Buffer Stocks & Inventory Control

Buffer Stocks

• Buffer stocks are emergency stocks to prevent shortages
• A business might hold buffer stocks of finished goods for sudden increases in demand, to avoid losing customers
• Businesses might keep buffer stocks of raw materials to protect against supply breaks, which could halt production
• Coal-powered electricity generators may keep coal buffer stocks to meet electricity demand surges
• Businesses use buffer stocks for a competitive edge, responding quickly to customer orders

Implications of Poor Inventory Control

• Businesses must hold the 'right' inventory amount, as too much or too little negatively impacts them
• Holding excess inventory leads to unnecessary costs

Holding Too Much Inventory Incurs Unnecessary Costs

• Storage costs includes space, heating, lighting, and security
• Special storage conditions like chilling might be needed for certain products
• Opportunity costs is the capital tied in inventory that could be used for other investments like new machinery
• Spoilage costs include quality deterioration of perishable goods and obsolescence of finished goods
• Administrative and financial costs include order processing and handling
• There is a potential for unsold inventory due to unexpected demand reductions
• Shrinkage costs include potential theft increases by employees

Holding Too Little Inventory Causes Problems

• Inability to meet unexpected demand increases may result in losing customers
• Inventory delivery delays can stop production and lead to inactive labor and machinery
• An increased vulnerability to material shortages may disrupt production
• More frequent ordering increases total ordering costs and potential discount losses from bulk buying

Just-In-Time (JIT) Management of Inventory

• Just-in-time manufacturing is part of lean production and the kaizen approach
• JIT was developed in the Japanese shipbuilding industry in the 1950s and 1960s to reduce capital tied up in inventory
• Steel suppliers delivered steel just a few hours before it was needed, reducing the need for high working capital levels
• JIT extended to every stage, where raw materials were delivered JIT to make parts, parts were delivered JIT to make goods, and goods were produced and delivered JIT to be sold
• JIT was introduced in other Japanese industries, such as the car industry, and then spread to other parts of the world
• JCB® has used JIT in its Rochester, UK, plant where excavators are manufactured

Advantages of JIT

• It improves cash flow since money is not tied up in stock
• JIT reduces waste, obsolete and damaged stock
• It frees up factory space for productive use
• It lowers the costs of stockholding significantly
• JIT improves links with, and the control of suppliers
• The supplier base is reduced significantly
• There is more scope for integration within the factory's computer system
• It improves worker motivation, given more responsibility and encouraged to work in teams

Disadvantages of JIT

• A lot of faith is placed in the reliability and flexibility of suppliers
• Increased ordering and administration costs are seen
• Advantages of bulk buying may be lost
• Firms are at risk of a break in supply and machinery breakdowns
• It's difficult to cope with sharp increases in demand
• Possible loss of reputation if customers are let down by late deliveries

Kanban Systems

• Kanban systems are a Japanese term that means signs or cards, used to control the transfer of materials between different production stages
• A kanban might be used to inform employees in the previous stage of production that a particular part must be taken from stock and sent to a specific destination (conveyance kanbans)
• A kanban might be used to tell employees involved in a particular operation that they can begin production and add their output to stock (production kanbans)
• A kanban might be used to instruct external suppliers to send parts to a destination (vendor kanbans)
• Without proper deployment, kanbans will be used to trigger movement or production of resources
• Kanbans prevent the build-up of stock or parts in a factory

Waste Minimisation

• Inadequate inventory control leads to waste, particularly with perishable goods
• Perishable stocks physically deteriorate over time like fresh produce, ready-mix concrete, some medical products
• Inventory can be wasted if it has a limited lifetime and becomes obsolete like seasonal goods
• Businesses producing such goods should control inventory levels carefully

Minimising Waste

• Place perishable goods in chilled storage to prolong their life
• Businesses should be conscientious when forecasting demand patterns for perishable goods, and use forecasting techniques
• Businesses should adopt a suitable stock rotation method, for example, FIFO (first in first out)
• Many businesses use computers to manage inventory and for automatic ordering
• Some businesses might be able to adjust product prices to help minimise waste as the sell-by date approaches
• Transportation needs to be rapid

Creative Methods for Disposing Goods

• Businesses might find creative methods in the disposal of goods that have passed their sell-by date, for example, food products given to charities or newspapers and magazines recycled

Competitive Advantage from Lean Production

• The use of JIT stock control is often an important element if a business is adopting lean production
• Lean production aims to use fewer resources in production
• Lean production techniques, such as kaizen, cell production, flexible manufacturing, teamworking, empowerment and multiskilling, are used to minimise waste
• Lean producers use less time, less inventory, fewer materials, less labor, less space and fewer suppliers
• Waste reduction will lower production costs
• Competitiveness will be improved because lean production raises productivity, reduces costs and cuts lead times
• The number of faulty products will be lowered
• Reliability will be improved and the speed of design time will be increased