Presentation on theme: "O.M. One of the key aims of prod.plann.is to minimize the costs of holding stocks whilst ensuring that there are sufficient resources for production to."— Presentation transcript:
O.M. One of the key aims of prod.plann.is to minimize the costs of holding stocks whilst ensuring that there are sufficient resources for production to be able to meet customer demand in a timely manner. STOCK CONTROL There are 3 categories of stocks: -raw materials -work-in-progress -finished goods B.have to decide on the optimal level of stock because there are costs and drawbacks in holding too much or too little stock COSTS OF HOLDING STOCK -storage costs:rent,insurance.. -stock may be prone to fire,theft or damage -some types of stock may perish or deteriorate.Hence holding large volumes of stock can be wasteful and expensive -stock can be illiquid so it ties up working capital which could have been used elsewhere -stock may become obsolete if demand suddenly changes PRODUCTION PLANNING
O.M Stockpiling occurs when a b.builds up excessive stock.This may have been caused by overproduction or falling demand. COSTS OF HOLDING INSUFFICIENT STOCK(STOCK-OUT) -lost sales since stocks are not available to meet customer orders -halted production due to insufficient stocks -damaged corporate image and reputation=this will also damage customer loyalty and goodwill -higher costs since staffing costs still need to be paid -higher administration costs will be incurred as the firm places more orders more often=this may also mean that these smaller orders do not attract discounts for bulk purchases JUST-IN-CASE VERSUS JUST-IN-TIME STOCK CONTROL JIC Is the traditional stock management system that recognizes the need to maintain large amounts of stock in case there are supply or demand fluctuations.A reserve stock(buffer stock)of raw materials,semi-finished and finished goods is used just in case there are any contigencies,such as late delivery of stocks from a supplier or a sudden increase in demand for output.JIC systems are used to ensure that there is always sufficient stock available to meet customer demands.
O.M. ADVANTAGES OF JIC: -JIC allows a b.to meet sudden changes in demand -There is increased flexibility because having sufficient stocks enables the firm to speed up production if necessary -JIC allows a b.to take advantage of purchasing economies of scale -JIC reduces downtime caused by a stock-out(lack of stock)since there is no need to wait for delivery Perhaps the key limitation with JIC is the high costs of storage.There is also an opportunity cost of money being tied up in stocks,i.e.the money could have been used more profitably elsewhere in the b. JUST-IN-TIME JIT is a stock management method based on having stocks delivered as and when they are needed in the production process.Since stocks are delivered just before they are used,there is no need for the b.to use traditional JIC stock control systems.Instead,only the absolute minimum level of stock is held.
O.M ADVANTAGES OF JIT: -JIT reduces the costs of holding stock -Since there is minimal money tied up in stock,working capital can be better used elsewhere -JIT improves cash flow and the working capital cycle -JIT allows firms to be more flexible and responsive to the needs of their customers,such as seasonal changes in demand -JIT system can improve motivation in the workplace by promoting employee participation and teamworking -JIT can help strenghten a firm’s relationship with its suppliers,thereby helping reduce lead times in the production process LIMITATIONS OF JIT: -There is a huge reliance on external suppliers.There will be major problems if stocks are not delivered on time.Hence,there is a need to establish good relationship with efficient suppliers -Minimal stock levels mean that there is little room for mistakes -JIT systems often prove inflexible in trying to cope with a sudden increase in demand -Administration costs will be higher as the frequency of stock ordering increses under a JIT system
O.M. -Since stock levels and stock orders are minimal,there are fewer opportunities to expoloit purchasing economies of scale PRODUCTION PLANNING AND BUSINESS STRATEGY Production planning and stock management are vital to a firm in order to improve its operational efficiency and cost control and can give the firm a competitive advantage,especially if it is able to pass on some of the cost savings to consumers in the form of lower prices Insufficient stocks will lead to production problems for the b.,which will disappoint customers.However,overstocking can lead to cash flow problems due to storage and other related costs.The marketing department might be able to provide data from sales forecasts to inform the operations department about the right stock levels needed for production. Since most firms find it difficult to know the exact amount of stock to hold at any one point in time,they will often hold a buffer stock. Outsourcing has provided many opportunities for b.in terms of cost control,access to stocks and productive efficiency gains. Effective stock control and production planning are based on the notion that higher levels of productivity lead to improved competitiveness.However,stock control is one of the many ways in which a firm can achieve greater productivity and lean production.Other methods include:staff training and development,improved staff motivation,enhanced quality management and reduced wastage….