Stock

1. Stock Operations Management Intermediate Business Management

2. Stock Stock is a resource which is held in a specific location (usually a warehouse) awaiting use. There are 3 basic categories: • Raw materials - Resources required to produce a product • Work in progress – goods which are still to be completed • Finished goods – final product waiting to be distributed to the end-user R Alexander March 2009

3. Storage of Stock • Stock is an expensive item which should be stored properly to avoid deterioration and wastage. • Stock should be stored in a room which is: • Stock should be clearly labelled with oldest stock in front. • It can either be stored centrally (in one location) or departmentally (each department holds their own supplies) Locked Well lit Well ventilated Dry R Alexander March 2009

4. Questions • Outline the 3 basic categories that describe stock. (3 marks) • Distinguish between holding stock centrally or departmentally. (1 mark) • Identify the features of a suitable room for storing stock (4 marks) R Alexander March 2009

5. Solutions • Raw materials are the basic resources which are required to produce a product. Work in progress is goods which are currently in the process of being produced by have yet to be completed. Finished goods are the final product which is being stored awaiting distribution to the customer. • Holding stock centrally is where stock is held in one location whereas holding it departmentally is where each department holds its own stock of supplies. • Dry, well lit, well ventilated, locked. R Alexander March 2009

6. Why Is It Important To Control Stock? • An effective stock control system ensures minimal wastage and expense. • Operations must ensure correct levels of stock are held to use resources efficiently. Needs of production department Cost of holding stock R Alexander March 2009

7. An effective control system Would have following factors: • Regular stock checks to ensure records accurate and up-to-date. (If an order is placed, business has to be aware if they can meet it!) • Security of storage to prevent stock being damaged or stolen • Ensure that costs are minimised whilst ensuring that correct levels of stock are held R Alexander March 2009

8. Stock Levels Stock can be recorded either • Manually (e.g. on cards) or • Electronically (e.g. database or spreadsheet) R Alexander March 2009

9. Electronic Stock Levels Recording stock levels electronically has a few benefits: • Changes are recorded as they take place, giving a running balance • This should be accurate, reducing need for stock takes • Ordering can be linked to this system allowing for automatic re-ordering A physical stock check can be done for accounting purposes or to monitor and stop theft. R Alexander March 2009

10. Questions • Describe 2 reasons why controlling stock is important. (2 marks) • Explain the advantages of recording stock electronically. (3 marks) R Alexander March 2009

11. Solution • An effective stock control system ensures that wastage is kept to a minimum. This helps keep costs down and reduces the unit cost of producing each finished product, enabling the business to increase profit levels. Holding the correct levels of stock also ensures that resources are used efficiently and money is not tied up in raw materials, work in progress or finished products which could otherwise be used elsewhere. R Alexander March 2009

12. Solution • One advantage is that changes are recorded as they take place. This means the business can get a running balance of stock levels at any time for analysis. A second advantage is that stock levels should be accurate. This reduces the need for physical stock takes which can be expensive in terms of money and time. A third advantage is that ordering can be linked to this system. This enables the business to automatically reorder stock when required to maintain optimum levels. R Alexander March 2009

13. Levels of Stock A business which holds stock will implement the following stock levels in order to meet customer demand at all times: • Minimum level • Maximum level • Re-order level • Re-order quantity R Alexander March 2009

14. Levels of Stock MINIMUM LEVEL: • This is the minimum amount of stock needed in case the required supply were to be delivered late. The business will never allow the stock level to drop below a certain point in order to prevent a resource shortage. MAXIMUM LEVEL: • This is the maximum amount of stock which can be held in the warehouse at any given time. This level is restricted by factors such as space; cost; and, delivery time. R Alexander March 2009

15. Levels of Stock Re-Order Level: • This is when the stock level drops to a certain point and the process will automatically re-order the required stock. In order to decide at what point to re-order, businesses must consider the following: how long is the delivery time? how reliable is the supplier? Re-Order Quantity: • This is the amount of stock required to return stock levels to the maximum stock level on the same day the new stocks arrive. • The re-order quantity is automatically ordered as soon as the re-order level is reached. R Alexander March 2009

16. Supplies are available when you need them. Any increase in demand can be met. Discounts available for bulk buying. Customers’ orders can be met immediately. Money could be used more efficiently. Financial costs associated with warehousing and insurance. Labour costs involved in stock control. Value of stock may decrease if fashions change or passes sell by date. Cost/Benefit Analysisof Over-Stocking Benefits Costs R Alexander March 2009

17. Less financial costs – insurance, heating, lighting, wages etc. Money not tied up in stocks – can be used elsewhere in the business Might not be able to cope with unexpected orders – might upset customers Production might have to be stopped – machinery would be idle and sales lost Firm may need to place more regular orders – high admin costs and loss of discount for bulk-buying Cost/Benefit Analysisof Under-Stocking Benefits Costs R Alexander March 2009

18. Questions • Explain the costs and benefits of: • Understocking • Overstocking (8 marks) R Alexander March 2009

19. Solution E.g. • A benefit of understocking is that money is not tied up in stocks. This is an advantage as the money could be reinvested elsewhere in the business to generate profit. • A cost of understocking might be that the business may not be able to cope with unexpected orders. This is a disadvantage as it could upset customers who may choose to go to a rival supplier. R Alexander March 2009

20. Task • A local firm is having real problems with managing its stock levels – it is either holding far too much stock or far too little and can’t meet customer demand. • You have been asked to prepare a short Powerpoint presentation showing how the firm can always ensure it is meeting customer demand by holding the right amount of stock. • You should prepare a maximum of 4 slides and you will present your recommendations to the class. R Alexander March 2009

21. Computerised Stock Control • This enables stock to be ordered automatically. When the stock level reaches the re-order level an order for more of that product is automatically produced and then sent to the supplier. • Retailers use a computerised system called ELECTRONIC POINT OF SALE (EPOS) • EPOS means that a manual stock count by staff is no longer needed however spot checks are still carried out to ensure that the system is working and that there are no damaged or stolen goods. • The main benefit of EPOS is that it can help managers make decisions about which products to discontinue and which of those are successful. R Alexander March 2009

22. Just In Time Production (JIT) • JIT production is a Japanese approach to production that involves keeping the stock levels to a minimum. • Stocks arrive just in time to be used in production. • As a result, costs are cut by reducing the amount of stocks held by the business. • Goods are not produced unless the business has anorder from the customer. JIT strives to eliminate waste by producing the right part in the right place at the right time! R Alexander March 2009

23. Effective JIT In order to be effective and efficient JIT requires the following factors to be in place: • Highly skilled and flexible workforce which are able to respond to the challenges of JIT. • Absolute certainty regarding delivery times to ensure that production runs to schedule (if the delivery was late this would halt production). • If suppliers provide sub-standard items the whole system fails as there isn’t an alternative resource waiting in stock. R Alexander March 2009

24. Less space required for stock. Able to respond quickly to changes in demand. Closer relationship with suppliers. Capital can be used for other priorities as opposed to beingtied up in stocks. Production may be stopped if supplies are delayed. Sales may be lost if not meeting customer demands. Increased ordering and admin costs. Depending on the efficiency of the supplier. Advantages & Disadvantages of JIT Advantages Disadvantages R Alexander March 2009

25. Questions • Outline 2 benefits of using an EPOS system. (2 marks) • Describe the factors which are needed for effective JIT production (3 marks) • Explain the advantages and disadvantages of JIT production (4 marks) R Alexander March 2009