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TLIA2807C Assess

and monitor
optimum stock levels
Learner Guide
Contents
What this Learner’s Guide is about ........................................ 1
Plan your learning .................................................................. 2
How will you be assessed? .................................................... 5

Section 1 Assessing projected demand.......................................... 7


What is demand? ................................................................. 14
How do I determine high and low volume periods and seasonal
variations?............................................................................ 15
How do I analyse stock movement data? ............................ 22
What inventory do I need during different production and sales
cycles? ................................................................................. 22

Section 2 Variables impacting on optimum stock levels............. 25


What variables impact on optimum stock levels? ................ 28
What are lead, processing and distribution times? .............. 28
How do I calculate lead, processing and distribution times? 29
How does lead, processing and distribution time impact on
optimum stock levels?.......................................................... 30
How do I calculate spoilage and obsolescence times?........ 33
How do I assess my maximum stock carrying capacity? ..... 36
How do I assess physical and human resource levels?....... 37
How do contingencies affect optimum stock levels?............ 42

Section 3 Determining optimum inventory levels ........................ 44


How do I determine optimum inventory levels? ................... 47

Section 4 Monitoring optimum inventory levels........................... 56


How do I monitor optimum stock levels?.............................. 59

Additional resources....................................................................... 69

Feedback on activities .................................................................... 71


TLIA2807C Assess and monitor optimum stock levels

What this Learner’s Guide is about

This Learner’s Guide is about the skills and knowledge required to


assess and monitor optimum stock levels in accordance with
workplace requirements including assessing projected demand,
assessing variables that impact upon optimum stock levels,
determining optimum inventory levels, and monitoring optimum
inventory levels.

The unit of competency TLIA2807C Assess and monitor optimum


stock levels is from the Transport and Logistics Training Package
(TLI07). It has a number of elements of competency that are
covered in this guide. These are:
• Assess projected demand.
• Assess variables that impact upon optimum stock
levels.
• Determine optimum inventory levels.
• Monitor optimum inventory levels.

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TLIA2807C Assess and monitor optimum stock levels

Plan your learning

It  is  important  to  plan  your  learning  before  you  start  because  you  may  
already  have  some  of  the  knowledge  and  skills  that  are  covered  in  this  
Learner’s  Guide.  This  might  be  because:  
• you  have  been  working  in  the  industry  for  some  time,  
and/or  
• you  have  already  completed  training  in  this  area.  

Together  with  your  supervisor  or  trainer,  use  the  checklist  on  the  
following  pages  to  help  you  plan  your  study  program.  Your  answers  to  
the  questions  in  the  checklist  will  help  you  work  out  which  sections  of  
this  Learner’s  Guide  you  need  to  complete.  

This  Learner’s  Guide  is  written  with  the  idea  that  learning  is  made  more  
relevant  when  you,  the  learner,  are  actually  working  in  the  industry.  
This  means  that  you  will  have  people  within  your  enterprise  who  can  
show  you  things,  discuss  how  things  are  done  and  answer  any  
questions  you  have.  Also  you  can  practise  what  you  learn  and  see  how  
what  you  learn  is  applied  in  the  enterprise.  

If  you  are  working  through  this  Learner’s  Guide  and  have  not  yet  found  
a  job  in  the  industry,  you  will  need  to  talk  to  your  trainer  about  doing  
work  experience  or  working  and  learning  in  some  sort  of  simulated  
workplace.

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Section 1: Assessing projected demand

Are you able to: Yes No


1. Analyse information about demand from
sales plans and stock movement data?
2. Determine high and low volume periods
from sales plans and/or stock movement
data?
3. Determine seasonal stock demand from
sales plans and/or stock movement
data?
4. Determine required inventory levels at
different production and sales cycles in
the sales plan and/or stock movement
data?

Section 2: Variables impacting upon optimum


stock levels

Are you able to: Yes No


1. Determine stock manufacturing/supply
and consignment delivery lead times?
2. Determine internal processing and
distribution times?
3. Calculate spoilage and obsolescence
times?
4. Assess your enterprise’s maximum stock
carrying capacity?
5. Assess the physical and human
resources required for projected stock
levels?
6. Develop contingencies for interruptions
or delays in the supply chain?

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Section 3: Determining optimum inventory


levels

Are you able to: Yes No


1. Coordinate production and sales
information with supply and distribution
times?
2. Calculate safety stock levels?
3. Determine the optimum level of inventory
in your enterprise?

Section 4: Monitoring optimum inventory levels

Are you able to: Yes No


1. Compare current and known future
sales turnover/production requirements
to inventory benchmarks?
2. Adjust inventory levels according to
reassessed sales turnover/production
requirements and workplace
procurement processes within your level
of responsibility?
3. Document changes and/or requests for
adjustments to inventory levels according
to the policies used at your workplace?
4. Assemble the resources required for
optimum inventory levels?

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How will you be assessed?

Assessment of this unit of competency will include observation of


real or simulated work processes using workplace procedures and
questioning on underpinning knowledge and skills. It must be
demonstrated in an actual or simulated work situation under
supervision.

You will be required to demonstrate that you can:


• assess projected demand for stock based on analysis of
the sales plan and stock movement data and
considering the seasonal nature of stock
• assess variables that impact on optimum stock levels
such as lead time, internal processing, distribution,
spoilage and obsolescence times
• determine optimum inventory levels by integrating
production, sales, supply and distribution information
with safety stock calculations
• determine the physical and human resources required
to produce required stock levels
• monitor optimum inventory levels versus benchmarks
• suggest improvements to supply operations, negotiate
changes and adjust inventory levels accordingly
• mediate and resolve issues surrounding supply storage
and management
• identify requirements of tasks and organise planning,
job completion and evaluation stages
• locate, interpret and apply relevant information
• provide customer/client service and work effectively with
others.

© Department of Education, Science and Training 2005 Page 5


Customised and Developed by Armstrong’s Driver Education P/L May 2008 ADELG1023
TLIA2807C Assess and monitor optimum stock levels

Section 1 Assessing
projected demand

© Department of Education, Science and Training 2005 Page 7


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TLIA2807C Assess and monitor optimum stock levels

Section outline
Areas  covered  in  this  section  are:  
• what  information  and  data  you  analyse  when  assessing  
projected  demand  
• how  to  determine  high  and  low  volume  periods  from  sales  
plans/stock  movement  information  
• how  to  determine  seasonal  demand  variations  from  sales  
plan/stock  movement  data  
• how  to  determine  required  inventory  levels  at  different  
production  and  sales  cycle  stages  from  the  sales  plan/stock  
movement  data.  

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TLIA2807C Assess and monitor optimum stock levels

© Department of Education, Science and Training 2005 Page 9


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What is an inventory?

Enterprises normally have hundreds or even thousands of items


stocked in their warehouses. These stocks are known as
inventory. Stocks may be held for small objects such as pens or
paper clips, through to large items such as machines or trucks.
The type of goods stocked in an inventory will depend on the kind
of business an enterprise is engaged in and what it produces.

Manufacturing firms typically carry several types of inventories,


including:
• raw materials
• parts and components
• partially completed goods (known as “work-in-process”)
• finished goods
• replacement parts
• tools and supplies
• goods in transit to storage warehouses or customers.

Why have inventories?

Inventories of required goods are necessary for several reasons.


Some of these include:
• to have sufficient stocks to meet anticipated customer
demand
• to build up stocks during off season periods so
requirements during peak demand periods can be met
• to protect against stock-outs
• to take advantage of order cycles which result in lower
purchasing costs
• to hedge against price increases.

Why assess and monitor stock levels?

The amount of stock carried by an enterprise has a significant


impact on its overall profitability. If too little or too much stock is
carried, an enterprise can lose a lot of money. As a store
supervisor it is crucial that you assess available information and
consider the variables which impact on what the optimum stock
levels are in your warehouse. Your objective is to meet customer

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demands for delivery times at a level where stock carrying costs do


not eat into your enterprise’s profitability.

Problems  with  understocking  


If too little stock is carried, an enterprise loses money through
things such as:
• missed deliveries
• lost sales
• loss of repeat business and goodwill with dissatisfied
customers
• cost blowouts caused by delays in the production and
distribution processes.

