Description
Substances in a natural state before they go through manufacturing or other processing, Components that require assembly, Purchased from outside suppliers.
Stock Control
The Importance of
Managing Stocks
AS & A2 Business Studies
PowerPoint Presentations 2005
tutor2u™
tutor2u™
www.tutor2u.net
What Are Stocks?
Raw
Materials
Work in
Progress
Finished
Goods
Three main categories of stocks
tutor2u™
www.tutor2u.net
Types of Stock
• Raw Materials
– Substances in a natural state before they go through manufacturing or other
processing
– Components that require assembly
– Purchased from outside suppliers
• Work in progress
– Items which, at a given time, are going through the production process
– Some products have a long production process – so the value of work in
progress is often substantial – e.g. construction projects
• Finished goods
– Goods that are complete
– May be stocked awaiting delivery to customer
– May be produced some time in advance ahead of seasonal increases in
demand
tutor2u™
www.tutor2u.net
Why Hold Stocks?
• To meet demand
– Acts as a “buffer” in times of high demand
– Protect against uncertain / unreliable delivery from suppliers
– Encourage customers to buy (crucial in businesses like retailers)
• To lower production costs
– Take advantage of quantity or “bulk” discounts by ordering more at a
time
– Can buy stocks ahead of a shortage or a supplier price rise
– Reduce ordering costs
– Ensure continuity of production (avoid costs of production shortages)
tutor2u™
www.tutor2u.net
Role of the Purchasing Department
• An important service function in any business that
needs to acquire inputs (e.g. raw materials) and
transform them into outputs
– E.g. manufacturing business
– E.g. retailer
• Objectives of the purchasing department
– Stocks are sufficient for the business needs at any one time
– Avoid “overstocking”
– Obtain stocks of the right quality
– Obtain stocks at the best available price
– Develop strong working relationships with key suppliers
– Operate the purchasing function effectively and efficiently
tutor2u™
www.tutor2u.net
Costs of Holding Stocks
• Purchase price (i.e. the cost of the stock itself!)
• Stock “Holding Costs”
– Opportunity cost of the cash tied up by buying stocks (i.e. the cost of not
having that cash invested elsewhere)
– Cost of storing and handling stocks (e.g. warehouse, stock control
systems? employees)
– Cost of insurance (important – many businesses have gone bust because
their stocks were not insured…)
– Cost / risk of deterioration or “obsolescence” (i.e. the stock becomes
unusable after a period of time)
– Stock losses (e.g. damage / theft)
• Stock Ordering Costs
– Clerical and administrative costs (e.g. purchasing department)
• Stock Shortage Costs
– Production stoppages caused by lack of raw materials
– Lost sales due to stockouts or delayed deliveries
tutor2u™
www.tutor2u.net
Stock Control Systems
• Wide range of stock control systems available
– Reorder and maximum stock levels
– Economic Order Quantity (“EOQ”)
– ABC system
– Justintime (JIT) systems
– Perpetual inventory methods
– Subcontracting production processing
– Obtaining progress payments from customers
– Reduce number of product lines
• Objectives of stock control
– Minimise the value of stocks held by the business (i.e. conserve
cash)
– Ensure the business has the right stock at the right quantities to
allow production to carried out efficiently
tutor2u™
www.tutor2u.net
Setting Stock Levels
• Maximum stock
– The most stock of a particular item that the business is able or willing to hold
at any one time
– May reflect storage capacity (permanent & temporary)
– May also reflect management controls over spending by purchasing
department
• Reorder level
– When stocks held of an item fall to this level, a new purchase order is made
– Needs to take account of the possible “lead time” between the order being
placed and the stock being delivered by the supplier
• Minimum stock level
– Also known as the “buffer stock”
– Important to avoid “stockouts” (lost sales) and disruption to production
tutor2u™
www.tutor2u.net
Reorder Levels Illustration
tutor2u™
www.tutor2u.net
ABC System
• Helps to identify which stock items should be
controlled
• Stocks are divided into three categories (A, B, C)
according to importance of sales value
• High value stocks get the most management attention
for stock control
tutor2u™
www.tutor2u.net
ABC System Example
100 100
10 50 C
18 38 B
72 12 A
Stock Value
(% of total)
Stock Items
(% of total)
Stock
Category
Example Company:
Category A stocks require lots
of attention? regular stock
forecasting and monitoring?
