INVENTORY MANAGEMENT AND CONTROL

“The more inventory a company has, the less likely they

will have what they need.”

―Taiichi Ohno―

STOCKS AND INVENTORIES

Objectives:

• define the main terms used for inventory

management;
• describe the importance of stocks in an
organization;
• discuss the reasons for holding stock;
• review the role of stocks in a supply chain;
• explain the benefits of coordinated stocks in a
supply chain;
• describe some important business trends that Stocks and Inventories
affect stocks;
• Customer and supplier can be internal and external
• say how views of stock have changed over time;
• describe the changing pattern of stocks at a • The cost of holding stock is about 20 percent of its
national level. value a year.

Stocks of Materials • Organizations put a lot of effort into controlling these

costs through careful inventory management. This
Definition of terms function is also called stock control or inventory
o Stock – consists of all the goods and materials that control.
are stored by an organization. It is a store of items • Inventory management is the function responsible
that is kept for future use. for all decisions about stock in an organization
o Inventory – is a list of the items held in stock.
o Item – is a distinct product that is kept in stock: it is • It makes decisions for policies, activities and
one entry in the inventory. procedures to make sure the right amount of each
o Unit – is the standard size or quantity of an item. item is held in stock at any time

Reasons for holding stocks

• Giving a buffer

Stocks are expensive, because of the cost of tied-

up capital, warehousing, protection, deterioration,
loss, insurance, packaging, administration and so on.

WHY DO ORGANIZATIONS HOLD STOCK?

• Based on the need for a buffer, or cushion, between

supply and demand
• Angela’s bakery shop
• Two consecutive operations on an assembly line
• These two examples show how stock gives a buffer
Stock Cycle
between supply and demand. It allows for variation
Each stock cycle has the following elements: and uncertainty in both supply and demand.
• An organization buys a number of units of an item
from a supplier.

• At an arranged time, these units are delivered

• Unless they are needed immediately, the units are

put into storage, replenishing the stock

• Customers, either internal or external, create

demands for the item.

• Units are removed from stock to meet these

demands. ORGANIZATIONS HOLD STOCKS TO DO:
• At some point, the stock gets low and it is time for
• Allow for demands that are larger than expected or
the organization to place another order.
at unexpected times
• Allow for deliveries that are delayed or too small refineries, chemical works, plastics companies,
• Allow for mismatches between the best rate of manufacturers, importers, wholesalers and retailers
supply and actual rate of demand before finishing up in your bathroom
• Decouple adjacent operations
This series of activities and organizations forms
• Avoid delays in passing products to customers.
the product’s supply chain.
• Take advantage of price discounts on large orders.
• Allow the purchase of items when the prices is low • The function that has overall responsibility for
and expected to rise. moving materials through the supply chain is logistics
• Allow the purchase of items that are going out of or supply chain management.
production or are difficult to find. • A supply chain consists of the series of activities and
• Make full loads for delivery and reduce transport organizations that materials move through on their
costs journey from initial suppliers to final customers.
• Give cover for emergencies • Logistics or supply chain management is the
function responsible for this flow of materials

Types of Stocks

Raw materials - which have arrived from suppliers and

are kept until needed for operations

Work in progress - units currently being worked on;

Finished goods - are waiting to be shipped to customers.

Spare parts - for machinery, equipment, etc.,

Consumables - such as oil, paper, cleaners, etc

Cycle stock - normal stock used during operations

Safety stock - reserve of materials that is held for • An empirical observation suggests that the aggregate
emergencies. amount of stick held in a number of locations is:

Seasonal stock - used to maintain stable operations

• AS (N2) = AS (N1)
through seasonal variations in demand

Pipeline stock - currently being moved from one location Where:

to another N2= number of planned future facilities
Other stock - consists of all the stocks that are held for N1=number of existing facilities
some other reason.
AS (N1) = aggregate stock with N1 facilities
Importance of Stocks
• The best shape of a supply chain depends on many
• There is a huge variation in the stockholdings of factors, such as product’s value, bulk, perishability,
different industries and organizations. availability and so on.
• It also depends on the organization’s aims and
business strategy.
• Broadening the chain and adding more
intermediaries gives higher customer service, but
increases costs and reduces the organization’s
control
• Making the supply chain long and narrow can reduce
costs, but the organization loses some control and
customer service does not improve.

Taking the following steps to achieve best shape of

supply chain.
Stocks and supply chain • Logistics strategy
• Examine current operations
• Shape of supply chains
• Design an outline structure for logistics
• Each becomes a customer and a supplier
• Make detail plans
EXAMPLES: • Get final approval
• Finalize building design
1. Milk moves through a farm, tanker collection, dairy,
• Finalize equipment design
bottling plant, distributor and supermarket before we
• Fit out facilities
buy it.

2. A tooth brush starts its journey with a company • Open and receive stock, run final tests of all systems,
extracting crude oil, and then it passes through pipelines, finish training and begin operations.
• Sort out teething problems and get things running • Strategic alliance or partnership: involves a
smoothly. commitment over an extended time period and a
• Monitor and control, ensuring that everything works mutual sharing of information and the risks and
as planned, measure, performance, revise targets, rewards of the relationship.
etc.
 These are only guideline to suggest the
Benefits for Outsourcing Inventory Management
decisions in designing a supply chain.
• If an organization wants fast delivery, it has • Lower fixed costs
warehouses close to final customers; • Specialists’ suppliers
• If it wants the lowest costs, it concentrates stocks in • Guaranteed high levels of customer service
very large, centralized warehouses that are inevitably • Flexible capacity
some distance from customers. • Lower exposure to risk
• Increased geographical cover and local knowledge.
Cooperation within a supply chain
• A convenient way of working in new markets.

• Cross-docking: materials arrive at the receiving area

and are transferred straight away to the loading area
where they are put onto delivery vehicles for
customers.

• Postponement - package to order, where a company

keeps a product in stock, but only puts it in a boz
written in the appropriate language when it is about
to ship an order.

• Increasing environmental concerns: air pollution,

water pollution, energy consumption, urban
development and waste disposal

Changes to aggregate stocks

• Changing views of stock

• Aggregate national stocks
• Effects of the business cycle
• The total amount of stick in the supply chain rises
from 40 units to 190 units and this will take 15 weeks
to return to normal.
• The ways to avoid such problems is to coordinate the
stocks and flow of materials.

This brings a series of benefits:

o Lower costs - with lower stocks, less expediting,

balanced operations, economies of scale, etc.

o Improved performance - with more stable

operations, better planning, higher productivity of
resources, etc.

o Improved material flow - with co-ordination giving

faster and more reliable movements.

o Better customer service - with shorter lead times and

faster deliveries

o More flexibility - with organizations reacting faster to

changing conditions.

Achieving cooperation in the supply chain

• Developing a valuable working relationship

• Formal arrangement with a written contract setting
out the obligations of each party.