Problems  with  overstocking  


If a business carries too much stock, then it loses money through:
• having money tied up in inventory which could be used
more profitably elsewhere
• increased operating expenses such as rent, rates,
repairs, heating, cooling, and lighting for the time the
excess stock is in the warehouse
• inefficient use of space slowing down access and
therefore loading times
• increased chances of stock becoming obsolete, spoiling
or expiring if held for long periods
• increased costs of machine set-up time
• increased insurance costs
• longer time required to check incoming stock
• increased chance that stock will be pilfered
• longer time to record incoming stock.

Advantages  of  carrying  excess  stock  


However, there are some occasions when holding a large amount
of stock is beneficial for an enterprise. These are:
• when a discount is received from a supplier for ordering
a large quantity of goods
• holding a ‘buffer’ or ‘safety’ stock to prevent stock-outs
in times of unanticipated high demand, supply
interruptions, deliveries of wrong or poor quality
materials, staff shortages, breakdowns in equipment or

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any other factor which causes a delay in delivery to


customers
• achieving cost savings by buying a large amount just
prior to a price rise
• purchasing a large quantity before price increases take
effect
• carrying items which appreciate in value during their
time in storage (e.g. wines, spirits).

In the following sections, you will be provided with information and


practice activities to analyse the information and variables you
need to consider when determining the optimum stock level for
your warehouse. Once this has been established, you will learn
what information and techniques you can use to monitor inventory
levels to ensure you meet customer delivery demands without
inventory costs eating into your enterprise’s profitability.

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ADELG1023 Customised and Developed by Armstrong’s Driver Education P/L May 2008
TLIA2807C Assess and monitor optimum stock levels

Activity 1: Under and overstocking

Think of a time when you ran out of the stocks required to produce
a good or service made by your enterprise and were unable fulfil a
customer order.

What costs were incurred to your enterprise as a result of not being


able to deliver the required goods or services on time?

How did failure to meet the delivery deadline affect your


relationship with your supplier?

If you have excess stocks tied up in inventory, you are effectively


wasting your enterprise’s money. What are some of the things
your enterprise could be doing with the money tied up in unused
inventory to increase its profits?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s Guide  

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What is demand?

Demand is the willingness and ability of consumers to buy goods at


a range of prices, during a given time period. Consumers desire
goods and services that satisfy their needs and wants. Estimating
the demand is important so enterprises produce the right goods in
the right quantity at the right price at the right time, otherwise they
will not meet customer’s expectations.

What information is needed to assess projected


demand?

Stock levels and inventories are carried because they are the
intermediate materials necessary to produce the goods and
services demanded by customers. This means it is essential to
have reliable estimates of the amount of stocks needed and when
they are needed. Important sources of information that can be
analysed when assessing projected demand are:
• your enterprise’s sales plan and
• stock movement data.

Your enterprise’s sales plan is an invaluable source of information


when assessing projected demand for goods and services. Sales
plans may be produced:
• weekly if your enterprise produces a fast moving
consumer good like milk or beer
• monthly if you are selling a good such as cars
• 6 monthly if you are selling items such as clothes.

Enterprises make sales plans based on a combination of past sales


data and future demand forecasts. Analysis of the demand for a
good highlights patterns in the underlying demand from which
reasonable estimates of future sales can be made. You will see
how to analyse sales figures and underlying demand patterns to
assess projected demand in a moment.

Stock movement data is important to monitor whether the number


of sales forecast in the sales plan is reflected in the actual sales
being achieved. There is always an element of inaccuracy in sales
forecasts. Comparison of sales forecasts with actual stock
movement can reveal any discrepancies and appropriate action
taken to modify the amount of stock being ordered so under- or
overstocking does not occur.

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How do I determine high and low volume


periods and seasonal variations?

Determining the high and low volume periods and seasonal


variations in sales are important considerations in assessing
projected demand for stock levels. The following discussion will
assist you in working out how to identify high and low volume sales
periods and seasonal variations from sales data.

The purpose of analysing sales plans and stock movement data is


to identify underlying demand patterns. Often this is easily
achieved by looking at how the information is plotted on a graph.
The types of patterns that might appear include:
• trends
• seasonal variations
• cycles
• irregular or random variations in sales.  

Trends  
Trends refer to gradual, long-term movement in the demand for a
good or service. They show whether there is an overall general
increase or decrease in sales for a product. Increased sales over
time as a result of a demand trend are underpinned by conditions
beyond the control of the enterprise, such as population shifts,
increased economic prosperity, new improved technology and
cultural changes. Trends are usually analysed using demand data
collected over several years.
Examples of trends include:
• greater wine consumption resulting in lower beer sales
over the past 5 years in Australia as the wine industry
expands
• the ageing population of Australia causing an increase
in the number of retirement homes being built
• increased demand for DVD players leading to a
corresponding decline in demand for video recorders.
Figure 1 shows an example of what a trend such as a
gradual increase in wine consumption resulting in
increasing sales each year would look graphically, when
expressed in millions of litres of wine sold.

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Gradual increase
in sales over time

Seasonal  Variations  
Seasonal variations refer to short-term, regular demand variations
generally related to factors such as the weather, holidays and
vacations. Analysis of the seasonal variation often provides insight
into when the high and low volume periods of sales are. Examples
of seasonal variations that affect demand for goods and therefore
the stocks required to produce them include:
• less demand for bathing suits in the winter months
resulting in reduced sales
• increased demand for ice creams in the hotter summer
months resulting in increased sales
• increased demand for shellfish prior to Chinese New
Year resulting in increased sales
• greater demand for toys at Christmas time compared to
at any other time in the year.

Figure 2 shows a graph of how sales of overcoats varies according


to the seasons in a year. Sales of overcoats increase in May and
April with the release of new styles and designs launched during
fashion week where buyers select the products they wish to stock
and consumers purchase a coat in preparation for the winter
months. Sales stay relatively stable during the winter months

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before declining in September when consumers prepare for the


coming summer months by purchasing summer clothes.

Peak sales in the middle


of winter

Sales increase
at fashion week

Fewer sales as
summer
approaches

Cycles  
Cycles are wavelike variations lasting more than a year
that are related to things like economic, political, and
agricultural conditions. Examples of how cycles can impact
on demand and sales include:
• decreased demand for building materials due to an
economic slow down resulting is less sales of roof
trusses
• increased demand for mineral commodities caused by
economic prosperity in China resulting in booming
copper sales
• increased demand for wheat caused by crop failure due
to a drought restricting supplies on the world market
increasing sales in Australia.

Figure 3 shows an example of how a sales cycle might look for a


building material such as window frames over several economic
growth cycles if depicted graphically.

© Department of Education, Science and Training 2005 Page 17


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Peak
Peak

Slow
down Recovery

Recession

Variations  
As well as trends, seasonal variations and cycles, variations occur
to the regular sales and demand patterns. There are two types of
variations that occur:
• irregular variations
• random variations.

Irregular variations are due to unusual circumstances that have a


one-off affect on demand and sales. Irregular variations do not
reflect typical demand or sales, and if included in analysis can
distort the overall picture, so are often left out when assessing
projected demand.

Random variations are variations that occur after trends, seasonal


variation, cycles and irregular variations have been taken into
account. Enterprises may investigate the causes for the random
variation in more detail using complex statistical techniques,
particularly if they recur. If so called irregular variations become
more common then it could indicate the start of a new trend.
Examples of irregular variations that may influence demand
include:
• increased demand for and sales of food before a
cyclone hits

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TLIA2807C Assess and monitor optimum stock levels

• enterprises ordering larger quantities of stocks from


their suppliers when they know a strike is going to be
held in a week’s time
• increased demand for building materials for home
renovations before the introduction of the GST.

Figure 4 shows how an irregular occurrence such as a cyclone


leads to an irregular variation in the sales of baked beans. In this
example, sales of baked beans increase in a steadily rising trend
until October/November, when there is a sudden increase in sales.

Irregular
variation

Usual sale
trend

© Department of Education, Science and Training 2005 Page 19


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Activity 2: Analysing sales plans and stock movement data

Take a look at Figure 1. What are some of the reasons that could
account for the increase in wine consumption in recent years?

