The stock control system is responsible for the correct establishment of stock. When these levels are being established certain basic operational factors have to be considered and then reflected in the final stock figure. These factors are discussed below.
Operations need
This relates to the amount of stock needed by production, sales, distribution, maintenance and other departments over a certain period of time (eg weekly or monthly). The figure will be affected by overall demand and sales forecasts. In many cases information relating to stock usage in the past is supplied by stock record cards.
Shelf-life of stock
If an item has a very restricted shelf-life e.g fresh fruit) then the amount of stock that can be held will be controlled by its actual shelf-life period, unless special storage facilities can be arranged.
Delivery period
This relate to the time taken for the supplier to produce, dispatch and transport the goods needed to the store. The period of time will affect the level of stock needed to be held. Sufficient stock has to be purchased to last between one delivery and the next. The delivery period will depend on several important factors as follows:
(a) Are the goods imported?
(b) Are they ex-stock
(c) Do they have to be produced from an original specification?
(d) How far will the goods have to be transported?
(iv) Buffer/Safety stock:
Buffer stock refers to the extra stock a store holds to cover any unforeseen hold-ups in delivery or sudden changes in demand. The buffer stock will vary in size depending on how reliable deliveries are
and on the operational risk involved. In many organisation, 25% of the minimum stock level is regarded as being an adequate buffer or emergency stock.
Capital available
This is always a very important factor when establishing the level of stock held. If funds are not available to finance the stock level first established, it will have to be reduced.
Storage capacity
The amount of stock that can be held will be restricted by the actual physical capacity of the stores operation. In some cases where a special store is needed (e.g a refrigerated store) for items that need special storage, e.g meat, fresh vegetables, explosives, chemicals, etc., then the actual space available to store such items will be strictly limited by the capacity of the store. In some cases, excess stock can be stored outside warehouse units.
Stock Control System
There are three basic stock control systems: These are as follows:
(i) Fixed Order point system (fixed time and fixed quantity). A fixed order point system is based upon a re-ordering system that reacts when stock falls to a predetermined level of stock, the so-called re-order level.
(ii) Periodic review system (fixed time and variable quantity). Periodic review is based upon the system of stock being re-ordered at regular set intervals of time.
(iii) Programmes Ordering System. Gus Gilespie states that Different kinds of inventories require different stock management approaches. Examples are Material requirement planning(MRP) and Just in time(JIT). However, only the first control system is relevant for our purposes here.
Fixed Order Point System
The fixed order point system is used when the demand for stock is constant and known. The time and quantity to order is determined by a number of stock control levels. A stock control level is a predetermined quantity of stock to be held. When stock on hand falls to this predetermined quantity or stock level, certain action is taken. For example, when stock on hand falls to the reorder level, a fresh order, for a fixed or variable quantity, is placed with the suppliers.
Critical Levels in fixed Order Point System
Materials control have four (4) main critical levels that must be adhered to in order to avoid understocking and overstocking of material items. They are:
(1) Maximum stock level
(2) Minimum stock level
(3) Re-order stock level
(4) Re-order quantity
1. Maximum Stock level
This is the level above which a material should not exceed. This follows that at any point in time, the material in store will either be at that point or below it.
Maximum stock level essentially avoids over- stocking
Factors to be considered before setting the maximum stock level are:
* Consumption rate of the material
* The storage space
* Durability of the material
* Seasonability of the material
2. Minimum Stock level
This critical level is also referred to as”Safety Stock” or “Buffer Stock”.
The minimum stock level is the level below which material item should not fall, it is materials that should be found in stock at any point in time. Minimum stock level essentially avoids under-stocking.
Factors to be considered before setting the minimum stock level are:
* Rate of Consumption of the material item
* Lead-time
* Re-order level.
3. Re-order Stock level
Are-order level is the level at which purchase order are raised. The level is invariably higher than the minimum level but lower than the maximum level. The re-order level should be set in such a way that the minimum stock level would not be depleted before the next materials ordered for are received.
Factors to be considered before setting the Re-order level are:
* The minimum stock level
* The lead-time
* Consumption during lead-time
4. Re-order Quantity
The re-order quantity is the quantity of a material/item that is purchased anytime the purchase order is raised.
Factors to be considered before setting the Re-order Quantity are:
* The carrying cost (i.e depreciation, obsole-scence, interest foregone, breakages, pilferages, etc)
* Ordering cost: Cost of raising purchase order (ie Administrative costs, Transportation costs, Inspection costs,
purchase price costs, etc).
In addition to the above stock control levels, the followings factors should be considered in fixed order point system:
Lead time
Lead time is the time between when an action is initiated and that action is implemented. It is also the period of time when requisition is received by purchasing department and when the items to satisfy this need is finally received from supplier(s).
Progress level
When stock on hand falls to this level, a check should be made with the supplier as to the state of the outstanding orders.
Formulae
(i) Lead-time: The average delivery time, in weeks during a period.
(ii) Buffer stock: Policy stock in weeks multiplied by the usage per week.
