Professional Documents
Culture Documents
and monitor
optimum stock levels
Learner Guide
Contents
What this Learner’s Guide is about ........................................ 1
Plan your learning .................................................................. 2
How will you be assessed? .................................................... 5
Additional resources....................................................................... 69
It
is
important
to
plan
your
learning
before
you
start
because
you
may
already
have
some
of
the
knowledge
and
skills
that
are
covered
in
this
Learner’s
Guide.
This
might
be
because:
• you
have
been
working
in
the
industry
for
some
time,
and/or
• you
have
already
completed
training
in
this
area.
Together
with
your
supervisor
or
trainer,
use
the
checklist
on
the
following
pages
to
help
you
plan
your
study
program.
Your
answers
to
the
questions
in
the
checklist
will
help
you
work
out
which
sections
of
this
Learner’s
Guide
you
need
to
complete.
This
Learner’s
Guide
is
written
with
the
idea
that
learning
is
made
more
relevant
when
you,
the
learner,
are
actually
working
in
the
industry.
This
means
that
you
will
have
people
within
your
enterprise
who
can
show
you
things,
discuss
how
things
are
done
and
answer
any
questions
you
have.
Also
you
can
practise
what
you
learn
and
see
how
what
you
learn
is
applied
in
the
enterprise.
If
you
are
working
through
this
Learner’s
Guide
and
have
not
yet
found
a
job
in
the
industry,
you
will
need
to
talk
to
your
trainer
about
doing
work
experience
or
working
and
learning
in
some
sort
of
simulated
workplace.
Section 1 Assessing
projected demand
Section outline
Areas
covered
in
this
section
are:
• what
information
and
data
you
analyse
when
assessing
projected
demand
• how
to
determine
high
and
low
volume
periods
from
sales
plans/stock
movement
information
• how
to
determine
seasonal
demand
variations
from
sales
plan/stock
movement
data
• how
to
determine
required
inventory
levels
at
different
production
and
sales
cycle
stages
from
the
sales
plan/stock
movement
data.
What is an inventory?
Think of a time when you ran out of the stocks required to produce
a good or service made by your enterprise and were unable fulfil a
customer order.
There is feedback on this activity at the back of this Learner’s Guide
What is demand?
Stock levels and inventories are carried because they are the
intermediate materials necessary to produce the goods and
services demanded by customers. This means it is essential to
have reliable estimates of the amount of stocks needed and when
they are needed. Important sources of information that can be
analysed when assessing projected demand are:
• your enterprise’s sales plan and
• stock movement data.
Trends
Trends refer to gradual, long-term movement in the demand for a
good or service. They show whether there is an overall general
increase or decrease in sales for a product. Increased sales over
time as a result of a demand trend are underpinned by conditions
beyond the control of the enterprise, such as population shifts,
increased economic prosperity, new improved technology and
cultural changes. Trends are usually analysed using demand data
collected over several years.
Examples of trends include:
• greater wine consumption resulting in lower beer sales
over the past 5 years in Australia as the wine industry
expands
• the ageing population of Australia causing an increase
in the number of retirement homes being built
• increased demand for DVD players leading to a
corresponding decline in demand for video recorders.
Figure 1 shows an example of what a trend such as a
gradual increase in wine consumption resulting in
increasing sales each year would look graphically, when
expressed in millions of litres of wine sold.
Gradual increase
in sales over time
Seasonal
Variations
Seasonal variations refer to short-term, regular demand variations
generally related to factors such as the weather, holidays and
vacations. Analysis of the seasonal variation often provides insight
into when the high and low volume periods of sales are. Examples
of seasonal variations that affect demand for goods and therefore
the stocks required to produce them include:
• less demand for bathing suits in the winter months
resulting in reduced sales
• increased demand for ice creams in the hotter summer
months resulting in increased sales
• increased demand for shellfish prior to Chinese New
Year resulting in increased sales
• greater demand for toys at Christmas time compared to
at any other time in the year.