 
Figure 2 showed the seasonal variation in overcoat sales. List 5
products which have a seasonal variation in their sales.

 
Answer the following questions related to Figure 3. In which years
do you think there was a housing boom? Why?

Which year in the 1980’s was the worst in terms of building


houses?

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TLIA2807C Assess and monitor optimum stock levels

Figure 4 illustrated an irregular variation. Think of an item that you


produce in your enterprise. Describe a time when there was an
irregular variation in the level of sales. What do you think caused
the variation?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.  

© Department of Education, Science and Training 2005 Page 21


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How do I analyse stock movement data?

The movement of stock tells you what quantity and type of stocks
need to be ordered to meet the demand forecast contained in the
sales plan. Stock movement records can also be used to monitor
the effectiveness of the demand forecast and projected sales. For
example, if a demand estimate for a certain good is incorrect, then
this will be reflected in slow movement of the stock off the
warehouse shelves. Less stocks would be ordered to avoid
excessive inventory costs caused by poor sellers.

What inventory do I need during different


production and sales cycles?

Having analysed the sales plan and stock movement data you
need to determine what, how much and when stocks are required
to meet demand forecasts and sales projections. Taking high and
low volume periods, seasonal and irregular variations into account
will dramatically affect must be considered when making these
decisions.

Take for example an enterprise that manufactures chocolate


products. There are certain times of the year when demand and
sales for chocolate increases dramatically, such as:
• the week before Valentine’s Day
• the two months before Easter
• and two weeks before Mother’s Day in May.

In these periods, the volume of sales increases dramatically from


normal to meet increased consumer demand. The store supervisor
would need to check the sales plan to see how many more units of
chocolate products need to be produced compared to current
production levels to meet the anticipated demand increase at these
periods.

The store supervisor may also consult the stock movement data to
work out how much stock is currently in the warehouse before
deciding how many raw materials such as cocoa, butter, sugar, foil,
and wrapping are required to meet the production requirements.

The store supervisor would carry fewer stocks in the inventory in


the weeks immediately after these high volume periods, because
demand for chocolate falls dramatically after these days. Sales
may plateau for several months until they rise again around
Christmas time. The optimum inventory level during the high

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TLIA2807C Assess and monitor optimum stock levels

volume periods would be significantly different compared to other


periods when there is less demand and sales.

It is best to order required inventory well in advance of when the


goods are required, as it may take time for raw materials,
components or parts to reach you from suppliers, or suppliers may
need advance notice to increase their production schedule to meet
your order. This is known as “lead time’ and will be discussed in
more detail in Section 2.

© Department of Education, Science and Training 2005 Page 23


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Activity 3: Stock movement data analysis

Pick two stocks from your warehouse. Using your stock movement
records, compare the stock movement rates to the sales forecast
contained in the sales plan.

Is there a discrepancy between the sales forecast and the actual


movement of the stock during the current recording period?

Yes No

What are the high and low volume sales periods and seasonal
variations in demand for those two items?

How many more units do you need to hold in your inventory


between the lowest and highest volume sales periods throughout
the year?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.  

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Section 2 Variables
impacting on optimum
stock levels

© Department of Education, Science and Training 2005 Page 25


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TLIA2807C Assess and monitor optimum stock levels

Section outline

Areas  covered  in  this  section  are:  


• determining  stock  manufacturing/supply  and  consignment  
delivery  lead  times  
• determining  internal  processing  and  distribution  times  
• calculating  spoilage  and  obsolescence  times  
• assessing  maximum  stock  carrying  capacity  
• assessing  required  physical  and  human  resources  in  
relation  to  required  stock  levels  
• developing  contingencies  for  abnormal  distribution  
stoppages  or  slow  downs  to  the  supply  chain.  

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ADELG1023 Customised and Developed by Armstrong’s Driver Education P/L May 2008
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© Department of Education, Science and Training 2005 Page 27


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What variables impact on optimum stock


levels?

In Section 1, you saw how the sales of a good or service fluctuate


over weeks, months and years and how these variations must be
considered when assessing projected demand for stocks in your
inventory. In Section 2, you will learn which variables other than
seasonal variations, trends, cycles and variations influence the
amount of stock you carry in your inventory.

There are several different variables which impact on the optimum


stock levels in your inventory. These include:
• the lead time between ordering and delivery of stocks
• internal processing and distribution times
• spoilage times of perishable items
• time taken for goods/services to become obsolete
• your enterprise’s maximum stock carrying capacity
• your enterprise’s physical capacity to hold and store
projected stock levels
• the skills, experience, capability and availability of
human resources to process, store, produce and
distribute
• abnormal distribution stoppages
• slow downs to the supply chain
• inability of suppliers to meet order requirements.

What are lead, processing and distribution


times?

Lead time is the time between receiving an order and delivering it


to a customer. It includes the time taken to process the order,
schedule its production, manufacture, produce and distribute goods
or services to the customer. Lead times vary widely according to
the product being manufactured, the service being provided and
the characteristics of the industry an enterprise belongs to.

Examples of different lead times between an enterprise and their


suppliers include:
• a milk packaging plant receiving a delivery of milk every
12 hours
• a brewery receiving a tonne of hops every day

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• a concrete producer receiving a truckload of crushed


rock every week
• a car manufacturer receiving a consignment of
windscreen wiper parts every 17 minutes.

Supply  chain  integration  


Increasingly, suppliers are forming closer relationships with their
external customers to form a more closely coordinated supply
chain. In some enterprises, like car manufacturers for example,
suppliers may actually have offices on their client’s site and sit on
in production planning meetings. Their inventory ordering systems
may be integrated with their client’s system to reduce lead time
significantly, obtaining greater cost competitiveness as a result.

Internal  lead  times  


Besides the customer outside the enterprise, customers can also
be thought of as internal customers. Internal customers are those
people within an enterprise who rely upon others to perform an
intermediate step in the production process on time so that they
can meet their own performance standards. People working on an
intermediate step in the production of a good or service obviously
take time to complete their work. This time represents lead time for
the internal customer.

For example, in a biscuit manufacturing factory, the internal


customer for the biscuit wrapping team are the baking team. The
baking team may take 3 hours to bake the biscuits, which
represents the lead time for the packaging team. The packaging
team may in turn take 45 minutes to wrap, label and package a
batch of biscuits before sending them onto their internal customer,
the warehouse storage team, whose internal customer is in turn the
distribution team.

How do I calculate lead, processing and


distribution times?

Basically, anything that happens between the customer placing an


order and the good or service being delivered contributes to the
lead time. To calculate the lead time, you add up the time taken to
complete all the activities that take place between the customer
ordering a product and it being delivered to them. More
specifically, lead time consists of the time taken for things such as:
• obtaining the raw materials needed to produce the good
or service from suppliers
• processing the order within the enterprise

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• designing the manufacturing or development process


• planning the production schedule
• setting up any equipment to produce the goods or
service
• manufacturing or producing the goods
• conducting any quality checks and inspections
• overcoming any quality problems and rework
• packaging, labelling and addressing the goods
• checking the right quantity is being sent
• storing the goods in the warehouse prior to distribution
• transit time while being delivered to the customer.

Depending on where the customer is located, lead times may also


be affected by things such as time to clear customs and
quarantine, especially for international deliveries, or time to gather
the appropriate financing paperwork from banks. Governments
also regulate the length of time certain goods such as spare parts
need to be carried in an inventory which may also affect lead time.

How does lead, processing and distribution time


impact on optimum stock levels?

The lead time, processing, manufacturing and distribution times will


impact significantly on stock levels. For example, if you know that
you need to manufacture 5000 window frames to fulfil an order,
then knowing how long it takes for the raw materials to be ordered,
produced and delivered to your warehouse is vital to determine
whether you have the stock levels to meet the target delivery date.
If you do not have enough stock to meet production requirements,
you will need to order more stocks. If you have too much stock,
then you will need to seek other orders to reduce the excessive
costs contained in the excess inventory and would not reorder
stocks.

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Activity 4: Lead time, spoilage and obsolescence

Choose a good or service that is produced by your enterprise. List


all the steps involved between receiving an order of that good or
service through to delivering it to an external customer in the table
below and estimate the time taken to complete each task to
calculate the total lead time. The first two tasks are listed for you.

