chapter 1 stocks and inventory
TRANSCRIPT
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Chapter 1
Stocks and Inventory
Stocks of Materials
Definition of terms:
• Stock consists of all the goods and materials that are
stored by an organization. It is a store of items that is kept
for future use.
• An inventory is a list of the items held in stock.
• An item is a distinct product that is kept in stock: it is one
entry in the inventory. (SKU: Stock Keeping Unit)
• A unit is the standard size or quantity of an item.
• Tangible: Raw materials, components, finished products
• Intangible
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Stocks of Materials
• Tangible: Raw materials, components, finished products,
people, paperwork, consumables, energy, money
• Intangible: Information, message, knowledge
Stock Cycles
Stock of items CustomersSuppliers Deliveries Withdrawals
At some point the stock gets
low and suppliers are asked to
make another delivery
Stock is replenished
by relatively large,
infrequent deliveries
from suppliers
Units are held
in stock until
needed
Stock is reduced by
relatively small,
frequent withdrawals
to meet customer
demand
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Stock Cycles
Time
Stock
level
Replenishment Replenishment
Stock Cycle
Place
order
Order
arrives
Lead Time
Stock declines to
meet demand
Stock Cycle
• Inventory management is the function responsible for all
decisions about stock in an organization.
• It makes decisions for policies, activities and procedures to
make sure the right amount of each item is held in stock at
any time.
• Rule of thumb: the cost of holding stock is about 20% of its
value a year.
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Reasons for Holding Stocks
Stock – giving
a buffer
between
supply and
demand
Demand –
with variation
and
uncertainty in
quantities and
timing
Suppliers –
with
variation
and
uncertainty
in quantities
and timing
Reasons for Holding Stocks
Giving a buffer• Allow for demands that are larger than expected, or at
unexpected times;
• Allow for deliveries that are delayed or too small;
• Allow for mismatches between the best rate of supply and actual
rate of demand;
• Decouple adjacent operations;
• Avoid delays in passing products to customers;
• Take advantage of price discounts on large orders;
• Allow the purchase of items when price is low;
• Allow the purchase of items that are difficult to find;
• Make full loads for delivery and reduce transport costs;
• Give cover for emergencies.
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Types of Stocks
• Raw materials, which have arrived from suppliers and are
kept until needed for operations;
• Work in progress, which are units currently being worked
on;
• Finished goods, which are waiting to be shipped to
customers.
• Spare parts, for machinery, equipment, etc.,
• Consumables, such as oil, paper, cleaners, etc.
Types of Stocks
Raw materials Finished goodsOperations in the process
Consumables Spare parts
Work in progress
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Types of Stocks
• Cycle stock is the normal stock used during operations.
• Safety stock is a reserve of materials that is held for
emergencies.
• Seasonal stock is used to maintain stable operations
through seasonal variations in demand.
• Pipeline stock is currently being moved from one location to
another.
• Other stock consists of all the stocks that are held for some
other reason.
Stocks in the Supply Chain
• A supply chain consists of the series of activities and
organizations that materials move through on their journey
from initial suppliers to final customers.
• Logistics or supply chain management is the function
responsible for this flow of materials.
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Stocks in the Supply Chain
Organization
Supplier
Supplier
Supplier
Supplier
Supplier
Supplier
Customer
Customer
Customer
Customer
Customer
Customer
Tiers of suppliers (length)
2nd tier 1st tier
Tiers of customers (length)
1st tier 2nd tier
Stocks in the Supply Chain
• An empirical observation suggests that the aggregate
amount of stock held in a number of locations is:
𝐴𝑆 𝑁2 = 𝐴𝑆 𝑁1 ×𝑁2
𝑁1
Where:
𝑁2= number of planned future facilities
𝑁1= number of existing facilities
𝐴𝑆 𝑁𝑖 = aggregate stock with 𝑁𝑖 facilities
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Worked Example:
Stocks in the Supply Chain
AJT Transport is planning to increase its service. It currently
has 12 depots with aggregate stock at $12 million and plan to
expand to 16 depots. With a carrying cost of 20% of value a
year, what is the likely cost of this change?
𝑁1= 12 depots
𝑁2= 16 depots
𝐴𝑆 𝑁1 = $12 million
𝐴𝑆 𝑁2 = 𝐴𝑆 𝑁1 ×𝑁2
𝑁1= 12 ×
16
12= $13.9 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
Additional stock carrying cost = (13.9 – 12)(0.20)=0.38 mil.
