Chapter 1 Stocks and Inventory

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Chapter 1

Stocks and Inventory

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. (SKU: Stock Keeping Unit)

• A unit is the standard size or quantity of an item.

• Tangible: Raw materials, components, finished products

• Intangible

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Stocks of Materials

• Tangible: Raw materials, components, finished products,

people, paperwork, consumables, energy, money

• Intangible: Information, message, knowledge

Stock Cycles

Stock of items CustomersSuppliers Deliveries Withdrawals

At some point the stock gets

low and suppliers are asked to

make another delivery

Stock is replenished

by relatively large,

infrequent deliveries

from suppliers

Units are held

in stock until

needed

Stock is reduced by

relatively small,

frequent withdrawals

to meet customer

demand

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Stock Cycles

Time

Stock

level

Replenishment Replenishment

Stock Cycle

Place

order

Order

arrives

Lead Time

Stock declines to

meet demand

Stock Cycle

• Inventory management is the function responsible for all

decisions about stock in an organization.

• It makes decisions for policies, activities and procedures to

make sure the right amount of each item is held in stock at

any time.

• Rule of thumb: the cost of holding stock is about 20% of its

value a year.

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Reasons for Holding Stocks

Stock – giving

a buffer

between

supply and

demand

Demand –

with variation

and

uncertainty in

quantities and

timing

Suppliers –

with

variation

and

uncertainty

in quantities

and timing

Reasons for Holding Stocks

Giving a buffer• 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 price is low;

• Allow the purchase of items that are difficult to find;

• Make full loads for delivery and reduce transport costs;

• Give cover for emergencies.

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Types of Stocks

• Raw materials, which have arrived from suppliers and are

kept until needed for operations;

• Work in progress, which are units currently being worked

on;

• Finished goods, which are waiting to be shipped to

customers.

• Spare parts, for machinery, equipment, etc.,

• Consumables, such as oil, paper, cleaners, etc.

Types of Stocks

Raw materials Finished goodsOperations in the process

Consumables Spare parts

Work in progress

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Types of Stocks

• Cycle stock is the normal stock used during operations.

• Safety stock is a reserve of materials that is held for

emergencies.

• Seasonal stock is used to maintain stable operations

through seasonal variations in demand.

• Pipeline stock is currently being moved from one location to

another.

• Other stock consists of all the stocks that are held for some

other reason.

Stocks in the Supply Chain

• 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.

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Organization

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Customer

Customer

Customer

Customer

Customer

Customer

Tiers of suppliers (length)

2nd tier 1st tier

Tiers of customers (length)

1st tier 2nd tier


• 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

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Worked Example:


AJT Transport is planning to increase its service. It currently

has 12 depots with aggregate stock at $12 million and plan to

expand to 16 depots. With a carrying cost of 20% of value a

year, what is the likely cost of this change?

𝑁1= 12 depots

𝑁2= 16 depots

𝐴𝑆 𝑁1 = $12 million

𝐴𝑆 𝑁2 = 𝐴𝑆 𝑁1 ×𝑁2

𝑁1= 12 ×

16

12= $13.9 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

Additional stock carrying cost = (13.9 – 12)(0.20)=0.38 mil.


Co-operation within a supply chain:

• Lower costs

• Improved performance

• Improved material flow

• Better customer service

• More flexibility

Achieving co-operation in the supply chain:

• Strategic alliance or partnership

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Worked Example:Co-operation within the Supply Chain

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. In other words,

each buys enough materials from its suppliers to make its

closing stock at the end of the week equal to the demand

during the week. Demand for a product is steady at 10 units a

week. One week, however, demand from final customers

rises to 20 units. Assuming that deliveries are very fast, how

does this affect stocks in the supply chain?


