2 The cost of STOCKSStocks are materials and goods required to allow the production and supply of products to the customers.The cost of storing and warehousing stocks is commonly calculated at 4%-10%.This can be an area of great cost-savings to business.
3 Types of STOCK Retail business: Goods on display Goods in the warehouse waiting to be shelvedGoods on the shelves waiting to be sold
4 Type of STOCK Service business (Banks, Insurance) Office supplies Stationery
5 Type of STOCK Manufacturing business 1. Raw materials & components Purchased from outside suppliers. They are held until ready to be used in the production process.2. Work-in-Progress (Work-in-Process)The raw materials and components currently being finished into the final good. Batch production has high levels of WIP stock.3. Finished GoodsItems that have completed the production process and are ready to sell.
6 Stock-holding Costs What costs are associated with holding stocks? Opportunity CostWorking capital tied up in the cost of stocks that could be used elsewhere (pay off loans, pay vendors, left in bank earning interest)Storage CostWarehouse costs (air conditioning, refrigeration, security, insurance)Risk of Waste and ObsolescenceIf stocks are not sold quickly, they may become out-dated, obsolete, damaged, or deteriorate.
7 Costs of not holding ENOUGH Stock Lost salesIncluding future potential ordersPayment penalties if you cannot meet delivery datesIdle production resources (if raw material or component stocks run out)Expensive equipment not operatingPaying labor that is not workingSpecial orders could be expensiveUnexpected special orders could be expensive or impractical to deliverSmall order quantities means:Expensive deliveryNo economy of scale – discounts on large orders
8 Economic Order Quantity (EOQ) Economic Order Quantity is the optimum quantity of stock to re-order taking into account delivery costs and stock-holding costs.
9 Controlling Stock Levels Buffer StocksThe minimum amount of stock that should be on-hand to ensure production can take place in the event of delivery delays or unexpected production increases.Maximum Stock LevelThe most stock that can be held due to space limitations, financial costs, or deterioration
10 Controlling Stock Levels Re-Order QuantityThe number of units to be ordered each time an order must be placed with a supplier. This will be influenced by the EOQ – Economic Order Quantity.Lead TimeThe time it takes between ordering and delivery
11 Controlling Stock Levels Re-Order Stock LevelThe level at which reordering of more stock is triggered. It takes into consideration buffer stock and lead times of new stock arrival.Material Requirements Planning SystemsRe-Order Stock levels can be set in computerized production planning systems (MRP) to trigger automatic ordering to suppliers.EDI – Electronic Data Interchange is a common computerized communication system between production factory and supplier
12 Just-in-Case Stocking (JIC) Just-in-Case stocking holds high stocking levels in case there is a problem with receiving from suppliers or an unexpected increase in sales.JICLarge InventoryFactory Production
13 Advantages/Disadvantages of JIC Easy to meet unexpected increase in demand by increasing productionHigh opportunity costs of working capital tied up in stock costsRaw-material “hold-ups” will not lead to stopping productionHigh storage costsEconomies of scale are realized with bulk buying discountsRisks of damaged stocks or outdated stocksStocks of finished products are plentiful so they can be displayed for potential customers“Getting it right” is less important because of replacement stocks which increases costsStocks of finished good can meet sudden increased of consumer demand because they are finished and warehousedSpace to store stock cannot be used for other purposesStockpiles of inventory can meet expected increases such as seasonal items
14 Just-in-Time Stocking (JIT) Just-in-Time stocking aims to avoid holding extra stocks and requires suppliers to send stock when needed on the production on the line.JITInventoryFactory Production
15 Advantages/Disadvantages of JIT Opportunity cost is reduced because less is invested in stocksAny failure to receive stocks can lead to production delaysCosts of storage are reducedDelivery costs increase as smaller quantities are deliveredStorage space can be used for other productive purposesAdministration costs rise because more attention is needed to multiple ordersLess opportunity for stock to become outdated or damagedReduction in bulk discounts pricing because of smaller ordersMore flexibility in production is required which leads to adapting to changing customer needsSignificant dependence on outside factors – the quality and dependability of outside suppliersMulti-skilled workers may be more motivated
16 JIT not suitable to everyone What if costs of halting production because of no stocks is TOO expensive or risky?Expensive computer systems are needed and small firms may not be able to justify the cost for potential cost savings.Raw material costs or delivery costs may actually rise making future production more expensive with newer raw materials.
17 Stock Control Chart 300 125 50 Max stock level Re-Order Level Max stock levelRe-Order LevelBuffer StocksTime
18 CapacityCapacity utilization is the proportion of maximum output capacity currently being achieved when compared with the total capacity available.Current output levelX 100 = rate of capacity utilizationMaximum output levelPlant A can produce a maximum of 5000 widgets. They are currently producing 3000 widgets. There current rate of capacity is (3000/5000) X 100 = 60%HL
19 Impact on Average Fixed Costs When capacity utilization is high…. Then average fixed costs are spread over more units causing a decrease in average fixed costsWhen capacity utilization is low…. Then average fixed costs are spread over fewer units causing an increase in average fixed costsHL
20 Maximum CapacityAre there any downsides to operating at maximum or full capacity?What do you think?Full capacity – when a business is producing at the maximum output levelHL
21 Drawbacks to operating at full capacity Staff may feel pressure of workload and added stressOperations managers cannot make any scheduling errorsRegular customers cannot increase their orders and may turn to other suppliersMachinery cannot be shut down for maintenance or repairsHL
22 What are choices? Should more production resources be purchased? Should it keep existing capacity but subcontract work to other firms?Can work subcontracted be assured of quality?Will demand fall in the near future making expansion unnecessary?HL
23 Excess CapacityExcess capacity exists when current levels of demand or less than full capacity output of the business. Also known as spare capacity.Excess CapacityMaximum CapacityCurrent output capacityHL
24 Capacity ShortageCapacity shortage – when demand for products exceed production capacityWhen capacity shortage is determined not to be short-term, capacity expansion options need to be considered.HL
25 Ways to expand Capacity Outsourcing (or subcontracting)Using another business to undertake part of the production process (It is called offshoring when this activity occurs in another country.)Business Process OutsourcingA form of outsourcing but for a business function not a production function (human resources or finance)HL
26 Reasons to Outsource Reduction in costs Increased flexibility Only “buy” the amount of capacity needed when neededImproved company focusManagement can focus on core business rather than administrative activitiesQuality resourcesExperts can be used that may not be available internally in your companyFree up resources for other business activitiesEliminate the payroll department, now space and employee resources can be used for customer serviceHL
27 Drawbacks to Outsourcing Loss of jobs within your businessQuality issuesCustomer resistanceEthical concernsSecurityHL
28 Make-Or-BuyCan you buy the component or service cheaper than you can produce it yourself?HL