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O.M. The traditional stock control system(JIC)uses a purchasing department to take charge of stock control.The roles of this department are: -Purchase.

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Presentation on theme: "O.M. The traditional stock control system(JIC)uses a purchasing department to take charge of stock control.The roles of this department are: -Purchase."— Presentation transcript:

1 O.M. The traditional stock control system(JIC)uses a purchasing department to take charge of stock control.The roles of this department are: -Purchase good quality raw materials and other supplies at competitive prices -Ensure that the right quantity and quality of products are available for production -Arrange for timely delivery of stocks to ensure that they are available for production -Develop good professional relationship with suppliers STOCK CONTROL CHARTS Are used to graphically illustrate a simplistic system of stock control: -Maximum stock level refers to the upper limit of stock that a b.wishes to hold.The maximum limit is determined partly by the physical storage space that is available and the level of demand for its output,per period of time -Reorder level:there is a time lag between a firm placing an order for stocks and it being delivered.Hence,when stocks fall to the reorder level,the next order is placed.This should help to ensure that the new order arrives just before stocks fall below the predetermined minimum level -Minimum stock level refers to the smallest amount of stock that a b.wishes to hold.Buffer stock refers to the minimum stock level held by a case there are any unexpected occurrences,such as delays in the delivery of raw materials or a sudden increase in demand for the firm’s product TRADITIONAL STOCK CONTROL

2 O.M Stock control charts can also help b.with their management of stocks. -Reorder quantity refers to the amount of new stock ordered.This order is placed whenever stock levels reach the reorder level -Lead time measures the amount of time between placing an order and receiving the stock.The greater the lead time,the higher the buffer stock tends to be.By contrast,JIT stock control systems have minimal buffer stock,if any at all.In reality,delays can prolong lead times so it may be important to have some stock to deal with contigency situations.This will mean that stock levels go below their desired minimum level(but are above 0) CONSEQUENCES OF FASTER USAGE: -Faster depletion of stocks mean that more orders will need to be made or the b.has to do without stocks,i.e.halt production -Stocks will fall below the minimum stock level line.This highlights the importance of having a buffer stock -The stock control line will be steeper,leading to more frequent reordering of stock -There will be a knock-on effect so stock will only return to its normal levels once the reorder quantity is increased

3 O.M. OPTIMUM LEVEL OF STOCK The best level of stock for a b. will vary from one b.or industry to another.B.face a dilemma when they order stocks:a large order will generate cost savings through economies of scale,but will also involve higher storage costs to hold the additional stocks.Striking a balance relies on the expertise of managers.This balance is known as the economic order quantity,i.e.the optimum level of stocks which ensures that there are sufficient stocks for production to take place without any interruptions,but also allows a firm to incur only minimal costs.There is a number of factrors which influence the amount of stock that a b.holds and orders: -type of product:FMCGs such as soft drinks and personal hygiene products sold in supermarkets,will need to be reordered in large quantities.Consumer durables such motor vehicles,furniture will be reordered in much smaller quantities since there is a slower stock turnover for such products -forecast level of demand:the higher,the greater the amount of stock will be held -lead times:suppliers that can guarantee short lead times allow a have minimal buffer stocks -costs of stockholding:the higher the opportunity cost of holding stock,the lower the optimal stock level tends to be. Today,most large b.use computerized stock control systems.When the stock level reaches the reorder level,the computer system automatically reorder stocks

4 O.M Being able to stock the right products at the time when consumers want them can certainly help to give the b.a competitive advantage.It is also possible for the firm to decide which of the less popular products should be discontinued. Computerized stock control systems have led to huge efficiency gains.Computerized systems known as Electronic Point of Sale automatically keep a running balance of stock levels and,reorder them when necessary.However,EPOS does not completely eliminate the need for manual stock control by staff(known as spot checks)since computerized systems do not account for damaged or stolen stock CAPACITY UTILIZATION Measures the existing level of output of a firm as a proportion of its total potential output.A high level of capacity utilization means that output levels are close to their maximum level(known as the productive capacity)per period of time.E.g.,80% capacity utilization means that there is 20% spare capacity in the org.High capacity utilization is financially important as it helps to spread out fixed and indirect costs of production over a large level of output. Capacity utilization=actual output/productive capacity x 100

