Inventory • Inventory or stock are the materials and goods required to allow for the production of supply of products to the customer. • All business hold stocks of some kind, Banks and insurance companies will hold stocks of stationery and retailers have stocks of goods on display and in their warehouses and many other businesses will hold stocks in different distinct forms.
The reasons for keeping stock There are three basic reasons for keeping an inventory: • Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance. • Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. • Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.
Inventory examples • Raw materials - materials and components scheduled for use in making a product. • Work in process, WIP - materials and components that have begun their transformation to finished goods. • Finished goods - goods ready for sale to customers.
Stock Holding Costs • Opportunity Cost: working capital tied up in stocks could be put to another use example pay of loans or buy new equipment. • Storage cost:stocks have to be held in secure warehouses, they often require special conditions such as refrigeration and staff will also we needed to guard and transport the stocks. • Risk of wastage and obsolescence: If stocks are not used or sold as rapidly as expected, then there is an increasing danger of goods deteriorating or becoming outdated.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, then sales could be lost to firms that hold higher stock levels. This may lead to future lost orders too. • Idle production resources: If stocks of raw materials and components run out, then production will have to stop, leaving expensive labour and machinery idle. • 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 in special delivery charges. • Small order quantities: Keeping low stocks level may mean only ordering goods and supplies in small quantities, this may cause the firm to lose bulk discounts and increase in transportation costs as many more deliveries have to be made.
Optimum order size --Ensure right quality supplies are delivered at right time in sufficient quantities. ---Ordering and administration costs will be low as less orders --Ensure continuous production ---Real costs involved of holding stocks --opportunity costs are high —more capital tied up.
ECONOMIC optimum /order quantity (EOQ) The optimum or least cost quantity of stock to reorder taking into account delivery costs and stock holding costs.
Controlling Stock Levels · Stock control charts are widely used to monitor a firm’s stock position. · These charts record stock levels, stock delivers, buffer stocks & maximum stock levels over time. a) Buffer stocks is the minimum stocks that should be held to ensure that produce could still take place should a delay in delivery occur or production rates increases. b) Maximum stock level - This may be limited by space or costs of holding higher level of stocks. c) Re-order quantity - This will be influenced by the EOQ concept. d) Lead time - The normal time taken between ordering new stocks & their delivery. e) Re-order stock level - The level of stocks that will trigger a new order to be sent to the supplier.
Controlling Stock Levels c)Re-order quantity - This will be influenced by the EOQ concept. d) Lead time - The normal time taken between ordering new stocks & their delivery. e) Re-order stock level - The level of stocks that will trigger a new order to be sent to the supplier
Requirements--Just in time For JIT principles to be SUCCESSFULLY introduced, there are certain very important requirements that a business must ensure are met: a) Relationships with suppliers have to be excellent. b) Production staff must be multi-skilled & prepared to change jobs at short notice. c) Flexible equipment & machinery.
Requirements--Just in time d) Accurate demand forecasts will make JIT more successful. e) The latest IT equipment will allow JIT to be successful. f) Excellent employee-employer relationship are essential. g) Quality must be everyone’s priority
JIT stock control -Advantages a) Reduces capital invested in stocks & reduces the opportunity cost of stockholding. b) Reduce costs of storage & stockholding. c) Less chance of stock becoming outdated & obsolescent. d) Greater flexibility. e) Multi-skilled staff required for JIT to work gain from improved motivation. f) It improves cash flow since money is not tied up in stocks.
JIT Evaluation ---JIT is not suitable for all firms. ---It requires a different organisational culture. ---This change in culture towards not accepting waste or poorly used resources can be of benefit to business. ---There is no buffer in the JIT system to cover up for inefficient workers, inflexible people & equipment.