Does your organisation have stocks of materials or equipment for you and your team to use?

Transcription

1 Controlling stock Does your organisation have stocks of materials or equipment for you and your team to use? Is there any system for controlling how much you have or when it is re-ordered? Controlling stock is an important way of ensuring resources are used effectively. In Keeping organisations supplied you learnt that resources should be stored safely, securely, tidily and economically. This is to protect the resources and the people who use them. In this session you will learn more about the need to store resources economically. This is not just about the cost of the warehouse or stock room itself. It is also about the cost of the resources held in them. Resources cost money to buy. All the time they are being stored they are a burden on the organisation. In this session you will learn why. The stock of resources, particularly of materials, is often described as inventory. It is used to refer to the value of the stock of materials that is being held by an organisation. This is the price of each item multiplied by the quantity. So ten reams of paper (a ream is a pack of 250 sheets) bought for 2.35, is an inventory of (10 x 2.35). Page 1

2 Why does inventory matter? Most organisations hold stocks of materials which add up to a lot of money. This money is tied up in the stock and can t be used for anything else. Inventory also affects an organisation's cash flow. Cash flow is the amount of money coming into an organisation less the amount going out. An organisation which is buying in more goods and services than it is selling may have cash flow problems - money is flowing out faster than it is flowing in. Imagine a bath with the tap on but the plug out. Water flows in and water flows out. If the water flows out faster than it flows in, the bath will gradually empty. The same thing happens to an organisation s bank account. By reducing how much it buys, it can slow down the outflow. Cash flow can be a particular problem when new products are being introduced. Components have to be bought, assembled and put in stock before anything is sold. If that money has to be borrowed then the cost of inventory has to include the interest on the money to hold the stock, as well as the cost of the stock itself. Cash flow is like a bath with the tap on and the plug out. Holding down inventory reduces this borrowing cost. This is done by keeping the amount in stock down to the minimum level. This is why JIT (which you learnt about in the BS2 session Keeping organisations supplied) is used. Organisations have to keep a balance between having as little stock as possible to avoid stopping production or losing sales, and as much as possible to always keep production and sales going. Case Study Tina is a team leader at Holden s Ltd. Holden s produce electronic components for various manufacturers. The company has developed a revolutionary new product which can be used in the electronic control systems of domestic appliances, like washing machines and spin dryers. Tina has been asked to lead the team which will assemble this new (Continued on page 3) Page 2

3 product and she is currently training the team to do this. The company has been buying in components for her team to use and the production manager, Ken, is keen for her to get the production line working at full speed. Ken: I know you re doing a good job Tina, but we really must get this line operational soon. We ve got about 50,000-worth of components in stock now, and the Finance Director is on my back because we re not producing anything sellable yet. Tina: I know you want us to get going, but it s not easy. The assembly is really difficult and the team are all new. I did say we should have chosen experienced people. It would be so much easier to train them. Ken: I know, but we can t afford to get behind with everything else as well. We need the experienced people on the other lines to produce the cash to pay for the costs of this new operation. The importance of stock control As you learnt in the last session, stock control can help the organisation trace resources as they are received and used. Stock control is the system for recording what resources have been received and issued, what is currently in stock and where it is located. Good stock control means that the organisation knows what it has in stock. It also knows what it has used, and when. That helps it plan better and ensure that it keeps its stock levels to the minimum. Setting re-order levels Stock control can also help to identify when stocks are getting low and need to be replaced. To do this successfully the organisation has to set re-order levels These are the levels of stock at which new supplies are ordered. Re-order levels are useful even when there is no formal stock control. They can be set for any items which may run out and need replacing. Re-order levels should be based on: The time it takes suppliers to deliver. Some goods and services are available on demand. A builder can expect to get sand or cement from a builders merchant as it is needed. Some office equipment suppliers guarantee same day delivery. Page 3

4 That means that an organisation doesn't need to order its basic office stationery until it has virtually run out. But the supplier of a specialised component which is made to order may need three months to deliver items. The supplier needs time to buy materials and schedule production. The lifespan of the resources. Some goods are seasonal - fresh produce may not be available in the middle of winter. Some goods have very short lives, and should only be ordered when you are certain they are going to be needed. Stocks of anything that can deteriorate need to be carefully managed to avoid waste. An obvious example is fresh food. Food is a perishable good, which means that it can perish or go bad if it isn t used quickly. The minimum size of an order. The minimum size of the order can reflect the cost of delivery or of setting up to produce the items. An office supply company may have a minimum order value of 30 for free delivery but a company in Taiwan supplying electronic components may require a complete container-load to be ordered, worth several thousand pounds. The availability of alternative suppliers or items. The office supply company is selling standard goods in competition with many other suppliers. If it can't deliver, there are plenty of others that could. This makes it easy to run stocks right down. If the items are made solely for the customer, it may be very difficult to find anyone else to produce them. That makes the supplier s ability to respond to orders so critical in setting reorder levels. The importance of the goods for production or sales. Does it matter if you run out? Some items are so important that not having them available means that many other things can't happen. Just because they are important doesn't mean they are going to be expensive. The cheaper they are, the less reason there is for letting stocks get too low. If they don't cost much, an organisation can afford to have high stock levels, just to reduce any risks of running out. The cost of the items. Expensive items need to be watched most carefully, because of the cost of holding stock. Re-order levels may be set lower than would be the case for cheaper Page 4

