Chapter 13 – Purchasing, Inventory, and Quality Control
13–20
CHAPTER OUTLINE AND TEACHING NOTES
1. The order quantity determined by the
level of inventory and the order inter-
val.
2. When inventory level determines the
time to order, the amount is a fixed
of carrying the inventory.
4. The EOQ is determined by balancing:
a. The cost of placing an order for
13.2.)
5. Inventory turnover is a key ratio (See
Chapter 14.) in inventory control and
Chapter 13 – Purchasing, Inventory, and Quality Control
13–21
CHAPTER OUTLINE AND TEACHING NOTES
VI. OPERATIONS PLANNING AND CONTROL
Learning Objective 5.
Explain what is involved in operations planning and con-
trol.
A. As shown in Chapter 6, operations plan-
ning and control begins when you are go-
B. Handling Variations in Demand
1. Demand for products varies dues to
2. These variations may also entail:
a. Constant hiring and training.
Chapter 13 – Purchasing, Inventory, and Quality Control
13–22
CHAPTER OUTLINE AND TEACHING NOTES
f. Product shortages.
3. Operating plans used to partially
cope with seasonal variations:
a. Allowing operations to rise and
fall according to changing sales
demands; requiring periodic hir-
ing and firing.
b. Using self-service to reduce
number of full-time employees;
hiring part-time or hire temporary
workers during peak periods.
Chapter 13 – Purchasing, Inventory, and Quality Control
13–23
CHAPTER OUTLINE AND TEACHING NOTES
slow demand. (Such as coupons,
sales, Bogo, or free samples.)
C. Scheduling Operations
1. SCHEDULING is setting the times
and sequences required to do work.
2. Scheduling according to perform spe-
cialized activities, including when,
D. Controlling Operations
1. Even with the best of everything, con-
trol over the operations is still hands
on.
2. In other words, the Boss has to be
Chapter 13 – Purchasing, Inventory, and Quality Control
13–24
CHAPTER OUTLINE AND TEACHING NOTES
tional control.
b. More often, a system of formal
checks is needed:
VII. QUALITY AND ITS CONTROL
A. U.S. companies are taking steps to im-
REAL WORLD EXAMPLE 13.9
Control of quality is important, down to monitoring the
speed and accuracy of automated response systems.
B. QUALITY refers to product character-
istics and/or the probability of meeting
established standards.
Chapter 13 – Purchasing, Inventory, and Quality Control
13–25
CHAPTER OUTLINE AND TEACHING NOTES
product being judged.
2. Quality means the probability that
Products will meet established
Standards.
3. The concept of Total Quality (TQ)
has developed from actual practice in
manufacturing settings, and has vali–
4. Quality involves characteristics of the
product: strength, color, taste, smell,
content, weight, tone, look, capacity,
Chapter 13 – Purchasing, Inventory, and Quality Control
13–26
CHAPTER OUTLINE AND TEACHING NOTES
6. Customers tend to want high quality,
but often will only pay a limited price
for the product.
{ An example of this is seen every day in
Native American jewelry. A customer tells
you that she wants “a handmade sterling silver
shock.
“Oh you know what,” there is one over on
that shelf for $29.99. I Believe I will get her that
one, instead.” You explain the difference, to no
Chapter 13 – Purchasing, Inventory, and Quality Control
13–27
CHAPTER OUTLINE AND TEACHING NOTES
7. Advances in manufacturing
C. Improving and Controlling Quality
1. QUALITY CIRCLES are small work
groups meeting periodically to find
ways to improve quality and perfor-
mance, with access to more training.
2. Designing quality into the process
a. Production processes must be
designed to produce the desired
quality.
Chapter 13 – Purchasing, Inventory, and Quality Control
13–28
CHAPTER OUTLINE AND TEACHING NOTES
type of control can correct the
situation.
3. Installing a quality control system
a. Quality control, or quality assur-
4. Owners and top managers must stay
involved in a continuous improve
5. The late W. Edwards Deming, deve-
REAL WORLD EXAMPLE 13.11
To monitor the quality of his company’s instant noodles,
Wei Ying-chan taste-tests the noodles every morning for
breakfast.
6. Effective quality control involves:
Chapter 13 – Purchasing, Inventory, and Quality Control
13–29
CHAPTER OUTLINE AND TEACHING NOTES
c. Comparing that performance with
standards.
d. Making corrections when
needed.
LEARNING OBJECTIVES REVISITED
1. Discuss the importance of purchasing.
● The cost of materials and goods and services needed to produce a product is about half of
2. Explain the need to choose suppliers carefully.
● Sources must be investigated and one or more suppliers selected.
Chapter 13 – Purchasing, Inventory, and Quality Control
13–30
3. Describe how to establish an effective purchasing procedure.
● Determine the items needed, in what quantity, from whom to purchase, and the terms of the
contract.
● Requisition goods or services.
4. Discuss how to establish and maintain effective inventory control.
● There is no way to avoid carrying inventory; the best you can do is manage its movement
and control its cost.
Chapter 13 – Purchasing, Inventory, and Quality Control
13–31
5. Explain what is involved in operations planning and control.
● Operation planning starts with a forecast of sales.
