Stock Optimisation Principles

Study Notes

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.

Description

This quiz covers the fundamentals of stock optimisation, focusing on inventory management strategies that reduce costs while meeting customer demands. Key concepts such as Economic Order Quantity, Reorder Points, and Safety Stock are explored along with models like ABC Analysis and Just-In-Time. Test your understanding of these essential inventory strategies.