Chapter 22 Inventory management Flashcards
What is stock?
Stock (inventory) is materials and goods required to allow for the production and supply of products to the customer
What are the 3 forms of inventory?
1 Raw materials and components
2 Work in progress
3 Finished goods
What can happen without effective stock management?
1 There might be insufficient stocks to meet unforeseen changes in demand
2 Out-of-date stocks might be held if an appropriate stock-rotation system is not used e.g. for fresh foods or for fast-changing technological products
3 Stock wastage might occur due to mishandling or incorrect storage conditions
4 Very high stock levels may result in excessive storage costs and a high opportunity cost for the capital tied up
Stock-holding costs: Opportunity costs
The working capital tied up in stocks could be put for other uses e.g. used to pay off loans or left in a bank to earn interest.
Stock-holding costs: Storage costs
Stocks have to be held in secure warehouses. They often require special conditions, such as refrigeration. Staff will be needed to guard and transport the stocks. These are all costs that add to the firm’s overheads
Stock-holding costs:Risk of wastage and obsolescence
If stocks are not used or sold as rapidly as expected, then there is an increasing danger that they can become damaged and/or outdated. This will lower the value of such stocks.
Costs of not holding enough stocks: Lost sales
If a firm is unable to supply customers ‘from stock’, then sales could be lost to firms that hold higher stock levels
Costs of not holding enough stocks:Idle production resources
If stocks of raw materials and components runs out, then production equipment will have to stop. This will leave expensive equipment idle and labour with nothing to do.
Costs of not holding enough stocks:Special orders could be expensive
If an urgent order is given to a supplier to deliver additional stock due to shortages, then extra costs might be incurred in administration of the order and the special delivery charges could be more expensive.
Costs of not holding enough stocks:Small order quantities
By ordering in small quantities, the firm may lose out on bulk discounts, and transport costs could be higher as so many deliveries have to be made.
What is Optimum order size?
Economic order quantity is the optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs
What is Buffer stocks?
Buffer stocks are 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.
What is maximum stock level?
This may be limited by space or by financial cost of holding even higher stock levels.
what is Re-order quantity?
The re-order quantity means the number of units ordered each time.
What is Lead time?
The lead time is the normal time taken between ordering new stocks and their delivery.
What is Re-order stock level?
The re-order stock level is the level of stocks that will trigger a new order to be sent to the supplier.
What is Just-in-time (JIT) stock control?
Just-in-time is a stock-control method that aims to avoid holding stocks by requiring supplies to arrive juts as they are needed in production and completed products are produced to order
What are the requirements that a business must meet in order to use JIT successfully?
1 Relationships with suppliers have to be excellent
2 Production staff must be multi-skilled and prepared to change jobs at short notice
3 Equipment and machinery must be flexible
4 Accurate demand forecasts will make JIT a much more successful policy
5 The latest IT equipment will allow JIT to be more successful
6 Excellent employee-employer relationships are essential for JIT to operate smoothly
7 Quality must be everyone’s priority
Advantages of JIT?
1 Capital invested in inventory is reduced and the opportunity cost of stock holding is reduced
2 Costs of storage and stock holding is reduced. Space released from holding of stocks can be used for a more productive purpose
Disadvantages of JIT?
1 Any failure to receive supplies of materials or components in time caused by, for example, a strike at the supplier’s factory, transport problems or IT failure will lead to expensive production delays
2 Delivery costs will increase as frequent small deliveries are an essential feature of JIT
Evaluate JIT.
1 JIT requires a very different organisational culture to that of other stock-control systems are referred to as ‘JIC’ – holding stocks ‘just in case’ they might be needed
JIT may not be suitable for all firms at all times,
1 There may be limits to the application of JIT if the costs resulting from production being halted when supplies do not arrive far exceed the costs of holding buffer stocks of key components
2 Small firms could argue that the expensive JIT systems needed to operate JIT effectively cannot be justified by the potential cost savings
