Stocks and Inventories

Aims of the chapter

• Introduce the ideas that lie behind
inventory management.
• Define the terms used.
• Describe the general features of
stocks, their purpose, importance and
use.
 Stocks of materials
Definition of terms
• Stock consists of all the goods and
materials that are stored by an
organization. It is a store of items that
is kept for future use.
• An inventory is a list of the items held
in stock.
• An item is a distinct product that is
kept in stock: it is one entry in the
inventory.
• A unit is the standard size or quantity
of an item.
• All kind of stocks need the same
kinds of management.
• For simplicity, we will use the general
term ‘material’ for anything that is
kept in stock.
 Stock cycle
• Stocks are formed whenever an
organization acquires materials that it
does not use immediately.
• Figure 1.1
 Each stock cycle has the following
elements:
• An organization buys a number of units
of an item from a supplier.
• At an arranged time, these units are
delivered.
• Unless they are needed immediately,
the units are put into storage,
replenishing the stock.
• Customers, either internal or external,
create demands for the item.
• Units are removed from stock to meet
these demands.
• At some point, the stock gets low and
it is time for the organization to place
another order.
• Fig. 1.2 stock levels in a typical cycle
• Customer and supplier can be internal
and external.
• The cost of holding stock is about 20
percent of its value a year.
• Organizations put a lot of effort into
controlling these costs through careful
inventory management. This function is
also called stock control or inventory
control.
 An empirical observation suggests that
the aggregate amount of stock held in a
number of locations is:

AS(N2) = AS(N1) ×
N2
N1
Where
N2=number of planned future facilities
N1=number of existing facilities
AS(Ni)=aggregate stock with Ni facilities
 Worked example
AJT Transport of Manchester is planning
to increase its services to mainland
Europe. It currently has 12 depots with
aggregate stock valued at 12 million
and plans to expand to 16 depots. With
a carrying cost is 20 percent of value a
year, what is the likely cost of this
change ?
 solution
N1=12, N2=16, AS(N1)=12 million

N2
AS(N2) = AS(N1) × N1

=12 × √16/12 = 13.9 million

The additional depots will raise stock
holding costs by: (13.9 – 12) × 0.2 =
0.38 million
 Quiz 2 /5 Marks
• LogiFleet Solutions currently operates 4
depots with an aggregate stock valued at
£16 million. They plan to expand their
operations by increasing the number of
depots to 16. During the expansion, they
estimate that the stock value per depot will
increase by 25% due to enhanced inventory
and logistics management.
 solution
N1=4, N2=16, AS(N1)=16 million
AS(N2) = AS(N1) × N2
N1
=16 × √16/4 = 32 million
The additional depots will raise stock holding
costs by (32 – 16) × 0.2 = 3.2 million.
Stock value increase by 25%=3.2 ×
0.25=0.80million
3.2+0.80=4million
 Reasons for holding stocks
• Giving a buffer
Stocks are expensive, because of the
costs of tied-up capital, warehousing,
protection, deterioration, loss,
insurance, packaging, administration,
and so on.
 Why do organization hold
stock ?
• Based on the need for a buffer, or
cushion, between supply and demand.
• Angela’s Bakery Shop
• Two consecutive operations on a
assembly line.
• These two examples show how stock
gives a buffer between supply and
demand. It allows for variation and
uncertainty in both supply and demand.
 Organizations hold stocks to do:
• Allow for demands that are larger than
expected, or at unexpected times
• Allow for deliveries that are delayed or
too small.
• Allow for mismatches between the best
rate of supply and actual rate of demand
• Decouple adjacent operations.
• Avoid delays in passing products to
customers.
• Take advantage of price discounts on
large orders.
• Allow the purchase of items when the
price is low and expected to rise.
• Allow the purchase of items that are
going out of production or are difficult to
find.
• Make full loads for delivery and reduce
transport costs.
• Give cover for emergencies.
 Core Goal Product/Material Industry