5 O.M. High capacity utilization is likely to be relatively more important to firms that have: -High fixed costs:higher capacity utilization will help to reduce the average fixed costs of production.The higher the firm’s capacity utilization,the lower the fixed costs per unit will be -Low profit margins:products with low profit margins contribute little to the profits of a b.Hence,they will need to be sold in large quantities to be profitable.Mass market products such as FMCG have low profit margins,but the high level of output and sales justifies their existence -High levels of break-even:high capacity utilization is needed if a firm has a high break-even level of output METHODS TO INCREASE CAPACITY UTILIZATION -the use of marketing strategies can help to increase sales -a relatively quick way to increase productive capacity is to subcontract work.This involves using external firms to help supply the firm’s products.the main drawback is that profit margins are likely to be lower(if prices are kept constant)or prices need to be raised(in order to maintain profit margins)Higher prices can dampen the demand for a firm’s products

6 O.M -spare capacity might exist because of excess capacity…need to close down operations to reduce excess capacity:this is likely to cause job losses,although will often be necessary for the firm to return to profitability -if the cause of low capacity utilization is an economic recession,there is little that the firm can do.When the economy recovers,capacity utilization should automatically increase to meet the increasing level of consumer demand DRAWBACKS OF HIGH CAPACITY UTILIZATION -high cap.util.will mean that equipment and machinery are being used constantly without any time for routine servicing and maintenance -operating at full capacity can lead to stress being placed on workers.Quality is also likely to fall if there is continual pressure on running at full capacity -for services can lead to all sorts of problems,such as longer waiting times and lower standards of customer service -the firm may experience diminishing marginal returns as it operates near full capacity.This means that each additional unit of output costs increasingly more because resources are overstreched -high not a substitute for organizational growth.In order for a take on more orders to meet rising levels of demand,it will need to expand its scale of production,i.e.raise its productive capacity

7 O.M Finally,it is important to remember that whether higher or lower capacity utilization is a good thing depends on the context of the b.. The above disadvantages can apply when a b.operates near or at its productive capacity.Diseconomies of scale can only happen if the operating on a larger scale,i.e.if its productive capacity has increased OUTSOURCING AND SUBCONTRACTING One way in which b.have strived to gain a cost advantage is by outsourcing(subcontacting)- refers to the practice of transferring internal b.activities to an external firm as a method of reducing costs.Subcontractors should be able to carry out the outsourced work for less then the b.would be able to,without compromising quality. Outsourcing,or contracting out,tends to be used for 3 reasons: -when activities are not core to the functions of the b. -when the b.lacks the specific skills -to cut costs of production

8 O.M ADVANTAGES OF OUTSOURCING: -specialists are hired to carry out the work to high quality standards -different subcontractors will tender to carry out the outsourced work.The firm with the most attractive overall package will be awarded the contract.This means that the subcontracted work is provided at competitive prices -contracting out also helps to reduce labour costs-no need to remunerate subcontractors with holiday pay,bonuses,pension contribution.. -outsourcing allows the concentrate on its core activities -has become popular as it improves workforce flexibility -contracting out production facilities to overseas org.(offshoring)can help a get around protectionist measures used by the government DISADVANTAGES OF OUTSOURCING -will initially cause redundancies in the org.and will therefore need to be managed carefully as it will affect the level of morale and motivation within the firm -subcontractors need to be monitored to ensure that deadlines and quality standards are observed -outsourcing and offshoring have often been associated with ethical concerns and problems.E.g.,offshoring may involve exploatation of labour in less economically developed countries

9 O.M -quality management becomes more difficult -the benefits of offshoring are subject to changes in the external environment.E.g.,cost savings from using an overseas subcontractor may be wiped out simply because of adverse fluctuations in the exchange rate.. OFFSHORING Is an extension of outsourcing that involves relocating b.activities and processes abroad.It tends to take place in less economically developed countries where labour costs are relatively low. MAKE-OR-BUY DECISIONS Refer to a firm’s choice of whether to produce a product itself or to purchase the product from a supplier and then resell it.There are several quantitative methods that can be used to help in this decision:break-even analysis,investment appraisal and cost-benefit analysis. The make-or-buy decision involves an assessment of both financial and qualitative factors.As with outsourcing the buy decision requires a consider whether it has the expertise and equipment to manufacture a quality product and at a competitive cost.If the firm does not,then the buy decision should go ahead. COST-BENEFIT ANALYSIS:if the cost of producing the product is lower than the supplier’s price,then it makes financial sense to manufacture the product rather than use outsourcing.

10 O.M 4 key variables must be known: -expected sales volume or quantity(Q) -fixed costs associated with making the product,,machinery costs.. -average variable costs of making the product,e.g.wages and material costs -price per unit charged by the supplier COST TO BUY = PxQ COST TO MAKE = FC+(AVCxQ) Qualitative factors are also usually taken into account when considering make-or-buy decisions These factors include issues such as: -an assessment of the firm’s core competencies and its non-core activities and functions -the reliability of subcontractor -whether the manufacturer has spare capacity to meet extra orders….

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