make sure buffer stocks are
adequate
Category C accounts for half
of the number of stock items –
but only 10% of the value?
stock control can be more
informal
tutor2u™
www.tutor2u.net
JustinTime Systems
• JIT focuses on minimising the holding costs of stock
• Idea is that stocks are brought into the production
process at the time they are needed
• Effectively an attempt to operate production with
minimal / zero buffer stocks
• With JIT systems, production and purchasing are
closely linked to sales demand on a weektoweek basis
– Continuous flow of raw materials into stock
– When workinprogress is completed, it goes straight to the customer
tutor2u™
www.tutor2u.net
Requirements for JIT Systems
• Flexibility
– Suppliers and internal workforce need to be able to expand and contract
output at short notice
– Need to be able to deliver supplies quickly and reliably
• High quality
– Raw materials must be of guaranteed quality
– Whole production process must focus on quality
– There are no/minimal buffer stocks should a batch of raw materials from a
particular supplier prove faulty, or if they are damaged during the production
process
• Close working relationship with suppliers
– Often geographically close
– Joint approach to ensuring quality
– Systems need to be able to share information (e.g. sales data, purchasing
requirements, delivery times)
tutor2u™
www.tutor2u.net
Potential Benefits of JIT
• Lower levels of cash tied up in stocks (i.e. – lower
working capital)
• Reduction in stock holding costs
• Reduced manufacturing lead times
• Improved labour productivity
• Reduced scrap and warranty costs
• Price reductions on purchased materials
• Reduction in the time and cost of purchasing /
accounting
tutor2u™
www.tutor2u.net
Pitfalls / Problems with JIT
• Not suitable for many industries / organisations
– Higher risk of stockouts: e.g. critical medical supplies
• Lots of potential problems for suppliers
– Break in supply causes immediate problem for supplier to solve
– May require new systems
– Potential loss of reputation if supplier responsible for stopping whole
of customer’s production
• Not something that can be done easily
– Requires careful planning
– Cannot be done overnight – production needs to move gradually
towards minimal / zero buffer stocks
– Often requires a substantial change in production culture
tutor2u™
www.tutor2u.net
Stock Ratios
• Measure how efficiently a business is managing its
investment in stock
• Stock days
– How many days of production are kept in stock?
– Calculation: (Average stock / Cost of Sales) / x 365 days
• Stock turnover
– How often does a business use its average stock levels each year?
– Calculation: (Cost of Sales / Average Stock)
tutor2u™
www.tutor2u.net
Stock Ratios Example
97 days Stock Days (1,387 / 5,200) x 365 days
1,500 1,275 Total Stocks
500 475 Finished Goods
3.75 Stock Turnover (5,200 / 1,387)
1,387 Average Stock (1,275 + 1,500) / 2
150 125 Workinprogress
850 675 Raw Materials
Stocks at Balance Sheet Date:
5,200 4,750 Cost of Sales
2005
£’000
2004
£’000
Extracts from Profit and Loss Account & Balance Sheet
tutor2u™
www.tutor2u.net
Stock Ratios Interpretation
• Reasons for High Stock Days / Low Stock Turnover
Ratios
– Business is being cautious in stockholding policy (i.e. setting high
levels of buffer stock)
– Business has too much obsolete or slowmoving stock (a problem)
– Stocks were unusually high at the balance sheet date
– Business operates in an industry where stock traditionally turns over
slowly
• Reasons for Low Stock Days / High Stock Turnover
Ratios
– Business operates in industries where stock normally turns over
quickly
– Business has supply difficulties and does not carry enough stock
– Business is managing its stocks effectively
doc_287118774.pdf
Substances in a natural state before they go through manufacturing or other processing, Components that require assembly, Purchased from outside suppliers.
