4.2 INVENTORY MANAGEMENT

• Inventory


  Material & goods required to allow for the production & supply of products to the customer
• Classification of inventory


  • Raw materials and components
  • Work in progress
  • Finished goods
• Finished goods


  • Goods ready to be shipped out
• Possible problems without effective stock management


  • Insufficient stocks to meet unforeseen changes in demand
  • Face with too much out dated stock
  • Stock wastage due to incorrect storage conditions
  • High level stock lead to opportunity cost for capital tied up
  • No capacity to hold the extra stock ordered
• Costs of not holding enough inventories

  • Lost sales
  • Idle production resources
  • Special orders could be expensive
  • Small order quantities lead to higher cost due to higher price in future and administration cost
• Costs of holding stock

  • Administration cost
  • Insurance
  • Possibility of theft & damage
  • Obsolescence
  • Cost of storage
  • Costs of finance
  • Opportunity costs
• Economic Order Quantity (EOQ)


  The optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs
• Economic Order Quantity


  1. EOQ = 2CD/H

  2. C = cost of placing order (order costs)

  3. D = annual rate of demand (quantity)

  4. H = cost of holding one unit of stock for a year (average unit stock)
• Inventory control chart


  A diagram which shows the minimum and maximum inventory levels, the level of buffer inventories, the reorder level, and the lead time (the time taken between ordering and receiving goods)
• The Traditional Stock Control Model

  1. Maximum stock levels achieved after stock delivery

  2. Stock levels decline during production

  3. When the inventory level reaches the re-order level, it triggers a new order

  4. The difference between the time of re-order and delivery is the 'lead time'
• Buffer inventories


  The minimum inventory level that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase
• Re-order quantity


  The number of units ordered each time
• Lead time


  The normal time taken between ordering new inventories & their delivery
• Factors that determine the level of buffer inventories

  • Amount of space available for storage
  • Pattern of demand & likelihood of a big order
  • Insurance costs
  • Chance of deterioration & obsolescence
  • Cost of delivery & administration
  • Speed of production
  • Peace of mind of owner
• Just in Time (JIT)

  focusing minimize inventory level by ONLY ordering & receive goods when needed and need to manage when to order and estimate when it will arrive
• Just in Case (JIC) inventory management

  Focuses on never running out of inventory by holding high buffer inventory levels
• Advantages of JIT


  • Capital invested in inventory is reduced and the opportunity cost of inventory holding is reduced
  • Costs of storage and inventory holding are reduced
  • There is much less chance of inventories becoming outdated or obsolete
  • The greater flexibility needed for JIT leads to quicker response times to changes in consumer demand or tastes
  • The multi-skilled and adaptable staff required for JIT to work may gain improved motivation
• Disadvantages of JIT

  • Any failure to receive supplies of materials or components in time
  • Delivery costs will increase as frequent small deliveries are an essential feature of JIT
  • Order administration costs may rise because so many small orders need to be processed
  • There could be a reduction in the bulk discounts offered by suppliers because each order is likely to be very small
  • The reputation of the business depends significantly on outside factors such as the reliability of suppliers and traffic delays
• Requirements or factors to consider before applying JIT

  • Excellent supplier relationship
  • Production employees must be multi-skilled and flexible
  • Equipment and machinery must be flexible
  • Accurate demand forecasts
  • IT equipment is needed for JIT
  • Excellent employee-employer relationship
  • Quality must be everyone's priority
• There is no surplus or buffer in the JIT system to cover up for inefficient workers, inflexible people and equipment, unreliable suppliers or poor production planning
• Factors to consider if JIT is appropriate in a business situation

  • Finance – money available to be capital intensive
  • Have the commitment from top management & the cooperation of workforce?
  • Difficulties in forecasting demand
  • The relationship with supplier
  • Global inflation makes holding stocks or raw materials more beneficial as it may be cheaper to buy a large quantity now