5 items, to run stocks as low as possible before new deliveries arrive. You may not be involved in setting re-order levels, but you may well be affected by them. If you think about the: 1. delivery time, 2. lifespan of the resource, 3. any minimum order sizes, 4. the availability of alternative suppliers, 5. the importance, and 6. the cost of the resource you will understand why re-order levels are set as they are. Case Study Ellie leads the administration team in a solicitor s office. She is responsible for ordering office stationery. In order that they don t run out of important items she decides to set re-order levels for them. Most of the stationery is kept in two large cupboards. For some items she puts a notice on the shelf telling team members to warn her when stocks reach a certain number. For various types of paper, she sticks some tape on the side of the cupboard to show the point at which each type needs to be re-ordered. Some expensive items, like toner cartridges for printers, are kept in a locked cupboard. If Ellie buys more than 10 she can get a discount, but she s not sure it s worth holding so many in stock. She keeps a record of when each one was ordered and when they are issued. This helps her to see how fast they are used and whether it s worth buying in larger quantities. Rotating stock The lifespan of the resource can be particularly important when setting re-order levels. This is because stocks of perishable goods need to be kept as low as possible. You can see that a restaurant or greengrocer would want the oldest food to be used or sold first. Taking goods out of stock in the order they went in is called a first in, first out (or FIFO) system. The first item used or sold is the oldest one there is (the first one to have gone into stock). For example, staff in Page 5

6 supermarkets put new stock on the back of shelves to encourage customers to take the older stock from the front first. Even where materials aren't perishable, this is still good practice. Most things deteriorate with time. This is why organisations aim to rotate stock - to move items in and out of stock, in turn, so that the oldest items are used or sold first. Read the case study. Case Study Shahan leads a team repairing public telephone boxes. He and his team each have a stock of replacement parts on their vans. They carry these with them to repair call boxes that are out of order. The team are all receiving a new fleet of vans and one Friday they all meet at the depot to transfer their tools and materials from the old to the new. As they do this, several find that they have got boxes of components that are quite old. Some items have gone rusty, others have fallen through holes in the boxes as these have started to perish. Shahan suggest that they sort through the stock and throw away anything that it not useable. He also suggests that they put the older items on the top of newer stock, and try to use it first. At the end they have filled several boxes with unusable parts. Some of these are quite expensive items and Shahan suggests that everyone tries to avoid filling their new vans up with more than they will need. He tells them that the items are safer in the stock room, where they can control the order in which they use things. Exercise What system exists to re-order the stocks that your team uses? Do you rotate the stocks that you use to ensure that older items don t get left in stock? If so, how is that organised? Page 6

7 Your role as a team leader Organisations always have to find the right balance between: having as much stock as possible, to ensure that they can operate effectively; and as little as possible, to keep the costs of inventory down. As a team leader you have responsibility for ensuring that your team keeps to any organisational procedures to control stocks of resources. You should help to keep stocks of resources that you use as low as possible, without risking operational problems. Always warn your manager if you think that too few or too many resources are being held in stock. Page 7

8 Comprehension Check Complete the following exercises. Refer back to the session if necessary. A. What are the six main factors which shape the re-order level for an item? B. Complete each sentence. Circle the letter in front of the answer. 1. Cash flow is the: a. speed with which bills have to be paid. b. the amount of money the bank has lent your organisation. c. the balance of money coming in to and going out from the organisation. 2. Stock control is: a. the system for recording resources being delivered, stored and used. b. the system for securing stock so that it isn t lost or stolen. c. the system for recording the issue of purchase orders. 3. A re-order level is: a. the number of items that must be ordered from a supplier. b. the number of suppliers who can supply an item. c. the level of stock at which an order is issued. 4. Stock rotation means: a. turning stock round on the shelves. b. using stock in the order it was supplied. c. keeping a small stock of items in case of emergencies. 5. FIFO means: a. First In, First Out. b. First In, Final Out. c. Final In, First Out. Page 8

9 Making Connections Answer the questions following the case. Ram was having a bad week. On Monday his manager said that he would have to have a smaller team as the company needed to save money. On Tuesday he lost the key to the stationery cupboard and had to ask his manager if he could get a new one cut. On Wednesday he opened the stationery cupboard to find that they were almost out of paper with the company s letter heading on it. And today, Thursday, his manager said that they had to send a letter to all 2,000 customers, to tell them about some price rises. Ram explains that they will have to wait for two weeks for new headed paper to send the letter. His manager gets very angry. He asks Ram why he let stocks get so low. Ram says that he was told last month that he had too much stationery and that he should get the amount down. His manager says that he didn't mean that he should lose the key so nobody would know what he had! He points out that the main problem was that he had bought nearly six months supply of copier paper. This was stacked up in the back of the office because there was nowhere else to put it. Ram says that he got it very cheaply, and they would have been silly to turn the chance down. What advice would you give to Ram about his stock control? What should he think about when he decides on how much to buy and to hold in stock? Page 9

10 Think and Apply How well do you use the skills in this session? Think about the resources which you and your team use. How well are stocks controlled? Is there anything you or your team could do to improve the way that stock is controlled? If so, what action could you take to encourage that improvement? 1. Read the list of skills. Tick the boxes to show your strengths and weaknesses. Skills strengths < > weaknesses I m good at this I m quite good at this I m not so good at this I m quite poor at this understand why stock control is so important explain why re-order levels are set the way they are explain why it is good practice to rotate stocks 2. Do you want to improve any of these skills? 3. How do you plan to improve the skills you listed in question 2? (You might want to discuss this with your line manager or your tutor/mentor/coach.) Page 10