MANAGING OPERATIONS

CHAPTER 10 ENTREPRENEURSHIP

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Chapter Objectives
To understand the importance or correct purchasing in a venture To list the activities involved in purchasing To tabulate the elements of a purchase policy To discuss the ways to evaluate suppliers To discuss the best practices in purchasing To list the kinds of inventory carrying costs To classify different kinds of inventory To understand the importance of cash management To understand the role of the cash manager To appreciate the challenges posed by cash flows To understand the principles of receivables management To discuss managing for disasters To understand the strategies followed by seasonal businesses

Entrepreneurship Oxford University Press 2008

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Purchase
Unplanned purchasing can lead to: spending more money than you need to buying goods that aren't of the proper quality choosing suppliers that don't offer the required level of customer service

Entrepreneurship Oxford University Press 2008

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Role of the Purchase Manager

gather orders from various departments make sure the orders are complete, stay within specified spending parameters select appropriate vendors order for the goods check condition upon receipt check to make sure the invoice is correct ensure timely payment of the invoice by forwarding it to the accounting department communicate effectively with the suppliers on various issues
Entrepreneurship Oxford University Press 2008 All rights reserved

Purchase Policy
The purchase policy should address the following issues: Who is authorized to purchase various goods? How is the budget set for a purchase? How does the venture hope to ensure competition among vendors? How to ensure quality of received goods? What will be the payment system? What will be the level of confidentiality between the venture and vendors?
Entrepreneurship Oxford University Press 2008 All rights reserved

Suppliers
Evaluate a supplier on: Timely delivery Completeness of orders shipped Quality of items Price competitiveness Strength of financial condition Ability to service special orders Quality of customer service Expertise of sales representatives and technical staff Consistency on above factors
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Prioritising Purchases
Some items need more attention than others, on the basis of: Unit cost Total cost Time to delivery Quality Criticality
Entrepreneurship Oxford University Press 2008 All rights reserved

Inventory
Costs of carrying inventory Interest on the financial investment in inventory. Cost of insurance covering inventory. Rental or ownership related costs of the store Cost of handling inventory Obsolescence Pilferage, wastage or deterioration of stock

Entrepreneurship Oxford University Press 2008

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Types of Inventory
On the basis of stage in process: Raw Materials Work In Progress (WIP) Finished goods Goods for resale

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Types of Inventory
On the basis of reason for stock to be held: Buffer stock Safety stock Overproduction Lot delay stock Demand fluctuation stock Line balance stock
Entrepreneurship Oxford University Press 2008 All rights reserved

Cash Management
The efficient utilization of current assets and current liabilities throughout each phase of the business cycle. The systematic planning, management and monitoring of the companys collections and disbursements. The collection, management and dissemination of information to enable effective use of available funds.
Entrepreneurship Oxford University Press 2008 All rights reserved

Good Vs Bad Cash Management

Increasing the possibility that your business never runs out of cash. Eliminating the constant worry associated with not knowing your current and future cash position Improved relationships with your vendors as a result of good payment practices. The ability to foresee cash flow problems long before they actually happen. Suppliers are going to be dissatisfied with late paymentsand that will lead to higher prices, late deliveries or quality problems. If you are unable to meet salary obligations on payday, employees are going to be worried about the financial stability of the firm. If your cash problems are a result of tardy collections, customers will stand to gain a lot by not paying up and taking their business elsewhere.

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Cash Manager
Role of the cash manager: Efficiently collecting cash inflows Concentrating collected funds Controlling the timing of cash outflows Forecasting the cash position Securing adequate sources of short-term funds Optimizing use of any temporary cash surpluses Gathering timely information Implementing the systems necessary to monitor, manage and control the cash position Ensuring the internal and external transfer of financial data between departments or with the bank.
Entrepreneurship Oxford University Press 2008 All rights reserved

Cash Problems
As a result of business growth, cash can be: Mismatched Irregular Unpredictable

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Collecting Accounts Receivable

Investigate new customers. Supply against written orders. Sign on a legal contract. Maintain close contact with customers. Get and repeat positive feedback. Send invoice ASAP.

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Collecting Accounts Receivable

Contact before sending invoice. Keep a close watch on customers fortunes. Immediately contact on any delayed payment. Be firm Allow a customer to graduate in his credit ratings with you.
Entrepreneurship Oxford University Press 2008 All rights reserved

Managing During Disasters

Identify risks Reduce risks Plan Train Getting back to business

Entrepreneurship Oxford University Press 2008

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Seasonal Businesses
Seasonal businesses try to cut costs during the off season. The easiest way to do that is to pare down operations is seasons of low demand. Many businesses which close down during the off season depend on temporary labour and sometimes even the infrastructure is leased for a short time only. The off season is a very good time to carry out routine maintenance and repair work.
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Entrepreneurship Oxford University Press 2008