Sales increase
at fashion week
Fewer sales as
summer
approaches
Cycles
Cycles are wavelike variations lasting more than a year
that are related to things like economic, political, and
agricultural conditions. Examples of how cycles can impact
on demand and sales include:
• decreased demand for building materials due to an
economic slow down resulting is less sales of roof
trusses
• increased demand for mineral commodities caused by
economic prosperity in China resulting in booming
copper sales
• increased demand for wheat caused by crop failure due
to a drought restricting supplies on the world market
increasing sales in Australia.
Peak
Peak
Slow
down Recovery
Recession
Variations
As well as trends, seasonal variations and cycles, variations occur
to the regular sales and demand patterns. There are two types of
variations that occur:
• irregular variations
• random variations.
Irregular
variation
Usual sale
trend
Take a look at Figure 1. What are some of the reasons that could
account for the increase in wine consumption in recent years?
Figure 2 showed the seasonal variation in overcoat sales. List 5
products which have a seasonal variation in their sales.
Answer the following questions related to Figure 3. In which years
do you think there was a housing boom? Why?
There is feedback on this activity at the back of this Learner’s Guide.
The movement of stock tells you what quantity and type of stocks
need to be ordered to meet the demand forecast contained in the
sales plan. Stock movement records can also be used to monitor
the effectiveness of the demand forecast and projected sales. For
example, if a demand estimate for a certain good is incorrect, then
this will be reflected in slow movement of the stock off the
warehouse shelves. Less stocks would be ordered to avoid
excessive inventory costs caused by poor sellers.
Having analysed the sales plan and stock movement data you
need to determine what, how much and when stocks are required
to meet demand forecasts and sales projections. Taking high and
low volume periods, seasonal and irregular variations into account
will dramatically affect must be considered when making these
decisions.
The store supervisor may also consult the stock movement data to
work out how much stock is currently in the warehouse before
deciding how many raw materials such as cocoa, butter, sugar, foil,
and wrapping are required to meet the production requirements.
Pick two stocks from your warehouse. Using your stock movement
records, compare the stock movement rates to the sales forecast
contained in the sales plan.
Yes No
What are the high and low volume sales periods and seasonal
variations in demand for those two items?
There is feedback on this activity at the back of this Learner’s Guide.
Section 2 Variables
impacting on optimum
stock levels
Section outline
Receive order
Process order
What would happen to this lead time if there was a delay in delivery
of raw material from a supplier or there were not enough trucks to
deliver the goods or services to the customer?
Who are the internal customers for tasks conducted within your
enterprise?
There is feedback on this activity at the back of this Learner’s Guide.
Spoilage
times
Some goods go off, become stale, decay or deteriorate if not used
within a specified period of time or stored inappropriately. Fresh
food products are obvious examples:
• a seafood products manufacturer must use fresh
seafood within a short time period or it will be unsellable
• a juice producer must use fresh fruit within a few weeks
or the fruit will perish
• a milk packager must put milk in cartons under
refrigerated conditions within a couple of days or the
milk will go off.
Obsolescence
times
Obsolescence refers to something becoming old, disused, no
longer useful or no longer used. Examples of products that
become obsolete include:
• fashion items which last a season before they become
yesterday’s ‘must-have’ buy
• computer chips which are superseded within 18 months
by a smaller chip with higher capacity
• video recorders being replaced by DVD players
• analogue mobile phones being replaced by 3rd
generation phones.
How do you know how long the good can be stored before it spoils,
decays, deteriorates and is no longer fit to be used? What sources
of information would you consult to find this information out?
There
is
feedback
on
this
activity
at
the
back
of
this
Learner’s
Guide.
Increasing
capacity
A firm that does not have the space to physically store all required
components may get several deliveries of components and parts
regularly throughout the day. When the parts or components are
delivered they go straight onto the production line with minimal
storage time. In this way a production facility with storage space
for say, 40 sets of car components, can still manufacture 100 cars
a day.
Organising
stock
All stock should be organised in a way that maximises productivity
and prevents double handling. This will increase profits for the
company and help you reach an optimum inventory level. Stock
should also be organised to avoid damage and spoilage due to
things such as sunlight, heat, and radiation.
