant or a supermarket in the run-up to Christmas.

The benefits of just in time

1. Cash is freed up. Money that would sit on a warehouse shelf as unsold stock stays in the bank, where it can pay wages, suppliers or for new equipment.
2. Storage space is freed up. The business needs a smaller warehouse, so it pays less rent, heating, insurance and security, or uses the space for production instead.
3. Less stock is lost. Nothing is sitting long enough to go past its use-by date, get damaged in the warehouse or go out of fashion before it sells.
4. Faults are found quickly. Deliveries go straight into use, so a batch of poor materials shows up at once rather than after weeks in storage.

The drawbacks of just in time

1. There is no safety net. One late lorry, strike or road closure can stop production or empty the shelves the same day, because nothing is held in reserve.
2. Sudden demand cannot be met. If a product unexpectedly takes off, the business has nothing extra to sell and the customer buys from a rival instead.
3. Frequent deliveries cost money. Many small drops mean more transport charges, more paperwork and more staff time spent receiving and checking goods.
4. Bulk discounts are lost. Ordering little and often means the business does not qualify for the lower price per unit a large order would earn.

Judging just in time for a given business

1. Start with the suppliers, because JIT only works when they deliver the right goods on time every time, and when they are close enough to deliver often.
2. Then look at demand, because steady, predictable sales can be matched by small deliveries, while spiky or seasonal demand needs a buffer.
3. Then look at the product, because JIT is worth most where stock is bulky, expensive or perishable, and worth least where it is small, cheap and keeps for years.
4. Finally look at the cash position, because a business short of cash gains most from not having thousands of pounds sitting in a warehouse.
5. A small independent shop with one weekly delivery and unpredictable trade would be badly served by JIT, while a car plant with local suppliers is a strong fit.

3.2.1b Costs and benefits of stock management

Buffer stock

1. Deciding how much buffer stock to hold is a balance, because holding stock costs money and running out of stock also costs money.
2. A large buffer buys security, and the business pays for that security every week the stock sits there unsold.
3. A small buffer cuts those costs, but brings its own bill in extra deliveries and a higher chance of turning a customer away.

The cost of holding buffer stock

1. Cash is tied up. Stock has already been paid for but has not yet been sold, so that money cannot be used for wages, marketing or new equipment until it shifts.
2. Storage space costs rent. A warehouse or stockroom has to be rented, lit, heated and in some cases refrigerated, and none of that space is earning anything while it holds spare stock.
3. Insurance rises. The more stock is on site, the more there is to insure against fire, flood and theft, so the premium goes up.
4. Security has to be paid for. Alarms, cameras, locked cages and sometimes night staff are needed, particularly where the stock is small, valuable and easy to carry.
5. Stock goes out of date or gets damaged. Food passes its use-by date, and boxes get crushed, dropped or forgotten at the back of a shelf, so the business throws away goods it has paid for.
6. Stock becomes unfashionable. Clothing, phones and toys lose their appeal while they sit in storage, so they can only be cleared at a heavily reduced price.

The benefit of having spare stock

1. Unexpected demand can be met. When a product suddenly becomes popular, the stock is already on the shelf, so the business takes the extra sales rather than watching them go elsewhere.
2. No sales are lost to a stock-out. A customer who finds an empty shelf usually buys from a rival, and may not come back, so the loss is bigger than one missed sale.
3. Production keeps running. If a supplier is late, the factory works from the buffer instead of standing idle while still paying wages, rent and interest.
4. Large orders earn a discount. Buying in bulk brings a lower price per unit, which is a purchasing economy of scale, and it also means fewer deliveries to organise.

The cost of holding less stock

1. More frequent deliveries: ordering little and often means more delivery charges, more paperwork, and more staff time spent booking in and checking each drop.
2. Lost purchasing economies of scale: small orders do not qualify for the bulk price, so the business pays more for every unit it buys.
3. There is also a higher risk of running out altogether, which is why the saving on holding costs is never the whole picture.

