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-in-

time 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 Justification

This is the most

amount of inventory

(stock) that should

be held.

Setting this level

avoids consequences

of overstocking.

10

Minimum Stock Level

Description Justification

This is the least

amount of inventory

(stock) that should

be held.

Setting this level

avoids consequences

of understocking.

11

Re-order Level

Description Justification

The level at which stock is re-

ordered. Computerised

inventory systems link to EPOS

and automatically re-order

goods.

This ensures

the quantity

ordered is not

too much or

too little.

12

Re-order Quantity

Description Justification

This is the

amount that is

ordered.

This ensures the quantity

ordered is not too much

or too little.

13

Lead Time

Description Justification

This is the time taken

between an order

being placed and

stock arriving.

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

16

Advantages Disadvantages

• 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.

• 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.

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

18

Advantages Disadvantages

• 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.

• 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.

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

21

• 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.

Disadvantages of a Centralised

Storage

22

• 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.

Decentralised Storage

This involves storing inventory in many

locations in smaller warehouses or store

rooms.

23

Advantages of a Decentralised

Storage

24

• 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.

Disadvantages of a Decentralised

Storage

25

• 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.

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 Disadvantages

Road network

• Very quick to deliver in

cities

• Cheaper than other methods

• Petrol

• Vehicles

• Insurance

• Pollution

Rail network

• Quick service from city to

city

• Good for large products and

large volumes of deliveries

• Train service

• Some areas of the country do not have a

reliable rail service

Aeroplane • Quick to distribute products

over a long distance

• Can be used for small

quantities

• Airline service

• Getting to airport

• Not suitable for large products

Sea Can be useful for large

quantities to be transported

long distances if time is not an

issue

• Vessel

• Costs to getting to docks

• Some areas of the country are not close

to docks

• Journey can take a long time 28