Topic 9 - Inventory (Stock) Management Higher Business Management 1
Learning Intentions / Success Criteria Learning Intentions Inventory (stock) management Success Criteria Learners should be explain and discuss: features, costs and benefits of just-intime inventory (stock) control storage and warehousing of inventory (stock) logistical management of inventory (stock). 2
Stock Management The term stock refers to raw materials, goods that are currently being manufactured (work in progress) and finished goods. At all stages of the production process stock must be managed because there must be sufficient quantities of raw materials and finished goods at all times. 3
Factors to Consider when Manufacturing and Storing Goods The quantity of the product that is required. The volume of products that can be manufactured at any one time. Working practices, procedures and health and safety requirements. The storage available in a warehouse. Procedures for maintaining and managing quality. 4
Purpose of a Stock Management System Ensure stock is readily available at anyone time. Ensure production continues. Avoid delays to customer orders. Ensure over-stocking does not take place, which results in higher costs. Avoid stock deteriorating (e.g. fresh food) and/or becoming obsolete. 5
Consequences of Overstocking Stock could go to waste or deteriorate, resulting in stock that needs to be discarded if they are stored for too long. Supplies could go out of fashion before they are used. Increased financial costs (e.g. storage, security and insurance). Higher risk of stock being stolen by staff, customers or thieves. The opportunity cost of money being tied up in stock which could be better used elsewhere in the business. 6
Consequences of Understocking The business may run out of stock and be unable to continue production and therefore employees and machines sit idle. The business will not benefit from bulk buying discounts due to making smaller orders. There will be an increase in delivery costs since many smaller deliveries will have to be made. There may be no stock to sell, resulting in a bad reputation and customers not returning. Customers might not receive their orders on time, which could result in complaints. There will be an increase in administration costs, e.g. paying staff to browse for supplies, complete order forms, settle invoices, etc. 7
Inventory (Stock) Management System 8
Features of an Inventory Management System Maximum stock level Minimum stock level Re-order level Re-order quantity Lead time 9
Maximum Stock Level Description This is the most amount of inventory (stock) that should be held. Justification Setting this level avoids consequences of overstocking. 10
Minimum Stock Level Description This is the least amount of inventory (stock) that should be held. Justification Setting this level avoids consequences of understocking. 11
Re-order Level Description The level at which stock is reordered. Computerised inventory systems link to EPOS and automatically re-order goods. Justification This ensures the quantity ordered is not too much or too little. 12
Re-order Quantity Description This is the amount that is ordered. Justification This ensures the quantity ordered is not too much or too little. 13
Lead Time Description This is the time taken between an order being placed and stock arriving. Justification As short a lead time as possible allows the business to react to rush orders. 14
Computerised Stock Control Most inventory systems are now computerised. 15
Advantages/Disadvantages of a Computerised Stock Control Advantages Databases keep balances of inventory which are automatically updated. Can be linked to tills through EPOS, which update inventory levels with each sale. Accurate and constant monitoring of stock levels allows for automatic re-ordering. Allows for decisions on slow-moving stock or best sellers to be made by managers from their computers. Can highlight regional variations in stock for head office. Can highlight seasonal shifts in demand. Is a deterrent to theft by staff as they know inventory levels are monitored closely. Disadvantages Computerised systems will cost a lot of money to install and maintain. Money and time need to be invested to train staff to operate the system efficiently. 16
Just In Time (JIT) Just in time (JIT) is a method of stock control that keeps cost levels to the minimum. As the name suggest, stock arrives just in time for it to be used in the production process and goods are only manufactured when a customer order is received. 17
Advantages/Disadvantages of a JIT Advantages Less cash is tied up in stock, improving cash flow and working capital. Less wastage as all stock is used for production. Less storage and warehouse space is required saving costs. Wastage should be reduced as only stock required is ordered. Changes in the external environment (e.g. fashion trends) will have a reduced impact. Disadvantages Suppliers who are reliable are required so that stock is delivered on time. Production can stop if stock is not delivered when required. Less environmentally friendly as more journeys with less stock will be made. Delivery costs might be higher due to more journeys. Discounts for bulk buying (economies of scale) might be lost. No room for error in production. 18
Storage and Warehousing A business has to decide how to store its inventory (stock). Inventory is usually stored in warehouses. Large buildings in central locations are used to store inventory and distribute raw materials to factories or finished goods to retail outlets (called centralised storage). Warehouses can also be smaller buildings or areas of a factory or retail outlet (called decentralised storage). 19
Centralised Storage This involves storing inventory in one central location in a large, purpose-built warehouse. 20
Advantages of a Centralised Storage Specialist staff are employed to maintain inventory, which improves speed of stock handling and security. Centralised warehouses can store a massive amount of stock, benefiting from economics of scale. The same procedures for issuing inventory are used across the organisation, improving consistency. It may be cheaper to store inventory in one large warehouse than the total cost of many smaller on-site storerooms. Centralised warehouses are often located close to infrastructure, e.g. motorway networks, docks or air and rail cargo terminals. 21
Disadvantages of a Centralised Storage Inventory has to be delivered to the each division or department, causing delays. Specialist staff need to be employed to maintain inventory, increasing wage costs. Specialist equipment needs to be purchased and maintained. Inventory usage levels and needs are unclear as divisions need to communicate with the warehouse. The use of centralised warehousing has declined due to more efficient inventory systems such as JIT, sourcing direct from the supplier. 22
Decentralised Storage This involves storing inventory in many locations in smaller warehouses or store rooms. 23
Advantages of a Decentralised Storage Inventory is always close at hand when needed for production or to sell to needed for production or to sell to customers. Smaller, more local warehouses are more responsive to local needs. Inventory usage reflects production as it is stored in factories or retail outlets. Smaller amounts of inventory result in no negative consequences of overstocking. 24
Disadvantages of a Decentralised Storage Can lead to wastage or theft of stock as security isn t as good as it is in centralised storage. Lack of specialist staff can lead to inventory control being clumsy and inefficient. Each division may handle inventory differently, leading to inconsistency and problems being harder to pinpoint for senior management. Smaller amounts of inventory result in negative consequences of understocking. 25
Distribution and Logistics Concerned with getting the finished product to the right customer. How the product gets to the customer depends on the distribution mix. Some organisations may choose to transport the product themselves or they may employ a company that specialises in logistics and distribution to do this. The distribution mix identifies various factors to be considered when deciding upon the route to get the product to the customer. 26
Factors to Consider when Distributing Goods Reliability of other organisations. Legal restrictions. Availability of finance. The product being distributed. The image associated with the product. The stock management system being used. The distribution capability of the manufacturer. 27
Methods of Distribution Method of distribution Advantages Road network Very quick to deliver in cities Cheaper than other methods Rail network Quick service from city to city Good for large products and large volumes of deliveries Aeroplane Quick to distribute products over a long distance Can be used for small quantities Sea Can be useful for large quantities to be transported long distances if time is not an issue Disadvantages Petrol Vehicles Insurance Pollution Train service Some areas of the country do not have a reliable rail service Airline service Getting to airport Not suitable for large products Vessel Costs to getting to docks Some areas of the country are not close to docks Journey can take a long time 28