Stocks and Inventory

Aims of the chapter

By the end of this chapter, you should be able to:

 Define the main terms used for inventory management

 Describe the importance of stocks in an organization
 Discuss the reason of holding stock
 Review the role of stock in supply chain
 Explain the benefits of coordinated stocks in the supply
chain
 Describe some important business trends that affect
stocks
 Say how views of stocks have changed over time
What is stock?
the materials that are stored
by an organization until they
are needed

What is inventory?
a list of the items kept in stock

What is an item?
a distinct product that is kept
in stock: it is one entry in the
inventory

What is a unit?
the standard size or quantity of an item
 Overall stock consists of numbers of units held of each
item.
 The stock level of each item follows a cycle that falls to
meet customer demand and rises with replenishment from
suppliers.
 Customers are anyone (or thing) that reduces stock levels,
while suppliers are anyone (or thing) that increases
stocks.
 The main purpose of holding stock is to give a cushion
between supply and demand.
 There are many reasons why such a cushion is needed,
often – but not necessarily – related to variability or
uncertainty.
Inventory Management
Inventory management (stock
management, etc.) is a broad
term that includes all
decisions related to the stocks
 It makes decisions for policies,
activities and procedures to make
sure the right amount of each
item is held in stock at any time.

 holding stock is expensive.

 A rule of thumb says that the cost of holding
stock is about 20 per cent of its value a year. If
you keep $500 of food in a freezer, it costs
about $100 a year.
 Efficient inventory management is important to a
company because of its position in the working capital
cycle... Cash
received
Debtors or Purchase
receivables orders

Distribution
& retail
Inventories of
raw materials
Inventories of
finished goods
RIP

Other Other production

production resources
resources
Work-in-process
inventories

Money tied up in inventory is costly “dead money”. It

cannot be used for other more productive purposes...
Additional materials …but the need to hold inventory is often unavoidable!
 Reasons for holding stocks
Rate of supply of inputs
The water tank
model of inventory

Rate of demand
of outputs
Inventory

Input Output
process process
Inventory
Keep inventory (water in the tank) lower, by:
 Keeping the person controlling the input pipe in contact with
the person controlling the output pipe...
 …and with the persons knowing the demand for water.
Additional materials
  Demand forecast
error
 Unpredictable or late
deliveries from suppliers
 Minimum supplier order
quantity
 Supplier delivery interval
 Stocking methodology
 Reorder interval & quantity
 Consignment
stocking
 Minimisation of
delivery costs
 Pipeline inventory
 Anticipation or
precautionary stocks
MEETING CHANGING DEMAND
WITH FLAT CAPACITY

 Strategic stocking DEMAND

SUPPLIER
CAPACITY
 Purchase price advantage STOCK
BUILD PULL
 Lead-times offered FORWARD
to customers are shorter
than supplier lead-times
Additional materials
 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
 We can define two additional types
Spare parts: for machinery, equipment, etc.

Consumables: such as oil, paper, cleaners, etc

These are needed to support

operations, but they do not
form a part of the final product
another classification…

 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 ORDERS
GOODS

FACTORY
CONSUMERS RETAILER DISTRIBUTOR FACTORY
WAREHOUSE

A supply chain consists of the series of activities

and organizations that move materials through on
their journey from initial suppliers to final
customers.

Logistics or supply chain management is the

function with overall responsibility for the
movement of materials, and inventory
management is often seen as one activity within
logistics.
Supply chain – length and breadth
Supply chain – length and breadth /
number of facilities

observation suggests that the aggregate amount

of stock held in a number of locations is:
Worked example 1
AJT Transport of Manchester is planning to increase its
services to mainland Europe. It currently has 12 depots
with aggregate stock valued at £12 million and plans to
expand to 16 depots. With a carrying cost is 20 per cent
of value a year, what is the likely cost of this change?

Solution
N1 = 12 depots
N2 = 16 depots
AS(N1) = £12 million
Then we can substitute these values to get:

The additional depots will raise stock holding costs by:

(13.9 − 12) × 0.2 = 0.38 million or £380,000 a year
Cooperation within the supply chain ORDERS
GOODS

FACTORY
CONSUMERS RETAILER DISTRIBUTOR FACTORY
WAREHOUSE

ORDERS
2. Orders from
retailers to 3. Orders from
distributors distributors to 4. Orders
factory from factory
1. Increase of 10%
warehouse warehouse to
in orders from
consumers to factory
retailers

TIME
Additional materials
Worked example 2
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?
Solution
The spreadsheet in Figure 1.6 shows these
results. For each tier you can see:
• 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;

• number of units bought – which equals demand

plus any change in stock:
buys = demand + (closing stock − opening stock)
Solution
Traditional vertically-oriented supply chain
Information Final
flow consumers
Product
flow Market
dominating
assembler &
distributor

Suppliers of
assembled
components

Suppliers of
components &
other inputs

Suppliers of
OIL raw materials

Additional materials steel

 An integrated
supply chain
steel

Consumers

OIL

Information
flow
Product
flow
Additional materials
 Cooperation within a supply chain:

 lower costs – with lower stocks, less expediting,

balanced operations, economies of scale, etc.;
 improved performance – with more stable
operations, better planning, higher productivity
of resources, etc.;
 improved material flow, with co-ordination giving
faster and more reliable movements;
 better customer service, with shorter lead times
and faster deliveries;
 more flexibility, with organizations reacting
faster to changing conditions.
 New trends affecting stocks:

1. Improving communications.
2. Improving customer service.
3. Concentration on ownership.
4. Outsourcing inventory management.
5. Cross-docking.
6. Postponment.
7. Invironmental concerns.
 1. Improving communication

• electronic data interchange or EDI – lead time

• EPOS – electronic point-of-sales – data
• e-purchasing or e-procurement

Associated technologies supported EDI

• item coding
• electronic fund transfer (EFT)
 2. Improving customer service
• Knowledgeable customers
• Prices reduction to compete in the marketplace –
holding cost
• Balance betwen costs and service

3. Concentration of ownership
• Large companies and the economies of scale
• Changing power in the supply chain – power shift
4. Outsourcing inventory management
• Outsourcing – third party logistics – contract
logistics
• Benefits might include:
 lower fixed costs, with organizations only paying for services
they use;
 specialist suppliers who have expertise and use the best
systems and practices;
 third parties can combine work from several customers to get
economies of scale;
 guaranteed high, and agreed, levels of customer service;
 flexible capacity, dealing effectively with peaks and troughs
in demand;
 lower exposure to risk from, say, varying demand;
 increased geographical cover and local knowledge;
 a convenient way of working in new markets.
4. Outsourcing inventory management
• Vendor managed inventory
• Co-managed inventory

5. Cross-docking

• Cross-docking benefits
• Sorting activities
• Drop-shipping (where materials do not actually
go to the warehouse, but are delivered directly
from upstream suppliers to downstream
customers)
 5. Cross-docking

• Benefits of reducing lead times, reducing costs

to customers, having manufacturers talking
directly to their final customers, allowing
customers access to a wider range of products,
and so on
• Stock on wheels
 6. Postponement
• Push v. pull system
• Standardization vs. Customization
• Delay customization, push-pull, or postponement
• The effect on inventory

PUSH & PULL

Determining the cross-over point

Additional materials
 Postponement & its impact on
reducing variety in inventory

Materials in

Variety

Postponement
(delaying
customisation)
Finished goods out
A = B
Additional materials
7. Increased environmental concerns

• Green logistics
• Regulations
Excluded from the first chapter

• Changes to aggregate stocks, pp. 24-28