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Operational decisions and stocks
Materials management involves:
-the purchasing of stocks and their delivery
-the storing and control of stocks
-the issue and handling of stocks
-the disposal of surpuses
-the provision of information about stocks |
Stock Levels
Affected by
-Demand; buffer stock is used to describe stock held for unforeseen rises in demand or breaks in supply
-Stockpile goods
-Cost of stock holding
-Amount of working capital available
-Type of stock
-Lead time the amount of time if takes for a purchase to be placed, received, inspected and made ready for use
-External factors |
Stock Control
Economic order quantity Calculate the level of stocks which minimize costs; it takes into account the costs of holding stock which rise with the amount of stock held and the average costs of ordering stock which fall as the size of the order is increased
Fixed re-order interval This method ignores the economic order quantity, but ensures that stocks are "topped up" on a regular basis
Fixed re-order level This method involves setting a fixed order level which is repeated at varying time intervals
Two bin system Method involved dividing stock into two bins |
Methods focus on:
1. Re-order quantity how much stock is ordered when a new order is placed
2. Re-order level the level of stock when an order is placed
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The Nature of Stocks
Raw Materials and Components |
Work-in-progress |
Finished Goods |
Purchased from suppliers before production |
Partly finished goods |
To cope with changes in demand and stock |
Helps stop delays in production |
(happens in batch or flow production) |
Helps avoid the need to step up production rates quickly if needed. |
Back-up plan in case suppliers are sucky |
Assembly line |
Stock take involves recording the amount and value of stocks which the firm is holding; security reasons and to determine the value of total purchases during the year for a firm's accounts.
Computarized stock control
Having the business's entire stock on computer databases helps the company because it is an easy, fast and useful way of managing stock since different details may be reviewed fast in a computer |
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Cost of holding stocks
It can help improve business performance
Having too much stock may mean money is tied up unproductively, but inadequate stock can lead to delays in production and late deliveries
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-There may be an opportunity cost in holding stocks.
-Storage can also prove costly.
-Spoilage costs (quality, outdated, deteriorate)
-Administrative and Financial costs (placing and processing orders)
-Out-of-stock costs are costs of lost revenue. (loss of goodwill) |
Too much or too little stock
Too Much |
Too Little |
High costs |
Not being able to cope with unexpected changes |
Space |
Running out of stock |
Opportuity cost |
Not being able to cope with shortages of materials |
May result in unsold stock |
Lost production |
May result in theft by employees |
Placing orders may raise total ordering costs |
JIT and Stock Rotation
Just In Time Management; Stock Rotation is the flow of stock (FIFO and LIFO) |
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