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Business · Making operational decisions

Working with suppliers

A business needs the right materials, at the right time, at the right price. That means managing stock - with bar gate stock graphs or just-in-time - and choosing suppliers on quality, delivery, availability, cost and trust.

  • 8 key terms
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Last Lesson

Answer from memory before the answers appear.

  • Name the three production processes.

    Job, batch and flow.

  • Which process has the lowest cost per unit?

    Flow production.

  • What is productivity?

    Output per worker in a period of time.

  • Give one impact of technology on production.

    Lower unit costs, higher productivity, better quality or more flexibility.

Learning Objectives

  1. 1Interpret a bar gate stock graph.
  2. 2Explain just-in-time (JIT) stock control.
  3. 3Explain the factors in choosing a supplier: quality, delivery, availability, cost and trust.
  4. 4Explain the effect of logistics and supply decisions on costs, reputation and customer satisfaction.

Why Manage Stock?

Stock is the raw materials, components and finished goods a business holds.

  • Too much stock

    Ties up cash, costs money to store and insure, and may go out of date, be damaged or stolen.

  • Too little stock

    Production stops and customers are let down, so sales and reputation suffer.

  • The balance

    Enough stock to keep running and meet demand, without wasting money holding too much.

The Parts of a Bar Gate Stock Graph

  • Maximum stock level

    Meaning: The most stock the business wants to hold. On the graph: 1,000 units

  • Reorder level

    Meaning: The stock level at which a new order is placed. On the graph: 400 units

  • Buffer (minimum) stock

    Meaning: The lowest level stock should fall to, kept for emergencies. On the graph: 200 units

  • Reorder quantity

    Meaning: The amount ordered each time. On the graph: 800 units

  • Lead time

    Meaning: The time between placing an order and it arriving. On the graph: 1 week

Using the Graph

Work out what is used during the lead time.

The business uses 200 units a week and reorders when stock falls to 400 units. The lead time is 1 week. How much stock will be left when the delivery arrives, and what will stock be after the 800-unit delivery?

Show the solutionHide the solution
  1. 1 Stock used during the lead time 200 units a week × 1 week = 200 units
  2. 2 Stock left when the delivery arrives 400 - 200 = 200 units (the buffer stock)
  3. 3 Stock after the delivery 200 + 800 = 1,000 units (the maximum)

Answer200 units left; 1,000 units after the delivery.

Just-in-Time (JIT) Stock Control

Advantages

  • Very little money tied up in stock.
  • Low storage, insurance and waste costs.
  • Less space needed, so smaller premises.
  • Stock is always fresh and up to date.

Disadvantages

  • Production stops if a delivery is late.
  • Relies on very reliable suppliers.
  • Frequent small deliveries can cost more.
  • Cannot meet a sudden rise in demand.
  • Loses bulk-buying discounts.

How JIT Works

Just-in-time means ordering materials to arrive exactly when they are needed, and holding little or no stock.

  • Frequent deliveries

    Suppliers deliver small amounts often, sometimes several times a day.

  • Close relationships

    The business and its suppliers share production plans so deliveries arrive on time.

  • Suits

    Businesses with reliable suppliers nearby and predictable demand, such as car makers and supermarkets.

Factors in Choosing a Supplier

  • Quality

    Materials must be good enough to make a quality product; poor materials mean faults and complaints.

  • Delivery

    The cost, speed and reliability of delivery - late deliveries stop production.

  • Availability

    The supplier must be able to supply the quantities needed, when they are needed.

  • Cost

    A lower price reduces the business's costs, but the cheapest is not always the best.

  • Trust

    A reliable supplier with a good track record, who communicates honestly when problems arise.

The Effect of Supply Decisions

Logistics is the management of getting materials in and products out on time. Supply decisions affect the whole business.

  • Costs

    Cheaper suppliers and efficient deliveries reduce costs; unreliable ones cause expensive delays.

  • Reputation

    Poor-quality materials or unethical suppliers can damage the business's reputation.

  • Customer satisfaction

    Products in stock, of good quality and delivered on time keep customers happy and loyal.

Case study

Toyota and the Chip Shortage

Toyota developed just-in-time production in Japan, and car makers around the world copied it. JIT kept their stock costs extremely low. But in 2021 a worldwide shortage of computer chips showed the risk. Modern cars need hundreds of chips, and car makers holding little stock could not get enough. Factories around the world, including in the UK, had to cut or stop production, and customers waited months for new cars. Many businesses began holding more buffer stock of key parts.

JIT Developed by Toyota in Japan
2021 A global chip shortage stops car production

Stock Detective

A café uses 50 bags of coffee beans a week. Its maximum stock is 300 bags, its reorder level is 150 bags, its buffer stock is 50 bags and the lead time is 2 weeks. Sketch the bar gate stock graph for 12 weeks. Then explain one risk if the supplier's lead time increased to 3 weeks.

1. Draw the graph with the levels labelled.

2. Mark the reorder point and delivery each time.

3. Explain the risk of a longer lead time.

A good answer shows: A correct saw-tooth graph with all levels labelled, and the risk that the café runs out - stock would fall to 0 before delivery.

Can I...?

  1. 1Explain why businesses manage stock.
  2. 2Read and label a bar gate stock graph.
  3. 3Calculate stock levels from a graph.
  4. 4Explain just-in-time.
  5. 5Give advantages and disadvantages of JIT.
  6. 6Explain the five factors in choosing a supplier.
  7. 7Explain how supply decisions affect costs, reputation and customer satisfaction.