To store stock in the most convenient and efficient way you should:
• store high turnover stock near the dispatch area
• have markings on the floor to indicate where stock
should go
• place stock in bins
• have vertical stacking on racks and use forklifts for
access
• have a secure area for high cost items.
to plan with the production team leaders when staff will be required,
what skills they need, and whether there are enough of them to
process physically produce the goods.
There is feedback on this activity at the back of this Learner’s Guide.
Section 3 Determining
optimum inventory
levels
Section outline
Areas
covered
in
this
section
are:
• how
to
relate
production
and
sales
cycle
stages
to
stock
manufacturing
supply
and
distribution
lead
times
• how
to
calculate
safety
stocks
• how
to
identify
the
optimum
inventory
level.
Safety
stocks
As discussed in Section 2, the optimum inventory level is not the
minimum amount of stocks required to produce the number of
goods set in the production schedule. Things often happen in the
supply, production and distribution of goods that necessitate more
than the bare minimum stocks are obtained. If only the bare
minimum stocks are carried, then when something does go wrong,
it will lead to a stock out. Some of the things that could go wrong
include:
• a supplier cannot deliver raw materials due to industrial
action
• a supplier breaches contract and fails to deliver goods
• a supplier’s truck breaks down and misses the deadline
for delivery
There is feedback on this activity at the back of this Learner’s Guide.
Make a list of all the items you will need to make strawberry jam.
Remember that not only will you need the raw materials to make
the jam, but must consider stocks for such things as packaging,
labelling and wrapping.
There is feedback on this activity at the back of this Learner’s Guide.
Section 4 Monitoring
optimum inventory
levels
Section outline
Areas
covered
in
this
section
are:
• comparing
inventory
benchmarks
to
sales
turnover/production
requirements
• making
adjustments
to
inventory
levels
in
accordance
with
reassessed
sales
turnover/production
requirements
• documenting
changes
and
requests
to
inventory
levels
• assembling
resources
to
optimise
inventory
levels.
Reorder
cycles
As well as monitoring stock levels, you need to monitor stock
reorder cycles. A reorder cycle is the continuous physical counting
of inventory so that all items are counted at a specific frequency,
and these records are reconciled with actual data. A “cycle” is the
time taken to count all items in the inventory at least once. The
cycle changes depending on changes in the demand for the
product and is dictated by the frequency of orders and the quantity
required. This system may be manual, where a delegated staff
member places an order weekly, monthly or another specified time
period, or electronic using point of sale equipment
For example, if a store supervisor was trying to work out the stock
turn for a line of televisions with stock sales worth $100,000 over 3
months, with the opening stock worth $89,000 and the closing
stock $21,000, then the average stock is:
Stock turn is therefore the sales divided by the average stock value
over the three months:
$100,000 = 2.72
36,666
Inventory
benchmarks
Enterprises keep records of their inventory levels, stock turnover
rate and sales figures which they use not only to plan projected
stock demands, but also to measure their current stock levels
against previous levels in similar periods of demand.
1.
2.
3.
4.
5.
Which items are fast sellers? Which items are slow sellers?
How does the stock turn for these items compare with your
enterprise’s stock turn target or industry benchmarks? If you do
not keep this kind of information, where could you get it from?
What conclusions can you draw from the stock turns you
calculated?
There is feedback on this activity at the back of this Learner’s Guide.
Your enterprise will have policies and procedures that govern how
you should submit requests such as these. It is unlikely that you
will be able to make a decision without consulting other functions in
the enterprise. Input from many different business functions is
required in determining the optimum inventory level.
Assembling
resources
Having considered all the factors which affect the optimum
inventory level, you now have to assemble all the resources
together to obtain them. This means:
• researching potential suppliers,
• negotiating with and placing orders with suppliers
Supply arrangements differ among the suppliers that you deal with.
It is important that you strive for a cost effective supply deal to
maximise the profits for your enterprise. To do this you may decide
to order excess stocks if it results in a quantity discount from the
supplier. However, you must be careful not to order too much as
the goods may become obsolete by the time you have produced
them all.
