Stock Control

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  • Created by: MRH__98
  • Created on: 20-06-16 16:59

Stock (A.K.A. Inventory)

  • Stock includes the raw materials, work in progress and finished goods that the business has within its production line.
  • Other topics related to stock control include:
    • Cash flow - greater stocks held reduces cash inflows
    • Stock (or inventory) turnover
    • Special (or non-standard) orders
    • Lean production - JIT, Jidoka, Effective management of quality (quality control / quality assurance / Total Quality Management)
    • Use of technology - Automated stock control, Electronic Point of Sale, Kanban
    • Methods of production - Job, Batch, Mass/Flow; Mass customisation (large quantities of varied products are made e.g. cars), Cell production.
  • Suppliers need to be efficient and reliable to provide businesses with the stocks that they need on time.
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Advantages of holding stock

  • Businesses are prepared for unexpected changes in demand.
  • Holding stock allows just in case stock control to be used.
  • Allows business to be less reliant on suppliers.
  • Can meet customer demand more easily.
  • Production can be continued even if there are problems with stock deliveries / suppliers.
  • Allows cost savings due to purchasing economies of scale - unit costs decrease.
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Disadvantages of holding stock

  • Reduced cash flow.
  • Storage costs may increase.
  • A business may be holding perishable goods that have to be sold quickly.
  • There is an opportunity cost: cash tied up in stock can't be used elsewhere.
  • Risk of waste e.g. products becoming out of date, damaged or obsolete.

Products prone to waste / going out of date

  • Food is perishable.
  • Technology can quickly be made obsolete by newly-introduced products.
  • Fashion items are prone to changing trends.
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Influences on the amount of stock held

  • Speed of change within the market.
  • Nature of the product.
  • The business's attitude to risk.
  • Cash flow position of the business.
  • Storage capacity.
  • Importance of speed of response as an operational objective.
  • Level of sales expected - may be influenced by seasonality or timing of marketing campaigns / product launches.
  • Degree of competition.
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Stock-holding costs

  • Storage costs are the most obvious cost of holding stock. Storage costs include rent for the warehouse and also the non-obvious costs of heatinglightingrefrigerationsecurity etc.
  • Wastage costs are the costs of discarding useless stock. The longer a business holds stock, the more likely it is to create waste. Stock gets physically damaged as time goes, and can also go out of fashion.
  • Opportunity costs is the cost of investing money in stock instead of something else. Capital tied up in stock is unproductive and could be used more productively elsewhere, such as financing a marketing campaign.
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Adequate stock levels

  • Most businesses try to reduce  the level of stocks they're holding. The maximum level of stock a business wants to hold depends on the size of their warehouses, their production method and also on opportunity cost.
  • Businesses that use flow production need a large stock of raw materials, whereas batch production leads to large stocks of work-in-progressJob production often means there are no stocks of finished goods to be stored and cell production usually relies on just-in-time stock control.
  • A business needs a minimum level of stock so that it won't run out of raw materials or finished goods. This minimum stock level is called buffer stock.
  • The amount of buffer stock needed depends on the warehouse space available, the kind of product (perishable, or something which keeps), the rate at which stocks are used up, and the lead time.
  • The lead time is the time it takes for goods to arrive after ordering them from the supplier. The longer the lead time, the more buffer stocks you need to hold - if customer demand suddenly went up, you wouldn't want to wait a long time for stocks to arrive from the supplier. A short lead time means you can have small buffer stocks and top them up as and when you need to.
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Inventory / Stock control charts

Give a visual representation of:

  • Maximum level (max level of stock a business can or wants to hold)
  • Lead time (the time it takes between placing an order and receiving delivery)
  • Reorder level
  • Buffer level (minimum level of stock hold)
  • Re-order quantities
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Factors affecting when/how much stock to re-order

  • Lead time from the supplier
    • How long delivery takes
    • Higher lead times may require a higher re-order level
  • Demand for the product
    • Higher demand normally means higher re-order levels
  • Implications of running out
    • If "stock-outs" are very damaging, then a higher re-order level and quantity minimises risks.

"Stock-outs"

  • Opposite of an overstock.
  • Occurs when businesses run out of stocks.
  • Can be defined as any time the customer is willing to buy something leaves without buying that item for any reason other than price e.g. poor customer service or badly organised systems can cause stock-outs.
  • There is a trade-off with stock or inventory management.
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Methods of stock control

  • Just in time (JIT)
  • Just in case (Companies keep large inventories on hand. This aims to minimize the probability that a product will sell out of stock.)
  • LIFO (Last In First Out) new goods are latest to the inventory.
  • FIFO (First In First Out) - Goods that are unsold are the ones that were most recently added to the inventory.
  • Kanban
  • Electronic Point Of Sale
  • Electronic Data Exchange (EDI) - Info passed to a computer that automatically reorders stock at the required level.

Benefits of FIFO

  • Good for perishable goods
  • Good for fashion
  • Good for technology

Benefits of LIFO

  • Allows you to match your most recent costs against your revenue.
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Just-In-Time Production

  • Just-in-time production aims to have as little stock as possible. Ideally, all raw materials come in one door, are made into products and go straight out another door - all just in time for delivery to customers.
  • JIT is based on very efficient stock control. Kanban is the JIT system of triggering repeat orders. When staff reach coloured kanban cards towards the end of a batch of components, they order more straight away. The supply of raw materials is linked directly to the demand for raw materials, and there's no need for lots of stock.
  • JIT has advantagesstorage costs are reduced and working capital control is improved. There's less waste because there's less out-of-date stock lying around.
  • There are disadvantages - no stock means customers can't be supplied during production strikes. Businesses using JIT can't respond to sudden rises in demand. Suppliers have to be reliable because there isn't much stock of raw materials to keep production going.
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