Balancing the two

1. The right stock level is the one where the cost of holding stock and the cost of running out are both as small as they can be together.
2. A perishable or fast-changing product pushes a business towards a small buffer, because the stock loses its value in days or weeks.
3. Unpredictable demand or a distant, unreliable supplier pushes it the other way, because the cost of an empty shelf is then far higher than the cost of storage.
4. Greggs keeps very little sandwich filling in reserve because it would spoil, while a plumbing merchant holds pipes and fittings for months because they do not.

3.2.2 Factors affecting choice of suppliers

Why the choice of supplier matters

1. A supplier's performance turns into the buyer's performance, because their late lorry becomes your empty shelf and their weak material becomes your faulty product.
2. AQA names three factors in the choice: price, quality and reliability, and a business weighs all three against what it sells and who it sells to.

Price

1. The price a supplier charges is a direct cost to the buyer, so a lower price cuts the cost of every unit the business makes or resells.
2. That lower unit cost can be passed on as a lower selling price, which helps a business competing on price, or kept as a wider profit margin.
   1. Aldi's low shelf prices depend on buying own-brand lines from suppliers at a lower price than a rival pays for a branded equivalent.
3. The price that matters is the delivered price per unit, so delivery charges, minimum order sizes and bulk discounts all have to be counted in.
4. Price is easy to compare, which is exactly why it gets too much weight: it is the one factor printed on a quotation.

Quality

1. The quality of what comes in sets a ceiling on the quality of what goes out, because no amount of care in the factory rescues poor materials.
2. Poor inputs create faults, and faults cost money twice: once in the wasted materials and staff time, and again in refunds, replacements and complaints.
3. Quality also has to be consistent, since a supplier whose materials vary from batch to batch forces the buyer to inspect every delivery.
4. Input quality matters most where the business charges a premium price, because a customer paying more expects the product not to fail.

Reliability

1. A reliable supplier delivers the right goods, in the right quantity, on the day promised, every time, without the buyer having to chase them.
2. An unreliable supplier stops production or empties the shelves, so staff and machines stand idle while wages and rent still have to be paid.
3. The customer feels the failure, not the supplier, so a Deliveroo restaurant that runs out of an ingredient loses the order and the review.
4. Reliability lets the buyer hold less stock, because a business that trusts its deliveries does not need to pay to store a large buffer.

Other factors a business weighs

1. Delivery time: a short wait between ordering and receiving goods means the business can react to a change in demand instead of guessing weeks ahead.
2. Capacity to grow with you: a supplier that cannot double its output will hold the buyer back if the buyer expands, forcing a change of supplier later.
3. Payment terms: being given 30 days to pay lets the buyer sell the goods before the invoice falls due, which eases pressure on cash.
4. Location: a nearby supplier can deliver more often and at shorter notice, while a distant one is usually cheaper per unit but slower to respond.

Why the cheapest supplier can cost the most

1. A low price only saves money if nothing goes wrong, and the costs of poor quality and late delivery are far larger than the pennies saved on each unit.
2. Which factor a business ranks first depends on what it sells: a discount retailer puts price first, a jeweller puts quality first, and a sandwich shop puts reliability and delivery time first.

3.2.3 Procurement and logistics

Procurement

1. What gets bought in covers raw materials, components, stock for resale, equipment, and services such as cleaning, insurance and IT support.
2. Procurement is more than placing an order, because someone has to compare quotations, negotiate the price and the payment terms, and check what arrives against what was agreed.
3. The target is the right quality, in the right quantity, at the right time, for the right price, and all four have to hold at once.
4. In a large business a buying team handles this full time, while in a sole trader it is the owner ringing round on a Friday afternoon.