What would you say to the supplier with whom you have an
existing supply contract?
A
supplier
that
is
contracted
to
deliver
5
truckloads
of
stock
items
every
twelve
hours
has
been
late
by
as
much
as
one
or
two
hours
consistently
over
the
past
week.
This
has
resulted
in
halting
the
production
line
while
waiting
for
the
components
to
arrive.
This
has
resulted
in
knock-‐on
delays
to
the
distribution
of
finished
goods
to
your
customers
and
causing
the
operations
manager
to
ask
you
to
sort
the
delivery
problems
immediately.
How would you handle the supply problems you are experiencing?
There is feedback on this activity at the back of this Learner’s Guide.
Additional
resources
Further information
Books
• Stevenson,
W.J.
(1996),
Production/Operations
Management,
5th
edn.,
Irwin/McGraw-‐Hill:
Boston
Websites
• http://inventoryops.com/warehouse_optimization.htm
and
www.inventoryops.com
provides
information
on
how
to
optimise
inventory
levels.
Feedback on activities
The
responses
provided
in
this
section
are
suggested
responses.
Because
every
workplace
is
different,
your
responses
may
vary
according
to
your
specific
workplace
procedures,
the
equipment
available
and
the
nature
of
the
business.
The answer to the first question will vary depending on the specific
circumstances surrounding the example you provide. However, in
general, the sorts of costs that are incurred to an enterprise when they
understock are that:
• sales are lost
• late delivery penalties are incurred
• loss of repeat business
• loss of referred business
• inefficient production.
In the second question, you should describe whether the failure to meet
the delivery deadline affected your relationship with your supplier. The
damage to your relationship will vary depending on the level of integration,
trust and working relationship you have with the customer, the underlying
causes for the missed delivery and how much your actions were
responsible for the delay.
In the third question, among the things that your enterprise could be doing
with the cash tied up in excess inventory include:
• using it to purchase high rotation, high volume stock
• buying new assets
• hiring new staff
• training staff
• implement a new computer system.
The important principle from this question is that excess inventory costs
your enterprise a lot of money which could, in extreme cases, be
responsible for an enterprise going out of business.
The answer to the question related to Figure 4 will depend on the example
you provide. However, irregular variations may be caused by things such
as:
• abnormal weather patters such as a heatwave or flooding
• any unusual events or occurrences.
The tasks and time taken between receiving and order and delivering it to
a customer will vary depending on the item you select. You may need to
talk to your suppliers, internal customers and colleagues in your
enterprise to work out the time it takes to complete many of the tasks
involved in the lead time. Some of the tasks involved in calculating the
lead time include:
• obtaining the raw materials needed to produce the good or
service from suppliers
• processing the order within the enterprise
• designing the manufacturing or development process
• planning the production schedule
• setting up any equipment to produce the goods or service
• manufacturing or producing the goods
• conducting any quality checks and inspections
• overcoming any quality problems and rework
• packaging, labelling and addressing the goods
• checking the right quantity is being sent
• storing the goods in the warehouse prior to distribution
• transit time while being delivered to the customer.
The internal customers within the lead time chain are any department,
persons or section who are relying on you to complete your work before
they can begin theirs. Satisfying the internal customer is crucial to
meeting lead time targets and ultimately translates into meeting the
external customer’s expectations.
The amount of time that your stocks can be stored before spoiling,
decays, deteriorates or is no longer fit for its intended purpose will vary
depending on the characteristics of the good. Sources of information you
may access and people you may like to consult to determine spoilage
times include:
• material safety data sheets provided by the supplier
• quality and enterprise work specifications and procedures
• manufacturer’s specifications and/or suppliers handling and storage
advice
• workplace operating procedures and policies
• supplier and or client instructions
• legislation
• industrial agreements
• standards and certification requirements
• quality assurance procedures
• hazardous substances and dangerous goods codes
• consultations with other employees, supervisors, management, Health
and Safety Representatives, industrial relations, OHS specialists, other
professional and technical staff, contractors and maintenance
personnel.
