TLIA2807C - Assess and Monitor Optimum Stock Levels - Learner Guide

TLIA2807C Assess

and monitor

optimum stock levels

Learner Guide

Contents What this Learner’s Guide is about ........................................ 1

Plan your learning .................................................................. 2

How will you be assessed? .................................................... 5

Section 1 Assessing projected demand.......................................... 7

What is demand? ................................................................. 14

How do I determine high and low volume periods and seasonal variations?............................................................................ 15

How do I analyse stock movement data? ............................ 22

What inventory do I need during different production and sales cycles? ................................................................................. 22

Section 2 Variables impacting on optimum stock levels............. 25

What variables impact on optimum stock levels? ................ 28

What are lead, processing and distribution times? .............. 28

How do I calculate lead, processing and distribution times? 29

How does lead, processing and distribution time impact on optimum stock levels?.......................................................... 30

How do I calculate spoilage and obsolescence times?........ 33

How do I assess my maximum stock carrying capacity? ..... 36

How do I assess physical and human resource levels?....... 37

How do contingencies affect optimum stock levels?............ 42

Section 3 Determining optimum inventory levels ........................ 44

How do I determine optimum inventory levels? ................... 47

Section 4 Monitoring optimum inventory levels........................... 56

How do I monitor optimum stock levels?.............................. 59

Additional resources....................................................................... 69

Feedback on activities .................................................................... 71

TLIA2807C Assess and monitor optimum stock levels

© Department of Education, Science and Training 2005 Page 1 Customised and Developed by Armstrong’s Driver Education P/L May 2008 ADELG1023

What this Learner’s Guide is about

This Learner’s Guide is about the skills and knowledge required to assess and monitor optimum stock levels in accordance with workplace requirements including assessing projected demand, assessing variables that impact upon optimum stock levels, determining optimum inventory levels, and monitoring optimum inventory levels.

The unit of competency TLIA2807C Assess and monitor optimum stock levels is from the Transport and Logistics Training Package (TLI07). It has a number of elements of competency that are covered in this guide. These are: • Assess projected demand. • Assess variables that impact upon optimum stock

levels. • Determine optimum inventory levels. • Monitor optimum inventory levels.


Page 2 © Department of Education, Science and Training 2005 ADELG1023 Customised and Developed by Armstrong’s Driver Education P/L May 2008

Plan your learning

It is important to plan your learning before you start because you may already have some of the knowledge and skills that are covered in this Learner’s Guide. This might be because:

• you have been working in the industry for some time, and/or

• you have already completed training in this area.

Together with your supervisor or trainer, use the checklist on the following pages to help you plan your study program. Your answers to the questions in the checklist will help you work out which sections of this Learner’s Guide you need to complete.

This Learner’s Guide is written with the idea that learning is made more relevant when you, the learner, are actually working in the industry. This means that you will have people within your enterprise who can show you things, discuss how things are done and answer any questions you have. Also you can practise what you learn and see how what you learn is applied in the enterprise.

If you are working through this Learner’s Guide and have not yet found a job in the industry, you will need to talk to your trainer about doing work experience or working and learning in some sort of simulated workplace.



Section 1: Assessing projected demand

Are you able to: Yes No 1. Analyse information about demand from

sales plans and stock movement data?

2. Determine high and low volume periods from sales plans and/or stock movement data?

3. Determine seasonal stock demand from sales plans and/or stock movement data?

4. Determine required inventory levels at different production and sales cycles in the sales plan and/or stock movement data?

Section 2: Variables impacting upon optimum stock levels

Are you able to: Yes No 1. Determine stock manufacturing/supply

and consignment delivery lead times?

2. Determine internal processing and distribution times?

3. Calculate spoilage and obsolescence times?

4. Assess your enterprise’s maximum stock carrying capacity?

5. Assess the physical and human resources required for projected stock levels?

6. Develop contingencies for interruptions or delays in the supply chain?



Section 3: Determining optimum inventory levels

Are you able to: Yes No 1. Coordinate production and sales

information with supply and distribution times?

2. Calculate safety stock levels?

3. Determine the optimum level of inventory in your enterprise?

Section 4: Monitoring optimum inventory levels

Are you able to: Yes No 1. Compare current and known future

sales turnover/production requirements to inventory benchmarks?

2. Adjust inventory levels according to reassessed sales turnover/production requirements and workplace procurement processes within your level of responsibility?

3. Document changes and/or requests for adjustments to inventory levels according to the policies used at your workplace?

4. Assemble the resources required for optimum inventory levels?



How will you be assessed?

Assessment of this unit of competency will include observation of real or simulated work processes using workplace procedures and questioning on underpinning knowledge and skills. It must be demonstrated in an actual or simulated work situation under supervision.

You will be required to demonstrate that you can: • assess projected demand for stock based on analysis of

the sales plan and stock movement data and considering the seasonal nature of stock

• assess variables that impact on optimum stock levels such as lead time, internal processing, distribution, spoilage and obsolescence times

• determine optimum inventory levels by integrating production, sales, supply and distribution information with safety stock calculations

• determine the physical and human resources required to produce required stock levels

• monitor optimum inventory levels versus benchmarks • suggest improvements to supply operations, negotiate

changes and adjust inventory levels accordingly • mediate and resolve issues surrounding supply storage

and management • identify requirements of tasks and organise planning,

job completion and evaluation stages • locate, interpret and apply relevant information • provide customer/client service and work effectively with

others.



Section 1 Assessing projected demand



Section outline

Areas covered in this section are:

• what information and data you analyse when assessing projected demand

• how to determine high and low volume periods from sales plans/stock movement information

• how to determine seasonal demand variations from sales plan/stock movement data

• how to determine required inventory levels at different production and sales cycle stages from the sales plan/stock movement data.





What is an inventory?

Enterprises normally have hundreds or even thousands of items stocked in their warehouses. These stocks are known as inventory. Stocks may be held for small objects such as pens or paper clips, through to large items such as machines or trucks. The type of goods stocked in an inventory will depend on the kind of business an enterprise is engaged in and what it produces.

Manufacturing firms typically carry several types of inventories, including: • raw materials • parts and components • partially completed goods (known as “work-in-process”) • finished goods • replacement parts • tools and supplies • goods in transit to storage warehouses or customers.

Why have inventories?

Inventories of required goods are necessary for several reasons. Some of these include: • to have sufficient stocks to meet anticipated customer

demand • to build up stocks during off season periods so

requirements during peak demand periods can be met • to protect against stock-outs • to take advantage of order cycles which result in lower

purchasing costs • to hedge against price increases.

Why assess and monitor stock levels?

The amount of stock carried by an enterprise has a significant impact on its overall profitability. If too little or too much stock is carried, an enterprise can lose a lot of money. As a store supervisor it is crucial that you assess available information and consider the variables which impact on what the optimum stock levels are in your warehouse. Your objective is to meet customer



demands for delivery times at a level where stock carrying costs do not eat into your enterprise’s profitability.

Problems with understocking

If too little stock is carried, an enterprise loses money through things such as: • missed deliveries • lost sales • loss of repeat business and goodwill with dissatisfied

customers • cost blowouts caused by delays in the production and

distribution processes.

Problems with overstocking

If a business carries too much stock, then it loses money through: • having money tied up in inventory which could be used

more profitably elsewhere • increased operating expenses such as rent, rates,

repairs, heating, cooling, and lighting for the time the excess stock is in the warehouse

• inefficient use of space slowing down access and therefore loading times

• increased chances of stock becoming obsolete, spoiling or expiring if held for long periods

• increased costs of machine set-up time • increased insurance costs • longer time required to check incoming stock • increased chance that stock will be pilfered • longer time to record incoming stock.

