Inventory Management

Introducing the topic The Shocking cost of Holding Inventory Read Case Study, Answer the questions on paper…. Page 419

Why Hold Stock? A Manufacturing business holds stock in three distinct forms. Raw Materials and Components – Used to make the final consumer good. WIP – Stock of semi finished goods, or goods going through the production process. Finished Goods – The completed product ready for sale.

Effective Stock Management Why should stock be managed effectively? - There might be insufficient stock to meet demand. - Stock might go Out of Date ie perishable goods - Stock wastage may occur - Business incurs excessive storage costs. - late deliveries, low discounts from suppliers or over supply.

What are the costs of Holding Stock Opportunity Cost – Money tied up in stock could be used to pay of loans, buy new assets, earn interest. Storage Costs – You need to pay for storage, insurance, transport etc/ Wastage, out of date – Stock might get to old and cant be sold or sold at a lower price.

What if you don’t have enough Stock? Should we try and limit stock holding? Is it possible for all businesses to operate a JIT system of stock control? There is risks associated with not holding enough stock the most obvious being the loss of potential sales to customers because you cant supply there order, and they go to a competitor.

What if you don’t have enough Stock? What are some other problems? - Production may have to stop, downtime equals lost sales and increased expenses from inactivity of staff. - The costs of a rushed order can be expensive as extra admin cost and short notice delivery costs are incurred. - No bulk discounts due to lower order quantity and extra delivery costs.

Economic Order Quantity

Controlling Stock Levels Charts are often used to record stock levels, stock deliveries, buffer stock and maximum stock levels over time.

Stock Levels Buffer Stock – the minimum stock level that should be held to ensure that production could still take place, should a delay In delivery occur or should production rates increase. Maximum stock levels – this could be limited by physical holding space or financial cost.

Stock Levels Re-order quantity – the number of units ordered each time. Lead Time – time between order and delivery. Re – order stock level – the level of stock that will trigger a new order to be sent to a supplier.

JIT – Stock Control Just in time – this stock method aims to avoid holding stocks by requiring supplies to arrive just as they are needed in production and completed products are produced to order. This method has become popular but there is a heavy reliance on suppliers, staff, customers, forecasts to make it work effectively.

JIT - Requirements 1)Suppliers – you relationship must be strong with them so they can supply you at very short notice. (based around mutual benefit) 2)Multi skilled – Production staff must be multi skilled and be able to complete all tasks within the process to avoid excess stock being produced.

JIT - Requirements 3)Equipment/machinery – the machinery needs to be flexible and be able to make different components to keep up with demand. 4)Forecasts – these need to be accurate as supply will need to be continuous as the aim is to avoid stock holding.

JIT - Requirements 5)Technology – Updated software programs to keep track of sales trends reorder levels because maintaining zero stock levels is crucial. 6)Employee’s – good relationships with staff are imperative to avoid production breakdowns. 7)Quality – All products must be off the highest quality to avoid non supply.

JIT – Stock Control

JIT - Evaluation JIT can be very useful for a business as it requires greater efficiency and accountability from staff, suppliers and customers to avoid time delays and wastage. However it is not always the most suitable as relying on factors outside your control could lead to significant and costly delays that could be solved by having buffer stocks. Not to mention the difficulty of inflation and rising fuel costs that would impact more heavily on small orders then the larger quantities.