Planning and Controlling Purchases and Materials Usage Essay

Planning and Controlling Purchases and Materials Usage - Essay Example Budgeting is an important tool adopted by the company for planning and controlling purchases and materials usage. Sales forecast is the basis for planning and budgeting after carefully considering various factors such as capacity available and product mix. Since inventory involves significant investment, keeping it at an optimum level is very important for controlling cost. Material requirement planning is carried out in line with the production schedule for the year. Importance of study Home appliances market is very competitive. The company’s products face stiff competition from the products imported from China and Japan. The company is under tremendous pressure to ensure quality of its products and make improvements to maintain its market share. The company focuses on ‘planning and controlling purchases and materials usage’ with a view to bring down the cost of production to make its products more competitive in the market. The main objective of inventory plann ing is to keep the investment low for reducing the interest cost. The inventory can be classified into three categories. 1. Raw materials 2. Components purchased for assembly 3. Finished products Purchase and production departments along with stores are responsible for planning and controlling of inventory of raw materials and components and the production department is responsible for planning and controlling of material usage. There are varieties of household appliances manufactured and marketed by the company. Since most of the appliances are electrically operated, quality of materials purchased is very important, keeping in view the safety of the customers. Timely supply of raw materials and components avoid disruptions in production schedule usually. Order size is decided based on factors such as price, usage and lead time required for supply of materials. The materials should be purchased without compromising quality of materials at the cheapest cost in line with the purchase policy of the organization. This requires product knowledge and negotiating skills on the part of purchase manager. Planning and control of purchases is closely relating to storing of raw materials and component part before issue to various production or assembly units of the organization. Inventory planning is therefore is an important aspect in planning and control of purchases in the organization. According to Michalski (2008) â€Å"The basic financial inventory management aim is holding the inventory to a minimally acceptable level in relation to its costs. Holding inventory means using capital to finance inventory and links with inventory storage, insurance, transport, obsolescence, wasting and spoilage costs.† Planning and control of usage of materials in production department depends upon the regular supply of materials by the stores department, efficiency in production by the workers and keeping generation of scrap at minimum level. At the same time, requirements as p er the production schedule and changes thereof for a week need to be informed in advance to the stores for closely monitoring the stock levels of various raw materials and components for making necessary requisition to purchase department for initiating purchase process. Though reorder levels are fixed for various materials, uncertainties in lead time and sudden demand for appliances should be informed to the purchase and