Advantages of carrying excess stock

However, there are some occasions when holding a large amount of stock is beneficial for an enterprise. These are: • when a discount is received from a supplier for ordering

a large quantity of goods • holding a ‘buffer’ or ‘safety’ stock to prevent stock-outs

in times of unanticipated high demand, supply interruptions, deliveries of wrong or poor quality materials, staff shortages, breakdowns in equipment or



any other factor which causes a delay in delivery to customers

• achieving cost savings by buying a large amount just prior to a price rise

• purchasing a large quantity before price increases take effect

• carrying items which appreciate in value during their time in storage (e.g. wines, spirits).

In the following sections, you will be provided with information and practice activities to analyse the information and variables you need to consider when determining the optimum stock level for your warehouse. Once this has been established, you will learn what information and techniques you can use to monitor inventory levels to ensure you meet customer delivery demands without inventory costs eating into your enterprise’s profitability.



Activity 1: Under and overstocking

Think of a time when you ran out of the stocks required to produce a good or service made by your enterprise and were unable fulfil a customer order.

What costs were incurred to your enterprise as a result of not being able to deliver the required goods or services on time?

How did failure to meet the delivery deadline affect your relationship with your supplier?

If you have excess stocks tied up in inventory, you are effectively wasting your enterprise’s money. What are some of the things your enterprise could be doing with the money tied up in unused inventory to increase its profits?

There is feedback on this activity at the back of this Learner’s Guide



What is demand?

Demand is the willingness and ability of consumers to buy goods at a range of prices, during a given time period. Consumers desire goods and services that satisfy their needs and wants. Estimating the demand is important so enterprises produce the right goods in the right quantity at the right price at the right time, otherwise they will not meet customer’s expectations.

What information is needed to assess projected demand?

Stock levels and inventories are carried because they are the intermediate materials necessary to produce the goods and services demanded by customers. This means it is essential to have reliable estimates of the amount of stocks needed and when they are needed. Important sources of information that can be analysed when assessing projected demand are: • your enterprise’s sales plan and • stock movement data.

Your enterprise’s sales plan is an invaluable source of information when assessing projected demand for goods and services. Sales plans may be produced: • weekly if your enterprise produces a fast moving

consumer good like milk or beer • monthly if you are selling a good such as cars • 6 monthly if you are selling items such as clothes.

Enterprises make sales plans based on a combination of past sales data and future demand forecasts. Analysis of the demand for a good highlights patterns in the underlying demand from which reasonable estimates of future sales can be made. You will see how to analyse sales figures and underlying demand patterns to assess projected demand in a moment.

Stock movement data is important to monitor whether the number of sales forecast in the sales plan is reflected in the actual sales being achieved. There is always an element of inaccuracy in sales forecasts. Comparison of sales forecasts with actual stock movement can reveal any discrepancies and appropriate action taken to modify the amount of stock being ordered so under- or overstocking does not occur.



How do I determine high and low volume periods and seasonal variations?

Determining the high and low volume periods and seasonal variations in sales are important considerations in assessing projected demand for stock levels. The following discussion will assist you in working out how to identify high and low volume sales periods and seasonal variations from sales data.

The purpose of analysing sales plans and stock movement data is to identify underlying demand patterns. Often this is easily achieved by looking at how the information is plotted on a graph. The types of patterns that might appear include: • trends • seasonal variations • cycles

• irregular or random variations in sales.

Trends

Trends refer to gradual, long-term movement in the demand for a good or service. They show whether there is an overall general increase or decrease in sales for a product. Increased sales over time as a result of a demand trend are underpinned by conditions beyond the control of the enterprise, such as population shifts, increased economic prosperity, new improved technology and cultural changes. Trends are usually analysed using demand data collected over several years. Examples of trends include: • greater wine consumption resulting in lower beer sales

over the past 5 years in Australia as the wine industry expands

• the ageing population of Australia causing an increase in the number of retirement homes being built

• increased demand for DVD players leading to a corresponding decline in demand for video recorders.

Figure 1 shows an example of what a trend such as a gradual increase in wine consumption resulting in increasing sales each year would look graphically, when expressed in millions of litres of wine sold.



Seasonal Variations

Seasonal variations refer to short-term, regular demand variations generally related to factors such as the weather, holidays and vacations. Analysis of the seasonal variation often provides insight into when the high and low volume periods of sales are. Examples of seasonal variations that affect demand for goods and therefore the stocks required to produce them include: • less demand for bathing suits in the winter months

resulting in reduced sales • increased demand for ice creams in the hotter summer

months resulting in increased sales • increased demand for shellfish prior to Chinese New

Year resulting in increased sales • greater demand for toys at Christmas time compared to

at any other time in the year.

Figure 2 shows a graph of how sales of overcoats varies according to the seasons in a year. Sales of overcoats increase in May and April with the release of new styles and designs launched during fashion week where buyers select the products they wish to stock and consumers purchase a coat in preparation for the winter months. Sales stay relatively stable during the winter months

Gradual increase in sales over time



before declining in September when consumers prepare for the coming summer months by purchasing summer clothes.

Cycles Cycles are wavelike variations lasting more than a year that are related to things like economic, political, and agricultural conditions. Examples of how cycles can impact on demand and sales include: • decreased demand for building materials due to an

economic slow down resulting is less sales of roof trusses

• increased demand for mineral commodities caused by economic prosperity in China resulting in booming copper sales

• increased demand for wheat caused by crop failure due to a drought restricting supplies on the world market increasing sales in Australia.

Figure 3 shows an example of how a sales cycle might look for a building material such as window frames over several economic growth cycles if depicted graphically.

Sales increase at fashion week

Peak sales in the middle of winter

Fewer sales as summer approaches



Variations

As well as trends, seasonal variations and cycles, variations occur to the regular sales and demand patterns. There are two types of variations that occur: • irregular variations • random variations.

Irregular variations are due to unusual circumstances that have a one-off affect on demand and sales. Irregular variations do not reflect typical demand or sales, and if included in analysis can distort the overall picture, so are often left out when assessing projected demand.

Random variations are variations that occur after trends, seasonal variation, cycles and irregular variations have been taken into account. Enterprises may investigate the causes for the random variation in more detail using complex statistical techniques, particularly if they recur. If so called irregular variations become more common then it could indicate the start of a new trend. Examples of irregular variations that may influence demand include: • increased demand for and sales of food before a

cyclone hits

Recession

Peak

Slow down Recovery

Peak



• enterprises ordering larger quantities of stocks from their suppliers when they know a strike is going to be held in a week’s time

• increased demand for building materials for home renovations before the introduction of the GST.

Figure 4 shows how an irregular occurrence such as a cyclone leads to an irregular variation in the sales of baked beans. In this example, sales of baked beans increase in a steadily rising trend until October/November, when there is a sudden increase in sales.

Usual sale trend

Irregular variation



Activity 2: Analysing sales plans and stock movement data

Take a look at Figure 1. What are some of the reasons that could account for the increase in wine consumption in recent years?

Figure 2 showed the seasonal variation in overcoat sales. List 5 products which have a seasonal variation in their sales.

Answer the following questions related to Figure 3. In which years do you think there was a housing boom? Why?

Which year in the 1980’s was the worst in terms of building houses?



