Topic 9 - Inventory (Stock)
Management
Higher Business Management
1
Learning Intentions / Success Criteria
Learning
Intentions
Inventory
(stock)
management
Success Criteria
Learners should be explain and discuss:
• features, costs and benefits of just-in-
time inventory (stock) control
• storage and warehousing of inventory
(stock)
• logistical management of inventory
(stock).
2
Stock Management
• The term stock refers to raw
materials, goods that are
currently being
manufactured (work in
progress) and finished
goods.
• At all stages of the
production process stock
must be managed because
there must be sufficient
quantities of raw materials
and finished goods at all
times.
3
Factors to Consider when Manufacturing
and Storing Goods
• The quantity of the product that is required.
• The volume of products that can be
manufactured at any one time.
• Working practices, procedures and health and
safety requirements.
• The storage available in a warehouse.
• Procedures for maintaining and managing
quality.
4
Purpose of a Stock Management
System
• Ensure stock is readily available at anyone
time.
• Ensure production continues.
• Avoid delays to customer orders.
• Ensure over-stocking does not take place,
which results in higher costs.
• Avoid stock deteriorating (e.g. fresh food)
and/or becoming obsolete.
5
Consequences of Overstocking
• Stock could go to waste or deteriorate, resulting in
stock that needs to be discarded if they are stored for
too long.
• Supplies could go out of fashion before they are used.
• Increased financial costs (e.g. storage, security and
insurance).
• Higher risk of stock being stolen by staff, customers
or thieves.
• The opportunity cost of money being tied up in stock
which could be better used elsewhere in the business.
6
Consequences of Understocking
• The business may run out of stock and be unable to continue
production and therefore employees and machines sit idle.
• The business will not benefit from bulk buying discounts due to
making smaller orders.
• There will be an increase in delivery costs since many smaller
deliveries will have to be made.
• There may be no stock to sell, resulting in a bad reputation and
customers not returning.
• Customers might not receive their orders on time, which could result
in complaints.
• There will be an increase in administration costs, e.g. paying staff to
browse for supplies, complete order forms, settle invoices, etc.
7
Inventory (Stock) Management
System
8
Features of an Inventory
Management System
• Maximum stock level
• Minimum stock level
• Re-order level
• Re-order quantity
• Lead time
9
Maximum Stock Level
Description Justification
This is the most
amount of inventory
(stock) that should
be held.
Setting this level
avoids consequences
of overstocking.
10
Minimum Stock Level
Description Justification
This is the least
amount of inventory
(stock) that should
be held.
Setting this level
avoids consequences
of understocking.
11
Re-order Level
Description Justification
The level at which stock is re-
ordered. Computerised
inventory systems link to EPOS
and automatically re-order
goods.
This ensures
the quantity
ordered is not
too much or
too little.
12
Re-order Quantity
Description Justification
This is the
amount that is
ordered.
This ensures the quantity
ordered is not too much
or too little.
13
Lead Time
Description Justification
This is the time taken
between an order
being placed and
stock arriving.
As short a lead time as
possible allows the
business to react to rush
orders.
14
Computerised Stock Control
Most inventory
systems are now
computerised.
15
Advantages/Disadvantages of a
Computerised Stock Control
16
Advantages Disadvantages
• Databases keep balances of inventory which
are automatically updated.
• Can be linked to tills through EPOS, which
update inventory levels with each sale.
• Accurate and constant monitoring of stock
levels allows for automatic re-ordering.
• Allows for decisions on slow-moving stock
or best sellers to be made by managers from
their computers.
• Can highlight regional variations in stock
for head office.
• Can highlight seasonal shifts in demand.
• Is a deterrent to theft by staff as they know
inventory levels are monitored closely.
• Computerised
systems will cost a
lot of money to
install and
maintain.
• Money and time
need to be
invested to train
staff to operate the
system efficiently.
Just In Time (JIT)
• Just in time (JIT) is a method of stock control
that keeps cost levels to the minimum.
• As the name suggest, stock arrives just in time
for it to be used in the production process and
goods are only manufactured when a customer
order is received.
