Stock Intermediate II and Higher Business Management
What is stock? Raw Materials Work in Progress Finished Goods
Why hold Stock? Having stock enables goods to be available for immediate use in production or for delivery to customers. It enables customer demands to be met. It allows bulk buying to take place so that discounts can be received.
Too much stock can lead to.. High storage and insurance costs. High security costs. Large amount of space taken up storing the stock. Money tied up when it could be used more profitably elsewhere. Stock left for too long can deteriorate or become out-dated Possibility of theft by employees.
Too little stock can lead to.. Business not being able to cope with unexpected changes in demand. If deliveries are delayed, stock may run out. Loss of revenue and custom if unable to deliver on time. Gain bad reputation. Rush order for stock may have to be placed therefore losing out on discounts
So you can see that... Stock control, sometimes called Inventory Management is very important!
Ideally an organisation should operate with as little stock as possible, but this is not always ideal. There has to be a balance between the cost of holding stock and the cost of lost production and sales. But, a continuous supply of stock is required for efficient production.
Economic Stock Level This is the lowest level of stock that ensures that production is not interrupted. At the same time, it ensures that the organisation is not carrying too much stock. Economic Stock Level is based on the following...
Minimum Stock Level Ensures that there will always be stock for production, allowing for ordering and delivery times (known as lead time) Re-order Stock Level When stock falls to this level, new stock must be ordered to make sure that the organisation does not run out. For example, if it takes a week for new stock to arrive, then the reorder level will be at the point where there is one week’s stock left (but more likely 10 days to allow time for delivery delays).
Computerised Stock Control The computer automatically orders more stock when the stock falls to the re-order stock level. One example is bar codes Bar Code Reader logs stock into and out of the system. Physical checks should also be made from time to time as discrepancies may occur. This system means that slow moving lines and best sellers can easily be identified.
Storage of Stock Centralised Held in one central place. Improved security Specialist staff Costs may be less with a one site location Improved efficiency Decentralised Stock located in the different areas in which it is used. Always “at hand” Speedier turnover of a small quantity of stock reduces the likelihood of its deterioration or decay.
Just in Time (JIT) A Japanese approach to production – first developed by Toyota. Involves keeping stock levels at a minimum. Works only if there is a very good relationship between manufacturer and their suppliers. The stock is held by the supplier and is only brought to the factory as and when it is needed. Savings can be high as there are very little stock- holding costs. H
Pros and Cons of JIT Capital not tied up in stocks. Reduction in warehouse costs. Good relationship with suppliers. Reduce wastage. Increase in cash flow Reduction in stock-holding costs Danger of disruption due to non-arrival of stock. Danger of lost sales. High dependence on suppliers. Increased ordering. Increased transport costs. Less chance of discounts for buying in bulk. H
Kanban This is another Japanese system devised by Toyota. It uses markers (eg lights or flags), to order movement of stocks between different stages of production. For example, if a worker has to fit six steering wheels, a Kanban Card would be sent to the production team to order another 6 wheels. These would arrive just in time, before the worker ran out of steering wheels. When Toyota opened up in the UK, they had to train suppliers in this process. Suppliers had to prove that they could deliver small quantities of high quality goods and short notice in order to be awarded contracts. H