Figure 4 illustrated an irregular variation. Think of an item that you produce in your enterprise. Describe a time when there was an irregular variation in the level of sales. What do you think caused the variation?

There is feedback on this activity at the back of this Learner’s Guide.



How do I analyse stock movement data?

The movement of stock tells you what quantity and type of stocks need to be ordered to meet the demand forecast contained in the sales plan. Stock movement records can also be used to monitor the effectiveness of the demand forecast and projected sales. For example, if a demand estimate for a certain good is incorrect, then this will be reflected in slow movement of the stock off the warehouse shelves. Less stocks would be ordered to avoid excessive inventory costs caused by poor sellers.

What inventory do I need during different production and sales cycles?

Having analysed the sales plan and stock movement data you need to determine what, how much and when stocks are required to meet demand forecasts and sales projections. Taking high and low volume periods, seasonal and irregular variations into account will dramatically affect must be considered when making these decisions.

Take for example an enterprise that manufactures chocolate products. There are certain times of the year when demand and sales for chocolate increases dramatically, such as: • the week before Valentine’s Day • the two months before Easter • and two weeks before Mother’s Day in May.

In these periods, the volume of sales increases dramatically from normal to meet increased consumer demand. The store supervisor would need to check the sales plan to see how many more units of chocolate products need to be produced compared to current production levels to meet the anticipated demand increase at these periods.

The store supervisor may also consult the stock movement data to work out how much stock is currently in the warehouse before deciding how many raw materials such as cocoa, butter, sugar, foil, and wrapping are required to meet the production requirements.

The store supervisor would carry fewer stocks in the inventory in the weeks immediately after these high volume periods, because demand for chocolate falls dramatically after these days. Sales may plateau for several months until they rise again around Christmas time. The optimum inventory level during the high



volume periods would be significantly different compared to other periods when there is less demand and sales.

It is best to order required inventory well in advance of when the goods are required, as it may take time for raw materials, components or parts to reach you from suppliers, or suppliers may need advance notice to increase their production schedule to meet your order. This is known as “lead time’ and will be discussed in more detail in Section 2.



Activity 3: Stock movement data analysis

Pick two stocks from your warehouse. Using your stock movement records, compare the stock movement rates to the sales forecast contained in the sales plan.

Is there a discrepancy between the sales forecast and the actual movement of the stock during the current recording period?

Yes No

What are the high and low volume sales periods and seasonal variations in demand for those two items?

How many more units do you need to hold in your inventory between the lowest and highest volume sales periods throughout the year?




Section 2 Variables impacting on optimum stock levels



Section outline


• determining stock manufacturing/supply and consignment delivery lead times

• determining internal processing and distribution times

• calculating spoilage and obsolescence times

• assessing maximum stock carrying capacity

• assessing required physical and human resources in relation to required stock levels

• developing contingencies for abnormal distribution stoppages or slow downs to the supply chain.





What variables impact on optimum stock levels?

In Section 1, you saw how the sales of a good or service fluctuate over weeks, months and years and how these variations must be considered when assessing projected demand for stocks in your inventory. In Section 2, you will learn which variables other than seasonal variations, trends, cycles and variations influence the amount of stock you carry in your inventory.

There are several different variables which impact on the optimum stock levels in your inventory. These include: • the lead time between ordering and delivery of stocks • internal processing and distribution times • spoilage times of perishable items • time taken for goods/services to become obsolete • your enterprise’s maximum stock carrying capacity • your enterprise’s physical capacity to hold and store

projected stock levels • the skills, experience, capability and availability of

human resources to process, store, produce and distribute

• abnormal distribution stoppages • slow downs to the supply chain • inability of suppliers to meet order requirements.

What are lead, processing and distribution times?

Lead time is the time between receiving an order and delivering it to a customer. It includes the time taken to process the order, schedule its production, manufacture, produce and distribute goods or services to the customer. Lead times vary widely according to the product being manufactured, the service being provided and the characteristics of the industry an enterprise belongs to.

Examples of different lead times between an enterprise and their suppliers include: • a milk packaging plant receiving a delivery of milk every

12 hours • a brewery receiving a tonne of hops every day



• a concrete producer receiving a truckload of crushed rock every week

• a car manufacturer receiving a consignment of windscreen wiper parts every 17 minutes.

Supply chain integration

Increasingly, suppliers are forming closer relationships with their external customers to form a more closely coordinated supply chain. In some enterprises, like car manufacturers for example, suppliers may actually have offices on their client’s site and sit on in production planning meetings. Their inventory ordering systems may be integrated with their client’s system to reduce lead time significantly, obtaining greater cost competitiveness as a result.

Internal lead times

Besides the customer outside the enterprise, customers can also be thought of as internal customers. Internal customers are those people within an enterprise who rely upon others to perform an intermediate step in the production process on time so that they can meet their own performance standards. People working on an intermediate step in the production of a good or service obviously take time to complete their work. This time represents lead time for the internal customer.

For example, in a biscuit manufacturing factory, the internal customer for the biscuit wrapping team are the baking team. The baking team may take 3 hours to bake the biscuits, which represents the lead time for the packaging team. The packaging team may in turn take 45 minutes to wrap, label and package a batch of biscuits before sending them onto their internal customer, the warehouse storage team, whose internal customer is in turn the distribution team.

How do I calculate lead, processing and distribution times?

Basically, anything that happens between the customer placing an order and the good or service being delivered contributes to the lead time. To calculate the lead time, you add up the time taken to complete all the activities that take place between the customer ordering a product and it being delivered to them. More specifically, lead time consists of the time taken for things such as: • obtaining the raw materials needed to produce the good

or service from suppliers • processing the order within the enterprise



• designing the manufacturing or development process • planning the production schedule • setting up any equipment to produce the goods or

service • manufacturing or producing the goods • conducting any quality checks and inspections • overcoming any quality problems and rework • packaging, labelling and addressing the goods • checking the right quantity is being sent • storing the goods in the warehouse prior to distribution • transit time while being delivered to the customer.

Depending on where the customer is located, lead times may also be affected by things such as time to clear customs and quarantine, especially for international deliveries, or time to gather the appropriate financing paperwork from banks. Governments also regulate the length of time certain goods such as spare parts need to be carried in an inventory which may also affect lead time.

How does lead, processing and distribution time impact on optimum stock levels?

The lead time, processing, manufacturing and distribution times will impact significantly on stock levels. For example, if you know that you need to manufacture 5000 window frames to fulfil an order, then knowing how long it takes for the raw materials to be ordered, produced and delivered to your warehouse is vital to determine whether you have the stock levels to meet the target delivery date. If you do not have enough stock to meet production requirements, you will need to order more stocks. If you have too much stock, then you will need to seek other orders to reduce the excessive costs contained in the excess inventory and would not reorder stocks.



Activity 4: Lead time, spoilage and obsolescence

Choose a good or service that is produced by your enterprise. List all the steps involved between receiving an order of that good or service through to delivering it to an external customer in the table below and estimate the time taken to complete each task to calculate the total lead time. The first two tasks are listed for you.

Name of good or service:

Task Time taken

Receive order

Process order

Total lead time:

What would happen to this lead time if there was a delay in delivery of raw material from a supplier or there were not enough trucks to deliver the goods or services to the customer?



Who are the internal customers for tasks conducted within your enterprise?




How do I calculate spoilage and obsolescence times?

