Stock Optimisation Principles

Stock Optimisation

• Definition: Stock optimisation involves managing inventory levels to reduce costs while meeting customer demand.

• Objectives:

  • Minimize holding costs (storage, insurance, spoilage).
  • Avoid stockouts (lost sales or customer dissatisfaction).
  • Improve cash flow and operational efficiency.

• Key Concepts:

  • Economic Order Quantity (EOQ): A formula used to determine the optimal order quantity that minimizes total inventory costs.
  • Reorder Point (ROP): The inventory level at which a new order should be placed to replenish stock before running out.
  • Safety Stock: Extra inventory kept to mitigate the risk of stockouts due to demand variability or supply chain disruptions.

• Models of Stock Optimisation:

  • ABC Analysis: Categorizes inventory into three classes (A, B, C) based on importance and value to focus management efforts on critical items.
  • Just-In-Time (JIT): Inventory strategy that aligns raw-material orders with production schedules to reduce inventory costs.
  • Vendor-Managed Inventory (VMI): Suppliers manage the inventory of their products in the customer’s warehouse to optimize stock levels.

• Techniques:

  • Forecasting: Use historical data and market trends to predict demand.
  • Inventory Management Software: Tools that automate tracking and analysis of stock levels.
  • Continuous Review System: Regularly monitoring inventory levels and placing orders as needed.

• Challenges:

  • Demand variability and unpredictability.
  • Supply chain disruptions (e.g., delays, shortages).
  • Balancing cost efficiency with service levels.

• Performance Metrics:

  • Inventory Turnover Ratio: Measures how often inventory is sold and replaced over a period.
  • Service Level: Percentage of customer demand met without stockouts.
  • Gross Margin Return on Investment (GMROI): Assesses the profitability of inventory.

• Best Practices:

  • Regularly review and adjust inventory policies.
  • Collaborate with suppliers for better forecasting and stock management.
  • Implement technology for real-time inventory tracking and analytics.

Stock Optimisation

• Definition: Involves managing inventory levels to reduce costs while satisfying customer demand.

• Objectives:

  • Minimize holding costs such as storage, insurance, and spoilage.
  • Prevent stockouts to avoid lost sales and customer dissatisfaction.
  • Enhance cash flow and overall operational efficiency.

Key Concepts

• Economic Order Quantity (EOQ): Formula for determining the optimal order quantity that minimizes total inventory costs.

• Reorder Point (ROP): Inventory level at which a new order must be placed to avoid stock shortages.

• Safety Stock: Additional inventory kept to protect against stockouts caused by demand fluctuations or supply chain issues.

Models of Stock Optimisation

• ABC Analysis: Inventory categorization method that sorts items into three classes (A, B, C) based on their importance and value.

• Just-In-Time (JIT): Strategy that synchronizes raw material orders with production schedules to decrease inventory expenses.

• Vendor-Managed Inventory (VMI): Suppliers oversee and manage the stock of their products within the customer's warehouse to maintain optimal levels.

Techniques

• Forecasting: Employs historical data and market trends to accurately predict future demand.

• Inventory Management Software: Tools designed to automate the tracking and analysis of stock levels effectively.

• Continuous Review System: Involves regular monitoring of inventory levels and timely ordering as necessary.

Challenges

• Fluctuating and unpredictable demand can complicate inventory management.

• Supply chain disruptions, including delays and shortages, can impact stock levels.

• Balancing cost efficiency with maintaining high service levels presents ongoing challenges.

Performance Metrics

• Inventory Turnover Ratio: Indicates how frequently inventory is sold and replaced in a specific time frame.

• Service Level: Represents the percentage of customer demand met without experiencing stockouts.

• Gross Margin Return on Investment (GMROI): Evaluates the profitability of the inventory held.

Best Practices

• Conduct regular reviews and adjustments of inventory policies to align with business needs.

• Collaborate with suppliers to enhance forecasting accuracy and stock management strategies.

• Utilize technology for real-time inventory tracking and analytics to optimize decision-making.