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Chapter1 Stocks and Inventories. Aims of the chapter Introduce the ideas that lie behind inventory management. Define the terms used. Describe the general.

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Presentation on theme: "Chapter1 Stocks and Inventories. Aims of the chapter Introduce the ideas that lie behind inventory management. Define the terms used. Describe the general."— Presentation transcript:

1 Chapter1 Stocks and Inventories

2 Aims of the chapter Introduce the ideas that lie behind inventory management. Define the terms used. Describe the general features of stocks, their purpose, importance and use.

3 Stock Stock 1. ;( ) 2.,, 3. ( ), 4., 5., 6. ( ), 7., ; 10., [C][U] 11. ( ), ; 12.

4 Inventory 1. ; ( ); [C][U] 2. ; [C][U] 3. ( )[C] 4. ( ) [U]

5 Stocks of materials Definition of terms Stock consists of all the goods and materials that are stored by an organization. It is a store of items that is kept for future use. An inventory is a list of the items held in stock.

6 Stocks of materials In recent years, it has become more common to use inventory for both the list of items and the stock itself, and the two terms then become interchangeable.

7 An item is a distinct product that is kept in stock: it is one entry in the inventory. A unit is the standard size or quantity of an item.

8 All kind of stocks need the same kinds of management. For simplicity, we will use the general term material for anything that is kept in stock.

9 Stock cycle Stocks are formed whenever an organization acquires materials that it does not use immediately. Figure 1.1


11 Each stock cycle has the following elements: An organization buys a number of units of an item from a supplier. At an arranged time, these units are delivered. Unless they are needed immediately, the units are put into storage, replenishing the stock. Customers, either internal or external, create demands for the item.

12 Units are removed from stock to meet these demands. At some point, the stock gets low and it is time for the organization to place another order. Fig. 1.2 stock levels in a typical cycle


14 Customer and supplier can be internal and external. The cost of holding stock is about 20 percent of its value a year. Organizations put a lot of effort into controlling these costs through careful inventory management. This function is also called stock control or inventory control.

15 Reasons for holding stocks Giving a buffer ( ) Stocks are expensive, because of the costs of tied-up capital, warehousing, protection, deterioration, loss, insurance, packaging, administration, and so on.

16 Why do organization hold stock ? Based on the need for a buffer, or cushion, between supply and demand. Angelas Bakery Shop Two consecutive operations on a assembly line. These two examples show how stock gives a buffer between supply and demand. It allows for variation and uncertainty in both supply and demand.


18 Organizations hold stocks to do: Allow for demands that are larger than expected, or at unexpected times Allow for deliveries that are delayed or too small. Allow for mismatches between the best rate of supply and actual rate of demand Decouple adjacent operations. Avoid delays in passing products to customers.

19 Take advantage of price discounts on large orders. Allow the purchase of items when the price is low and expected to rise. Allow the purchase of items that are going out of production or are difficult to find. Make full loads for delivery and reduce transport costs. Give cover for emergencies.

20 Types of stocks Raw materials Work in progress Finished goods Spare parts ( ) Consumables( )

21 Types of stocks (continued) Cycle stock Safety stock Seasonal stock Pipeline stock – is currently being moved from one location to another. Other stock

22 Importance of stock There is a huge variation in the stockholdings of different industries and organizations.

23 Questions What is the difference between stock and inventory? How would you define supplier and customers? How do stocks act as a buffer between operations? How would you classify lubrication oil for an engine?


25 Stocks in the supply chain Shape of supply chains Each becomes a customer and a supplier.

26 Stocks in the supply chain Example: (1)Milk moves through a farm, tanker collection, dairy, bottling plant, distributor and supermarket before we buy it. (2)A toothbrush starts its journey with a company extracting crude oil, and then it passes through pipelines, refineries, chemical works, plastics companies, manufacturers, importers, wholesalers and retailers before finishing up in your bathroom.

27 Stocks in the supply chain This series of activities and organizations forms the products supply chain. The function that has overall responsibility for moving materials through the supply chain is logistics or supply chain management.