Other variables that must be considered when determining optimum inventory levels include the time before goods spoil or become obsolete. Calculating the spoilage and time taken for products to become obsolete is important as it will dictate how often you need to order certain types of stock. You do not want to get stuck with stock that goes off or there is no longer any demand for, as this will raise inventory carrying costs significantly.

Spoilage times

Some goods go off, become stale, decay or deteriorate if not used within a specified period of time or stored inappropriately. Fresh food products are obvious examples: • a seafood products manufacturer must use fresh

seafood within a short time period or it will be unsellable • a juice producer must use fresh fruit within a few weeks

or the fruit will perish • a milk packager must put milk in cartons under

refrigerated conditions within a couple of days or the milk will go off.

Health regulations usually require suppliers or producers to put a “best before” or a “use by” date on their product labels if they spoil. The difference between “best before” and “use by” date is that a producer cannot guarantee the quality of a good or service after a specified time, whereas goods marked “use by” usually results in some adverse effect if consumed after the use by date. For example: • if you ate yoghurt after the use by date then there is a

fair chance that you would become ill • whereas if you used a photographic film after the best

before date of May 2010, you will still be able to develop photographs, but the colour definition may not be as sharp as if you developed pictures in 2007.

Examples of other goods that spoil include: • chemicals • glues that harden over time • nuts and bolts that corrode in a damp environment.



Obsolescence times

Obsolescence refers to something becoming old, disused, no longer useful or no longer used. Examples of products that become obsolete include: • fashion items which last a season before they become

yesterday’s ‘must-have’ buy • computer chips which are superseded within 18 months

by a smaller chip with higher capacity • video recorders being replaced by DVD players • analogue mobile phones being replaced by 3rd

generation phones.

Calculating the time it takes for things to become obsolete is often difficult. Some goods become obsolete overnight. Others become obsolete after a known period of time. Fashion goods, for example, may have industry defined obsolescence times driven by new seasons and designs, but for other goods such as a particular brand of car it is difficult to pinpoint when it will lose favour with consumers, become replaced with a newer model or no longer be used. You will need to consult with members of the marketing department and sales team to monitor what is selling well and what is happening in the marketplace to determine whether a good or service is becoming obsolete. You will then need to modify the stocks you carry in your inventory accordingly.



Activity 5: Spoilage and obsolescence

Choose an item that you stock regularly in your warehouse inventory and answer the following questions about it.

How do you know how long the good can be stored before it spoils, decays, deteriorates and is no longer fit to be used? What sources of information would you consult to find this information out?

How do you know whether an item you stock is becoming obsolete? Who would you consult with and what information would you analyse to make such a decision?




How do I assess my maximum stock carrying capacity?

Capacity refers to the maximum amount that can be made by an enterprise’s production process and represents the limit of what output is possible in your enterprise’s production process. It follows that the maximum rate of output dictates the maximum number and types of stocks that can be carried in the inventory. For example, if your enterprise can manufacture a maximum of 100 cars in 24 hours, then you need to carry a minimum100 windscreens, 100 sets of tyres (including a spare), 100 engines and 100 sets of chassis and all other car components every day to meet this requirement. Usually enterprises will carry more than the minimum amount of raw material stocks in their inventories, however. This is to prevent stock outs for occurring during delivery lead times. This extra stock, known as “safety” or “buffer” stocks, will be discussed in greater detail later in this section and in Section 3.

Knowing the maximum stock carrying capacity helps you determine whether it is physically possible to produce goods and services in sufficient quantities to fulfil a customer order. This is especially important in high volume periods where there is high demand for your products or goods. Factors which affect maximum stock carrying capacity include the mix of products you are manufacturing and the demand characteristics of the product or service you are producing.

Increasing capacity

A firm that does not have the space to physically store all required components may get several deliveries of components and parts regularly throughout the day. When the parts or components are delivered they go straight onto the production line with minimal storage time. In this way a production facility with storage space for say, 40 sets of car components, can still manufacture 100 cars a day.

Enterprises may choose not to operate at their maximum stock carrying capacity because it may not be profitable to do so. For example, there is no point having a fully stocked warehouse of raw materials in a low volume period of demand because the costs of carrying all the unused stock will be high. The enterprise would be tying up cash that could be used more effectively elsewhere. Enterprises may also choose not to fully stock a warehouse because the money tied up in purchasing stock may disrupt the enterprise’s cash flow and threaten the solvency of the business.



Capacity planning is a complicated process usually performed by the manufacturing manager or production scheduler in conjunction with representatives from the other business functions such as marketing, sales and finance. It involves some complex mathematical and statistical concepts and calculations that are beyond the level required for this unit. However an understanding of the factors affecting the maximum stock carrying capacity is important so that you are aware of why you need to alter the stock carrying levels and why the maximum stock carrying capacity changes regularly.

How do I assess physical and human resource levels?

Two other important considerations which affect the optimum stock levels include the physical resources available in your enterprise’s production and warehousing facility and whether you have sufficiently skilled and competent staff to process, transit, manufacture, store and distribute goods and services.

Physical resource levels

The size of production and warehousing facilities obviously plays an important part in determining how much stock you can hold. You cannot hold more than a certain amount of raw materials or components in a warehouse or production facility. How much you can store depends on what parts and components you are storing and the size of the finished goods which are in transit storage awaiting collection or distribution.

When analysing projected stock levels, you need to be aware of the size and volume of your facility and the size and volume of the goods that are coming into your warehouse, both in their packaged and unpacked forms. You will also need to ensure you have adequate space to store the goods while they are being checked, processed and awaiting distribution.

As well as the size, the layout of your warehouse or production facility plays an important role in determining how many stocks you carry in your warehouse. Storing items neatly using a simple, logical system makes it easier to access stocks, and cuts down the lead time within a production facility or manufacturing plant, allowing more stocks to be turned over. Simple storage solutions such as having three levels of storage rather than one can make a significant impact on the amount of inventory that can be carried.



Organising stock

All stock should be organised in a way that maximises productivity and prevents double handling. This will increase profits for the company and help you reach an optimum inventory level. Stock should also be organised to avoid damage and spoilage due to things such as sunlight, heat, and radiation.

To store stock in the most convenient and efficient way you should: • store high turnover stock near the dispatch area • have markings on the floor to indicate where stock

should go • place stock in bins • have vertical stacking on racks and use forklifts for

access • have a secure area for high cost items.

Depending on your racking and block stacking capacity you should always look at your movement, ‘turnover’ or order picking requirements to help you decide how to place stock in your warehouse. Just because a product can stack three high does not mean it cannot be racked and vice versa.

Stock should also be organised in a way that prevents contamination by other stock. For example you should not have chemicals placed on racks above foodstuffs.

Other ways to organise stock include: • multiple locations (picking or reserve 2 bins) • picking direct from bulk (1 bin) • binning • racking • bulk stacking • separate special purpose areas (e.g. coldrooms,

freezers, dangerous goods storage area) • theft sensitive cages.

Human resource levels

It is also important to assess the level of staff you have available when assessing optimum stock levels. If staff are ill, redeployed to another production line, inadequately skilled or unmotivated this will impact on the number of potential and actual output of goods produced. This in turn affects how much stock and inventory is used and how much sits on the shelves. It is therefore necessary



to plan with the production team leaders when staff will be required, what skills they need, and whether there are enough of them to process physically produce the goods.



Activity 6: Maximum capacity, physical and human resources

Explain how stock is placed in your warehouse. Give special consideration to any stock which has special storage requirements.

Draw a diagram of the layout of your warehouse. Mark on the map any areas where improvements to the layout could quicken turnover of inventory.