Name of good or service:

Task Time taken

Receive order

Process order

Total lead time:

What would happen to this lead time if there was a delay in delivery
of raw material from a supplier or there were not enough trucks to
deliver the goods or services to the customer?

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Who are the internal customers for tasks conducted within your
enterprise?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.  

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How do I calculate spoilage and obsolescence


times?

Other variables that must be considered when determining


optimum inventory levels include the time before goods spoil or
become obsolete. Calculating the spoilage and time taken for
products to become obsolete is important as it will dictate how
often you need to order certain types of stock. You do not want to
get stuck with stock that goes off or there is no longer any demand
for, as this will raise inventory carrying costs significantly.

Spoilage  times  
Some goods go off, become stale, decay or deteriorate if not used
within a specified period of time or stored inappropriately. Fresh
food products are obvious examples:
• a seafood products manufacturer must use fresh
seafood within a short time period or it will be unsellable
• a juice producer must use fresh fruit within a few weeks
or the fruit will perish
• a milk packager must put milk in cartons under
refrigerated conditions within a couple of days or the
milk will go off.

Health regulations usually require suppliers or producers to put a


“best before” or a “use by” date on their product labels if they spoil.
The difference between “best before” and “use by” date is that a
producer cannot guarantee the quality of a good or service after a
specified time, whereas goods marked “use by” usually results in
some adverse effect if consumed after the use by date. For
example:
• if you ate yoghurt after the use by date then there is a
fair chance that you would become ill
• whereas if you used a photographic film after the best
before date of May 2010, you will still be able to
develop photographs, but the colour definition may not
be as sharp as if you developed pictures in 2007.

Examples of other goods that spoil include:


• chemicals
• glues that harden over time
• nuts and bolts that corrode in a damp environment.

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Obsolescence  times  
Obsolescence refers to something becoming old, disused, no
longer useful or no longer used. Examples of products that
become obsolete include:
• fashion items which last a season before they become
yesterday’s ‘must-have’ buy
• computer chips which are superseded within 18 months
by a smaller chip with higher capacity
• video recorders being replaced by DVD players
• analogue mobile phones being replaced by 3rd
generation phones.

Calculating the time it takes for things to become obsolete is often


difficult. Some goods become obsolete overnight. Others become
obsolete after a known period of time. Fashion goods, for example,
may have industry defined obsolescence times driven by new
seasons and designs, but for other goods such as a particular
brand of car it is difficult to pinpoint when it will lose favour with
consumers, become replaced with a newer model or no longer be
used. You will need to consult with members of the marketing
department and sales team to monitor what is selling well and what
is happening in the marketplace to determine whether a good or
service is becoming obsolete. You will then need to modify the
stocks you carry in your inventory accordingly.

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Activity 5: Spoilage and obsolescence

Choose an item that you stock regularly in your warehouse


inventory and answer the following questions about it.

How do you know how long the good can be stored before it spoils,
decays, deteriorates and is no longer fit to be used? What sources
of information would you consult to find this information out?

How do you know whether an item you stock is becoming


obsolete? Who would you consult with and what information would
you analyse to make such a decision?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.
   

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How do I assess my maximum stock carrying


capacity?

Capacity refers to the maximum amount that can be made by an


enterprise’s production process and represents the limit of what
output is possible in your enterprise’s production process. It
follows that the maximum rate of output dictates the maximum
number and types of stocks that can be carried in the inventory.
For example, if your enterprise can manufacture a maximum of 100
cars in 24 hours, then you need to carry a minimum100
windscreens, 100 sets of tyres (including a spare), 100 engines
and 100 sets of chassis and all other car components every day to
meet this requirement. Usually enterprises will carry more than the
minimum amount of raw material stocks in their inventories,
however. This is to prevent stock outs for occurring during delivery
lead times. This extra stock, known as “safety” or “buffer” stocks,
will be discussed in greater detail later in this section and in Section
3.

Knowing the maximum stock carrying capacity helps you determine


whether it is physically possible to produce goods and services in
sufficient quantities to fulfil a customer order. This is especially
important in high volume periods where there is high demand for
your products or goods. Factors which affect maximum stock
carrying capacity include the mix of products you are
manufacturing and the demand characteristics of the product or
service you are producing.

Increasing  capacity  
A firm that does not have the space to physically store all required
components may get several deliveries of components and parts
regularly throughout the day. When the parts or components are
delivered they go straight onto the production line with minimal
storage time. In this way a production facility with storage space
for say, 40 sets of car components, can still manufacture 100 cars
a day.

Enterprises may choose not to operate at their maximum stock


carrying capacity because it may not be profitable to do so. For
example, there is no point having a fully stocked warehouse of raw
materials in a low volume period of demand because the costs of
carrying all the unused stock will be high. The enterprise would be
tying up cash that could be used more effectively elsewhere.
Enterprises may also choose not to fully stock a warehouse
because the money tied up in purchasing stock may disrupt the
enterprise’s cash flow and threaten the solvency of the business.

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Capacity planning is a complicated process usually performed by


the manufacturing manager or production scheduler in conjunction
with representatives from the other business functions such as
marketing, sales and finance. It involves some complex
mathematical and statistical concepts and calculations that are
beyond the level required for this unit. However an understanding
of the factors affecting the maximum stock carrying capacity is
important so that you are aware of why you need to alter the stock
carrying levels and why the maximum stock carrying capacity
changes regularly.

How do I assess physical and human resource


levels?

Two other important considerations which affect the optimum stock


levels include the physical resources available in your enterprise’s
production and warehousing facility and whether you have
sufficiently skilled and competent staff to process, transit,
manufacture, store and distribute goods and services.

Physical  resource  levels  


The size of production and warehousing facilities obviously plays
an important part in determining how much stock you can hold.
You cannot hold more than a certain amount of raw materials or
components in a warehouse or production facility. How much you
can store depends on what parts and components you are storing
and the size of the finished goods which are in transit storage
awaiting collection or distribution.

When analysing projected stock levels, you need to be aware of


the size and volume of your facility and the size and volume of the
goods that are coming into your warehouse, both in their packaged
and unpacked forms. You will also need to ensure you have
adequate space to store the goods while they are being checked,
processed and awaiting distribution.

As well as the size, the layout of your warehouse or production


facility plays an important role in determining how many stocks you
carry in your warehouse. Storing items neatly using a simple,
logical system makes it easier to access stocks, and cuts down the
lead time within a production facility or manufacturing plant,
allowing more stocks to be turned over. Simple storage solutions
such as having three levels of storage rather than one can make a
significant impact on the amount of inventory that can be carried.

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Organising  stock  
All stock should be organised in a way that maximises productivity
and prevents double handling. This will increase profits for the
company and help you reach an optimum inventory level. Stock
should also be organised to avoid damage and spoilage due to
things such as sunlight, heat, and radiation.

To store stock in the most convenient and efficient way you should:
• store high turnover stock near the dispatch area
• have markings on the floor to indicate where stock
should go
• place stock in bins
• have vertical stacking on racks and use forklifts for
access
• have a secure area for high cost items.

Depending on your racking and block stacking capacity you should


always look at your movement, ‘turnover’ or order picking
requirements to help you decide how to place stock in your
warehouse. Just because a product can stack three high does not
mean it cannot be racked and vice versa.

Stock should also be organised in a way that prevents


contamination by other stock. For example you should not have
chemicals placed on racks above foodstuffs.

Other ways to organise stock include:


• multiple locations (picking or reserve 2 bins)
• picking direct from bulk (1 bin)
• binning
• racking
• bulk stacking
• separate special purpose areas (e.g. coldrooms,
freezers, dangerous goods storage area)
• theft sensitive cages.

Human  resource  levels  


It is also important to assess the level of staff you have available
when assessing optimum stock levels. If staff are ill, redeployed to
another production line, inadequately skilled or unmotivated this will
impact on the number of potential and actual output of goods
produced. This in turn affects how much stock and inventory is
used and how much sits on the shelves. It is therefore necessary

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to plan with the production team leaders when staff will be required,
what skills they need, and whether there are enough of them to
process physically produce the goods.

