Production planning Chapter 36

The cost of ‘holding’ stock It is commonly accepted that the cost of holding stock is between 4% - 10% of the stocks value. These costs include: Storage costs Stock handling costs Loss / damage of stocks Obsolescence Opportunity cost of capital security

Stock All businesses hold stock, in a variety of forms: Raw materials. (bought from suppliers, held in stock until they are needed for the production process) Work in progress (half finished products, such as a car / construction site) Finished goods (goods waiting to be dispatched to the customer)

14 June, 2016© easilyinteractive.com Which types of stock are the following (in a pottery) * Raw materials Work in Progress Finished goods

14 June, 2016© easilyinteractive.com Which types of stock are the following (in a pottery) * Image by Peter Emmett. Used with permission Raw materials Work in Progress Finished goods

14 June, 2016© easilyinteractive.com Which types of stock are the following (in a pottery) * Raw materials Work in Progress Finished goods

14 June, 2016© easilyinteractive.com Which types of stock are the following (in a pottery) * Raw materials includes components and consumables Raw materials Work in Progress Finished goods

14 June, 2016© easilyinteractive.com Which types of stock are the following (in a pottery) * Raw materials Work in Progress Finished goods

Disadvantages of holding stock 1.Opportunity costs. Holding stock is not advantageous to the business, the stock could be sold off to pay of loans or the money used to hold stock could be invested into the business. 2.Storage costs. Stock has to be held in secure warehouses. Sometimes stock must be kept refrigerated and therefore increasing electricity costs. Expensive stock may need expensive security equipment and insurance costs are likely to be high. 3.Wastage / obsolescence. If stock is not used, or is perishable it will quickly lose value, and may have to be destroyed.

However, holding low stock is also disadvantageous 1.Lost sales / damaged reputation. If a firm cannot supply customers due to insufficient stock then the customers will order from another business. 2.Idle production resources. It raw materials run out, then production will have to stop 3.Unable to achieve purchasing economies of scale. The business orders minimal amounts of raw materials and therefore cannot benefit from economies of scale.

1.Explain, with the use of a graph the Economic Order Quantity [4] 2.Copy the stock control graph, explain the following terms: [5] Buffer stock Lead time Maximum stock level Reorder level

Lead times task - brainstorm Consider the main influences on lead times for the following products: – Custom made cars – Mass market clothes – Milk – Cut flowers – Baked beans * Influences might include:  Distance  Transport options  Perishability  Length of supply chain Influences might include:  Backlog of orders  Need for specialist parts Influences might include:  Ability of manufacturer to respond to demand  Availability of materials  Shipment method/ schedules Influences might include:  Perishability of product (hence a short supply chain)  Location of farm Influences might include:  Perishability of product  Location of suppliers (Kenyan Rift Valley?)  Transport method (air)  Season Influences might include:  Availability of beans (including success of harvest)  Length of supply chain  Capacity utilisation in factory

Question 1 [12] Page 375