If the changes you identified were implemented in your warehouse, how would the skills of the people working in the warehouse change and what would you do to ensure they gained these skills?




How do contingencies affect optimum stock levels?

A contingency is something that happens as a direct result of another action occurring. For example, a contingency in supply chain management could be that the missed delivery of crushed rock to a concrete manufacturer causes a stock out. Carrying excess stock in the inventory could have prevented the stock out. Safety stocks are also carried because things also often go wrong in the manufacturing and distribution process that cause delays.

Few enterprises carry the bare minimum stock levels of raw materials, parts or components to fulfil orders. If they did this, then when an interruption to the supply, production or distribution of those materials occurred, or a delay in the production process occurred, then production would cease, stock outs would occur and customers would be displeased because they have not received their goods on time. As a result, a certain level of excess stock, over and above the minimum amount required to meet production requirements, known as a safety stock, is carried. Issues to consider when calculating the safety stock will be discussed in Section 3.





Section 3 Determining optimum inventory levels



Section outline


• how to relate production and sales cycle stages to stock manufacturing supply and distribution lead times

• how to calculate safety stocks

• how to identify the optimum inventory level.





How do I determine optimum inventory levels?

To determine the optimum inventory level, all the factors discussed in Sections 1 and 2 should be considered: • the demand for the product • seasonality • trends • irregular variations • production cycles • high or low volume sales periods • lead time for raw material/components/parts

manufacture, supply and distribution • spoilage times • obsolescence times • maximum stock carrying capacity • available physical space • availability and skills of human resources • contingencies for overcoming interruptions to the supply

chain.

Determining optimum inventory levels is a complicated process involving a multidisciplinary planning effort between suppliers, marketing, sales, finance, operations, human resources and the logistics functions within an enterprise. Some of the sources of information that may be used to help you determine the optimum inventory level include: • supply requirements • supplier information • workplace contract procedures • sales plans • distribution times.

Supply requirements are generally worked out by calculating the difference between existing stocks held in the inventory and stocks required to meet production targets. Information about the supplier is generally kept by enterprises for regularly stocked items so you can calculate the lead time and availability of stocks reasonably easily. Your enterprise may also have supply contracts which restrict or dictate who you can supply from and under what conditions you can seek alternative suppliers.



As discussed previously, analysis of sales plans has a significant effect on the inventory you carry. The distribution time forms part of the lead time for stocks to arrive which also affects how much , how often and when you need to order stocks to top up your inventory.

Production and sales cycles and lead times

It is important to recognise the link between the production and sales cycle stages and the impact this has on: • what needs to be ordered • what quantity needs to be ordered • where it needs to be ordered from • whether the required stocks can be obtained on time.

It is best to plan resource requirements and arrange their procurement well in advance of when production is scheduled to ensure that supply requirements are met. This is because: • there is lead time for stocks to be acquired, grown or

produced by the supplier • there is lead time for parts or components to be

manufactured by a supplier • there is lead time for raw materials, parts or

components to be delivered.

Failure to allocate sufficient time to procure the required raw materials, parts or components will result in understocking and being unable to fulfil customer requirements and less profit for your enterprise.

Safety stocks

As discussed in Section 2, the optimum inventory level is not the minimum amount of stocks required to produce the number of goods set in the production schedule. Things often happen in the supply, production and distribution of goods that necessitate more than the bare minimum stocks are obtained. If only the bare minimum stocks are carried, then when something does go wrong, it will lead to a stock out. Some of the things that could go wrong include: • a supplier cannot deliver raw materials due to industrial

action • a supplier breaches contract and fails to deliver goods • a supplier’s truck breaks down and misses the deadline

for delivery



• there are not enough staff on the production line due to flu spreading through the employees

• a piece of production equipment breaks down or does not work properly

• an inaccurate planning schedule is implemented resulting in too few units being produced

• some goods fail quality inspection • goods are packaged or labelled incorrectly • a distribution truck breaks down.

All of these occurrences pose a threat to being able to meet customer expectations. To overcome this problem, enterprises usually carry more than the bare minimum of stock required to produce goods. This excess stock carried to be used in cases where a problem occurs to ensure production can continue is known as safety stock. Other terms used describe safety stock include a buffer stock or emergency stock.

There are various ways of calculating the safety stock. Some organisations keep a safety stock equal to half the lead time for the raw materials. Some keep a safety stock of 20% over what is needed for production. The level of safety stock will depend on many factors, including: • the type of good being produced • the availability of the raw materials, parts or

components • changes to market conditions • fluctuating demand • the industry characteristics.



Activity 7: Safety stocks

How is the safety stock calculated for items stocked in your enterprise’s inventory?

How much safety stock does your enterprise usually carry? On what basis was it decided to carry this much safety stock?




Calculating optimal inventory levels

The optimum inventory level is essentially the process of using the sales plan forecasts and stock movement data and other sources of information to determine production requirements considering all variables and then calculating the minimum amount of raw materials, components and parts required to produce the production target plus safety stock to allow for contingencies.

Determining the optimum inventory level is often a multidisciplinary effort between representatives of several different business functions in your enterprise.



Activity 8: Determining optimum inventory levels

Imagine you are at a monthly sales meeting with representatives from the finance, marketing, operations, and human resources team. You have noticed that over the past two months strawberries have been spoiling in the warehouse. You notice from the stock movement data that strawberry jam is not selling as much as predicted by the sales plan. After much discussion with the group, and further analysis of sales figures from other products, you decide the decline in sales has largely been caused by a reduction in the amount of advertising spent on promoting the strawberry jam.

After consultation with the marketing manager, it is decided that a promotion will be used in an attempt to boost sales by 10% over 3 months. The operations manager suggests that the promotion should start in 2 months’ time to coincide with the spring harvest of strawberries, so that there will be enough raw materials to meet production requirements. The marketing manager agrees because this will give the marketing team time to negotiate a better rate with advertisers. It will also allow human resource manager to recruit, induct and train approximately 10 more staff who will be required to work on the production line to cope with the anticipated extra production. The two months will allow the finance team some breathing space to raise the capital required to fund the promotion without impacting dramatically on the enterprise’s cash flow.

Answer the following questions about determining the optimum inventory relating to this scenario:

Make a list of all the items you will need to make strawberry jam. Remember that not only will you need the raw materials to make the jam, but must consider stocks for such things as packaging, labelling and wrapping.



If the production target in 2 months’ time was 100,000 jars of strawberry jam, would you order 100,000 of all the raw materials and necessary items involved in producing the finished product or would you order more? Why or why not?

What would be the advantages of entering into an exclusive supply contract with a single strawberry supplier? Why would you consider entering into supply contracts with more than one strawberry supplier?




Suggesting supply improvements

Calculating the optimum inventory level may require you to suggest improvements to supply operations and negotiate changes to supply agreements. For example, if you notice that stock outs are frequently occurring because your enterprise is overly reliant on one supplier who is not consistently meeting target delivery times, then you may suggest that another two additional suppliers are sought to reduce reliance on that supplier.

Alternatively, if your stock movement data indicates that sales are greater than forecast in the sales plan, you may need to negotiate with your supplier to deliver more raw materials, parts and component stocks than specified in the original supply contract.

Calculating the optimum inventory level is a constantly changing, complicated and difficult task involving a combination of quality information, rigorous analysis, multidisciplinary teamwork and contingency planning. However, once the desired level of inventory is determined, the next challenge is to monitor inventory levels in the face of fluctuating demand. How to do this will be discussed in Section 4.