Stocks in the Supply Chain
Co-operation within a supply chain:
• Lower costs
• Improved performance
• Improved material flow
• Better customer service
• More flexibility
Achieving co-operation in the supply chain:
• Strategic alliance or partnership
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Worked Example:Co-operation within the Supply Chain
A simple supply chain has a manufacturer, regional and local
wholesalers, a retailer and final customer. Each organization
holds its own stock of one week’s demand. In other words,
each buys enough materials from its suppliers to make its
closing stock at the end of the week equal to the demand
during the week. Demand for a product is steady at 10 units a
week. One week, however, demand from final customers
rises to 20 units. Assuming that deliveries are very fast, how
does this affect stocks in the supply chain?
Worked Example:Co-operation within the Supply Chain
• Demand - which equals the amount bought by the following
tier of customers;
• Opening stock at the beginning of the week - which equals
its closing stock in the previous week;
• Closing stock at the end of the week - which must equal
demand in the week or the difference between the Opening
stock and Demand (maximum of the two);
• Number of units bought - which equals demand plus any
change in stock:
Buys = Demand + (Closing stock − Opening stock)
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Worked Example:Co-operation within the Supply Chain
Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Customer
Demand 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Retailer
Demand 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Opening stock 10 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Closing stock 10 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Buys 10 30 0 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Local wholesaler
Demand 10 30 0 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Opening stock 10 10 30 30 20 10 10 10 10 10 10 10 10 10 10 10 10 10
Closing stock 10 30 30 20 10 10 10 10 10 10 10 10 10 10 10 10 10 10
Buys 10 50 0 0 0 10 10 10 10 10 10 10 10 10 10 10 10 10
Regional wholesaler
Demand 10 50 0 0 0 10 10 10 10 10 10 10 10 10 10 10 10 10
Opening stock 10 10 50 50 50 50 40 30 20 10 10 10 10 10 10 10 10 10
Closing stock 10 50 50 50 50 40 30 20 10 10 10 10 10 10 10 10 10 10
Buys 10 90 0 0 0 0 0 0 0 10 10 10 10 10 10 10 10 10
Manufacturer
Demand 10 90 0 0 0 0 0 0 0 10 10 10 10 10 10 10 10 10
Opening stock 10 10 90 90 90 90 90 90 90 90 80 70 60 50 40 30 20 10
Closing stock 10 90 90 90 90 90 90 90 90 80 70 60 50 40 30 20 10 10
Makes 10 170 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10
Bullwhip Effect
http://www.aalhysterforklifts.com.au/index.php/about/blog-
post/what_is_the_bullwhip_effect_understanding_the_concept_definition
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Achieving Co-operation in the
Supply Chain
Obstacles:
• Lack of trust
• Reluctance in sharing information
• Different priorities
• Competition
• Data exchange
• Appropriate systems
• Skills
• Security
• Complexity of systems
Achieving Co-operation in the
Supply Chain
• Informal working relationship
• Formal agreement
• Strategic alliance or partnership: An ongoing relationship
between firms, which involves a commitment over an
extended time period, and a mutual sharing of information
and the risks and rewards of the relationship. – Ellram and
Krause (1994)
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Trends Affecting Stock
• Improving communications– Electronic data interchange (EDI)
• Item coding – bar code, RFID
• Electronic Fund Transfer (EFT)
– e-purchasing/e-procurement (B2B/B2C)
• Improving customer service
• Concentration of ownership
• Outsourcing inventory management
• Cross-docking
• Postponement
• Increasing environmental concerns
Changes to Aggregate Stocks
• Changing views of stock– From “measures of wealth” to “cost minimization”
• Aggregate national stocks
• Effects of business cycle
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Aggregate stock as a
percentage of GDP for the UK
US Inventory
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
199
2_1
199
2_3
199
3_1
199
3_3
199
4_1
199
4_3
199
5_1
199
5_3
199
6_1
199
6_3
199
7_1
199
7_3
199
8_1
199
8_3
199
9_1
199
9_3
200
0_1
200
0_3
200
1_1
200
1_3
200
2_1
200
2_3
200
3_1
200
3_3
200
4_1
200
4_3
200
5_1
200
5_3
200
6_1
200
6_3
200
7_1
200
7_3
200
8_1
200
8_3
200
9_1
200
9_3
201
0_1
201
0_3
201
1_1
201
1_3
201
2_1
201
2_3
201
3_1
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US Inventory/GDP
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%199
2_1
199
2_3
199
3_1
199
3_3
199
4_1
199
4_3
199
5_1
199
5_3
199
6_1
199
6_3
199
7_1
199
7_3
199
8_1
199
8_3
199
9_1
199
9_3
200
0_1
200
0_3
200
1_1
200
1_3
200
2_1
200
2_3
200
3_1
200
3_3
200
4_1
200
4_3
200
5_1
200
5_3
200
6_1
200
6_3
200
7_1
200
7_3
200
8_1
200
8_3
200
9_1
200
9_3
201
0_1
201
0_3
201
1_1
201
1_3
201
2_1
201
2_3
201
3_1
Stock level in a business cycle