Stock Control
The Importance of
Managing Stocks
AS & A2 Business Studies
PowerPoint Presentations 2005
tutor2u™
tutor2u™
www.tutor2u.net
What Are Stocks?
Raw
Materials
Work in
Progress
Finished
Goods
Three main categories of stocks
tutor2u™
www.tutor2u.net
Types of Stock
• Raw Materials
– Substances in a natural state before they go through manufacturing or other
processing
– Components that require assembly
– Purchased from outside suppliers
• Work in progress
– Items which, at a given time, are going through the production process
– Some products have a long production process – so the value of work in
progress is often substantial – e.g. construction projects
• Finished goods
– Goods that are complete
– May be stocked awaiting delivery to customer
– May be produced some time in advance ahead of seasonal increases in
demand
tutor2u™
www.tutor2u.net
Why Hold Stocks?
• To meet demand
– Acts as a “buffer” in times of high demand
– Protect against uncertain / unreliable delivery from suppliers
– Encourage customers to buy (crucial in businesses like retailers)
• To lower production costs
– Take advantage of quantity or “bulk” discounts by ordering more at a
time
– Can buy stocks ahead of a shortage or a supplier price rise
– Reduce ordering costs
– Ensure continuity of production (avoid costs of production shortages)
tutor2u™
www.tutor2u.net
Role of the Purchasing Department
• An important service function in any business that
needs to acquire inputs (e.g. raw materials) and
transform them into outputs
– E.g. manufacturing business
– E.g. retailer
• Objectives of the purchasing department
– Stocks are sufficient for the business needs at any one time
– Avoid “overstocking”
– Obtain stocks of the right quality
– Obtain stocks at the best available price
– Develop strong working relationships with key suppliers
– Operate the purchasing function effectively and efficiently
tutor2u™
www.tutor2u.net
Costs of Holding Stocks
• Purchase price (i.e. the cost of the stock itself!)
• Stock “Holding Costs”
– Opportunity cost of the cash tied up by buying stocks (i.e. the cost of not
having that cash invested elsewhere)
– Cost of storing and handling stocks (e.g. warehouse, stock control
systems? employees)
– Cost of insurance (important – many businesses have gone bust because
their stocks were not insured…)
– Cost / risk of deterioration or “obsolescence” (i.e. the stock becomes
unusable after a period of time)
– Stock losses (e.g. damage / theft)
• Stock Ordering Costs
– Clerical and administrative costs (e.g. purchasing department)
• Stock Shortage Costs
– Production stoppages caused by lack of raw materials
– Lost sales due to stockouts or delayed deliveries
tutor2u™
www.tutor2u.net
Stock Control Systems
• Wide range of stock control systems available
– Reorder and maximum stock levels
– Economic Order Quantity (“EOQ”)
– ABC system
– Justintime (JIT) systems
– Perpetual inventory methods
– Subcontracting production processing
– Obtaining progress payments from customers
– Reduce number of product lines
• Objectives of stock control
– Minimise the value of stocks held by the business (i.e. conserve
cash)
– Ensure the business has the right stock at the right quantities to
allow production to carried out efficiently
tutor2u™
www.tutor2u.net
Setting Stock Levels
• Maximum stock
– The most stock of a particular item that the business is able or willing to hold
at any one time
– May reflect storage capacity (permanent & temporary)
– May also reflect management controls over spending by purchasing
department
• Reorder level
– When stocks held of an item fall to this level, a new purchase order is made
– Needs to take account of the possible “lead time” between the order being
placed and the stock being delivered by the supplier
• Minimum stock level
– Also known as the “buffer stock”
– Important to avoid “stockouts” (lost sales) and disruption to production
tutor2u™
www.tutor2u.net
Reorder Levels Illustration
tutor2u™
www.tutor2u.net
ABC System
• Helps to identify which stock items should be
controlled
• Stocks are divided into three categories (A, B, C)
according to importance of sales value
• High value stocks get the most management attention
for stock control
tutor2u™
www.tutor2u.net
ABC System Example
100 100
10 50 C
18 38 B
72 12 A
Stock Value
(% of total)
Stock Items
(% of total)
Stock
Category
Example Company:
Category A stocks require lots
of attention? regular stock
forecasting and monitoring?