Section 4 Monitoring optimum inventory levels



Section outline


• comparing inventory benchmarks to sales turnover/production requirements

• making adjustments to inventory levels in accordance with reassessed sales turnover/production requirements

• documenting changes and requests to inventory levels

• assembling resources to optimise inventory levels.





How do I monitor optimum stock levels?

An essential step in determining optimum stock control is to monitor the stock levels in the warehouse. As a result of this, well kept records are essential.

When implementing monitoring and maintenance systems for your stock, you should remember that stock is money and you must use it as efficiently as possible to get as much profit from it as possible.

Keeping stock records

Stock records will tell you: • how much stock is currently in storage and undergoing

production • how much stock is required to maintain current

production levels • the suppliers you need to deal with to buy stock • delivery times for stock to be delivered.

When monitoring stock levels in your store, consideration needs to be given to a number of factors, including: • What is the ideal level of stock for a product? • How much space is available for storage? • How often should stock be reordered, and when is the

reorder cycle? • Is it easy to adjust stock levels without suffering loss? • What is the demand for the product? • What is the availability of supply? • What is the supplier’s lead time?

As with other aspects of inventory management, the objective of monitoring stock levels is to avoid an out of stock situation, maintaining sales to meet customer demand.

When monitoring stock levels, you need to use a system to keep count of stock so you know exactly how much stock is currently in your warehouse. The system of monitoring in your warehouse should include: • the method used to count stock, such as a computer

recording system, a comparison of figures from year to year, physically counting what is in stock or a combination of manual and computer counting methods



• the frequency of the monitoring for example each day, week, bi-weekly, monthly or yearly

• the actions available to you if you find you have a stock shortage or surplus.

Reorder cycles

As well as monitoring stock levels, you need to monitor stock reorder cycles. A reorder cycle is the continuous physical counting of inventory so that all items are counted at a specific frequency, and these records are reconciled with actual data. A “cycle” is the time taken to count all items in the inventory at least once. The cycle changes depending on changes in the demand for the product and is dictated by the frequency of orders and the quantity required. This system may be manual, where a delegated staff member places an order weekly, monthly or another specified time period, or electronic using point of sale equipment

Monitoring stock turnover

Whilst monitoring the stock reorder cycle and the stock levels, the rate of sale, or turnover of stock, is important in deciding what inventory you will need to reorder. You need to identify which stock is moving quickly and which is moving slowly. Fast moving stock, as the best sellers, need sufficient levels of replacement stock to ensure they do not run out. Slow sellers need to be identified to ensure they are eliminated from the range or to reduce their stock orders so not too much of these stocks are being carried.

A method of calculating fast and slow sellers is to calculate the stock turn of each stock. This calculation relates to the sale of the item over a period of time. The rate of stock turn is equal to the total sales divided by the average stock.

Stock turn rate is calculated by using the following formula to calculate the average stock then dividing it by the total sales:

Opening Stock+ Closing Stock Number of days/weeks/months

For example, if a store supervisor was trying to work out the stock turn for a line of televisions with stock sales worth $100,000 over 3 months, with the opening stock worth $89,000 and the closing stock $21,000, then the average stock is:

$89,000+$21000 = $36,666 average stock over the 3 months

3 months



Stock turn is therefore the sales divided by the average stock value over the three months:

$100,000 = 2.72 36,666

The stock has therefore turned over 2.72 times in 3 months.

As an example of how to work out how fast items sell, if a product had ten items in the warehouse each time the stock was ordered, and it turned 2 times in three months, then the store sold 20 items altogether. If there had been 10 items in the warehouse and the stock turned 1 time in three months, then 10 items were sold. This can help you identify that the first good sold twice as many as the slower selling item. You may wish to remove the slow seller from the range you are selling, or consult with marketing about doing a promotion to boost sales. Almost certainly you would modify ordering for the slower moving item.

Inventory benchmarks

Enterprises keep records of their inventory levels, stock turnover rate and sales figures which they use not only to plan projected stock demands, but also to measure their current stock levels against previous levels in similar periods of demand.

Current performance is also measured against industry benchmarks. A benchmark is something that serves as a standard by which performance may be measured as a basis for evaluation or comparison. Benchmarks may be: • periodic • monthly or • weekly.

Often enterprises purchase information from external consultancies which gather data on things such as stock turnover times, cash conversion cycles, average lead times and customer satisfaction levels in the industry the enterprise works in. Some industries benefit from information published by public agencies such as the Australian Bureau of Statistics or government departments. Enterprises use this information to determine whether there is any discrepancy between the levels of inventory that their enterprise is carrying compared to the industry standard.



If inventory turnover is less than the industry standard, then this usually means that the enterprise’s inventory management is uncompetitive and too much stock is being carried compared to its rivals. The enterprise will need to come up with ways to reduce the inventory without sacrificing performance standards or it may go out of business. If inventory turnover is higher than the industry average, then as long as customer needs are being met, this represents and ideal situation because it means the inventory being carried is competitive in relation to competitors and it enjoys higher profit margins.



Activity 9: Fast and slow sellers

Choose five products from your warehouse. Gather information on their sales over the past three months. Using the formula shown on the previous page, calculate the stock turn for each item.

List the stock items and their stock turns here:

1.

2.

3.

4.

5.

Which items are fast sellers? Which items are slow sellers?

How does the stock turn for these items compare with your enterprise’s stock turn target or industry benchmarks? If you do not keep this kind of information, where could you get it from?



What conclusions can you draw from the stock turns you calculated?




Documenting changes and requests for adjustments to inventory level

Imagine you notice that the raw materials for a product are not moving off the shelves very much over a few weeks. You calculate the average stock turn and discover that it is taking on average 5 weeks to turn over the items used in making this good. You calculate the average stock turn for other items and discover that all other products are moving out of the warehouse in around 2 weeks. Armed with these figures, you decide to call a meeting with the production team to discuss whether you reorder the raw materials or reorder as usual.

Your enterprise will have policies and procedures that govern how you should submit requests such as these. It is unlikely that you will be able to make a decision without consulting other functions in the enterprise. Input from many different business functions is required in determining the optimum inventory level.

As an example, imagine if you decided not to order the raw materials and then found out that the marketing department had planned a promotion for that good as a response to declining sales. Imagine that, having cancelled the goods, a supplier could not deliver the quantities you required because they had sold the stock to another enterprise and did not have the capacity to fulfil both orders. The finance department would also need to be consulted, because they need to stop payment and reallocate funds to other stock purchases and revise the budget. The human resources manager would need to know also so they could stop their current recruiting campaign as new production staff may not be required.

As a general rule, requests to changes in the inventory ordered should be in writing and submitted to other members of the enterprise team representing the different business functions. It is essential to communicate between the various business functions so that everyone is aware of what is happening, otherwise it could lead to stock outs and sub optimal use of inventory and conflicts between the different business functions operating in your enterprise.

Assembling resources

Having considered all the factors which affect the optimum inventory level, you now have to assemble all the resources together to obtain them. This means: • researching potential suppliers, • negotiating with and placing orders with suppliers



• checking that staff have adequate skills, training and experience to process, handle, move and use the stocks

• looking at the capacity to hold the stocks in the warehouse.

Negotiating with suppliers

Once you have decided which products need to be ordered, how much is needed, and when you need it to be delivered by, you will need to negotiate the purchase and supply agreement with your supplier. These agreements must be recorded accurately so you know what you have ordered and at what price.

