22Inventory management

Transcription

1 22Inventory management Activity 22.1 (page 423): Stock management at Sportswize Equipment plc 1 Explain why, according to Jack, this business needs to hold stocks of raw materials and components. [6] Jack argues that the business needs to hold stocks of raw materials and components to ensure that production of sports equipment is never held up by a lack of relevant stock. This approach will ensure that machinery is never idle due to a stock-out. Thus, if a sudden increase in production of tennis rackets is required, then there will be metal frames in stock to allow this to occur. This will make it easier for Sportswize to meet customer orders quickly. 2 Explain the two other types of stock held by Sportswize. [4] Finished goods Sportswize holds stocks of footballs, football shirts and boots and other sports equipment ready to be sold to customers. Work-in-progress semi-finished goods that are still undergoing production processes. 3 Using your knowledge of batch-production methods, explain why stocks of certain goods are likely to be high at particular times. [6] Batch production involves the production of a group of identical items all at the same time. The group moves from one production process to another until all stages of production are complete. The entire group completes one stage of the process before any items move on to the next stage. As a consequence, there is a high level of work-in-progress as the production process requires each item in the batch to be stored, waiting for the other items in the batch to complete that process. 4 Assume current interest rates are at 10% per year and capital not used for holding stocks would be left in the bank. Calculate the opportunity cost of increasing stocks from $3 million to $7 million in one year. Explain your result. [5] Opportunity cost is the next-best alternative foregone. Increasing stock from $3 million to $7 million will lead to an outflow of cash which could, otherwise, have been earning interest in a bank account. At an interest rate of 10%, the lost interest as a result of the increased stock holding over the year is 0.1 $4m = $400,000. 1

2 5 Do you think Sportswize has taken the correct decision to increase stocks of finished goods at this time especially of football equipment and clothing? [10] Sportswize has increased its stock holding from $3 million to $7 million: an increase of 133%. Possible arguments for and against this decision include: Potential benefits of increasing stock levels By increasing stock levels, Sportswize will be well placed to take advantage of an economic upturn and demand generated by the World Cup. As production methods are old-fashioned, Sportswize might struggle to meet demand if demand increases and this would result in lost sales. No danger of stock-out and the costs associated with it. By increasing stock levels, the factory is kept working at full capacity. This will benefit workers by ensuring there is plenty of work to do. This will enhance industrial relations at the firm. Disadvantages of increasing stock levels The finance director is concerned about the stock-management policy. Producing and holding the stock will place a strain on Sportswize s cash flow. Raw materials and components, such as boot studs, will have been purchased. This will lead to a cash outflow. It may be some time before stock generates any cash inflows. Even if the state of the economy improves, it will take time for retailers to order and pay for football equipment. There is a danger of being left with unsold stocks of football equipment. Sportswize has built up stocks in anticipation of increased demand due to the World Cup; however, if this demand does not materialise or Sportswize has produced too much equipment relating to unsuccessful teams, then it will find them difficult to sell. This would potentially lose Sportswize a significant amount of money. Are economic conditions right for building stocks? It appears that the economy has not yet picked up; therefore, demand will be low. The opportunity cost of holding stock should also be considered: that is, what else Sportswize could have done with the resources it has devoted to producing the football goods. Evaluation may consider: Comment could be made on the risk that Sportswize is taking by stretching its finances for an uncertain return. Much will depend on the financial resources of the business and its ability to cope with an unfavourable outcome. Activity 22.2 answer provided on Student s CD-ROM. Activity 22.3 (pages 426 7): Nissan cuts stock to almost zero 1 Examine the benefits to both Nissan and Toyota of: the JIT system of stock control that both use their reliance on just one supplier for each major component. [12] 2

3 JIT system of stock control Nissan has been able to reduce stock holding of parts to just 1.6 days worth, on average. This reduces the costs associated with holding stock: less warehousing cost less security cost working capital benefits, i.e. cash outflows delayed less handling cost as components go straight on to the production line space that would have been used for storage can be used for production. However, there are potential problems. If suppliers are unreliable, e.g. a delivery is late or contains faulty component, production will quickly stop and machinery will be idle. Using one supplier Benefits include: Toyota has reduced its costs by $820m in each of the past three years as a result of using single suppliers of major components. Economies of scale possible as Toyota and Nissan will be purchasing components in greater quantities. Thus, the unit cost will be reduced. A stronger relationship with the supplier can be built, thus ensuring that the supplier is reliable. The supplier may become dependent on Toyota. This increases the ability of Toyota to negotiate a good price. The supplier can be integrated into the design process, thus ensuring that new components are suitable when launching new models. Disadvantages include: If the supplier has a problem, e.g. a fire, then there is no back-up and production will halt. 2 Using evidence drawn from the articles and from your own knowledge, examine the potential drawbacks to the adoption of the JIT concept for manufacturing businesses. [12] Relevant issues include: Firms have to be certain that the supplier is reliable, as any disruption to supplies will cause production to be halted as the manufacturer holds very low levels of stock. The manufacturer may need to invest money in building a relationship with the supplier. Nissan, for example, works closely with suppliers and management expertise to help the suppliers adapt to the demands of JIT. JIT highlights weaknesses in the production process and organisations have to be flexible to be able to solve problems. A zero-defects approach to manufacturing is necessary as there is no spare stock of raw materials, components and finished goods. There is no buffer stock to cover up for inefficient workers, inflexible people and equipment. It is important to be able to predict demand to avoid delay in meeting the demands of customers. If demand is erratic, JIT is less likely to work. Where seasonal demand is an issue, it is more difficult to adopt JIT principles; it may be necessary to build up stocks in advance of peak demand. JIT is supported by expensive IT systems. For example, Nissan has to be able to communicate its stock needs to suppliers on an almost continuous basis. Delivery quantities will be small and frequent. Therefore, delivery costs are increased. For the system to work, it may be necessary to have suppliers on site. 3

