Reorder
16
Managing stock levels: materials management and inventory control
Prerequisites Objectives
For part of this chapter you will find it useful to have some knowledge of the normal distribution (see Chapter 8: The shape of data: probability distributions) To be able to calculate the costs associated with holding stocks To be able to calculate the order quantity that would minimize these costs To know how to decide whether it is worthwhile to buy in bulk in order to obtain a price discount To be able to calculate a buffer stock to avoid stock-outs To understand the limitations of the Economic Order Quantity (EOQ) model Holding stock or inventory is a very expensive business, particularly where the goods are of high value. However even for small value items the cost can be high if the quantities involved are large enough. The alternative to holding stock is to operate a just in time (JIT) policy where stock arrives just as it is needed. This is part of lean manufacturing but even companies operating such policies do need some stock in case of emergencies or as a buffer between processes. There are very many inventory control policies but in this chapter we will look at variations of the most important one – the economic order quantity, or EOQ model. This is a model for situations where there is little uncertainty in demand or delivery times. However we will also briefly consider a situation where there is some uncertainty in demand.
Introduction
1
2
IV . DECISION-MAKING TECHNIQUES
Quantitative methods in action: Tesco’s in-store ordering
In April 2005, with its 1800 stores, Tesco was the largest supermarket in the UK; and it was the first supermarket to break the £2 billion annual profits level. It had around a third of the grocery market and was selling more children’s clothes than Marks & Spencer. To achieve such success Tesco had developed strong relationships with its suppliers, and maintained tight controls on its stock of grocery items.
Managing stock levels: materials management and inventory control
Prerequisites Objectives
For part of this chapter you will find it useful to have some knowledge of the normal distribution (see Chapter 8: The shape of data: probability distributions) To be able to calculate the costs associated with holding stocks To be able to calculate the order quantity that would minimize these costs To know how to decide whether it is worthwhile to buy in bulk in order to obtain a price discount To be able to calculate a buffer stock to avoid stock-outs To understand the limitations of the Economic Order Quantity (EOQ) model Holding stock or inventory is a very expensive business, particularly where the goods are of high value. However even for small value items the cost can be high if the quantities involved are large enough. The alternative to holding stock is to operate a just in time (JIT) policy where stock arrives just as it is needed. This is part of lean manufacturing but even companies operating such policies do need some stock in case of emergencies or as a buffer between processes. There are very many inventory control policies but in this chapter we will look at variations of the most important one – the economic order quantity, or EOQ model. This is a model for situations where there is little uncertainty in demand or delivery times. However we will also briefly consider a situation where there is some uncertainty in demand.
Introduction
1
2
IV . DECISION-MAKING TECHNIQUES
Quantitative methods in action: Tesco’s in-store ordering
In April 2005, with its 1800 stores, Tesco was the largest supermarket in the UK; and it was the first supermarket to break the £2 billion annual profits level. It had around a third of the grocery market and was selling more children’s clothes than Marks & Spencer. To achieve such success Tesco had developed strong relationships with its suppliers, and maintained tight controls on its stock of grocery items.