Supply arrangements differ among the suppliers that you deal with. It is important that you strive for a cost effective supply deal to maximise the profits for your enterprise. To do this you may decide to order excess stocks if it results in a quantity discount from the supplier. However, you must be careful not to order too much as the goods may become obsolete by the time you have produced them all.

Managing supply problems

You will often experience supply problems when receiving goods from your suppliers. For example, a delivery may not arrive. Most problems arise because of a communication breakdown somewhere in the process of ordering and supply. When a problem arises you may find yourself in disagreement or a potential conflict situation.

In such situations you need to communicate with the supplier to ensure the goods are still delivered. You do not want to annoy or mistreat the supplier. You must negotiate carefully to avoid losing a valued supplier relationship.



Activity 10: Negotiation with and managing suppliers

Imagine you are the store supervisor for an enterprise which manufactures jumpers. With winter approaching, the production manager has asked you to obtain a supply of 3 tonnes of wool required to meet production requirements. You have an existing long-term supplier, but over the past 18 months they have been unable to deliver orders on three separate occasions, resulting in stock outs and loss of a major department store client. The supplier has offered a discount on the usual price provided your enterprise keeps them as the exclusive supplier.

You investigate another supplier who is slightly more expensive, but has a better stock delivery record for its existing requirements, and is willing to reduce their price to gain the supply contract.

What would you say to the supplier with whom you have an existing supply contract?

What would you recommend to your production manager about which supplier to choose?



A supplier that is contracted to deliver 5 truckloads of stock items every twelve hours has been late by as much as one or two hours consistently over the past week. This has resulted in halting the production line while waiting for the components to arrive. This has resulted in knock-‐on delays to the distribution of finished goods to your customers and causing the operations manager to ask you to sort the delivery problems immediately.

How would you handle the supply problems you are experiencing?




Additional resources



Further information

The websites and publications listed below provide more information on topics relevant to unit TLIA2807C Assess and monitor optimum stock levels.

Books

• Stevenson, W.J. (1996), Production/Operations Management, 5th edn., Irwin/McGraw-‐Hill: Boston

Contains useful information on forecasting, analysing trends, cycles, variations and how to calculate optimum stock levels.

• Chopra, S. & Meindl, P. (2001) Supply Chain Management, Prentice Hall, UpperSaddle River: New Jersey.

Contains a comprehensive discussion of issues related to supply chain and inventory management.

• Simchi-‐ Levi D.P., Kaminski, E. (2003) Designing and Managing the Supply Chain (2nd Edition), Irwin McGraw Hill: Boston.

Contains a chapter on issues involved in inventory management.

Websites

• http://inventoryops.com/warehouse_optimization.htm and www.inventoryops.com provides information on how to optimise inventory levels.

TDTA2898B Assess and monitor optimum stock levels


Feedback on activities The responses provided in this section are suggested responses. Because every workplace is different, your responses may vary according to your specific workplace procedures, the equipment available and the nature of the business.



Activity 1: Under and overstocking

This activity is designed for you to appreciate how under or overstocking significantly impacts on the profits your enterprise makes.

The answer to the first question will vary depending on the specific circumstances surrounding the example you provide. However, in general, the sorts of costs that are incurred to an enterprise when they understock are that: • sales are lost • late delivery penalties are incurred • loss of repeat business • loss of referred business • inefficient production.

In the second question, you should describe whether the failure to meet the delivery deadline affected your relationship with your supplier. The damage to your relationship will vary depending on the level of integration, trust and working relationship you have with the customer, the underlying causes for the missed delivery and how much your actions were responsible for the delay.

In the third question, among the things that your enterprise could be doing with the cash tied up in excess inventory include: • using it to purchase high rotation, high volume stock • buying new assets • hiring new staff • training staff • implement a new computer system.

The important principle from this question is that excess inventory costs your enterprise a lot of money which could, in extreme cases, be responsible for an enterprise going out of business.



Activity 2: Analysing sales plans and stock movement data

Regarding Figure 1, some of the reasons consumers may have increased their wine consumption are: • the wine industry has developed so there is greater quality and variety

of products for consumers to choose form • the wine industry has been cleverly and innovatively marketed • a cultural shift away from drinking beer to wine • an increase in general alcohol consumption with increasing population • greater disposable income caused by improved economic prosperity.

For the second question, 5 products which have seasonal variations in their sales are: • ice creams • Christmas trees • skiing holidays • air flights • football boots.

Regarding Figure 3, there was a housing boom according to the graph between 1985 to 1990 and again between 2000 till 2005. This is reflected by the number of window frames being sold increasing during these periods because window frames are a component of building houses. There are more houses built during a booming economic cycle as consumers believe they have the money to pay for new construction of new homes. Around 1983 was the worst year in the 1980s for building houses as the economy was in the depths of a severe recession which reduced demand for building new houses.

The answer to the question related to Figure 4 will depend on the example you provide. However, irregular variations may be caused by things such as: • abnormal weather patters such as a heatwave or flooding • any unusual events or occurrences.



Activity 3: Stock movement data and analysis

The answers provided to this activity are dependent on the information available to you in your enterprise. If you do not have a sales plan or stock movement records, estimate from your own work experience when the high and low volume periods are, when there is a seasonal variation in the amount of goods or services produced and sold, and roughly estimate how many more stocks you use between the peak and low volume periods.

Activity 4: Stock movement data and analysis

The tasks and time taken between receiving and order and delivering it to a customer will vary depending on the item you select. You may need to talk to your suppliers, internal customers and colleagues in your enterprise to work out the time it takes to complete many of the tasks involved in the lead time. Some of the tasks involved in calculating the lead time include: • obtaining the raw materials needed to produce the good or

service from suppliers • processing the order within the enterprise • designing the manufacturing or development process • planning the production schedule • setting up any equipment to produce the goods or service • manufacturing or producing the goods • conducting any quality checks and inspections • overcoming any quality problems and rework • packaging, labelling and addressing the goods • checking the right quantity is being sent • storing the goods in the warehouse prior to distribution • transit time while being delivered to the customer.

Regarding the second question, if there is a delay in any of the tasks involved in getting a good or service to a customer then the lead time is extended. Because things often go wrong in the supply, productions, processing, and distribution of a good/service, most enterprises build in a bit of slack into the production process to allow for contingencies so they do not miss their delivery time.



The internal customers within the lead time chain are any department, persons or section who are relying on you to complete your work before they can begin theirs. Satisfying the internal customer is crucial to meeting lead time targets and ultimately translates into meeting the external customer’s expectations.

Activity 5: Spoilage and obsolescence

The amount of time that your stocks can be stored before spoiling, decays, deteriorates or is no longer fit for its intended purpose will vary depending on the characteristics of the good. Sources of information you may access and people you may like to consult to determine spoilage times include: • material safety data sheets provided by the supplier • quality and enterprise work specifications and procedures • manufacturer’s specifications and/or suppliers handling and storage

advice • workplace operating procedures and policies • supplier and or client instructions • legislation • industrial agreements • standards and certification requirements • quality assurance procedures • hazardous substances and dangerous goods codes • consultations with other employees, supervisors, management, Health

and Safety Representatives, industrial relations, OHS specialists, other professional and technical staff, contractors and maintenance personnel.

Knowing when a stock item is becoming obsolete is a difficult process involving analysis of the current and projected market conditions, and the associated production requirements to meet the level of demand. Some goods have defined obsolescence times like seafood and computers, while others may have a less clearly defined obsolescence time, like cars and books. Among the people you may consult with to assist you in determining whether something is becoming obsolete or not are: • clients • suppliers • the marketing team



• the sales team • your colleagues in the warehouse • external consultants.

