Physical Resources In a Business Essay

Physical Resources
Physical resources include:
Storage facilities – e­commerce
Buy or rent?

Plant, Machinery and Equipment
When to purchase
Buy or lease?

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Materials and Stocks
Efficient purchasing
Just – in – Case Stock Control
Just – in – Time Stock Control

© Business Studies Online: Slide 1

Premises: Location
The Choice of location will depend upon the type of business being set up:




E.g. Solicitor

E.g. Clothes Shop

E.g. Shoe Manufacturer

Will often be located
near to workers

Must be located near
to customers

Often located near to
good transport links

Local estate agents can give details of costs and
availability of business premises
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Plant, Machinery & Equipment: When?
Acquiring machinery and equipment requires a careful planning process
It must be done in conjunction with the cash flow forecast
There will be a tendency to buy all the equipment at once However financially this would be unwise
As such it is important to consider the following factors when deciding when to buy equipment:
Which pieces of equipment are necessities?
How much will they cost to buy AND maintain?
How much money is available?

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Materials & Stocks: Stock Control
The word “stock” can refer to a number of things: Raw materials and other components
things that go into the production process

products that are not yet finished, but where the production
process has started

Finished goods
products that have been completed to the right quality – and are waiting to be delivered to customers

in case of machinery break down

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Problems of Holding Too Much Stock
Businesses want to hold as little stock as possible due to Higher insurance costs
Since the value of the company on paper is higher

Instances of theft are less noticeable

Stock may go out of date, or be superseded by new technology

Storage Costs
Stock must be stored – so larger warehouses are needed

Many firms buy supplies using trade credit. If the stocks are not sold before payment is due it could create cash flow problems

Opportunity Cost
Money tied up in stocks cannot be used elsewhere
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Problems of Holding Too Little Stock
If insufficient stock is held a business may encounter: Lost Sales
Customers are likely to go elsewhere, and may not return!

Loss of Goodwill
Business will get a reputation for being unreliable

Longer Lead Times
Customers will be expected to wait if they don’t go elsewhere

This problem can be overcome in 2 ways:
The use of EPOS
Common in retail industry

The use of Stock Control Charts

© Business Studies Online: Slide 6

Stock Control Charts
These are used to maintain favourable stock levels
They are based upon 3 assumptions:
All deliveries are made correctly and on time
There are no faulty stocks
Stock is used up at a constant rate

The chart will show:
The Maximum Stock Level – the most stock a firm wants to hold The Re­Order Level – the level at which a new order is placed The Minimum (Buffer) Stock Level – the least stock a firm wants to hold

Re­Order Quantity – the number of items that are ordered Lead Time – the time between placing the order and receiving it

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Stock Control Charts

Stock Levels

A typical stock control chart will look like this: 300

Stock Level
(eg 300 units)


Re-Order Level
(eg 200 units)

Buffer Stock
(eg 100 units)

Lead Time
(eg 2 weeks)





Stock Level
(eg 100 units)


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Just-In-Time Stock Control
An idea developed by the Japanese at Toyota in the 1950s
They recognised that efficiency could be maximised if stocks were always at an absolute minimum
It therefore involves deliveries taking place just as stocks are required
It has become very popular, particularly in the
automotive industry and it has been adopted by

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The Advantages of Just-In-Time
Better cash flow since money is not tied
up in stocks
Reduced waste, obsolescence and
More factory space is available for
productive use
Improved relationships with suppliers
Motivation of workers is improved, since
they are given more responsibility

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The Disadvantages of Just-In-Time
Rely very heavily on suppliers
Increased administration costs, due to
increase in orders
May lose advantages of bulk buying
Problems if breakdowns occur
Difficult to respond to changes in
Loss of control on the ability to meet

© Business Studies Online: Slide 11