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Activity 6: Maximum capacity, physical and human resources

Explain how stock is placed in your warehouse. Give special


consideration to any stock which has special storage requirements.

Draw a diagram of the layout of your warehouse. Mark on the map


any areas where improvements to the layout could quicken
turnover of inventory.

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If the changes you identified were implemented in your warehouse,


how would the skills of the people working in the warehouse
change and what would you do to ensure they gained these skills?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.  

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How do contingencies affect optimum stock


levels?

A contingency is something that happens as a direct result of


another action occurring. For example, a contingency in supply
chain management could be that the missed delivery of crushed
rock to a concrete manufacturer causes a stock out. Carrying
excess stock in the inventory could have prevented the stock out.
Safety stocks are also carried because things also often go wrong
in the manufacturing and distribution process that cause delays.

Few enterprises carry the bare minimum stock levels of raw


materials, parts or components to fulfil orders. If they did this, then
when an interruption to the supply, production or distribution of
those materials occurred, or a delay in the production process
occurred, then production would cease, stock outs would occur and
customers would be displeased because they have not received
their goods on time. As a result, a certain level of excess stock,
over and above the minimum amount required to meet production
requirements, known as a safety stock, is carried. Issues to
consider when calculating the safety stock will be discussed in
Section 3.

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© Department of Education, Science and Training 2005 Page 43


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Section 3 Determining
optimum inventory
levels

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Section outline
Areas  covered  in  this  section  are:  
• how  to  relate  production  and  sales  cycle  stages  to  stock  
manufacturing  supply  and  distribution  lead  times  
• how  to  calculate  safety  stocks  
• how  to  identify  the  optimum  inventory  level.  

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How do I determine optimum inventory levels?

To determine the optimum inventory level, all the factors discussed


in Sections 1 and 2 should be considered:
• the demand for the product
• seasonality
• trends
• irregular variations
• production cycles
• high or low volume sales periods
• lead time for raw material/components/parts
manufacture, supply and distribution
• spoilage times
• obsolescence times
• maximum stock carrying capacity
• available physical space
• availability and skills of human resources
• contingencies for overcoming interruptions to the supply
chain.

Determining optimum inventory levels is a complicated process


involving a multidisciplinary planning effort between suppliers,
marketing, sales, finance, operations, human resources and the
logistics functions within an enterprise. Some of the sources of
information that may be used to help you determine the optimum
inventory level include:
• supply requirements
• supplier information
• workplace contract procedures
• sales plans
• distribution times.

Supply requirements are generally worked out by calculating the


difference between existing stocks held in the inventory and stocks
required to meet production targets. Information about the supplier
is generally kept by enterprises for regularly stocked items so you
can calculate the lead time and availability of stocks reasonably
easily. Your enterprise may also have supply contracts which
restrict or dictate who you can supply from and under what
conditions you can seek alternative suppliers.

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As discussed previously, analysis of sales plans has a significant


effect on the inventory you carry. The distribution time forms part
of the lead time for stocks to arrive which also affects how much ,
how often and when you need to order stocks to top up your
inventory.

Production  and  sales  cycles  and  lead  times  


It is important to recognise the link between the production and
sales cycle stages and the impact this has on:
• what needs to be ordered
• what quantity needs to be ordered
• where it needs to be ordered from
• whether the required stocks can be obtained on time.

It is best to plan resource requirements and arrange their


procurement well in advance of when production is scheduled to
ensure that supply requirements are met. This is because:
• there is lead time for stocks to be acquired, grown or
produced by the supplier
• there is lead time for parts or components to be
manufactured by a supplier
• there is lead time for raw materials, parts or
components to be delivered.

Failure to allocate sufficient time to procure the required raw


materials, parts or components will result in understocking and
being unable to fulfil customer requirements and less profit for your
enterprise.

Safety  stocks  
As discussed in Section 2, the optimum inventory level is not the
minimum amount of stocks required to produce the number of
goods set in the production schedule. Things often happen in the
supply, production and distribution of goods that necessitate more
than the bare minimum stocks are obtained. If only the bare
minimum stocks are carried, then when something does go wrong,
it will lead to a stock out. Some of the things that could go wrong
include:
• a supplier cannot deliver raw materials due to industrial
action
• a supplier breaches contract and fails to deliver goods
• a supplier’s truck breaks down and misses the deadline
for delivery

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• there are not enough staff on the production line due to


flu spreading through the employees
• a piece of production equipment breaks down or does
not work properly
• an inaccurate planning schedule is implemented
resulting in too few units being produced
• some goods fail quality inspection
• goods are packaged or labelled incorrectly
• a distribution truck breaks down.

All of these occurrences pose a threat to being able to meet


customer expectations. To overcome this problem, enterprises
usually carry more than the bare minimum of stock required to
produce goods. This excess stock carried to be used in cases
where a problem occurs to ensure production can continue is
known as safety stock. Other terms used describe safety stock
include a buffer stock or emergency stock.

There are various ways of calculating the safety stock. Some


organisations keep a safety stock equal to half the lead time for the
raw materials. Some keep a safety stock of 20% over what is
needed for production. The level of safety stock will depend on
many factors, including:
• the type of good being produced
• the availability of the raw materials, parts or
components
• changes to market conditions
• fluctuating demand
• the industry characteristics.

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Activity 7: Safety stocks

How is the safety stock calculated for items stocked in your


enterprise’s inventory?

How much safety stock does your enterprise usually carry? On


what basis was it decided to carry this much safety stock?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.  

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Calculating  optimal  inventory  levels  


The optimum inventory level is essentially the process of using the
sales plan forecasts and stock movement data and other sources
of information to determine production requirements considering all
variables and then calculating the minimum amount of raw
materials, components and parts required to produce the
production target plus safety stock to allow for contingencies.

Determining the optimum inventory level is often a multidisciplinary


effort between representatives of several different business
functions in your enterprise.

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Activity 8: Determining optimum inventory levels

Imagine you are at a monthly sales meeting with representatives


from the finance, marketing, operations, and human resources
team. You have noticed that over the past two months
strawberries have been spoiling in the warehouse. You notice from
the stock movement data that strawberry jam is not selling as much
as predicted by the sales plan. After much discussion with the
group, and further analysis of sales figures from other products,
you decide the decline in sales has largely been caused by a
reduction in the amount of advertising spent on promoting the
strawberry jam.

After consultation with the marketing manager, it is decided that a


promotion will be used in an attempt to boost sales by 10% over 3
months. The operations manager suggests that the promotion
should start in 2 months’ time to coincide with the spring harvest of
strawberries, so that there will be enough raw materials to meet
production requirements. The marketing manager agrees because
this will give the marketing team time to negotiate a better rate with
advertisers. It will also allow human resource manager to recruit,
induct and train approximately 10 more staff who will be required to
work on the production line to cope with the anticipated extra
production. The two months will allow the finance team some
breathing space to raise the capital required to fund the promotion
without impacting dramatically on the enterprise’s cash flow.

Answer the following questions about determining the optimum


inventory relating to this scenario:

Make a list of all the items you will need to make strawberry jam.
Remember that not only will you need the raw materials to make
the jam, but must consider stocks for such things as packaging,
labelling and wrapping.

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If the production target in 2 months’ time was 100,000 jars of


strawberry jam, would you order 100,000 of all the raw materials
and necessary items involved in producing the finished product or
would you order more? Why or why not?

What would be the advantages of entering into an exclusive supply


contract with a single strawberry supplier? Why would you consider
entering into supply contracts with more than one strawberry
supplier?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.  

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Suggesting  supply  improvements  


Calculating the optimum inventory level may require you to suggest
improvements to supply operations and negotiate changes to
supply agreements. For example, if you notice that stock outs are
frequently occurring because your enterprise is overly reliant on
one supplier who is not consistently meeting target delivery times,
then you may suggest that another two additional suppliers are
sought to reduce reliance on that supplier.

Alternatively, if your stock movement data indicates that sales are


greater than forecast in the sales plan, you may need to negotiate
with your supplier to deliver more raw materials, parts and
component stocks than specified in the original supply contract.

