Stock Management Systems

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MANAGEMENT OF STOCK


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Stock Management Objectives

The objectives of stockmanagement is toensure sufficient levelsof stock to maintain anacceptable level of availability on demandwhilst minimizing theassociated holding,

administrative andstockout costs.


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Why should stock be held ?

Stocks should be held to ensure

1. The availability of important rawmaterials and suppliers by avoidingstock outs during fluctuations insupply and demand.


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Why should stock be held ?

Stocks should be held to ensure2. Avoid shortage costs by reducing the

frequency of emergency purchases3. Minimizing ordering costs byrequiring less frequent orders.

4. Minimizing transportation costs byrequiring less frequent deliveries


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Costs of holding stocksCosts of holding stocks include :-

Interest on capital

Storage space and equipment

Administration and staff costs

Leases


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Disadvantages of holding largequantities of stocks

1. A large capital investment (funds) isneeded to purchase the stocks.

2. Stocks represent monetary value , andthe money tied up in stocks could beused elsewhere to generate income.E.g. money invested in stocks couldbe earning interest in the bank orother short term investment


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Disadvantages of holding largequantities of stocks (cont)

3. Carrying cost ( i.e., holding orstocking costs) are greater withlarger stocks. Stocks require astorage facility, storage equipment,electricity and utilities, personnel, andinsurance. The higher the stock level,

the higher these total costs will be( although the cost per unitdecreases)


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4. Deterioration and spoilage losses arelikely to be greater with larger stocks.

5. Expiration losses are likely to begreater with larger stocks.

6. Obsolescence of stock items canresult if new technology is developed.


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7. Loses due to theft, might increasewith larger stocks, particularly inabsence of good stock controls.


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Which items should bestocked ?

1. Local availability items that arehard to find locally

versus readilyavailable items.

- Stock managershould stock moreof the goods thatare not locallyavailable.


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2. level of use itemsused regularlyversus items which

are not usedregularly

- Items which areused regularlyshould always beavailable in stock


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3. Classification items alreadyidentified as vital

or essential versusnone essentialitems.

- Items classified asessential shouldalways be availablein stock


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Stock Management Systems(1)

1. Bin systems- The bin system involves a fixed quantity

being ordered at varying intervals.- The bin card has a maximum point and

a minimum point.- If stock exceeds either the stock

controller has to take immediate action.


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Stock Management Systems

Two bin system- This system utilizes two bins, e.g. A and B.

stocks are taken from bin A until A isfinished. An order for a fixed quantity isplaced and, in the meantime, stock is usedfrom B. the standard stock for B isexpected demand in the lead time( the timebetween the order being placed and stock arriving ) plus some buffer stocks.


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Stock Management Systems

Single Bin System- The same sort of approach is adopted

by some firms for a single bin with ared line within the bin indicating there-order level


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Advantages Of Bin Systems

Stocks can be kept at a lower levelsbecause of the ability to orderwhenever stocks fall to a low level,rather than having to wait for thenext re-order date.


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Stock Management Systems(2)2. Periodic review system ( or constant

order cycle system)- Stock levels are reviewed at fixed intervals

e.g. every four weeks. The stock in hand isthen made up to a predetermined level,which takes account of likely demandbefore the next review and during the lead-time.

- Thus a four weekly review in a systemwhere the lead time is two weeks woulddemand that stock be made up to the likelymaximum demand for the next six weeks.


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Advantages of periodic reviewsystem

order office work load is more evenlyspread and easier to plan. For thisreason the system is popular withsuppliers


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JIT Stock management system

JIT extends much further than aconcentration on stock levels. Itcentres around the elimination of waster.JIT defines waster as any activityperformed within a manufacturingcompany which does not add value tothe product


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JIT Stock management system

Examples of JIT waste are:-Raw material stock

Finished goods stockQuality problemsQueues and delays on the shop floor

Unnecessary clerical and accountingprocedures


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JIT Stock management systemJIT attempts to eliminate waste at everystage of the manufacturing process,notably by the elimination of:-

1. WIP, by reducing batch sizes usually toone

2. Raw materials stock, by the suppliersdelivering direct to the shop floor just intime for use

3. Scrap and rework, by an emphasis on totalquality control of the design of the processand of the materials


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cont4. Finished goods stock by reducing lead times

so that all products are made to order.The combination of these concepts in JIT

results in:-1. A smooth flow of work through the

manufacturing plant2. A flexible production process which is

responsive to the customers requirements3. Reduction of capital tied up in stocks


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Advantages of JIT stock management systems

1. With JIT stock holding costs are close tozero

2. Reduction in stock levels reduces the timetaken to count stocks and clerical cost.

3. Long term contracts and single sourcingstrengthen the buyer supplierrelationships and tend to result in a higherquality product.

4. Stock problems are shifted back to ontosuppliers, with deliveries being made asrequired.


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Advantages of JIT stock management systems(cont)

5. A JIT manufacture looks for a singlesupplier who can provide higherquality, frequent and reliabledeliveries, rather than the lowestprice. In return, the supplier canexpect more business under long-

term purchase orders, thus providinggreater certainty in forecastingactivity levels.

Stock Management Systems

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