• Demand - which equals the amount bought by the following

tier of customers;

• Opening stock at the beginning of the week - which equals

its closing stock in the previous week;

• Closing stock at the end of the week - which must equal

demand in the week or the difference between the Opening

stock and Demand (maximum of the two);

• Number of units bought - which equals demand plus any

change in stock:

Buys = Demand + (Closing stock − Opening stock)

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Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Customer

Demand 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Retailer

Demand 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Opening stock 10 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Closing stock 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Buys 10 30 0 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Local wholesaler

Demand 10 30 0 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Opening stock 10 10 30 30 20 10 10 10 10 10 10 10 10 10 10 10 10 10

Closing stock 10 30 30 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Buys 10 50 0 0 0 10 10 10 10 10 10 10 10 10 10 10 10 10

Regional wholesaler

Demand 10 50 0 0 0 10 10 10 10 10 10 10 10 10 10 10 10 10

Opening stock 10 10 50 50 50 50 40 30 20 10 10 10 10 10 10 10 10 10

Closing stock 10 50 50 50 50 40 30 20 10 10 10 10 10 10 10 10 10 10

Buys 10 90 0 0 0 0 0 0 0 10 10 10 10 10 10 10 10 10

Manufacturer

Demand 10 90 0 0 0 0 0 0 0 10 10 10 10 10 10 10 10 10

Opening stock 10 10 90 90 90 90 90 90 90 90 80 70 60 50 40 30 20 10

Closing stock 10 90 90 90 90 90 90 90 90 80 70 60 50 40 30 20 10 10

Makes 10 170 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10

Bullwhip Effect

http://www.aalhysterforklifts.com.au/index.php/about/blog-

post/what_is_the_bullwhip_effect_understanding_the_concept_definition

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Achieving Co-operation in the

Supply Chain

Obstacles:

• Lack of trust

• Reluctance in sharing information

• Different priorities

• Competition

• Data exchange

• Appropriate systems

• Skills

• Security

• Complexity of systems

Achieving Co-operation in the

Supply Chain

• Informal working relationship

• Formal agreement

• Strategic alliance or partnership: An ongoing relationship

between firms, which involves a commitment over an

extended time period, and a mutual sharing of information

and the risks and rewards of the relationship. – Ellram and

Krause (1994)

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Trends Affecting Stock

• Improving communications– Electronic data interchange (EDI)

• Item coding – bar code, RFID

• Electronic Fund Transfer (EFT)

– e-purchasing/e-procurement (B2B/B2C)

• Improving customer service

• Concentration of ownership

• Outsourcing inventory management

• Cross-docking

• Postponement

• Increasing environmental concerns

Changes to Aggregate Stocks

• Changing views of stock– From “measures of wealth” to “cost minimization”

• Aggregate national stocks

• Effects of business cycle

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Aggregate stock as a

percentage of GDP for the UK

US Inventory

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

199

2_1

199

2_3

199

3_1

199

3_3

199

4_1

199

4_3

199

5_1

199

5_3

199

6_1

199

6_3

199

7_1

199

7_3

199

8_1

199

8_3

199

9_1

199

9_3

200

0_1

200

0_3

200

1_1

200

1_3

200

2_1

200

2_3

200

3_1

200

3_3

200

4_1

200

4_3

200

5_1

200

5_3

200

6_1

200

6_3

200

7_1

200

7_3

200

8_1

200

8_3

200

9_1

200

9_3

201

0_1

201

0_3

201

1_1

201

1_3

201

2_1

201

2_3

201

3_1

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US Inventory/GDP

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%199

2_1

199

2_3

199

3_1

199

3_3

199

4_1

199

4_3

199

5_1

199

5_3

199

6_1

199

6_3

199

7_1

199

7_3

199

8_1

199

8_3

199

9_1

199

9_3

200

0_1

200

0_3

200

1_1

200

1_3

200

2_1

200

2_3

200

3_1

200

3_3

200

4_1

200

4_3

200

5_1

200

5_3

200

6_1

200

6_3

200

7_1

200

7_3

200

8_1

200

8_3

200

9_1

200

9_3

201

0_1

201

0_3

201

1_1

201

1_3

201

2_1

201

2_3

201

3_1

Stock level in a business cycle

Chapter 1 Stocks and Inventory

Documents

Transcript of Chapter 1 Stocks and Inventory