tutor2u

StockControl
TheImportanceof
ManagingStocks

AS&A2BusinessStudies
PowerPointPresentations2005
 WhatAreStocks?

Threemaincategoriesofstocks

Raw Workin Finished

Materials Progress Goods

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 TypesofStock

RawMaterials
Substancesinanaturalstatebeforetheygothroughmanufacturingorother
processing
Componentsthatrequireassembly
Purchasedfromoutsidesuppliers
Workinprogress
Itemswhich,atagiventime,aregoingthroughtheproductionprocess
Someproductshavealongproductionprocesssothevalueofworkin
progressisoftensubstantiale.g.constructionprojects
Finishedgoods
Goodsthatarecomplete
Maybestockedawaitingdeliverytocustomer
Maybeproducedsometimeinadvanceaheadofseasonalincreasesin
demand

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 WhyHoldStocks?

Tomeetdemand
Actsasabufferintimesofhighdemand
Protectagainstuncertain/unreliabledeliveryfromsuppliers
Encouragecustomerstobuy(crucialinbusinesseslikeretailers)
Tolowerproductioncosts
Takeadvantageofquantityorbulkdiscountsbyorderingmoreata
time
Canbuystocksaheadofashortageorasupplierpricerise
Reduceorderingcosts
Ensurecontinuityofproduction(avoidcostsofproductionshortages)

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 RoleofthePurchasingDepartment

Animportantservicefunctioninanybusinessthat
needstoacquireinputs(e.g.rawmaterials)and
transformthemintooutputs
E.g.manufacturingbusiness
E.g.retailer
Objectivesofthepurchasingdepartment
Stocksaresufficientforthebusinessneedsatanyonetime
Avoidoverstocking
Obtainstocksoftherightquality
Obtainstocksatthebestavailableprice
Developstrongworkingrelationshipswithkeysuppliers
Operatethepurchasingfunctioneffectivelyandefficiently

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 CostsofHoldingStocks

Purchaseprice(i.e.thecostofthestockitself!)
StockHoldingCosts
Opportunitycostofthecashtiedupbybuyingstocks(i.e.thecostofnot
havingthatcashinvestedelsewhere)
Costofstoringandhandlingstocks(e.g.warehouse,stockcontrol
systemsemployees)
Costofinsurance(importantmanybusinesseshavegonebustbecause
theirstockswerenotinsured)
Cost/riskofdeteriorationorobsolescence(i.e.thestockbecomes
unusableafteraperiodoftime)
Stocklosses(e.g.damage/theft)
StockOrderingCosts
Clericalandadministrativecosts(e.g.purchasingdepartment)
StockShortageCosts
Productionstoppagescausedbylackofrawmaterials
Lostsalesduetostockoutsordelayeddeliveries

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 StockControlSystems

Widerangeofstockcontrolsystemsavailable
Reorderandmaximumstocklevels
EconomicOrderQuantity(EOQ)
ABCsystem
Justintime(JIT)systems
Perpetualinventorymethods
Subcontractingproductionprocessing
Obtainingprogresspaymentsfromcustomers
Reducenumberofproductlines
Objectivesofstockcontrol
Minimisethevalueofstocksheldbythebusiness(i.e.conserve
cash)
Ensurethebusinesshastherightstockattherightquantitiesto
allowproductiontocarriedoutefficiently
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 SettingStockLevels

Maximumstock
Themoststockofaparticularitemthatthebusinessisableorwillingtohold
atanyonetime
Mayreflectstoragecapacity(permanent&temporary)
Mayalsoreflectmanagementcontrolsoverspendingbypurchasing
department
Reorderlevel
Whenstocksheldofanitemfalltothislevel,anewpurchaseorderismade
Needstotakeaccountofthepossibleleadtimebetweentheorderbeing
placedandthestockbeingdeliveredbythesupplier
Minimumstocklevel
Alsoknownasthebufferstock
Importanttoavoidstockouts(lostsales)anddisruptiontoproduction

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 ReorderLevelsIllustration

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 ABCSystem

Helpstoidentifywhichstockitemsshouldbe
controlled
Stocksaredividedintothreecategories(A,B,C)
accordingtoimportanceofsalesvalue
Highvaluestocksgetthemostmanagementattention
forstockcontrol