17
Advantages/Disadvantages of a JIT
18
Advantages Disadvantages
• Less cash is tied up in stock,
improving cash flow and
working capital.
• Less wastage as all stock is
used for production.
• Less storage and warehouse
space is required saving costs.
• Wastage should be reduced as
only stock required is ordered.
• Changes in the external
environment (e.g. fashion
trends) will have a reduced
impact.
• Suppliers who are reliable are
required so that stock is
delivered on time.
• Production can stop if stock is
not delivered when required.
• Less environmentally friendly as
more journeys with less stock
will be made.
• Delivery costs might be higher
due to more journeys.
• Discounts for bulk buying
(economies of scale) might be
lost.
• No room for error in production.
Storage and Warehousing
• A business has to decide how to store its inventory
(stock).
• Inventory is usually stored in warehouses.
• Large buildings in central locations are used to store
inventory and distribute raw materials to factories or
finished goods to retail outlets (called centralised
storage).
• Warehouses can also be smaller buildings or areas of
a factory or retail outlet (called decentralised storage).
19
Centralised Storage
This involves storing inventory in one
central location in a large, purpose-built
warehouse.
20
Advantages of a Centralised
Storage
21
• Specialist staff are employed to maintain inventory, which
improves speed of stock handling and security.
• Centralised warehouses can store a massive amount of
stock, benefiting from economics of scale.
• The same procedures for issuing inventory are used across
the organisation, improving consistency.
• It may be cheaper to store inventory in one large warehouse
than the total cost of many smaller on-site storerooms.
• Centralised warehouses are often located close to
infrastructure, e.g. motorway networks, docks or air and rail
cargo terminals.
Disadvantages of a Centralised
Storage
22
• Inventory has to be delivered to the each division or
department, causing delays.
• Specialist staff need to be employed to maintain inventory,
increasing wage costs.
• Specialist equipment needs to be purchased and maintained.
• Inventory usage levels and needs are unclear as divisions
need to communicate with the warehouse.
• The use of centralised warehousing has declined due to
more efficient inventory systems such as JIT, sourcing
direct from the supplier.
Decentralised Storage
This involves storing inventory in many
locations in smaller warehouses or store
rooms.
23
Advantages of a Decentralised
Storage
24
• Inventory is always close at hand when needed for
production or to sell to needed for production or to
sell to customers.
• Smaller, more local warehouses are more responsive
to local needs.
• Inventory usage reflects production as it is stored in
factories or retail outlets.
• Smaller amounts of inventory result in no negative
consequences of overstocking.
Disadvantages of a Decentralised
Storage
25
• Can lead to wastage or theft of stock as security isn’t
as good as it is in centralised storage.
• Lack of specialist staff can lead to inventory control
being clumsy and inefficient.
• Each division may handle inventory differently,
leading to inconsistency and problems being harder to
pinpoint for senior management.
• Smaller amounts of inventory result in negative
consequences of understocking.
Distribution and Logistics
• Concerned with getting the finished
product to the right customer.
• How the product gets to the
customer depends on the
distribution mix.
• Some organisations may choose to
transport the product themselves or
they may employ a company that
specialises in logistics and
distribution to do this.
• The distribution mix identifies
various factors to be considered
when deciding upon the route to get
the product to the customer.
26
Factors to Consider when
Distributing Goods
• Reliability of other organisations.
• Legal restrictions.
• Availability of finance.
• The product being distributed.
• The image associated with the product.
• The stock management system being used.
• The distribution capability of the manufacturer.
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Methods of Distribution
Method of
distribution
Advantages Disadvantages
Road network
• Very quick to deliver in
cities
• Cheaper than other methods
• Petrol
• Vehicles
• Insurance
• Pollution
Rail network
• Quick service from city to
city
• Good for large products and
large volumes of deliveries
• Train service
• Some areas of the country do not have a
reliable rail service
Aeroplane • Quick to distribute products
over a long distance
• Can be used for small
quantities
• Airline service
• Getting to airport
• Not suitable for large products
Sea Can be useful for large
quantities to be transported
long distances if time is not an
issue
• Vessel
• Costs to getting to docks
• Some areas of the country are not close
to docks
• Journey can take a long time 28