MANAGEMENT OF STOCK

Stock Management Objectives

 The objectives of stock
management is to
ensure sufficient levels
of stock to maintain an
acceptable level of
availability on demand
whilst minimizing the
associated holding,
administrative and
stockout costs.
Why should stock be held ?
 Stocks should be held to ensure

1. The availability of important raw

materials and suppliers by avoiding
stock outs during fluctuations in
supply and demand.
Why should stock be held ?
 Stocks should be held to ensure
2. Avoid shortage costs by reducing the
frequency of emergency purchases
3. Minimizing ordering costs by
requiring less frequent orders.
4. Minimizing transportation costs by
requiring less frequent deliveries
Costs of holding stocks
 Costs of holding stocks include :-

 Interest on capital

 Storage space and equipment

 Administration and staff costs

 Leases
Disadvantages of holding large
quantities of stocks
1. A large capital investment (funds) is
needed to purchase the stocks.
2. Stocks represent monetary value, and
the money tied up in stocks could be
used elsewhere to generate income.
E.g. money invested in stocks could
be earning interest in the bank or
other short term investment
Disadvantages of holding large
quantities of stocks (cont)
3. Carrying cost ( i.e., holding or
stocking costs) are greater with
larger stocks. Stocks require a
storage facility, storage equipment,
electricity and utilities, personnel, and
insurance. The higher the stock level,
the higher these total costs will be
( although the cost per unit
decreases)
Disadvantages of holding large
quantities of stocks
4. Deterioration and spoilage losses are
likely to be greater with larger stocks.

5. Expiration losses are likely to be

greater with larger stocks.

6. Obsolescence of stock items can

result if new technology is developed.
Disadvantages of holding large
quantities of stocks
7. Loses due to theft, might increase
with larger stocks, particularly in
absence of good stock controls.
Which items should be
stocked ?
1. Local availability –
items that are
hard to find locally
versus readily
available items.
- Stock manager
should stock more
of the goods that
are not locally
available.
Which items should be
stocked ?
2. level of use – items
used regularly
versus items which
are not used
regularly
- Items which are
used regularly
should always be
available in stock
Which items should be
stocked ?
3. Classification –
items already
identified as vital
or essential versus
none essential
items.
- Items classified as
essential should
always be available
in stock
Stock Management Systems
(1)
1. Bin systems
- The bin system involves a fixed quantity
being ordered at varying intervals.
- The bin card has a maximum point and
a minimum point.
- If stock exceeds either the stock
controller has to take immediate action.
Stock Management Systems
 Two bin system
- This system utilizes two bins, e.g. A and B.
stocks are taken from bin A until A is
finished. An order for a fixed quantity is
placed and, in the meantime, stock is used
from B. the standard stock for B is
expected demand in the lead time( the time
between the order being placed and stock
arriving) plus some buffer stocks.
Stock Management Systems
 Single Bin System
- The same sort of approach is adopted
by some firms for a single bin with a
red line within the bin indicating the
re-order level
Advantages Of Bin Systems
 Stocks can be kept at a lower levels
because of the ability to order
whenever stocks fall to a low level,
rather than having to wait for the
next re-order date.
Stock Management Systems
(2)
2. Periodic review system ( or constant
order cycle system)
- Stock levels are reviewed at fixed intervals
e.g. every four weeks. The stock in hand is
then made up to a predetermined level,
which takes account of likely demand
before the next review and during the lead-
time.
- Thus a four weekly review in a system
where the lead time is two weeks would
demand that stock be made up to the likely
maximum demand for the next six weeks.
Advantages of periodic review
system
 order office work load is more evenly
spread and easier to plan. For this
reason the system is popular with
suppliers
Stock Management Systems
(3)
3. Just in time (JIT) stock management
system
JIT is a series of manufacturing and supply
chain technique that aim to minimize stock
levels and improve customer service by
manufacturing not only at the exact time
customers require, but also in the exact
quantities they need and at competitive
price.
JIT Stock management system
 JIT extends much further than a
concentration on stock levels. It
centres around the elimination of
waster.
 JIT defines waster as any activity
performed within a manufacturing
company which does not add value to
the product
JIT Stock management system
 Examples of JIT waste are:-
 Raw material stock
 Finished goods stock
 Quality problems
 Queues and delays on the shop floor
 Unnecessary clerical and accounting
procedures
JIT Stock management system
 JIT attempts to eliminate waste at every
stage of the manufacturing process,
notably by the elimination of:-
1. WIP, by reducing batch sizes usually to
one
2. Raw materials stock, by the suppliers
delivering direct to the shop floor just in
time for use
3. Scrap and rework, by an emphasis on total
quality control of the design of the process
and of the materials
cont
4. Finished goods stock by reducing lead times
so that all products are made to order.
The combination of these concepts in JIT
results in:-
1. A smooth flow of work through the
manufacturing plant
2. A flexible production process which is
responsive to the customer’s requirements
3. Reduction of capital tied up in stocks
Advantages of JIT stock management systems

1. With JIT stock holding costs are close to

zero
2. Reduction in stock levels reduces the time
taken to count stocks and clerical cost.
3. Long term contracts and single sourcing
strengthen the buyer – supplier
relationships and tend to result in a higher
quality product.
4. Stock problems are shifted back to onto
suppliers, with deliveries being made as
required.
Advantages of JIT stock management systems
(cont)

5. A JIT manufacture looks for a single

supplier who can provide higher
quality, frequent and reliable
deliveries, rather than the lowest
price. In return, the supplier can
expect more business under long-
term purchase orders, thus providing
greater certainty in forecasting
activity levels.