Page 387 - Business Principles and Management

Unit 4

When new planning procedures are used or new activities are implemented,
planning is less likely to be accurate. Standards developed in those situations
should be studied more carefully than the standards for ongoing activities or
standards that have been developed in the same way for a long period of time.
Standards should be revised when it is clear they will not accurately reflect per-
formance and attempts to improve performance have been unsuccessful. When
standards are changed, the new standards and the reasons for the changes should
be clearly communicated to the employees affected. Also, the procedures for set-
ting standards should be revised so that standards developed in the future are
more accurate.

CHECKPOINT
Why should managers be reluctant to change standards even
when performance does not meet those standards?

Controlling Costs

All managers need to watch constantly for ways to reduce costs. Excessive costs
reduce the company’s profit. There are several areas in a business where managers
can anticipate cost problems and develop ways to reduce costs. They are inven-
tory, credit, theft, and employee health and safety.

INVENTORY Manufacturers need to produce enough of each product to fill
the orders they receive. They need enough raw materials to produce those
products. Wholesalers and retailers must maintain inventories to meet their
Inventory control is a kind of customers’ needs. In all types of businesses, if inventories are too low, sales
balancing act. What factors will be lost. If inventories are too high, costs of storage and handling will
need to be in place for just- increase. There may be products in inventory that are never used or sold.
in-time inventory controls to In that situation, the company loses all of the money invested in those
be successful? products.
Inventory control requires managers to walk a fine line. They must
maintain sufficient inventory to meet their production and sales needs
yet not so much that it is too costly to handle and store. They must
select products to purchase that can be sold quickly at a profit. They
must purchase products at the right time and in the correct quantities
to minimize the company’s inventory cost.
Many companies now use just-in-time (JIT) inventory controls. JIT
is a method of inventory control in which the company maintains very
small inventories and obtains materials just in time for use. To set up a
PHOTO: © GETTY IMAGES/PHOTODISC. levels. They then place orders for materials so that they arrive just as
JIT system, managers carefully study production time, sales activity, and
purchasing requirements to determine the lowest possible inventory

they are needed for production or to fill sales orders. Production levels
are set so the company has only enough products to fill orders as they
are received. Effective inventory control methods can be very compli-
cated. JIT inventory management requires the close support and coop-
eration of a company’s suppliers as well as the companies providing

374 transportation services to resupply inventories.