Calculating the optimum inventory level is a constantly changing,


complicated and difficult task involving a combination of quality
information, rigorous analysis, multidisciplinary teamwork and
contingency planning. However, once the desired level of
inventory is determined, the next challenge is to monitor inventory
levels in the face of fluctuating demand. How to do this will be
discussed in Section 4.
 

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© Department of Education, Science and Training 2005 Page 55


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Section 4 Monitoring
optimum inventory
levels

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Section outline
Areas  covered  in  this  section  are:  
• comparing  inventory  benchmarks  to  sales  
turnover/production  requirements  
• making  adjustments  to  inventory  levels  in  accordance  with  
reassessed  sales  turnover/production  requirements  
• documenting  changes  and  requests  to  inventory  levels  
• assembling  resources  to  optimise  inventory  levels.  

© Department of Education, Science and Training 2005 Page 57


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How do I monitor optimum stock levels?

An essential step in determining optimum stock control is to


monitor the stock levels in the warehouse. As a result of this, well
kept records are essential.

When implementing monitoring and maintenance systems for your


stock, you should remember that stock is money and you must use
it as efficiently as possible to get as much profit from it as possible.

Keeping  stock  records  


Stock records will tell you:
• how much stock is currently in storage and undergoing
production
• how much stock is required to maintain current
production levels
• the suppliers you need to deal with to buy stock
• delivery times for stock to be delivered.

When monitoring stock levels in your store, consideration needs to


be given to a number of factors, including:
• What is the ideal level of stock for a product?
• How much space is available for storage?
• How often should stock be reordered, and when is the
reorder cycle?
• Is it easy to adjust stock levels without suffering loss?
• What is the demand for the product?
• What is the availability of supply?
• What is the supplier’s lead time?

As with other aspects of inventory management, the objective of


monitoring stock levels is to avoid an out of stock situation,
maintaining sales to meet customer demand.

When monitoring stock levels, you need to use a system to keep


count of stock so you know exactly how much stock is currently in
your warehouse. The system of monitoring in your warehouse
should include:
• the method used to count stock, such as a computer
recording system, a comparison of figures from year to
year, physically counting what is in stock or a
combination of manual and computer counting methods

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• the frequency of the monitoring for example each day,


week, bi-weekly, monthly or yearly
• the actions available to you if you find you have a stock
shortage or surplus.

Reorder  cycles  
As well as monitoring stock levels, you need to monitor stock
reorder cycles. A reorder cycle is the continuous physical counting
of inventory so that all items are counted at a specific frequency,
and these records are reconciled with actual data. A “cycle” is the
time taken to count all items in the inventory at least once. The
cycle changes depending on changes in the demand for the
product and is dictated by the frequency of orders and the quantity
required. This system may be manual, where a delegated staff
member places an order weekly, monthly or another specified time
period, or electronic using point of sale equipment

Monitoring  stock  turnover  


Whilst monitoring the stock reorder cycle and the stock levels, the
rate of sale, or turnover of stock, is important in deciding what
inventory you will need to reorder. You need to identify which stock
is moving quickly and which is moving slowly. Fast moving stock,
as the best sellers, need sufficient levels of replacement stock to
ensure they do not run out. Slow sellers need to be identified to
ensure they are eliminated from the range or to reduce their stock
orders so not too much of these stocks are being carried.

A method of calculating fast and slow sellers is to calculate the


stock turn of each stock. This calculation relates to the sale of the
item over a period of time. The rate of stock turn is equal to the
total sales divided by the average stock.

Stock turn rate is calculated by using the following formula to


calculate the average stock then dividing it by the total sales:

Opening Stock+ Closing Stock


Number of days/weeks/months

For example, if a store supervisor was trying to work out the stock
turn for a line of televisions with stock sales worth $100,000 over 3
months, with the opening stock worth $89,000 and the closing
stock $21,000, then the average stock is:

$89,000+$21000 = $36,666 average stock over the 3


months
3 months

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Stock turn is therefore the sales divided by the average stock value
over the three months:
$100,000 = 2.72
36,666

The stock has therefore turned over 2.72 times in 3 months.


As an example of how to work out how fast items sell, if a product
had ten items in the warehouse each time the stock was ordered,
and it turned 2 times in three months, then the store sold 20 items
altogether. If there had been 10 items in the warehouse and the
stock turned 1 time in three months, then 10 items were sold. This
can help you identify that the first good sold twice as many as the
slower selling item. You may wish to remove the slow seller from
the range you are selling, or consult with marketing about doing a
promotion to boost sales. Almost certainly you would modify
ordering for the slower moving item.

Inventory  benchmarks  
Enterprises keep records of their inventory levels, stock turnover
rate and sales figures which they use not only to plan projected
stock demands, but also to measure their current stock levels
against previous levels in similar periods of demand.

Current performance is also measured against industry


benchmarks. A benchmark is something that serves as a standard
by which performance may be measured as a basis for evaluation
or comparison. Benchmarks may be:
• periodic
• monthly or
• weekly.

Often enterprises purchase information from external consultancies


which gather data on things such as stock turnover times, cash
conversion cycles, average lead times and customer satisfaction
levels in the industry the enterprise works in. Some industries
benefit from information published by public agencies such as the
Australian Bureau of Statistics or government departments.
Enterprises use this information to determine whether there is any
discrepancy between the levels of inventory that their enterprise is
carrying compared to the industry standard.

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If inventory turnover is less than the industry standard, then this


usually means that the enterprise’s inventory management is
uncompetitive and too much stock is being carried compared to its
rivals. The enterprise will need to come up with ways to reduce the
inventory without sacrificing performance standards or it may go
out of business. If inventory turnover is higher than the industry
average, then as long as customer needs are being met, this
represents and ideal situation because it means the inventory
being carried is competitive in relation to competitors and it enjoys
higher profit margins.

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Activity 9: Fast and slow sellers

Choose five products from your warehouse. Gather information on


their sales over the past three months. Using the formula shown
on the previous page, calculate the stock turn for each item.

List  the  stock  items  and  their  stock  turns  here:  

1.  

2.  

3.  

4.  

5.  

Which items are fast sellers? Which items are slow sellers?

How does the stock turn for these items compare with your
enterprise’s stock turn target or industry benchmarks? If you do
not keep this kind of information, where could you get it from?

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What conclusions can you draw from the stock turns you
calculated?

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.  

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Documenting  changes  and  requests  for  adjustments  to  inventory  


level  
Imagine you notice that the raw materials for a product are not
moving off the shelves very much over a few weeks. You calculate
the average stock turn and discover that it is taking on average 5
weeks to turn over the items used in making this good. You
calculate the average stock turn for other items and discover that
all other products are moving out of the warehouse in around 2
weeks. Armed with these figures, you decide to call a meeting with
the production team to discuss whether you reorder the raw
materials or reorder as usual.

Your enterprise will have policies and procedures that govern how
you should submit requests such as these. It is unlikely that you
will be able to make a decision without consulting other functions in
the enterprise. Input from many different business functions is
required in determining the optimum inventory level.

As an example, imagine if you decided not to order the raw


materials and then found out that the marketing department had
planned a promotion for that good as a response to declining sales.
Imagine that, having cancelled the goods, a supplier could not
deliver the quantities you required because they had sold the stock
to another enterprise and did not have the capacity to fulfil both
orders. The finance department would also need to be consulted,
because they need to stop payment and reallocate funds to other
stock purchases and revise the budget. The human resources
manager would need to know also so they could stop their current
recruiting campaign as new production staff may not be required.

As a general rule, requests to changes in the inventory ordered


should be in writing and submitted to other members of the
enterprise team representing the different business functions. It is
essential to communicate between the various business functions
so that everyone is aware of what is happening, otherwise it could
lead to stock outs and sub optimal use of inventory and conflicts
between the different business functions operating in your
enterprise.

Assembling  resources  
Having considered all the factors which affect the optimum
inventory level, you now have to assemble all the resources
together to obtain them. This means:
• researching potential suppliers,
• negotiating with and placing orders with suppliers

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• checking that staff have adequate skills, training and


experience to process, handle, move and use the
stocks
• looking at the capacity to hold the stocks in the
warehouse.

Negotiating  with  suppliers  


Once you have decided which products need to be ordered, how
much is needed, and when you need it to be delivered by, you will
need to negotiate the purchase and supply agreement with your
supplier. These agreements must be recorded accurately so you
know what you have ordered and at what price.