(iii) Reorder level: Lead time (in units) + Buffer stock (in units)
(iv) Order quantity: The economic order quantity or the year’s usage, divided by the number of orders to place.
(v) Progress level: Buffer stock (in units)+ 1/2 lead time (in units)
(vi) Maximum stock: order quantity + Buffer stock.
Example Fixed order point system: predetermining stock control levels under a fixed order point system.
Information: XYZ material
Usage 20 per week (constant demand)
Lead time 4 weeks
Buffer stock 1 week
Number of order per year 6 ( 2 months stock per order)
Stock Levels
1. Lead time (4 weeks x usage per week = 80
2. Buffer Stock ( 1 week x usage per week = 20
3. Re-order level (sum of lead time and buffer stock) = 100
4. Order quantity (year usage divided by 6)
(52 weeks per year) = 174
5. Progress level (buffer stock + half the lead time (in units) = 60
6. Maximum stock (order quantity + buffer stock) = 194
Note: When stock fall to 100 units, an order for 174 units is sent to the supplier. When the level reaches 60 units the suppliers is contacted to check if goods will be delivered as per schedule. If goods are received on time the quantity in stock should rise to 194 (174 delivered and 20
buffer stock). If the quantity in stock rises above 194 (i.e maximum stock) action should be taken to explain why this has happened)
Cost of Under-Stocking
1. Stoppage of production
2. Wastage of space in rent
3. Loss of profit on sales expected during production stoppage
4. Loss of profit on future sales
5. Payment of wages
6. Cost of other fixed overhead
7. Additional cost of procurement
Cost Of Overstocking
1. Interest on capital tied up
2. Cost of storage space
3. Obsolescence, breakages and pilferages
4. Maintenance cost
5. Additional premium paid for insurance.
Right Quality
In everyday life, the word “quality” has been associated with excellence. For example, we say that Mercedes Benzor Lexus car is a “quality” car when we really mean that it is manufactured to a very high standard. The fact that its qualities exceed most people’s need, and in any event, they could not meet the costs of such a car does not register into their thoughts when we use word “quality” in this way. On the other hand, we say a product is “cheap” when we mean that it is manufactured to a low standard. Everyone could afford such a product but it would not last very long or do all the things we wanted it to do.
To the buyer therefore, the “right” quality must incorporate three considerations. The product must be manufactured to a realistic standard so that it will give adequate satisfaction in performing its purpose at an acceptable cost to the consuming company.
Who Decides Quality?
From the buyer’s definition of the “right” quality given above, it can be seen that three consideration must be satisfied:
Manufactured to a realistic standard
This will involve knowledge of the characteristic of the process of manufacture. It would be unrealistic to expect hot rolled steel strip to be produced to Cae 0.002 tolerance when the hot rolling process is virtually impossible to control to this degree of tolerance. So, someone with a knowledge of the processes involved must be concerned in determining the right quality when this type of purchase is necessary.
Similarly, where chemical or technical properties are involved. Someone with the necessary expertise may be needed to indicate what a realistic standard may be. Such knowledge or expertise may be available in Research and development, or in Production/Engineering or Potential Suppliers may advice through the purchasing department.
Satisfaction in performing its purpose
The purpose for which an item is required to perform can be many and varied, whether it be used in the manufacturing processes of the buying company or to perform some activities within that company as a component part of the end product. Some of the many examples could be:
To fit a certain space;
To carry a certain load;
To create a certain level of heat;
To conduct a certain voltage;
To withstand a certain temperature;
To improve appearance;
Example of purpose to be performed are: endless, but it can be seen from those given above that the decision on whether an item performs satisfactorily can be made by a wide variety of people throughout a company depending upon how and where it is to be used. In many cases, the customer for the finished product states the specification to be met.
At an acceptable cost:
Price is only one element of the potential cost incurred in using a particular product to satisfy a need. Other elements for the overall cost may include:
Conversion costs: Some materials are easier to work on in production than others, saving man and machine hours.
Life costs Some items last longer than others, thus saving replacement costs.
Handling and transportation costs some materials are more costly to move and store than others.
Maintenance costs some products are easier to maintain, so saving the costs of maintenance.
These and other cost’s considerations must be taken into account when one is determining what is the most acceptable cost.
Summary
Quality required may be specified by:
1. Designers, architects, etc, where technical factors such as strength, stress, output, etc are involved;
2. Users, e.g the office manager may state preference for a particular make of photocopiers;
3. Customers or clients: who prescribe their requirements in the contract for the supply of products or services;
4. The buyer under what is termed specification by default where it is assumed that the items being bought will conform to normal commercial specification and the choice is left to the buyer.
It should be noted that for engineers or designers, technical considerations such as performance and reliability are paramount. For buyers, commercial considerations such as price and delivery are of prime concern. Buyers should not, however, be passive with regard to quality, even where technical considerations are paramount. Their job functions normally involve the right to request for the reconsideration of a technical decision for economic reasons.