22 - Invetory Management Flashcards
Why might a business hold stock?
- Raw materials and components, these will be held in stock until used in the production process. These stocks can be drawn upon at any time and allow the firm to meet the demand
- Work in progress, these are closer to becoming finished goods. They would have to be stored by the firm, in batch processing there tends to be high levels of works in progress. This is where the value addition process occurs
- Finished goods, these are the goods at the highest value as they are ready to be sold. These are held to cope with sudden, unpredictable increases in demand so that consumers can be satisfied without delay. These can be displayed to potential customers and increase the chance of sale
What is stock/inventory?
The materials and goods that a firm needs for the production of their products
Why if effective stock management important?
Without effective stock management:
-The might be insufficient stock to meet unforeseen changes in demand
- Out of date stock might be held if the firm doesn’t use an appropriate stock rotation system, or if the firm over stocks on products without high demand. this can happen with products such as fresh foods or fast changing technological products
- Stock wastage may occur due to mishandling or incorrect storage conditions.
- Very high stock levels may result in excessive storage costs and a high opportunity costs as the money is tied up as stock
- Poor management of the stock purchasing functions can result in late deliveries, low discounts from suppliers and damaged reputation from consumers
What are the stock holding costs?
- Opportunity cost, capital is tied up as stock and can no longer be used to generate more capital as interest in the bank. The firm can also make investments that can benefit the firm such as investing into capital equipment.
- Storage costs, stock held in warehouses often requires special conditions, such as refrigeration. Staff will be needed to guard and transport the stock. There are also insurance costs, which are recommended in the case that the stock is stolen, flooding or fires. Lower stock levels are likely to reduce these costs significantly
- Risk of wastage and obsolescence, if stocks are not used or sold as rapidly as expected, then there is an increase in the danger of goods deteriorating or becoming outdated. This will lower the value of stock, also when this occurs the firm might be forced to throw away their obsolete stock which is the equivalent of losing capital.
What are the costs of not holding stock?
- Lost of sales, if the firm is unable to supply their products to their consumers. The firm would lose out on potential sales, their reputation would be damaged as they would be considered as always being out of stock and there may be a loss of repeat purchases
- Idle production resources, if raw materials and components runout, then production would have to stop. This would leave expensive equipment idle and labour with doing nothing. The cost of reduced output and wastage would be considerable
- Special orders could be expensive, if an urgent order is given to a supplier to deliver additional stock due to shortages, then there would be extra costs
- Small order quantities, keeping low stock levels would mean ordering in small quantities, this would mean that the firm cannot buy in bulk and take advantage of those economies of scale. Therefore they wouldn’t able to use competitive pricing, this can lead to a reduction in demand. Transport costs could be higher due to map them making a large number of small orders
What is the economic order quantity?
The least cost quantity of stock to reorder taking into account delivery costs and stock holding costs
-The purchasing manager must ensure that supplies of the right quality are delivered at the right time insufficient quantities to allow smooth and unbroken production
What is buffer stock?
The minimum stock that should be held to ensure that production could still take place should a delay in delivery occurs or should production rates increase
-The greater the degree of uncertainty about delivery times or production levels, then the higher the buffer stock will have to be
What is reorder quantity?
This is the number of units ordered each time
-This will be influenced by the economic order quantity
What is the lead time?
The normal time taken between ordering new stocks and their delivery
-The longer the lead time the higher the reorder stock level will have to be
What are the factors of controlling stock levels?
Buffer stock, maximum stock level, reorder quantity, lead time and reorder stock level
What is the reorder stock level?
This is the level of stocks that will trigger a new order to be sent to the supplier
What is just in time?
This is a stock control method that is a move towards holding zero inventory. It requires suppliers to arrive just as the raw materials are needed in the production process
What factors would the success of JIT depend on?
- The effectiveness of this methods depends on these factors:
- The relationship the firm has with its suppliers. The suppliers must be ready and able to supply fresh supplies at very short notice, a short lead time is needed.
- The flexibility and skill of the production staff. Each worker must be able to switch to making different items at very short notice so that no excess supplies of any one product are produced
- Equipment and machinery must be flexible. The machinery would have to produce large batches of one type of component before being converted to making another item, while being efficient with time and resources. However such equipment is expensive and unavailable to small under financed firms
- Accurate forecasts will be needed. Demand forecasts can be converted into production schedules that allow calculation of the precise number of components of each type needed over a certain period of time
- The latest IT equipment will allow JIT to be more successful. This strengthens a firms relationship and communication with its suppliers. It supports effective and consistent delivery, which is needed in JIT
- Quality must be everyone’s priority. Due to the fact that there are no spares to fall back on, workers would have to be efficient and produce good quality products with small room for errors
What are the advantages and disadvantages of Just in time stock management?
Ads
-Capital invested into inventory is reduced, therefore there isn’t an opportunity cost of having capital tied up as stock
- Storage costs are reduced, space used for holding stock can be used for more productive purposes
- There’s a much lower chance of stock becoming outdated or obsolete as stock isn’t held for a long period of time. There is less stock held and this reduces the risk of damage or wastage.
- There is more variety and flexibility in the work, this would motivate the workers
Disads
-Any failure to receive supplies will lead to expensive production delays
- Delivery costs will increase as frequent small deliveries are an essential feature of JIT
- There could be a reduction in the bulk discounts offered by suppliers as there are small orders
- The reputation of the business depends significantly of the relationship and reliability of its suppliers. Also there is always the possibility of stocks not making it to the firm
- Expensive capital equipment is needed for this method to be effective
