A) Interpretation of stock control diagram
Lead time – This is the difference between the stock being reordered and it arriving.
Minimum stock level – This is the minimum amount of stock that a business will hold.
Re-order level – This is the point at which they order more stock.
B) Buffer stocks
Buffer stock – This is a certain amount of stock that is held in case of unexpected events or orders meaning that they can still be met without a delay.
The main benefit to a business having a buffer stock is so that they are able to reduce the risk of not being able to meet customer demand. This is due to the fact that the buffer stock will allow the business to meet any unexpected changes in demand. However, one of the costs of this is due to the fact that the business will have to spend lots of money storing these stocks and as a result of this may experience an increase in their average costs. This is especially detrimental due to the fact that the stock is unlikely to be used and therefore money could be wasted keeping a hold of buffer stock.
C) Implications of poor stock control:
- Increased costs – By having poor stock control it is likely to result in excess stock. Money will then have to be spent storing this or potentially getting rid of it if it has an expiry date. This will result in an unnecessary increase in the business’s costs. Furthermore, it will mean that money is tied up in stock when it could have been invested instead.
- Unable to meet demand – Poor stock control may result in the business not having enough stock in order to meet their demand. As a result of this, it is likely to result in a loss of customers who may be unhappy with the poor service. This is likely to damage the business’s reputation.
- Cash flow problems – By having money tied up in stocks it may mean that the business does not have enough cash to meet its current liabilities and therefore can lead to liquidity issues with the business. This will be shown by the business’s acid test ratio.
D) Just in time (JIT) management stock
Just in time system – A just in time system is a system where supplies are received as soon as they’re needed. Therefore there is no need for a business to hold any stock.
Just in time system benefits:
- Minimises wastes – Due to the fact that supplies are received when they’re needed there is no wastage. This is because it negates the problem of a business having too much or too little stock. This is likely to result in a reduction in the businesses average costs.
- Cost saving – As supplies are received when they’re needed it means that the business does not have to spend money holding onto stock. Therefore this will negate the need for the business to have storage facilities. This space could then be used in order to increase the output of the business e.g. another production line.
- Less capital tied up in stock – By incorporating a just in time system into a business it means that they do not have to have unnecessary amounts of stock. As a result of this, they will not have any capital tied up in stocks meaning that they can use it for better purpose e.g. investment which is likely to give them a rate of return on the money used.
Just in time system drawbacks:
- Difficult to incorporate – A just in time system can be very difficult to incorporate in some businesses due to the bi change business processes that it results in. Furthermore there are some industries where it cannot be implemented such as the food industry.
- High cost – There can be an extremely high cost of implementing the just in time system. This is due to the massive changes in production that will be required in order for the system to work. Furthermore, the suppliers will need to be located close to the business and therefore a lot of land is likely to be required.
- Risk of running out of stock – By using a just in time system the business runs the risk of running out of stock. This is especially the case if the business and suppliers do not have a good relationship. For example, if the supplier is not ready with the stock then it may result in the production process being brought to a halt which can be very costly to a business due to the loss of output it will result in.
E) Waste minimisation
Waste minimisation helps to reduce unit costs of production through improvements in efficiency.
F) Competitive advantage from lean production
Lean production is a management approach focusing on cutting wastage whilst making sure that products remain of sufficient quality. This helps to increase the efficiency of the business thus increasing the business’s profit margins. This will allow them to be more competitive either through lower prices or increased profit.