Question

Explain the concept of stock management in relations to over stocking and stock out and its relevance to a purchasing organisation.

need detailed answer please

Answer 1

What is Inventory?
Inventory is quantities of goods in stock
• Manufacturing Inventory
– raw materials
– component parts
– work-in-process (WIP)
– finished goods
• Service Inventory
– involves all activities carried out in
advance of the customer’s arrival

Inventory Costs
• Holding Cost
– costs that vary with the amount of inventory held
– typically described as a % of inventory value
– also called carrying cost
• Ordering Cost
– costs involved in placing an order
– sometimes called setup cost
– inversely related to holding cost
• Shortage Cost
– occur when we run out of stock

It is important that stock levels (the number of items stored) are managed. If a business has too much or too little stock, this has consequences.

Consequences of Under-stocking

• The business has nothing to sell, or may have to stop production. • Increased ordering costs. • No bulk buying discounts. • Customers buying from elsewhere. • A possible reputation for poor customer service. • Increased administration costs due to constantly running out of stock. • Loss of sales.

Consequences of Over-stocking

• It costs money to store stock (e.g. lighting, insurance, security, etc). • Increased costs for the extra storage (e.g. space, equipment, warehouse and stores staff, services, etc). • Stock has a higher risk of being stolen. • Stock has a higher risk of going out of date. • Money is tied up in stock that could be used for other purposes. • If social factors change (trends/fashion), the stock might be wasted.

Managing Stock

Stock levels can be managed through: • a computerised system that records how much stock there is at anyone time, e.g. using EPoS or a spreadsheet package • use of the internet to purchase raw materials • using technology in stock management enables the business to be ‘paper-free’, which is good for the environment and also allows stock to be managed more efficiently than by hand; errors are reduced and orders can be placed more quickly with suppliers than with a paper order form.

The cost of overstocking is denoted by Co and is the loss incurred by a firm for each unsold
unit at the end of the selling season. The cost of understocking is denoted by Cu and is the
margin lost by a firm for each lost sale because there is no inventory on hand. The cost of
understocking should include the margin lost from current as well as future sales if the customer
does not return. In summary, the two key factors that influence the optimal level of product
availability are
• Cost of overstocking the product
• Cost of understocking the product

Relevance to purchasing organisation

The managerial lever to improve supply chain profitability is the reduction
of demand uncertainty. With reduced demand uncertainty, a supply chain manager can better
match supply and demand by reducing both overstocking and understocking. A manager can
reduce demand uncertainty via the following means:
1. Improved forecasting: Use better market intelligence and collaboration to reduce
demand uncertainty.
2. Quick response: Reduce replenishment lead time so that multiple orders may be placed
in the selling season.
3. Postponement: In a multiproduct setting, postpone product differentiation until closer to
the point of sale.
4. Tailored sourcing: Use a low lead time, but perhaps an expensive supplier as a backup
for a low-cost but perhaps long lead time supplier.