Supply arrangements differ among the suppliers that you deal with.
It is important that you strive for a cost effective supply deal to
maximise the profits for your enterprise. To do this you may decide
to order excess stocks if it results in a quantity discount from the
supplier. However, you must be careful not to order too much as
the goods may become obsolete by the time you have produced
them all.

Managing  supply  problems  


You will often experience supply problems when receiving goods
from your suppliers. For example, a delivery may not arrive. Most
problems arise because of a communication breakdown
somewhere in the process of ordering and supply. When a
problem arises you may find yourself in disagreement or a potential
conflict situation.

In such situations you need to communicate with the supplier to


ensure the goods are still delivered. You do not want to annoy or
mistreat the supplier. You must negotiate carefully to avoid losing
a valued supplier relationship.

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Activity 10: Negotiation with and managing suppliers

Imagine you are the store supervisor for an enterprise which


manufactures jumpers. With winter approaching, the production
manager has asked you to obtain a supply of 3 tonnes of wool
required to meet production requirements. You have an existing
long-term supplier, but over the past 18 months they have been
unable to deliver orders on three separate occasions, resulting in
stock outs and loss of a major department store client. The
supplier has offered a discount on the usual price provided your
enterprise keeps them as the exclusive supplier.

You investigate another supplier who is slightly more expensive,


but has a better stock delivery record for its existing requirements,
and is willing to reduce their price to gain the supply contract.

What would you say to the supplier with whom you have an
existing supply contract?

What would you recommend to your production manager about


which supplier to choose?

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 A  supplier  that  is  contracted  to  deliver  5  truckloads  of  stock  items  
every  twelve  hours  has  been  late  by  as  much  as  one  or  two  hours  
consistently  over  the  past  week.  This  has  resulted  in  halting  the  
production  line  while  waiting  for  the  components  to  arrive.    This  has  
resulted  in  knock-­‐on  delays  to  the  distribution  of  finished  goods  to  
your  customers  and  causing  the  operations  manager  to  ask  you  to  sort  
the  delivery  problems  immediately.      

How  would  you  handle  the  supply  problems  you  are  experiencing?  

There  is  feedback  on  this  activity  at  the  back  of  this  Learner’s  Guide.

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Additional
resources

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Further information

The  websites  and  publications  listed  below  provide  more  information  


on  topics  relevant  to  unit  TLIA2807C  Assess  and  monitor  optimum  
stock  levels.  

Books  
• Stevenson,  W.J.  (1996),  Production/Operations  
Management,  5th  edn.,  Irwin/McGraw-­‐Hill:  Boston    

Contains  useful  information  on  forecasting,  analysing  trends,  


cycles,  variations  and  how  to  calculate  optimum  stock  levels.    
• Chopra,  S.  &  Meindl,  P.  (2001)  Supply  Chain  Management,  
Prentice  Hall,  UpperSaddle  River:  New  Jersey.  

Contains  a  comprehensive  discussion  of  issues  related  to  supply  


chain  and  inventory  management.  
• Simchi-­‐  Levi  D.P.,  Kaminski,  E.  (2003)  Designing  and  
Managing  the  Supply  Chain  (2nd  Edition),  Irwin  McGraw  
Hill:  Boston.  

Contains  a  chapter  on  issues  involved  in  inventory  management.  

Websites  
• http://inventoryops.com/warehouse_optimization.htm  
and  www.inventoryops.com  provides  information  on  how  
to  optimise  inventory  levels.

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Feedback on activities
The  responses  provided  in  this  section  are  suggested  responses.  Because  
every  workplace  is  different,  your  responses  may  vary  according  to  your  
specific  workplace  procedures,  the  equipment  available  and  the  nature  of  the  
business.  

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Activity 1: Under and overstocking

This activity is designed for you to appreciate how under or overstocking


significantly impacts on the profits your enterprise makes.

The answer to the first question will vary depending on the specific
circumstances surrounding the example you provide. However, in
general, the sorts of costs that are incurred to an enterprise when they
understock are that:
• sales are lost
• late delivery penalties are incurred
• loss of repeat business
• loss of referred business
• inefficient production.

In the second question, you should describe whether the failure to meet
the delivery deadline affected your relationship with your supplier. The
damage to your relationship will vary depending on the level of integration,
trust and working relationship you have with the customer, the underlying
causes for the missed delivery and how much your actions were
responsible for the delay.

In the third question, among the things that your enterprise could be doing
with the cash tied up in excess inventory include:
• using it to purchase high rotation, high volume stock
• buying new assets
• hiring new staff
• training staff
• implement a new computer system.

The important principle from this question is that excess inventory costs
your enterprise a lot of money which could, in extreme cases, be
responsible for an enterprise going out of business.

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Activity 2: Analysing sales plans and stock movement data

Regarding Figure 1, some of the reasons consumers may have increased


their wine consumption are:
• the wine industry has developed so there is greater quality and variety
of products for consumers to choose form
• the wine industry has been cleverly and innovatively marketed
• a cultural shift away from drinking beer to wine
• an increase in general alcohol consumption with increasing population
• greater disposable income caused by improved economic prosperity.

For the second question, 5 products which have seasonal variations in


their sales are:
• ice creams
• Christmas trees
• skiing holidays
• air flights
• football boots.

Regarding Figure 3, there was a housing boom according to the graph


between 1985 to 1990 and again between 2000 till 2005. This is reflected
by the number of window frames being sold increasing during these
periods because window frames are a component of building houses.
There are more houses built during a booming economic cycle as
consumers believe they have the money to pay for new construction of
new homes. Around 1983 was the worst year in the 1980s for building
houses as the economy was in the depths of a severe recession which
reduced demand for building new houses.

The answer to the question related to Figure 4 will depend on the example
you provide. However, irregular variations may be caused by things such
as:
• abnormal weather patters such as a heatwave or flooding
• any unusual events or occurrences.

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Activity 3: Stock movement data and analysis

The answers provided to this activity are dependent on the information


available to you in your enterprise. If you do not have a sales plan or
stock movement records, estimate from your own work experience when
the high and low volume periods are, when there is a seasonal variation in
the amount of goods or services produced and sold, and roughly estimate
how many more stocks you use between the peak and low volume
periods.

Activity 4: Stock movement data and analysis

The tasks and time taken between receiving and order and delivering it to
a customer will vary depending on the item you select. You may need to
talk to your suppliers, internal customers and colleagues in your
enterprise to work out the time it takes to complete many of the tasks
involved in the lead time. Some of the tasks involved in calculating the
lead time include:
• obtaining the raw materials needed to produce the good or
service from suppliers
• processing the order within the enterprise
• designing the manufacturing or development process
• planning the production schedule
• setting up any equipment to produce the goods or service
• manufacturing or producing the goods
• conducting any quality checks and inspections
• overcoming any quality problems and rework
• packaging, labelling and addressing the goods
• checking the right quantity is being sent
• storing the goods in the warehouse prior to distribution
• transit time while being delivered to the customer.

Regarding the second question, if there is a delay in any of the tasks


involved in getting a good or service to a customer then the lead time is
extended. Because things often go wrong in the supply, productions,
processing, and distribution of a good/service, most enterprises build in a
bit of slack into the production process to allow for contingencies so they
do not miss their delivery time.

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The internal customers within the lead time chain are any department,
persons or section who are relying on you to complete your work before
they can begin theirs. Satisfying the internal customer is crucial to
meeting lead time targets and ultimately translates into meeting the
external customer’s expectations.

Activity 5: Spoilage and obsolescence

The amount of time that your stocks can be stored before spoiling,
decays, deteriorates or is no longer fit for its intended purpose will vary
depending on the characteristics of the good. Sources of information you
may access and people you may like to consult to determine spoilage
times include:
• material safety data sheets provided by the supplier
• quality and enterprise work specifications and procedures
• manufacturer’s specifications and/or suppliers handling and storage
advice
• workplace operating procedures and policies
• supplier and or client instructions
• legislation
• industrial agreements
• standards and certification requirements
• quality assurance procedures
• hazardous substances and dangerous goods codes
• consultations with other employees, supervisors, management, Health
and Safety Representatives, industrial relations, OHS specialists, other
professional and technical staff, contractors and maintenance
personnel.