Logistics

1. Logistics covers three linked jobs: bringing materials in, storing them safely, and getting the finished product out to the customer.
2. Each of those jobs involves a choice about transport, and the choice trades cost against speed: road and rail are cheap and slow, air freight is fast and expensive.
3. Where goods are stored is itself a logistics decision, because a warehouse near the customers shortens every delivery that follows.
4. Tracking matters too, since a business that knows where a lorry is can tell the customer, and can react when it is delayed.

The effect on efficiency

1. When materials arrive on time and to specification, production runs without stopping, so staff and machines are never paid for standing still.
2. Ordering the right quantity avoids both extremes: no warehouse full of stock nobody needs, and no gaps that halt the line.
3. Good goods-in handling means fewer wrong or damaged deliveries to sort out, which frees staff time for work that adds value.
4. Get it wrong and the reverse happens: a late or incorrect delivery stops production, forces an emergency order at a premium price, and leaves overtime to catch up.

The effect on unit costs

1. Every pound taken out of the price of materials or the cost of transport comes straight off the cost of each unit the business sells.

1. Buying in larger quantities earns a purchasing economy of scale, and filling a lorry rather than half-filling two spreads the fuel and driver cost over more units.

Balancing lower cost against quality of service

1. The cheapest option in procurement and logistics is usually the slowest and the least dependable, so the saving is bought with service.
2. A cheaper courier that misses delivery slots hands the business refunds, complaints and lost repeat orders, which can cost more than the transport saved.
3. The customer only ever sees the service, so they judge the business on whether the order turned up on the promised day, not on what the business paid to send it.
4. How far a business can push cost savings depends on its customers: a discount retailer can accept a longer wait, while Deliveroo cannot.

3.2.4 Effective supply chain management

What a supply chain is

1. A loaf of bread has a chain that runs from a wheat farm, to a mill, to a bakery, to a distribution centre, to a supermarket shelf.
2. Most of the chain sits outside the business, in firms it does not own, which is why the links between the stages need managing rather than assuming.
3. The chain carries information as well as goods, because a supplier can only get the right amount to you on time if it knows what you expect to sell.

What managing the supply chain involves

1. It means treating suppliers as part of the operation, so sales forecasts, delivery schedules and quality standards are agreed and shared rather than guessed.
2. Long-term contracts do a lot of the work here, because a supplier with guaranteed orders will invest in equipment and put your delivery first.
3. Performance is monitored, so a supplier that starts arriving late or sending faulty batches is dealt with before it reaches the customer.

Working with suppliers so key processes run efficiently

1. When a supplier knows the production schedule, materials arrive in the quantity needed on the day they are needed, so the line keeps moving.
2. Fewer stoppages means fewer hours of paying staff and machinery to stand idle, and no rush of overtime afterwards to catch up.
3. Agreed quality standards mean fewer faulty inputs, so less is scrapped, less is reworked, and the finished product is more consistent.
4. The chain is only as strong as its weakest link, so one supplier failing disrupts every stage after it however well the rest performed.

Getting goods and services for the best price and value

1. A business that plans its buying ahead can order in large, predictable quantities, which earns a lower price per unit rather than paying the going rate in a hurry.
2. A long relationship strengthens the buyer's hand, because a supplier that wants the contract renewed will hold its price and improve its terms.
3. Best value is not the same as lowest price, since it means the best combination of price, quality and reliability across the whole chain.
4. Lower input costs lower the cost of each unit, which lets the business hold its price and take more profit, or cut its price to win customers from a rival.

Cutting waste for a streamlined process and fast production

1. Ordering only what the forecast says will sell removes the unnecessary cost of materials that sit in a warehouse and then have to be written off.
2. Cutting out duplicated checks, extra handling and unnecessary journeys between stages shortens the time a product spends in the chain.
3. Shorter production times mean the business can react to a change in demand quickly, and can promise the customer a delivery date it will actually meet.
4. Reliable supply and consistent quality bring the customer back, so a well-run chain protects sales as well as costs.