4 Evaluation may consider: JIT cost savings must be balanced against the risk of running out of stocks. Revision case study 1 (page 428): MFLEX to expand operations in Malaysia 1 Explain the terms: increase in capacity increase in scale of operation. [4] Increase in capacity this refers to an increase in the maximum possible output of MFLEX over a given period of time. Increase in scale of operation an increase in the scale of operation means that MFLEX is increasing its land, labour and capital inputs. 2 Analyse the benefits to MFLEX of being able to respond quickly to its customers demands for JIT supplies of printed circuits and other products. [6] There will be increased customer satisfaction and, therefore, more orders in the future. Customers will be able to reduce their costs and can offer better prices to consumers. This will increase demand for MFLEX. Being responsive and flexible will give MFLEX a competitive advantage in the market. Greater sales may result in increased profitability. 3 Analyse the reasons why MFLEX is also insisting on JIT deliveries from its main suppliers. [6] To enable MFLEX to be more responsive to meet customer demands this could be achieved by holding large stocks of components and materials. However, that would increase its costs and the prices it charges to customers. JIT stock control offers flexibility and the capability to be responsive to customer demands without the high costs of holding stock. To reduce costs of stock holding costs include warehousing, security and obsolescence as this is an industry in which there is rapid technological change. To release working capital for more productive use holding stock has an opportunity cost. 4 Explain three factors that MFLEX must put in place before its JIT strategy will work effectively. [6] MFLEX must build a strong relationship with suppliers. Reliable suppliers will be required to ensure that components are delivered as and when needed. Typically, JIT producers will focus on working with one supplier for each key component. MFLEX has signed exclusive deals with some suppliers. Working 4

5 with one supplier helps ensure that the supplier understands the manufacturer s needs, and makes the relationship more mutually beneficial. IT equipment is necessary to facilitate communication between MFLEX, its suppliers and customers. Using electronic data exchange speeds up the process of ordering components. MFLEX s production lines can be in constant contact with suppliers to increase responsiveness. MFLEX must adopt a zero-defects mentality. All 125 workers at the new factory must take responsibility for quality, as there is no buffer stock to fall back on. If mistakes are made, then the customer s order will be delayed. 5 Assess why JIT is not necessarily appropriate for all firms in all situations. [10] Reasons include: Firms may have to build stock over a long period of time in order to be able to meet peak demand. If this is not done, then the firm would need very large production capacity to cope with the peak demand; however, this would mean that capacity utilisation would be low at other times of the year. Rapid inflation will mean that the price of components is rising from day to day. It is, therefore, worthwhile to bring purchases forward to avoid higher costs at a later date. There could be long lead times and unpredictable demand. If demand cannot be accurately predicted and supplier lead times are long, then the firm cannot be responsive to customers without holding stocks. It may not be possible in the short term to find a reliable supplier. Purchasing in bulk may secure substantial discounts which outweigh the costs of holding stock. Transport costs may be too high for frequent deliveries. This will depend on distance from supplier, the nature of the supplies and the transport infrastructure. Essay 1 a Explain why manufacturing businesses need to manage stock efficiently. [10] Efficient management of stock will balance the costs of holding stock against the cost of stock-out. Cost of holding stock: warehousing costs, e.g. security obsolescence opportunity cost what else could be done with storage space, for example impact on cash flow loss and damage. Cost of stock-out and small stock quantities: Lost sales are possible. If customers are let down, then they will purchase elsewhere and may not return in the future. Idle resources, e.g. labour and capital equipment, can result. Running out of stock, even the most insignificant component of the production process, will bring production to a halt and result in an inefficient utilisation of labour and machinery. 5

6 Frequent orders of small quantities may mean that the firm loses out on purchasing economies. Thus efficient stock management will help ensure that: Customer needs can be met. Stock wastage is minimised. Costs are reduced. b Discuss whether a JIT stock-control system should be used by a soft drink manufacturer that purchases fruit and other supplies from many businesses. [15] Definition of just-in-time (JIT) stock control: stock arrives just as it is needed in production and completed orders are produced to order. A number of factors will determine whether JIT stock control is appropriate, including: Predictability of demand for the firm s soft drinks the more predictable demand is, the easier it is to plan stock deliveries to meet demand. Is demand seasonal? If demand is highly seasonal, then a firm may need to build up stocks of a particular soft drink in the period before peak demand. This will also depend on the capacity of the firm. Lead time from suppliers if suppliers have very short lead times, then JIT stock control is more likely to be successful. Reliability of suppliers. As fruit is an agricultural product, the producers cannot guarantee availability of output because the weather and disease will influence crop yield. Stock-holding costs versus costs of stock-out. Cost of setting up JIT system specialist IT equipment will be needed to facilitate JIT. Evaluation may consider: JIT benefits and problems explained and weighed up in the context of a soft drinks manufacturer. Better answers will recognise that JIT may be suitable for some soft drinks manufacturers but not others, due to issues such as location and size. 6