make sure buffer stocks are
adequate
Category C accounts for half
of the number of stock items –
but only 10% of the value?
stock control can be more
informal
tutor2u™
www.tutor2u.net
JustinTime Systems
• JIT focuses on minimising the holding costs of stock
• Idea is that stocks are brought into the production
process at the time they are needed
• Effectively an attempt to operate production with
minimal / zero buffer stocks
• With JIT systems, production and purchasing are
closely linked to sales demand on a weektoweek basis
– Continuous flow of raw materials into stock
– When workinprogress is completed, it goes straight to the customer
tutor2u™
www.tutor2u.net
Requirements for JIT Systems
• Flexibility
– Suppliers and internal workforce need to be able to expand and contract
output at short notice
– Need to be able to deliver supplies quickly and reliably
• High quality
– Raw materials must be of guaranteed quality
– Whole production process must focus on quality
– There are no/minimal buffer stocks should a batch of raw materials from a
particular supplier prove faulty, or if they are damaged during the production
process
• Close working relationship with suppliers
– Often geographically close
– Joint approach to ensuring quality
– Systems need to be able to share information (e.g. sales data, purchasing
requirements, delivery times)
tutor2u™
www.tutor2u.net
Potential Benefits of JIT
• Lower levels of cash tied up in stocks (i.e. – lower
working capital)
• Reduction in stock holding costs
• Reduced manufacturing lead times
• Improved labour productivity
• Reduced scrap and warranty costs
• Price reductions on purchased materials
• Reduction in the time and cost of purchasing /
accounting
tutor2u™
www.tutor2u.net
Pitfalls / Problems with JIT
• Not suitable for many industries / organisations
– Higher risk of stockouts: e.g. critical medical supplies
• Lots of potential problems for suppliers
– Break in supply causes immediate problem for supplier to solve
– May require new systems
– Potential loss of reputation if supplier responsible for stopping whole
of customer’s production
• Not something that can be done easily
– Requires careful planning
– Cannot be done overnight – production needs to move gradually
towards minimal / zero buffer stocks
– Often requires a substantial change in production culture
tutor2u™
www.tutor2u.net
Stock Ratios
• Measure how efficiently a business is managing its
investment in stock
• Stock days
– How many days of production are kept in stock?
– Calculation: (Average stock / Cost of Sales) / x 365 days
• Stock turnover
– How often does a business use its average stock levels each year?
– Calculation: (Cost of Sales / Average Stock)
tutor2u™
www.tutor2u.net
Stock Ratios Example
97 days Stock Days (1,387 / 5,200) x 365 days
1,500 1,275 Total Stocks
500 475 Finished Goods
3.75 Stock Turnover (5,200 / 1,387)
1,387 Average Stock (1,275 + 1,500) / 2
150 125 Workinprogress
850 675 Raw Materials
Stocks at Balance Sheet Date:
5,200 4,750 Cost of Sales
2005
£’000
2004
£’000
Extracts from Profit and Loss Account & Balance Sheet
tutor2u™
www.tutor2u.net
Stock Ratios Interpretation
• Reasons for High Stock Days / Low Stock Turnover
Ratios
– Business is being cautious in stockholding policy (i.e. setting high
levels of buffer stock)
– Business has too much obsolete or slowmoving stock (a problem)
– Stocks were unusually high at the balance sheet date
– Business operates in an industry where stock traditionally turns over
slowly
• Reasons for Low Stock Days / High Stock Turnover
Ratios
– Business operates in industries where stock normally turns over
quickly
– Business has supply difficulties and does not carry enough stock
– Business is managing its stocks effectively
doc_287118774.pdf