6. Describe how to maintain quality control.
● In small firms, the emphasis should be on quality of goods rather than on low price.
● Methods of improving quality include:
○ Establishing quality circles (QCs)
KEY TERMS USED IN THIS CHAPTER
According to the 80-20 rule, approximately 80% of a company’s income usually comes from 20% of its
products.
Bar codes are derived from a language called symbologie and used for specific identification of objects.
The economic order quantity (EOQ) is the quantity to purchase that balances the cost of placing the order
with the cost of carrying the inventory.
Fully integrated production networks are entire geographic regions where a fully integrated supply
chain, from raw materials to finished products, is built up.
Chapter 13 – Purchasing, Inventory, and Quality Control
Radio-frequency identification (RFID) is a method of specific identification transponders that contain
information and can be read from several meters distance.
NOTES FOR DISCUSSION QUESTIONS
1. Discuss the advantages and disadvantages of buying locally versus buying from a distant seller.
Some advantages of buying from a local vendor are: (1) Material has a shorter distance to be
transported; (2) You as a buyer have a shorter distance to travel if you go to the vendor; and (3) You may
2. What are the advantages and disadvantages of shopping at a single store rather than at several?
Some advantages of a single supplier are that you have a closer and individual relationship, may
3. A company orders widgets in batches such as 1,000 units. The company uses a constant number
each month (say 2,000) in production. Show how the inventory level changes over time between
orders. What factors would cause you to change the order size up or down?
Inventory fluctuates up and down as purchased units are received and used.
When an order is received, the inventory increases 1,000 units, as shown by the vertical line. As
Chapter 13 – Purchasing, Inventory, and Quality Control
13–33
4. How would you make an economic study to determine the quantity of a food item to buy for your
family on each trip to the store? How often should purchases be made?
Some of the costs associated with buying food are: (1) costs of the purchased items, (2) costs of
time to go to and from the store and to shop around, (3) costs of driving to and from the store, (4) costs of
5. In some parts of the country, building construction varies seasonally. Is this a problem for com–
pany management? What decisions must management make concerning these variations?
If management does not plan or if something unexpected occurs, such seasonal variation can be a
problem. Several alternatives are available, as detailed below.
The second question gets into the area of production planning. Consider this problem from the
standpoint of a construction company.
(1) How does the company handle its work force? Fewer workers are needed during slack peri-
ods than during peak periods. Legislation is making it harder to lay off workers without
heavy costs.
6. Many times, sales personnel do not practice good selling relations. How would you control the
quality of this type of service?
The text does not cover this specifically. Good relations involve working together to solve each
other’s problems. Arguments and hard-driving bargains should be tempered.
7. What is quality? How can it be measured? How can it be controlled?
Chapter 13 – Purchasing, Inventory, and Quality Control
13–34
The word “quality” has at least two meanings. First, it refers to characteristics of products being
8. Outline instructions for installing a new quality circle.
A quality circle is a small group of workers, led by a senior worker, that meet regularly to identify
and develop ways to solve company problems —one of which is quality. The members are given training
in areas such as problem identification, communication, and problem solving. Also, as they meet, they
may have access to resource people who can provide further expertise.
9. In Figure 13.2 styles are changed twice a year. What changes would be required with seasonal
changes of four or more styles?
Four seasonal changes would mean doubling all activities and speeding up of the entire process.
10. What would you do if you received a large number of customer response forms with comments
similar to those in Figure 13.7?
This comment card indicates that the service element (hostess, server, table preparation) is up to
Chapter 13 – Purchasing, Inventory, and Quality Control
13–35
11. What effect on your company would the delivery of an increased percentage of defective parts
have? What would you do about this?
More defective parts mean that you are paying more per good part received. This will increase
your costs of production. Defective parts require extra work by your employees to inspect and sort, to re-
NOTES FOR CASE QUESTIONS
CASE 13.1: Eddie & Company: Exceeding the Relevant Range
1. What options are available to the company?
One option would be to subcontract out production to meet the increased demand. Another option
2. What would you do if you faced the same situation?
3. Would you buy the product from your competitor to meet the contract? Explain.
This would not be an acceptable long-term solution. You would be putting your company’s secu-
4. Would you add the additional capacity? Explain.
Students will have individual opinions about this. If the company adds the additional capacity, it
Chapter 13 – Purchasing, Inventory, and Quality Control
13–36
BONUS EXERCISE
13.1 Controlling Quality
The definition of “quality” and its relative importance depends on the type of operation being
HANDOUT 13-A
Controlling Quality
You are an operations manager at a medium-sized corporation. You have just hung up the phone
after a conversation with the quality assurance department. They have analyzed the daily output sample
and reported the results to you. The report shows that 5% of the output sample has minor defects. An ad-
ditional 1% shows major defects, making the item unusable. For each of the products below, briefly ex-
plain how you should handle the report. What actions should you take? Are corrective measures needed?
Why or why not?
1. Clay flower pots (12 inches wide)
2. Wooden toothpicks
6. Flat-screen computer monitors (15 inch)
Chapter 13 – Purchasing, Inventory, and Quality Control
8. “My Little Monkey” plush toy