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 ABCSystemExample

ExampleCompany:
Stock StockItems StockValue CategoryAstocksrequirelots
Category (%oftotal) (%oftotal) ofattentionregularstock
forecastingandmonitoring
makesurebufferstocksare
A 12 72 adequate

B 38 18
CategoryCaccountsforhalf
ofthenumberofstockitems
C 50 10
butonly10%ofthevalue
stockcontrolcanbemore
100 100 informal

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 JustinTimeSystems

JITfocusesonminimisingtheholdingcostsofstock
Ideaisthatstocksarebroughtintotheproduction
processatthetimetheyareneeded
Effectivelyanattempttooperateproductionwith
minimal/zerobufferstocks
WithJITsystems,productionandpurchasingare
closelylinkedtosalesdemandonaweektoweekbasis
Continuousflowofrawmaterialsintostock
Whenworkinprogressiscompleted,itgoesstraighttothecustomer

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 RequirementsforJITSystems

Flexibility
Suppliersandinternalworkforceneedtobeabletoexpandandcontract
outputatshortnotice
Needtobeabletodeliversuppliesquicklyandreliably
Highquality
Rawmaterialsmustbeofguaranteedquality
Wholeproductionprocessmustfocusonquality
Thereareno/minimalbufferstocksshouldabatchofrawmaterialsfroma
particularsupplierprovefaulty,oriftheyaredamagedduringtheproduction
process
Closeworkingrelationshipwithsuppliers
Oftengeographicallyclose
Jointapproachtoensuringquality
Systemsneedtobeabletoshareinformation(e.g.salesdata,purchasing
requirements,deliverytimes)

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 PotentialBenefitsofJIT

Lowerlevelsofcashtiedupinstocks(i.e.lower
workingcapital)
Reductioninstockholdingcosts
Reducedmanufacturingleadtimes
Improvedlabourproductivity
Reducedscrapandwarrantycosts
Pricereductionsonpurchasedmaterials
Reductioninthetimeandcostofpurchasing/
accounting

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 Pitfalls/ProblemswithJIT

Notsuitableformanyindustries/organisations
Higherriskofstockouts:e.g.criticalmedicalsupplies
Lotsofpotentialproblemsforsuppliers
Breakinsupplycausesimmediateproblemforsuppliertosolve
Mayrequirenewsystems
Potentiallossofreputationifsupplierresponsibleforstoppingwhole
ofcustomersproduction
Notsomethingthatcanbedoneeasily
Requirescarefulplanning
Cannotbedoneovernightproductionneedstomovegradually
towardsminimal/zerobufferstocks
Oftenrequiresasubstantialchangeinproductionculture

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 StockRatios

Measurehowefficientlyabusinessismanagingits
investmentinstock
Stockdays
Howmanydaysofproductionarekeptinstock?
Calculation:(Averagestock/CostofSales)/x365days
Stockturnover
Howoftendoesabusinessuseitsaveragestocklevelseachyear?
Calculation:(CostofSales/AverageStock)

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 StockRatiosExample

ExtractsfromProfitandLossAccount&BalanceSheet 2004 2005

000 000
CostofSales 4,750 5,200

StocksatBalanceSheetDate:

RawMaterials 675 850

Workinprogress 125 150

FinishedGoods 475 500

TotalStocks 1,275 1,500

AverageStock(1,275+1,500)/2 1,387

StockDays(1,387/5,200)x365days 97days

StockTurnover(5,200/1,387) 3.75

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 StockRatiosInterpretation

ReasonsforHighStockDays/LowStockTurnover
Ratios
Businessisbeingcautiousinstockholdingpolicy(i.e.settinghigh
levelsofbufferstock)
Businesshastoomuchobsoleteorslowmovingstock(aproblem)
Stockswereunusuallyhighatthebalancesheetdate
Businessoperatesinanindustrywherestocktraditionallyturnsover
slowly
ReasonsforLowStockDays/HighStockTurnover
Ratios
Businessoperatesinindustrieswherestocknormallyturnsover
quickly
Businesshassupplydifficultiesanddoesnotcarryenoughstock
Businessismanagingitsstockseffectively

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