Inventory Management Definition: STOCK: Materials and goods required to allow for the production and supply of products to the customer

(eg – toy companies might stockpile for christmas) REMEMBER – APPLY you answers to the “stock” in the scenario (eg – toy companies might stockpile for christmas) The nature of stock There are 3 types of stock for MANUFACTURING businesses ... Raw materials and components – stocks bought from outside the business Can be used for upturns in demand for making the product Work in progress – Partly finished goods, often in the production process. Sometimes held in stock to meet a change in demand. Quantities held will depend on the “method” of production Finished goods – complete product. Held in stock to be sold stockpiling for seasonal changes or because of a fall in demand

So, why is “stock management” important? Insufficient stocks to meet demand Out of Date Stock – need stock rotation system in place Stock wastage – bad handling/ poor storage conditions Too much stock on hand/work in progress – high storage costs Poor purchasing department – late deliveries; low discounts obtained; too much delivered at one time OPPORTUNITY COSTS – what else could you do with the capital tied up in stocks???

Stock holding costs ... Opportunity Costs Can your funds be used more efficiently elsewhere? New Equipment Pay off Accounts Payable Early payment discounts Savings (if interest rates are favourable) Storage Costs Special conditions might be needed (perishables) Security might be needed Insurance of the stock Finance to buy the stock (interest)

Stock holding costs ... Wastage/Obsolescence Is your projected Sales forecast accurate? Will the goods deteriorate or go out of date? Will have to reduce the selling price of the products to get rid of them The usual cost to a business for holding stock is between 4%-10% ... BUT, some companies can pay up to 40% of the purchasing cost of their stocks due to bad stock conrol

So, what if we don’t hold enough stocks? Lost Sales – customers will go elsewhere Compensation payouts – B2B contracts Idle production resources – if there is nothing to make (costly) Special orders (if a customer wants to increase their order) – administration/delivery costs increase Small order quantities – to keep stocks low in the business could miss out on bulk buy discounts Higher delivery costs due to more deliveries Economic Order Quantity: The Optimum or least cost quantity of stock to reorder, taking into account delivery costs and stock holding costs So, how do you get the level right?

The purchasing department will consider how to operate best for their business Should the firm place large orders occasionally or small orders frequently Should the firm accept lower quality stock for a lower price Should the firm rely on one supplier or use several. Should the purchasing be centralised or decentralised

Decentralised Reduce the cost and administration costs Purchasers in each department are more in touch with what is required Added responsibility for the department (motivation of staff). Centralised Purchasing for the whole business carried out by one department. Benefit from economies of scale One standard for the whole company Distribution and warehousing can be planned better

Stock control charts Stock control charts are used to analyse a company’s stock level. Managers can use stock charts to see how stock levels change over time and note any change in patterns. They can also be used to see if there is too much or too little stock being held at any one time.

Stock control chart Stock Level 600 Maximum 300 100 Re-order Minimum Lead Time Buffer Stock Stock Level 600 300 100 0 1 2 3 4 5 6 7 8 9 Time (months)

On a chart there are; Maximum levels of stock- the amount able to be held in storage Minimum levels of stock- known as “buffer stock”. Some businesses like to keep a safety level of stock in case supplies don’t arrive on time or in case of an increase in demand. Re-order level – when stocks reach this level a new order will be sent. Lead time – this is the amount of time between when stock is ordered and when it is delivered.

This is a regular pattern which doesn’t always happen in real life but it shows; The maximum level of stock able to be held is 600 units There is a fixed re-order level of 300 units There is a constant lead time of 1 month Buffer stock of 100 units

Weekly stock of Mars Bars in a corner shop Special offer 3p off TV campaign Stock Level150 100 50 0 1 2 3 4 5 6 7 8 9 10 11 Weeks What is the usual buffer stock level? What is the maximum stock of mars bars that can be held? What causes the levels of stock held in the shop to change? Do you think the lead time is long or short? Explain why you think this.

Eliminating waste. There are seven types of waste: waste from overproduction. waste of waiting time. transportation waste. processing waste. inventory waste. waste of motion. waste from product defects.

The advantages of a just-in-time production system are: 1) Cashflow is improved, as less money is tied up in raw materials, work-in-progress and finished goods. 2) Less need for storage space for raw materials and finished goods. 3) The business builds up strong relationships with its suppliers. 4) Communication and co-operation between the marketing and the production departments are improved.

The disadvantages of a just-in-time production system are: 1) The business may struggle to meet orders if their suppliers fail to deliver the raw materials on time. 2) The business is unlikely to ‘bulk-buy’ its raw materials and, therefore, it may lose the benefit of achieving economies of scale. 3) Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring delivery immediately.