28 A supply chain consists of the series of activities and organizations that materials move through on their journey from initial suppliers to final customers. Logistics or supply chain management is the function responsible for this flow of materials.


30 An empirical observation suggests that the aggregate amount of stock held in a number of locations is: AS(N 2 ) = AS(N 1 ) × Where N 2 =number of planned future facilities N 1 =number of existing facilities AS(Ni)=aggregate stock with Ni facilities

31 Worked example AJT Transport of Manchester is planning to increase its services to mainland Europe. It currently has 12 depots( ) with aggregate ( ) stock valued at 12 million and plans to expand to 16 depots. With a carrying cost is 20 percent of value a year, what is the likely cost of this change ?

32 solution N 1 =12, N 2 =16, AS(N 1 )=12 million AS(N 2 ) = AS(N 1 ) × =12 × 16/12 = 13.9 million The additional depots will raise stock holding costs by: (13.9 – 12) × 0.2 = 0.38 million

33 The best shape of a supply chain depends on many factors, such as products value, bulk( ), perishability( ), availability, and so on. It also depends on the organizations aims and business strategy.

34 Broadening the chain and adding more intermediaries gives higher customer service, but increases costs and reduces the organizations control. Making the supply chain long and narrow can reduce costs, but the organization loses some control and customer service does not improve.

35 Taking the following steps to achieve best shape of supply chain Logistics strategy Examine current operations Design an outline structure for logistics Make detail plans Get final approval Finalize( ) building design Finalize equipment design Fit out( ) facilities(, )

36 Open and receive stock, run final tests of all systems, finish training and begin operations. Sort out( ) teething problems( ) and get things running smoothly. Monitor and control, ensuring that everything works as planned, measure performance, revise targets, etc.

37 These are only guideline to suggest the decisions in designing a supply chain.

38 If an organization wants fast delivery, it has warehouses close to final customers; if it wants the lowest costs, it concentrates stocks in very large, centralized warehouses that are inevitably( ) some distance from customers.

39 Cooperation within a supply chain

40 Worked example A simple supply chain has a manufacturer, regional and local wholesalers, a retailer and final customer. Each organization holds its own stock of one weeks demand. One week, demand from final customers rises to 20 units. Assuming that the deliveries are very fast, how does this affect stocks in the supply chain ?


42 The total amount of stock in the supply chain rises from 40 units to 190 units, and this will take 15 weeks to return to normal.

43 The ways to avoid such problems is to coordinate the stocks and flow of materials.

44 This brings a series of benefits: Lower costs- with lower stocks, less expediting, balanced operations, economies of scale, etc. Improved performance- with more stable operations, better planning, higher productivity of resources, etc. Improved material flow – with co-ordination giving faster and more reliable movements. Better customer service- with shorter lead times and faster deliveries. More flexibility- with organizations reacting faster to changing conditions.

45 Achieving cooperation in the supply chain Developing a valuable working relationship Formal arrangement with a written contract setting out the obligations of each party. Strategic alliance or partnership: involves a commitment over an extended time period, and a mutual sharing of information and the risks and rewards of the relationship.

46 Trends affecting stock Improving communications: Electronic data interchange( EDI) European Union North America Free Trade Agreement

47 Improving customer service Concentration of ownership( ) Outsourcing inventory management

48 Benefits for Outsourcing inventory management Lower fixed costs Specialist suppliers Guaranteed high levels of customer service Flexible capacity Lower exposure to risk Increased geographical cover and local knowledge. A convenient way of working in new markets.

49 Cross-docking: materials arrive at the receiving area and are transferred straight away to the loading area where they are put onto delivery vehicles for customers. Postponement – package-to-order, where a company keeps a product in stock, but only puts it in a box written in the appropriate language when it is about to ship an order. Increasing environmental concerns: air pollution, water pollution, energy consumption, urban( ) development and waste disposal(, ).

50 Changes to aggregate stocks Changing views of stock Aggregate national stocks Effects of the business cycle( )



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