Knowing when a stock item is becoming obsolete is a difficult process


involving analysis of the current and projected market conditions, and the
associated production requirements to meet the level of demand. Some
goods have defined obsolescence times like seafood and computers,
while others may have a less clearly defined obsolescence time, like cars
and books. Among the people you may consult with to assist you in
determining whether something is becoming obsolete or not are:
• clients
• suppliers
• the marketing team

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• the sales team


• your colleagues in the warehouse
• external consultants.

Sources of information you may like to consult when determining


obsolescence include:
• sales plans and stock movement data
• customer feedback
• market survey data
• press and media reports
• external consultant reports
• material safety data sheets provided by the supplier
• quality and enterprise work specifications and procedures
• manufacturer’s specifications and/or suppliers handling and storage
advice
• workplace operating procedures and policies
• supplier and or client instructions
• legislation
• standards and certification requirements
• quality assurance procedures
• hazardous substances and dangerous goods codes.

Activity 6: Maximum capacity, physical and human resources

You are required to give an explanation of the system used to store stock
in your warehouse. The idea of this activity is to get you to identify how
stock is stored in your warehouse to prepare you to analyse whether the
layout could be improved to promote increased turnover of stock. When
drawing the layout of your warehouse, consider the following issues when
thinking about improvements to the warehouse layout:
• whether high turnover stock is stored near the dispatch area
• whether there are clear markings on the floor to indicate where stock
should go
• whether stock would be stored or moved more compactly, easily and
efficiently if in bins
• whether vertical stacking would assist in inventory turnover.

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When you make layout changes in your warehouse, you may need to
redeploy warehouse workers in different areas or modify the way in which
they do their jobs. You may need to consider what training and new skills
are required to implement the new warehouse system accompanying the
new layout. This may require consultation and training with the workers
involved.

Activity 7: Safety stocks

Each enterprise has its own method for calculating the safety stock it
requires. In the past, the safety stock figure was essentially an arbitrary
decision based on experience and traditional figures. However, much
closer attention has been paid in recent years to calculating more
accurately just how much safety stock is required in order to reduce
excessive inventory carrying costs which eat into an enterprise’s
profitability. Working out the safety stock is often a complex process
requiring sophisticated statistical analysis performed with the assistance
of computer software, but at other enterprises it may be calculated using
historical data and subjective judgement based on experience. This
activity is designed to get you to think about whether there are better ways
for you to calculate safety stocks.

Activity 8: Determining optimum inventory levels

The items that you need to make strawberry jam include raw materials
such as strawberries, lemon juice, pectin, and sugar glass jars, lids,
labels, boxes, packaging materials such as wrapping and cardboard
separators.

Ideally you should order the minimum amount required to produce fulfil
production requirements (100,000) plus a safety stock to insure against
stock outs caused by things such as:
• a supplier cannot deliver raw materials due to industrial action
• a supplier breaches contract and fails to deliver goods
• a supplier’s truck breaks down and misses the deadline for
delivery
• there are not enough staff on the production line due to flu
spreading through the employees
• a piece of production equipment breaks down or does not
work properly
• an inaccurate planning schedule is implemented resulting in
too few units being produced

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• some goods fail quality inspection


• goods are packaged or labelled incorrectly
• a distribution truck breaks down.

Use your own enterprise’s guidelines for calculating the safety stock to
determine how much above the 100,000 items of stock you would need to
cover contingencies which may lead to a stock out.

The advantages of entering into an exclusive supply contract with a single


strawberry supplier are that because a large quantity is being ordered,
you will most likely be able to obtain a discount on the materials being
supplied. You can also build up a close working relationship and may be
able to integrate your inventory management systems to reduce lead time
and achieve greater cost savings as inventory levels are optimised. It
also allows you to plan ahead knowing that you have a steady source of
supply.

However, some disadvantages of having a sole supply contract are that it


means that your enterprise relied solely on one supplier. If that supplier is
not able to meet their delivery obligations for whatever reason, it means
that your lead time is extended and you may not be able to meet
customers’ expectations, resulting in loss of goodwill, repeat and referred
business. If locked into a long term contract, then if the price of the stocks
drops, you may be locked in to a more expensive price when the market
price drops.

To overcome problems of over reliance on one supplier, you may wish to


enter into several supply contracts. In case one supplier is unable to
deliver, then you have access to another supplier who is, avoiding a stock
out. In some cases one supplier may not be large enough to satisfy all
your supply requirements, and it may be a necessity to obtain supplies
from many different suppliers.

Other reasons why you may like to obtain supply contracts from more
than one supplier is to trial a range of suppliers before determining the
preferred supplier who best meets quality and delivery requirements,
regulatory restrictions on the amount of supply that any one supplier can
provide or to obtain cheaper prices by creating a competitive environment
amongst the suppliers.

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Activity 9: Fast and slow sellers

To calculate the stock turn of the 5 items you selected, you will need
access to the value of stock that you had in your inventory. You may
need to check computer or financial records prior to commencing this
activity.

Fast sellers are those items that have a relatively high stock turn rate, that
is, their stocks are used quickly when they come into the warehouse.
Slow sellers are those that do not turn over quickly. Slow sellers
effectively cost your enterprise money and steps should be taken to
investigate why they are selling slowly and if necessary the stock items
should be replaced with items that sell quicker.

Many enterprises keep benchmarking data on their average stock turn for
each items and measure the stock turn within a given period against that
benchmark. Reasons for any discrepancies are investigated with the aim
to consistently turn stock below average times as this means more stock
is being turned over reflecting increased sales. Stock turns above the
enterprise’s average means that stock is turning slower than expected
and that steps are required to increase the stock turn rate as the
enterprise is effectively losing money.

Industry benchmarks are often provided by private research consultancies


or government departments. Enterprises compare their stock turn to
industry levels because this represents a measure of the competitiveness
of the enterprise compared to its rivals. Enterprises who are above the
industry benchmark for stock turn have a competitive disadvantage
because they are slower to produce goods or services and have less
capacity to meet customer demands in high volume periods.

In analysing the stock turn data, if the stock turn data is discrepant with
the enterprise’s or industry benchmark, then you need to decide what
action needs to be taken to correct this discrepancy. This may mean you
need to suggest that a stock be dropped, investigated as to why its sock
turn is so slow. You may wish to raise your findings in a meeting with the
production, marketing, finance team and get their opinion on why the
stock is turning over so slowly.

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Activity 10: Fast and slow sellers

The answers to this activity will depend on your personal views. However,
some of the things you may consider saying to the supplier with whom
you have an existing contact are:
• that you have concerns about their ability to supply reliably
• that the discount offered is not enough given the poor delivery record
• that you are opening the supply contract up for open tender
• that you have received another offer.

What you recommend to your production manager about which supplier to


choose is subject to your opinion. It may be an idea to engage in more
than one supply contact in this case because:
• to diversify the risk of the suppliers being unable to meet delivery,
avoiding stock outs and lost customer orders
• to improve the quality of the supplies being delivered
• to obtain a variety in the range of products supplied.
Keep in mind that having more than one supply contract may lessen the
amount of integration between your existing supplier and your enterprise,
there is no guarantee that the other supplier will be better until you use
their services and suppliers may resent having to collaborate with their
competitors and try to undermine each other’s efforts.
In terms of handling the supply problem, it is generally a good idea to
contact the supplier’s representative and highlight the problems that have
occurred backed up with documentary evidence and estimates as to how
much this has disrupted the company. Rather than sticking to the letter of
the law, and threatening legal action in case of contract violation, it is
preferable to use diplomacy, tact and negotiate a mutually acceptable
solution. Legal action is costly, time consuming and does nothing to
enhance the working relationship between the supplier and your
enterprise.
You need to provide the supplier with the opportunity to fix any problems
that may be causing the supply problem. It could be that deliveries have
been missed due to a difficulty attracting sufficiently skilled people, and
are close to being resolved. Or maybe that their fleet management
computer system is undergoing a major upgrade and there are teething
problems that they are working hard to resolve.
Should performance not improve, then legal action to recover loss and
damage should be considered only as a last resort.

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