Sources of information you may like to consult when determining obsolescence include: • sales plans and stock movement data • customer feedback • market survey data • press and media reports • external consultant reports • material safety data sheets provided by the supplier • quality and enterprise work specifications and procedures • manufacturer’s specifications and/or suppliers handling and storage

advice • workplace operating procedures and policies • supplier and or client instructions • legislation • standards and certification requirements • quality assurance procedures • hazardous substances and dangerous goods codes.

Activity 6: Maximum capacity, physical and human resources

You are required to give an explanation of the system used to store stock in your warehouse. The idea of this activity is to get you to identify how stock is stored in your warehouse to prepare you to analyse whether the layout could be improved to promote increased turnover of stock. When drawing the layout of your warehouse, consider the following issues when thinking about improvements to the warehouse layout: • whether high turnover stock is stored near the dispatch area • whether there are clear markings on the floor to indicate where stock

should go • whether stock would be stored or moved more compactly, easily and

efficiently if in bins • whether vertical stacking would assist in inventory turnover.



When you make layout changes in your warehouse, you may need to redeploy warehouse workers in different areas or modify the way in which they do their jobs. You may need to consider what training and new skills are required to implement the new warehouse system accompanying the new layout. This may require consultation and training with the workers involved.

Activity 7: Safety stocks

Each enterprise has its own method for calculating the safety stock it requires. In the past, the safety stock figure was essentially an arbitrary decision based on experience and traditional figures. However, much closer attention has been paid in recent years to calculating more accurately just how much safety stock is required in order to reduce excessive inventory carrying costs which eat into an enterprise’s profitability. Working out the safety stock is often a complex process requiring sophisticated statistical analysis performed with the assistance of computer software, but at other enterprises it may be calculated using historical data and subjective judgement based on experience. This activity is designed to get you to think about whether there are better ways for you to calculate safety stocks.

Activity 8: Determining optimum inventory levels

The items that you need to make strawberry jam include raw materials such as strawberries, lemon juice, pectin, and sugar glass jars, lids, labels, boxes, packaging materials such as wrapping and cardboard separators.

Ideally you should order the minimum amount required to produce fulfil production requirements (100,000) plus a safety stock to insure against stock outs caused by things such as: • a supplier cannot deliver raw materials due to industrial action • a supplier breaches contract and fails to deliver goods • a supplier’s truck breaks down and misses the deadline for

delivery • there are not enough staff on the production line due to flu

spreading through the employees • a piece of production equipment breaks down or does not

work properly • an inaccurate planning schedule is implemented resulting in

too few units being produced



• some goods fail quality inspection • goods are packaged or labelled incorrectly • a distribution truck breaks down.

Use your own enterprise’s guidelines for calculating the safety stock to determine how much above the 100,000 items of stock you would need to cover contingencies which may lead to a stock out.

The advantages of entering into an exclusive supply contract with a single strawberry supplier are that because a large quantity is being ordered, you will most likely be able to obtain a discount on the materials being supplied. You can also build up a close working relationship and may be able to integrate your inventory management systems to reduce lead time and achieve greater cost savings as inventory levels are optimised. It also allows you to plan ahead knowing that you have a steady source of supply.

However, some disadvantages of having a sole supply contract are that it means that your enterprise relied solely on one supplier. If that supplier is not able to meet their delivery obligations for whatever reason, it means that your lead time is extended and you may not be able to meet customers’ expectations, resulting in loss of goodwill, repeat and referred business. If locked into a long term contract, then if the price of the stocks drops, you may be locked in to a more expensive price when the market price drops.

To overcome problems of over reliance on one supplier, you may wish to enter into several supply contracts. In case one supplier is unable to deliver, then you have access to another supplier who is, avoiding a stock out. In some cases one supplier may not be large enough to satisfy all your supply requirements, and it may be a necessity to obtain supplies from many different suppliers.

Other reasons why you may like to obtain supply contracts from more than one supplier is to trial a range of suppliers before determining the preferred supplier who best meets quality and delivery requirements, regulatory restrictions on the amount of supply that any one supplier can provide or to obtain cheaper prices by creating a competitive environment amongst the suppliers.




To calculate the stock turn of the 5 items you selected, you will need access to the value of stock that you had in your inventory. You may need to check computer or financial records prior to commencing this activity.

Fast sellers are those items that have a relatively high stock turn rate, that is, their stocks are used quickly when they come into the warehouse. Slow sellers are those that do not turn over quickly. Slow sellers effectively cost your enterprise money and steps should be taken to investigate why they are selling slowly and if necessary the stock items should be replaced with items that sell quicker.

Many enterprises keep benchmarking data on their average stock turn for each items and measure the stock turn within a given period against that benchmark. Reasons for any discrepancies are investigated with the aim to consistently turn stock below average times as this means more stock is being turned over reflecting increased sales. Stock turns above the enterprise’s average means that stock is turning slower than expected and that steps are required to increase the stock turn rate as the enterprise is effectively losing money.

Industry benchmarks are often provided by private research consultancies or government departments. Enterprises compare their stock turn to industry levels because this represents a measure of the competitiveness of the enterprise compared to its rivals. Enterprises who are above the industry benchmark for stock turn have a competitive disadvantage because they are slower to produce goods or services and have less capacity to meet customer demands in high volume periods.

In analysing the stock turn data, if the stock turn data is discrepant with the enterprise’s or industry benchmark, then you need to decide what action needs to be taken to correct this discrepancy. This may mean you need to suggest that a stock be dropped, investigated as to why its sock turn is so slow. You may wish to raise your findings in a meeting with the production, marketing, finance team and get their opinion on why the stock is turning over so slowly.




The answers to this activity will depend on your personal views. However, some of the things you may consider saying to the supplier with whom you have an existing contact are: • that you have concerns about their ability to supply reliably • that the discount offered is not enough given the poor delivery record • that you are opening the supply contract up for open tender • that you have received another offer.

What you recommend to your production manager about which supplier to choose is subject to your opinion. It may be an idea to engage in more than one supply contact in this case because: • to diversify the risk of the suppliers being unable to meet delivery,

avoiding stock outs and lost customer orders • to improve the quality of the supplies being delivered • to obtain a variety in the range of products supplied. Keep in mind that having more than one supply contract may lessen the amount of integration between your existing supplier and your enterprise, there is no guarantee that the other supplier will be better until you use their services and suppliers may resent having to collaborate with their competitors and try to undermine each other’s efforts. In terms of handling the supply problem, it is generally a good idea to contact the supplier’s representative and highlight the problems that have occurred backed up with documentary evidence and estimates as to how much this has disrupted the company. Rather than sticking to the letter of the law, and threatening legal action in case of contract violation, it is preferable to use diplomacy, tact and negotiate a mutually acceptable solution. Legal action is costly, time consuming and does nothing to enhance the working relationship between the supplier and your enterprise. You need to provide the supplier with the opportunity to fix any problems that may be causing the supply problem. It could be that deliveries have been missed due to a difficulty attracting sufficiently skilled people, and are close to being resolved. Or maybe that their fleet management computer system is undergoing a major upgrade and there are teething problems that they are working hard to resolve. Should performance not improve, then legal action to recover loss and damage should be considered only as a last resort.

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TLIA2807C - Assess and Monitor Optimum Stock Levels - Learner Guide

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