Summary & Exam Focus

  • A bar gate stock graph shows maximum stock, reorder level, buffer stock, reorder quantity and lead time.
  • JIT holds little stock, cutting costs, but relies on reliable suppliers.
  • Suppliers are chosen on quality, delivery, availability, cost and trust.
  • Supply decisions affect costs, reputation and customer satisfaction.

Exam focus

Explain one disadvantage to a business of using just-in-time stock control. (3 marks) (3 marks)

For bar gate graphs, read the numbers carefully off the axes and show your working. For JIT, link any answer to the reliability of suppliers.

Key terms

The vocabulary this lesson expects you to use. Each one is linked from the first place it appears above.

Stock
Raw materials, components and finished goods held by a business.
Bar gate stock graph
A graph showing how stock levels rise and fall over time.
Reorder level
The stock level at which a new order is placed.
Buffer stock
The minimum stock kept for emergencies.
Lead time
The time between ordering stock and it arriving.
Just-in-time (JIT)
Ordering stock to arrive exactly when it is needed, holding little or none.
Procurement
Finding and buying the materials and services a business needs.
Logistics
Managing the movement of materials and products into and out of a business.

Practice questions

Have a go at each one before you open its answer.

  1. Question 1 Define 1 mark

    Define the term 'lead time'.

    Show answerHide answer

    Model answer

    The time between placing an order for stock and the stock arriving.

    Mark scheme

    • Time between ordering and delivery — 1 mark
  2. Question 2 Calculate 2 marks

    A business uses 150 units of stock a day. It reorders when stock falls to 600 units, and the lead time is 3 days. Calculate how many units will be left when the delivery arrives. You are advised to show your working.

    Show answerHide answer

    Model answer

    Stock used during the lead time = 150 × 3 = 450 units. Stock left = 600 - 450 = 150 units.

    Mark scheme

    • Correct method: reorder level - (daily use × lead time) — 1 mark
    • Correct answer: 150 units — 1 mark (award 2 marks for the correct answer with no working)
  3. Question 3 Outline 2 marks

    Outline one reason why a business holds buffer stock.

    Show answerHide answer

    Model answer

    To keep production going if a delivery is late (1), so the business does not run out of materials and let customers down (1).

    Mark scheme

    • A reason identified — 1 mark
    • Developed — 1 mark
  4. Question 4 Explain 3 marks

    Explain one disadvantage to a business of using just-in-time stock control.

    Show answerHide answer

    Model answer

    Production may stop if a supplier delivers late (1). Because the business holds almost no stock, it has nothing to fall back on (1). This means it cannot meet customer orders, losing sales and damaging its reputation (1).

    Mark scheme

    • A disadvantage identified, e.g. relies on suppliers / cannot meet sudden demand / lost bulk discounts — 1 mark
    • First linked point of explanation — 1 mark
    • Second linked point of explanation — 1 mark
  5. Question 5 Justify 9 marks

    Source: Pedal Power Ltd makes electric bikes. It needs a new supplier of batteries. Supplier A is based in the UK, delivers within 2 days and has a strong reputation for quality, but charges £180 per battery. Supplier B is based in Asia, charges £120 per battery, but deliveries take 6 weeks and it has had some quality complaints. Justify which supplier Pedal Power Ltd should choose.

    Show answerHide answer

    Model answer

    Supplier B would cut Pedal Power's costs by £60 per battery, which on thousands of bikes would greatly increase profit or allow lower prices. However, a 6-week lead time means Pedal Power must hold much more stock, tying up cash, and it cannot react quickly to changes in demand. Its quality complaints are also a serious risk: a faulty battery in an electric bike could be dangerous and damage Pedal Power's reputation. Supplier A is more expensive, but its 2-day delivery means Pedal Power can hold little stock, and its reputation for quality protects Pedal Power's brand. On balance Pedal Power should choose Supplier A, because batteries are the most important and safety-critical part of an electric bike, and poor quality could cost far more in recalls and lost reputation than the £60 saving. This depends on whether customers will accept a higher bike price.

    Mark scheme

    • AO2 (Application, 3 marks): uses the context - electric bikes, £180 vs £120, 2 days vs 6 weeks, quality complaints — Level 1-3
    • AO3a (Analysis, 3 marks): chains of reasoning about each supplier — Level 1-3
    • AO3b (Evaluation, 3 marks): a justified choice with a supported judgement — Level 1-3

Quick check

  1. On a bar gate stock graph, what is the reorder level?

    1. AThe most stock the business holds
    2. BThe stock level at which a new order is placed
    3. CThe amount ordered each time
    4. DThe time taken for a delivery
    Show answerHide answer

    B: The stock level at which a new order is placed

    The reorder level is the stock level at which a new order is placed.

  2. What is the main advantage of just-in-time stock control?

    1. ALess money tied up in stock and lower storage costs
    2. BThe business never runs out of stock
    3. CBigger bulk-buying discounts
    4. DDeliveries are needed less often
    Show answerHide answer

    A: Less money tied up in stock and lower storage costs

    Holding little stock means less money tied up and lower storage costs.

  3. A business uses 100 units a week, reorders at 300 units and has a lead time of 2 weeks. How much stock is left when the delivery arrives?

    1. A300 units
    2. B200 units
    3. C100 units
    4. D0 units
    Show answerHide answer

    C: 100 units

    100 × 2 = 200 units used during the lead time; 300 - 200 = 100 units.

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