You are required to give an explanation of the system used to store stock
in your warehouse. The idea of this activity is to get you to identify how
stock is stored in your warehouse to prepare you to analyse whether the
layout could be improved to promote increased turnover of stock. When
drawing the layout of your warehouse, consider the following issues when
thinking about improvements to the warehouse layout:
• whether high turnover stock is stored near the dispatch area
• whether there are clear markings on the floor to indicate where stock
should go
• whether stock would be stored or moved more compactly, easily and
efficiently if in bins
• whether vertical stacking would assist in inventory turnover.
When you make layout changes in your warehouse, you may need to
redeploy warehouse workers in different areas or modify the way in which
they do their jobs. You may need to consider what training and new skills
are required to implement the new warehouse system accompanying the
new layout. This may require consultation and training with the workers
involved.
Each enterprise has its own method for calculating the safety stock it
requires. In the past, the safety stock figure was essentially an arbitrary
decision based on experience and traditional figures. However, much
closer attention has been paid in recent years to calculating more
accurately just how much safety stock is required in order to reduce
excessive inventory carrying costs which eat into an enterprise’s
profitability. Working out the safety stock is often a complex process
requiring sophisticated statistical analysis performed with the assistance
of computer software, but at other enterprises it may be calculated using
historical data and subjective judgement based on experience. This
activity is designed to get you to think about whether there are better ways
for you to calculate safety stocks.
The items that you need to make strawberry jam include raw materials
such as strawberries, lemon juice, pectin, and sugar glass jars, lids,
labels, boxes, packaging materials such as wrapping and cardboard
separators.
Ideally you should order the minimum amount required to produce fulfil
production requirements (100,000) plus a safety stock to insure against
stock outs caused by things such as:
• a supplier cannot deliver raw materials due to industrial action
• a supplier breaches contract and fails to deliver goods
• a supplier’s truck breaks down and misses the deadline for
delivery
• there are not enough staff on the production line due to flu
spreading through the employees
• a piece of production equipment breaks down or does not
work properly
• an inaccurate planning schedule is implemented resulting in
too few units being produced
Use your own enterprise’s guidelines for calculating the safety stock to
determine how much above the 100,000 items of stock you would need to
cover contingencies which may lead to a stock out.
Other reasons why you may like to obtain supply contracts from more
than one supplier is to trial a range of suppliers before determining the
preferred supplier who best meets quality and delivery requirements,
regulatory restrictions on the amount of supply that any one supplier can
provide or to obtain cheaper prices by creating a competitive environment
amongst the suppliers.
To calculate the stock turn of the 5 items you selected, you will need
access to the value of stock that you had in your inventory. You may
need to check computer or financial records prior to commencing this
activity.
Fast sellers are those items that have a relatively high stock turn rate, that
is, their stocks are used quickly when they come into the warehouse.
Slow sellers are those that do not turn over quickly. Slow sellers
effectively cost your enterprise money and steps should be taken to
investigate why they are selling slowly and if necessary the stock items
should be replaced with items that sell quicker.
Many enterprises keep benchmarking data on their average stock turn for
each items and measure the stock turn within a given period against that
benchmark. Reasons for any discrepancies are investigated with the aim
to consistently turn stock below average times as this means more stock
is being turned over reflecting increased sales. Stock turns above the
enterprise’s average means that stock is turning slower than expected
and that steps are required to increase the stock turn rate as the
enterprise is effectively losing money.
In analysing the stock turn data, if the stock turn data is discrepant with
the enterprise’s or industry benchmark, then you need to decide what
action needs to be taken to correct this discrepancy. This may mean you
need to suggest that a stock be dropped, investigated as to why its sock
turn is so slow. You may wish to raise your findings in a meeting with the
production, marketing, finance team and get their opinion on why the
stock is turning over so slowly.
The answers to this activity will depend on your personal views. However,
some of the things you may consider saying to the supplier with whom
you have an existing contact are:
• that you have concerns about their ability to supply reliably
• that the discount offered is not enough given the poor delivery record
• that you are opening the supply contract up for open tender
• that you have received another offer.