Chapter 39- Stock Control

Question 1

Variety of stocks held for a number or reasons:

Answer 1

• Raw materials and components, stored- enabling a business to
be able to cope with changes in production levels + being able
to avoid delays in production with raw materials readily available
+ if a supplier lets a business down then they will still have stock
so production can carry on.
• Work-in-progress, partly finished goods.
• Finished goods, enables business to cope with changes in
demand, firm can get hold of urgent orders + avoid having to
step up production rates quickly.

Question 2

A number of factors influence stock levels:

Answer 2

• Demand- sufficient stock needs to be kept to satisfy customer
demand + a buffer stock may be needed to cover any sudden
changes in demand.

• Stockpile goods- some manufacturers have to build up stocks in
order to be ready for an increase in demand e.g. toy manufacturers a
few months before Christmas or coal fired power stations build up
stock in summer ready for winter.

• The costs of stock holding- if stock is expensive to hold then a lower
quantity will be held.

• The amount of working capital available- business in short of working
capital may not be able to afford to stock as much as they would
want or need.

• The type of stock- only small stocks of perishable goods can be held
or those that will go out of date or even those that models will be
replaced for new up to date ones.

• Lead time- depending on how long it takes for goods to be ordered,
received, inspected and made ready for use will affect how many
products need to be stored. E.g. longer the lead time, the higher the
minimum level of stock needed.

• External factors- fear of future shortages = store more as precaution.

Question 3

Buffer stocks

Answer 3

Some businesses will keep buffer stocks- in case of an emergency such as an increase in demand. If the business is not able to meet demand, they will miss out on sales opportunities + could lose regular customers.

Question 4

Implications of poor stock control:

Answer 4

• Storage- holding of high amounts of stock means storage rent space
needs to be paid as well as heating, lighting, electrical costs, a
security guard to look after the site and insurance against damage
and fire + refrigerated foods.

• Opportunity cost- capital tied up in stock means no money rewards +
the money used to purchase the stock could have been used to
purchase machinery etc.

• Spoilage costs- quality of perishable goods could deteriorate and
other stock kept for too long may go out of date.

• Administrative and financial costs- these include the cost of placing
and processing orders, handling costs and the costs of failing to
anticipate price increases.

• Unsold stock- unexpected reduction in demand = left with stock it
cannot sell.

• Hold low stocks = have to place more orders = higher total ordering
costs + miss out on discounts of bulk buying.

Question 5

Waste minimization

Answer 5

Not holding right amount of stock can lead to wastage – e.g. perishable goods such as fruit, veg, meat, cakes and flowers or newspapers, sports fixture.

Question 6

Some methods may be adopted to minimise waste:

Answer 6

• Refrigeration
• Forecasting techniques through quantative techniques so that the
amount of stock kept is the right.
• Stock rotation- FIFO method- means that older stock is used up first.
• Computers used to manage stock control, so that people know when
stocks go and come.

Question 7

Buffer stocks

Answer 7

stock held as a precaution to cope with unforeseen demand

Question 8

Kanban

Answer 8

a card or object that acts as a signal to move or provide resources in a factory.

Question 9

Lead time

Answer 9

the time between placing the order and the delivery of goods.

Question 10

Re-order level

Answer 10

the level of current stock when new orders are placed.

Question 11

Re-order quantity

Answer 11

the amount of stock ordered when an order is placed

Question 12

Stock rotation

Answer 12

• the flow of stock into and out of storage.

Question 13

Work in progress

Answer 13

partly finished goods.

Question 14

Just in Time management

Answer 14

A manufacturing system in which materials or components are delivered immediately before they are required in order to minimize storage costs.

Question 15

Lean production

Answer 15

Lean production is an approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business – from design, through production to distribution.

Lean production aims to cut costs by making the business more efficient and responsive to market needs.

This approach sets out to cut out or minimise activities that do not add value to the production process, such as holding of stock, repairing faulty product and unnecessary movement of people and product around the business.

lean management system may include, e.g. JIT
production/Kaizen /TQM to build computers (

Question 16

Evaluate the use of Just in Time management

Answer 16

• Some managers choose to hold as little stock as possible. These managers use an approach called Just In Time (JIT) management – where materials and finished goods are provided immediately by suppliers upon demand –this requires a very close relationship between suppliers.
• For businesses that don’t use large amounts of stock, the incentive to operate a JIT system is less given the risks involved – in particular, for businesses with unpredictable and frequent fluctuating demand it can be difficult to operate.
• However, for businesses with greater quantities of stock, it can be incredibly useful in creating a leaner, more efficient organisation, reducing wastage and costs. This can add competitiveness to the business operations.
• For the final decision, it comes down to a business’s relationship with suppliers. Can a firm trust and rely on its supplier to be flexible, cost effective and willing to deliver on a JIT basis?

Question 17

Benefits of holding minimum amounts of stock.

Answer 17

•Benefit from lower costs. Firms that adopt JIT management systems don’t require as much space to store stock. This means they can operate out of smaller, cheaper premises and do not need to rent such large warehouses.
•
Less potential for breakages. Reducing the time spent transporting inventory from warehouses to production line reduces the chance of breakages. For firms that make use of perishable inventory, there is less potential for stock to go off or be spoilt. These reduced chances help lowers insurance costs.

Question 18

Consequences of holding minimum amounts of stock

Answer 18

• Carries risk. If there are any delays in receiving stock, such as shipping delays, a business may be without the components it needs. Lead times to customers will increase, damaging customer/retailer relations and ultimately a business could lose contracts with customers, damaging sales revenue and causing liquidity issues.
• Harder to obtain JIT suppliers. Few suppliers are prepared to deliver on a JIT basis, as this increases their own costs. To compensate this, suppliers may charge higher prices for materials or offer shorter trade credit periods. It may also be costly as it is harder to obtain purchasing economies of scale benefits due to frequent deliveries.

Question 19

Benefits & consequences of holding larger amounts of stock.

Answer 19

• Greater economies of scale. Firms that have the storage space can purchase much larger stock levels from suppliers allowing them to exploit purchasing economies of scale discounts.
• Greater flexibility. In periods of a sudden increase in demand or unexpected last-minute orders, firms are able to respond accordingly. Although the costs maybe higher from holding more stock, the greater revenue from accepting these special orders may counter this.
• Greater choice selecting suppliers. Not restricted in finding suppliers that will deliver on a JIT basis. This may make it easier to switch suppliers to source the lowest cost inventory.

Question 20

What businesses is inventory management most important to

Answer 20

• Type: Some businesses such as law firms, call centres etc. require very little inventory each month – customer service, promotional activities and labour costs play a far more crucial role. However, other businesses such as restaurants rely on the consistent supply of ingredients in stock in order to remain competitive
• Size: Larger businesses may have huge contracts with suppliers that are the lifeline to their stores, in the event of a fall in supply it is difficult to switch suppliers as established distribution networks and credit agreements have to be sorted first. For smaller businesses switching suppliers is relatively simple.