Following this presentation you will: - Understand why business hold stocks. - Recognize the need for optimum stock levels. - Understand different stock control methods.

1. BUSINES
S&MANA
GEMENTby: Shadi A. Razak 1
Production
Planning

2. Objectives
• Understand why business hold stocks and its
cost
• Recognize the need for optimum stock levels
• Explain different stock control methods
• Differentiate between just-in-case (JIC) and
just-in-time (JIT) stock control
• Make appropriate calculations to support
decisions to make or buy
by: Shadi A. Razak 2

3. Structure
• Introduction
• Stock Cost
• Stock Control Methods
• Outsourcing
by: Shadi A. Razak 3

4. Production planning
by: Shadi A. Razak 4
INTRODUCTION

5. Production planning
by: Shadi A. Razak 5
INTRODUCTION

6. Production planning
by: Shadi A. Razak 6
INTRODUCTION

7. Production planning
• Usually cover:
– Stock control
– Quality control
– Quality Assurance
– Man power and resources management
– Cost management
by: Shadi A. Razak 7
INTRODUCTION

8. Stock (Inventory)
• Materials and goods required for the
production of and supply of products to
customers
by: Shadi A. Razak 8
INTRODUCTION STOCK COST

9. Stock (Inventory)
• Raw materials
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INTRODUCTION STOCK COST

10. Stock (Inventory)
• Finished goods
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INTRODUCTION STOCK COST

11. Stock cost
• Major element of the production cost:
– Storage cost: Warehouse, security, etc..
– Deprecation (Obsolescence) cost: Wear and tear,
shelf-life, etc..
– Opportunity cost: zero revenue earned on stocks
sitting around!
– Administration costs: monitoring stock levels,
ordering and processing, etc..
by: Shadi A. Razak 11
INTRODUCTION STOCK COST

12. Optimum stock level
• Major element of the production cost:
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INTRODUCTION STOCK COST
Optimum

13. Optimum stock level
• Factors affect the optimum stock level:
– Market
– Final product
– Stock
– Finance
– Infrastructure
– Human resources
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INTRODUCTION STOCK COST

14. Economic order quantity
• Major element of the production cost:
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INTRODUCTION STOCK COST
Economic order quantity
(EOQ)

15. Stock cost
• Business avoid acquiring high stock cost by:
– Stock rotation: The movement of older stock
ahead of new stocks
– Stock-out: Minimising the level of stock without
ever disrupting the production process.
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INTRODUCTION STOCK COST

16. Stock control
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INTRODUCTION STOCK COST STOCK CONTROL METHODS
Stock Level
Time
Maximum Stock Level
Minimum Stock Level
Re-order level
The Traditional Stock Control Model
Maximum stock levels achieved after
stock delivery. Stock levels decline during
production.
When the stock level reaches the re-order level, it triggers a
new order. The difference between the time of re-order and
delivery is the ‘lead time’.
Lead Time
Re-order
triggered
Buffer Stock
Re-order
Amount

17. Stock control
• Benefit businesses:
– Ensure stock availability to meet customer needs
– Help to cope with unplanned changes in demand
– Smoothens out the volatility of lead times
by: Shadi A. Razak 17
INTRODUCTION STOCK COST STOCK CONTROL METHODS

18. Stock control
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INTRODUCTION STOCK COST STOCK CONTROL METHODS

19. Just-in-case (JIC)
• Holding high stock levels
of reserve just in case of
need, such as: an
unexpected upsurge in
demand or a production
problem.
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INTRODUCTION STOCK COST STOCK CONTROL METHODS

20. Just-in-case (JIC)
• Advantages:
– Economies of scale
– Reduce pressure on cash flow
– Ability to meet sudden demand
– Provides spare parts when needed
– No delivery issues
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INTRODUCTION STOCK COST STOCK CONTROL METHODS

21. Just-in-case (JIC)
• Disadvantages:
– High opportunity cost
– High storage cost
– Risk of damage or outdated products
– Space used for storage cannot be used for other
functions
by: Shadi A. Razak 21
INTRODUCTION STOCK COST STOCK CONTROL METHODS

22. Just-in-time (JIT)
• Stock only brought in from suppliers as and
when its required. The aim is to hold low (to
zero) level of stock
by: Shadi A. Razak 22
INTRODUCTION STOCK COST STOCK CONTROL METHODS

23. Just-in-time (JIT)
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INTRODUCTION STOCK COST STOCK CONTROL METHODS

24. Just-in-time (JIT)
• Advantages:
– Reduce costs (storage and opportunity)
– Reduce capital invested
– Improve the business working capital
– Creates more space for other business functions
– Creates closer relationship with suppliers
by: Shadi A. Razak 24
INTRODUCTION STOCK COST STOCK CONTROL METHODS

25. Just-in-time (JIT)
• Disadvantages:
– Increase in delivery cost
– Decrease economies of scale opportunities
– Risk of production delay
– Business depends on its suppliers
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INTRODUCTION STOCK COST STOCK CONTROL METHODS

26. Capacity utilisation
• Reflects the proportion of maximum output
capacity currently being achieved
• Its calculated by:
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INTRODUCTION STOCK COST STOCK CONTROL METHODS OUTSOURCING

27. Capacity shortage
• The demand for a business’s products exceeds
production capacity.
• In case the business is working at full capacity,
yet it have capacity shortage, they:
– Outsource production
– Offshore production
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INTRODUCTION STOCK COST STOCK CONTROL METHODS OUTSOURCING

28. Outsourcing (Sub-contracting)
• When using another business ‘Third party’ to
undertake part of the operation rather than
doing it.
• When the third party is in another country, we
call it ‘Offshoring’.
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INTRODUCTION STOCK COST STOCK CONTROL METHODS OUTSOURCING

29. Outsourcing (Sub-contracting)
• Advantages:
– Improve capacity utilisation
– Allow business to focus on its core activities
– No major capital investment is required
– Possible reduce in cost by cost restructuring
– Possible improve in quality
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INTRODUCTION STOCK COST STOCK CONTROL METHODS OUTSOURCING

30. Outsourcing (Sub-contracting)
• Disadvantages:
– Business dependent on supplier
– Lose of control over quality of output
– Communication barriers and Synergy difficulties
– Possible increase in costs (administration and
transport)
by: Shadi A. Razak 30
INTRODUCTION STOCK COST STOCK CONTROL METHODS OUTSOURCING

31. Outsourcing (Sub-contracting)
• Deciding whether to outsource of not is
governed by the cost of:
– To buy (CTB) the product/service:
CTB = P x Q
– To make (CTM) the product/service:
CTM = FC + (VC x Q)
P: product cost; Q: quantity;
FC: fixed cost; VC: variable cost
by: Shadi A. Razak 31
INTRODUCTION STOCK COST STOCK CONTROL METHODS OUTSOURCING

32. Summary
• Explained why business hold stocks
• Discussed advantages and disadvantages of
different stock control methods
• Explained the importance of optimum stock
level and stock handling cost in business
• Discussed the appropriate calculations to
support decisions to make or buy
products/services
by: Shadi A. Razak 32
INTRODUCTION STOCK COST STOCK CONTROL METHODS OUTSOURCING