5.6.3 Stock Control Charts Notes

Stock Control Balances Efficiency and Preparedness

1. Can you consider for a moment how much of a wasted opportunity it would be if one week, demand for your latest product surges unexpectedly, but your supplier is delayed?
2. Without the right stock management strategy, you risk disappointing customers and losing sales.

This is why it's so important to have effective inventory management.

Key Terms in Stock Management

1. To maintain a well-functioning inventory system, businesses must understand four key elements:
   1. Lead Time: The time between placing an order and receiving stock.
   2. Buffer Stock: Extra inventory kept as a safety net.
   3. Reorder Level: The point at which new stock must be ordered.
   4. Reorder Quantity: The amount of stock replenished in each order.

Lead Time: How Long Until Stock Arrives?

Why Lead Time Matters

1. Prevents Stockouts: Knowing your lead time helps you order stock before it runs out.
2. Improves Planning: Accurate lead time data enables better scheduling of production and sales activities.
3. Reduces Costs: Shorter lead times can minimize the need for holding large inventories, saving on storage costs.

Buffer Stock: A Safety Net for Uncertainty

Why Hold Buffer Stock?

1. Ensures Continuity: Keeps operations running smoothly even if there are disruptions.
2. Enhances Customer Satisfaction: Prevents lost sales by ensuring products are always available.
3. Mitigates Risks: Acts as a cushion against unforeseen events like supplier delays or sudden demand increases.

Factors Influencing Buffer Stock Levels

1. Demand Variability: Higher variability requires larger buffer stocks.
2. Supplier Reliability: Unreliable suppliers necessitate higher buffer levels.
3. Storage Costs: High storage costs may limit the amount of buffer stock a business can afford.

Reorder Level: Knowing When to Restock

How to Calculate Reorder Level

1. The reorder level depends on two factors:
   1. Lead Time: How long it takes for new stock to arrive.
   2. Average Daily Usage: How much stock is used or sold each day.

Formula:

$$\text{Reorder Level} = \text{Average Daily Usage} \times \text{Lead Time}$$

If a business sells 50 laptops per day and has a lead time of 5 days, the reorder level is:

$$50 \times 5 = 250 \text{ laptops}$$

This means that as soon as stock falls to 250 laptops, a new order must be placed.

Reorder Quantity: How Much to Order

How to Determine Reorder Quantity

The reorder quantity should cover your needs during the lead time and maintain buffer stock.

Formula:

$$\text{Reorder Quantity} = \text{Average Daily Usage} \times \text{Lead Time} + \text{Buffer Stock}$$

For example, if a company sells 100 smartphones per day, has a lead time of 3 days, and maintains a buffer stock of 200 phones, the reorder quantity would be:

$$(100 \times 3) + 200 = 500 \text{ smartphones}$$

This ensures that even if demand spikes, stock remains available.

Visualizing Stock Levels with Stock Control Charts

1. A stock control chart is a visual tool that helps track inventory levels over time.
2. They're also known as "sawtooth diagrams" because of their distinctive shape.

Key Components of a Stock Control Chart

1. Reorder Level: The point at which a new order is placed.
2. Buffer Stock: The minimum stock level maintained for emergencies.
3. Reorder Quantity: The amount of stock ordered each time.
4. Lead Time: The time between placing an order and receiving stock.

Stock Control in Action: The Role of Technology