2.4.3 Stock Control

Buffer Stock

• In an ideal world the business would run out of stock precisely when new supplies arrive, but this is risky. A delay with the delivery may halt production so a business keeps a small supply of emergency stock in case of this eventuality. This is called buffer stock. This is an extra quantity of stock held to meet delayed delivery or unexpectedly higher demand. Dipping into this extra stock acts as a signal to order more supplies.

Implications of poor stock control

• Stock control can be a problem for business managers...
• Too much stock:
• - increased costs
• - cash flow problems may result
• Too little stock:
• - production may be halted
• - cannot meet orders and lose customers
• Efficient stock control allows a business to have the stock it needs, in the right place at the right time. This ensures that capital is not tied up unnecessarily but also protects production if problems arise in the supply chain (the various suppliers that contribute input to the production process),
• Too much stock can be a problem for two main reasons, Firstly, it has to be stored somewhere, this means using space with both a direct cost and a opportunity cost. It is expensive to store stock, it requires labour and equipment to handle it and move it around the place and storage space might otherwise be used for extra production. Perishable stock deteriorates over times.
• Secondly, cash is tied up in the stock and cannot be used elsewhere; this can lead to cash flow problems. Even if this does not cause liquidity problems there is the opportunity cost, since cash tied up in stock cannot be used elsewhere in the business to create further growth and profitability.

........................................

• Too little stock brings the obvious risk of running out at a crucial time, with production forced to grind to a halt. Fixed costs still need to be paid and there is also the value of the lost output and revenue to be taken into account. Lack of production may lead to disappointed customers who may become reluctant to place further orders.

JIT

• JIT is a system of production that keeps stock levels to a minimum. Rather than having large amounts of stock which is inefficient, JIT relies on frequent deliveries of small quantities of supplies as and when they are needed. This involves close relationships between the suppliers and the producers, to ensure that suppliers do actually arrive in time and that the quality of components is totally reliable. It may be necessary to install sophisticated computerised stock control systems to ensure this level of co-ordination and ensure that sticks never actually run out. This removes the need to hold large reserve stocks which are expensive to purchase and store.
• JIT has some clear advantages; holding less stock saves on costs and improves liquidity. Space that might have been needed for stock is freed up and can be used for production. It becomes easier for the business to be flexible and respond to special or to changes in demand. A minor drawback is that only buying in small amounts of supplies at a time could remove savings from cheaper bulk purchases. However, this is amply compensated for the advantages of JIT.
• JIT has one major potential problem, the business depends on the supplier, late deliveries or a poor quality batch of components can disrupt production and be costly This is why a good relationship with suppliers is so important. This creates a lean supply system where close co-operation and working together with a sole supplier is seen as much more efficient than sourcing from several different suppliers who are all competing on price.

Waste Minimisation

• Reducing waste is a key idea behind much of lean management and modern business operations. It has a wider meaning than just reducing rubbish or producing fewer faulty products. It is an all-encompassing idea that tries to get as much output as possible out of the smallest amount of inputs by examining every stage of production to try to make efficiency gains.
• The Japanese word for waste - muda - means any activity or process that wastes time or resources or fails to add any value so ultimately reduced profitability. The production process consumes resources and waste occurs when more resources are used than essential to produce the goods and services the market wants. In other words, Muda is about increasing productivity and efficiency by trimming out unnecessary actions that just add to costs rather than profit.
• Muda has evolved to identify the following areas where waste can be minimised:
• STOCK - optimising the level of stock held.
• TRANSPORT - unnecessary movement of stock or product between operations and/or locations.
• MOTION - unnecessary movement of people or machinery during their work.
• WAITING - people and machinery should not be waiting for other production stages to finish.
• OVER-PRODUCTION - producing products or services beyond the customer's requirements
• DEFECTS - output that is damaged or not fit to be sold.
• TALENT - not recognising and making full use of the talents of the workforce
• RESOURCES - wasting power and energy.

....................................

• Minimising waste in all areas of a business involves examining production or operational system to see if they can be improved. If supplies arrive and are unloaded and stored in a warehouse a long way from the production line, it will take time to transport them to where they are needed. This is waste: could those supplies be stored closer to where they are used? A worker has to cross from one machine to another to complete an assembly process, could the machines be put next to each other?
• These may seem like small steps but they add up and increase the efficiency of the business.

Lean Production

• 'Lean and mean' is an oft-used expression conveying the idea that a business that is lean is also strong and very competitive.
• Lean production, combines components including:
• - JIT
• - Time-Based Management
• - TQM
• - Kaizen
• - Waste Minimisation
• - Flexibility
• - Short lead times
• - Lean Supply chain
• Lean production's more flexible approach sought continuous improvement as well as waste elimination. This called for every employee to be part of a team seeking better ways of organising production and making better products. It required excellent communication at every level of the business.

.............................

• TQM and Kaizen focus on the importance of quality and the need for continuous improvement. Some businesses find these approaches fit well with democratic leaderships, which encourages individuals to collaborate, sharing ideas and using team work to develop new products or procedures.
• Lean and flexible production allows businesses to adapt to dynamic markets and changing circumstances more quickly, and to offer customers what they want in a short period of time. Lean production reduces the product development lead times; the short this time is, the faster a new product can get to the market. Business that can quickly and efficiently respond to new orders will get more customers and a competitive advantage.
• Short lead times reduce costs. Development of products is expensive; cash is spent with no incoming sales revenue. The less time spent on this the lower the cost and the sooner the product reaches the customer and sales revenue begin to flow. A short lead time will reduce the development stage of the product life cycle. In addition there is the advantage of getting the product to the market before competition, sometimes called 'first mover advantage'. This is another source of competitive advantage.
• Greater flexibility in the use of both capital and labour makes short production runs possible. Where capital