4.22 Inventory management Flashcards
Stock(inventory)
- The raw materials, work in progress and finished goods held by a business to enable demand to be met
Why businesses hold stock?
- Raw materials and components
- Work in progress
- Finished goods
Stock-holding costs
- Opportunity cost: Working capital tied up in stocks could be put to another use
- Storage costs
- Risk of wastage and obsolescence
Costs of not holding enough stocks
- Lost sales
- Idle production resources: Stocks of raw materials and components run out, production will have o stop
- Special orders could be expensive: Out of stock -> place urgent order -> expensive than normal ones
- Small order quantities: Low stock level usually means small quantities orders -> lose out bulk discounts
Economic order quantity
The optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs
Buffer stocks
The minimum stocks that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase
Re-order quantity
The number of units ordered each time
Lead time
The normal time taken between ordering new stocks and their delivery
Just-in-time stock control
This stock-control 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
How to achieve JIT
- Relationships with suppliers have to be excellent
- Production staff must be multi-skilled and prepared to change jobs at short notice
- Equipment and machinery must be flexible
- Accurate demand forecasts
- Lastest IT equipment
- Excellent employee-employer relationship
- Quality must be everyone’s priority
Ads of JIT
+ Capital investment inventory is reduced
+ Less opportunity of holding cost
+ Less chance of stock becoming outdated to obsolescent.
+ Less damage, wastage
+ Greater flexibility that the system demands leads to quicker response times to changes in consumer demand or tastes
+ Multi-skilled and adaptable staff required to JIT may gain from improved motivation
Disads of JIT
- Delivery costs increase bc small orders is one feature of JIT
- Order-administration costs may rise
- Reduction in bulk discounts
Not hold stock effectively (ms)
– out of date stocks may be held if an effective stock rotation system is not used
– stock wastage may occur with inefficient inventory storage system
– inventory might be too high – high storage costs and opportunity cost of capital tied up
– Late deliveries
JIT evaluation
JIT may not be suitable at all times:
+ Expensive IT systems needed to operate JIT effectively
+ Rising global inflation makes holding stocks of raw materials more beneficial bc its cheaper to buy in large quantity
Benefits of holding inventory
- Ability to meet demand
- Ensuring production is not interrupted
- Gaining a discount
- Reducing inflation effects