Allow for demands that are Cotton Fabric, Yarn Textile and
larger than expected, or at Fashion
unexpected times
Allow for deliveries that are Packaging Materials, FMCG,
delayed or too small Clothing Essentials Apparel
(underwear, socks)
Allow for mismatches Polyester, Denim Textile
between the best rate of
supply & actual rate of
demand
Decouple adjacent Spun Polyester, Apparel
operations Zippers
Avoid delays in passing Pre-packaged Textile Home
products to customers Goods (e.g., bed Textiles
sheets, towels)
 Core Goal Product/Material Name Industry
Take advantage of price Bulk Textile Fabrics, Apparel,
discounts on large orders Raw Cotton FMCG
Allow the purchase of items
Fashion,
when the price is low and Wool, Silk
FMCG
expected to rise
Allow the purchase of items that Specialty Fabrics (Eco-
Apparel,
are going out of production or Friendly Textile
FMCG
are difficult to find Materials)
Pre-packed Clothing
Make full loads for delivery and Sets, FMCG FMCG,
reduce transport costs (Shampoos, Apparel
Detergents)
Medical Textiles,
FMCG,
FMCG (Sanitary
Give cover for emergencies Medical
Products, Hand
Textiles
Sanitizers)
 Types of stocks
• Raw materials
• Work in progress
• Finished goods
• Spare parts
• Consumables
 Types of stocks (continued)
• Cycle stock
• Safety stock
• Seasonal stock
• Pipeline stock – is currently being
moved from one location to another.
• Other stock
 Questions
• What is the difference between stock
and inventory?
• How would you define ‘supplier’ and
‘customers’?
• How do stocks act as a buffer
between operations?
• How would you classify lubrication oil
for an engine?
 Stocks in the supply chain
• Example:
(1)Milk moves through a farm, tanker
collection, dairy, bottling plant, distributor and
supermarket before we buy it.
(2)A toothbrush starts its journey with a
company extracting crude oil, and then it
passes through pipelines, refineries, chemical
works, plastics companies, manufacturers,
importers, wholesalers and retailers before
finishing up in your bathroom.
 Stocks in the supply chain
• This series of activities and organizations
forms the product’s supply chain.
• The function that has overall responsibility
for moving materials through the supply
chain is logistics or supply chain
management.
• A supply chain consists of the series of
activities and organizations that
materials move through on their journey
from initial suppliers to final customers.
• Logistics or supply chain management
is the function responsible for this flow
of materials.
• The best shape of a supply chain
depends on many factors, such as
product’s value, bulk, perishability,
availability, and so on.
• It also depends on the organization’s
aims and business strategy.
• Broadening the chain and adding more
intermediaries gives higher customer
service, but increases costs and reduces
the organization’s control.
• Making the supply chain narrow can
reduce costs, but the organization loses
some control and customer service does
not improve.
 Taking the following steps to
achieve best shape of supply chain
• Logistics strategy
• Examine current operations
• Design an outline structure for
logistics
• Make detail plans
• Get final approval
• Finalize building design
• Finalize equipment design
• Fit out facilities
• Open and receive stock, run final tests of
all systems, finish training and begin
operations.
• Sort out teething problems and get things
running smoothly.
• Monitor and control, ensure everything
works as planned, measure performance,
revise targets, etc.
These are only guideline to suggest
the decisions in designing a supply
chain.
• If an organization wants fast delivery,
• it has warehouses close to final
customers
• if it wants the lowest costs, it concentrates
stocks in very
• large, centralized warehouses that are
inevitably some distance from customers.
Cooperation within a supply chain
 Worked example
A simple supply chain has a
manufacturer, regional and local
wholesalers, a retailer and final
customer. Each organization holds its
own stock of one week’s demand. One
week, demand from final customers
rises to 20 units. Assuming that the
deliveries are very fast, how does this
affect stocks in the supply chain ?
• The total amount of stock in the
supply chain rises from 20 units to
170 units, and this will take 11 weeks
to return to normal.
• The ways to avoid such problems is
to coordinate the stocks and flow of
materials.
 This brings a series of benefits:
• Lower costs- with lower stocks, less expediting,
balanced operations, economies of scale, etc.
• Improved performance- with more stable
operations, better planning, higher productivity
of resources, etc.
• Improved material flow – with co-ordination
giving faster and more reliable movements.
• Better customer service- with shorter lead times
and faster deliveries.
• More flexibility- with organizations reacting faster
to changing conditions.
Achieving cooperation in the supply chain

• Developing a valuable working

relationship
• Formal arrangement with a written
contract setting out the obligations of each
party.
• Strategic alliance or partnership: involves
a commitment over an extended time
period, and a mutual sharing of
information and the risks and rewards of
the relationship.
 Trends affecting stock
• Improving communications:
Electronic data interchange( EDI)
European Union
North America Free Trade Agreement
 Improving customer service
• Improving customer service
• Concentration of ownership
• Outsourcing inventory management
 Benefits for Outsourcing inventory
management
• Lower fixed costs
• Specialist suppliers
• Guaranteed high levels of customer service
• Flexible capacity
• Lower exposure to risk
• Increased geographical cover and local
knowledge.
• A convenient way of working in new markets.
• Cross-docking: materials arrive at the
receiving area and are transferred straight
away to the loading area where they are put
onto delivery vehicles for customers.
• Postponement – package-to-order, where a
company keeps a product in stock, but only
puts it in a box written in the appropriate
language when it is about to ship an order.
• Increasing environmental concerns: air
pollution, water pollution, energy
consumption, urban development and waste
disposal.
 Changes to aggregate stocks
• Changing views of stock
• Aggregate national stocks
• Effects of the business cycle