What does under stocking mean and what are the problems?
Under Stocking means that a business has not bought enough stock to continue with its ordinary activities
Problems:
- Large numbers of small stock orders will have to be made, increasing admin costs
- Small orders can raise costs as bulk buying discounts are lost
- Production may have to stop
- Stockout’s may occur (no stock for consumers)
Economic (Maximum) Stock level
Stock level that permits activities to continue without interruption but incurs the minimum cost for the business.
Cost per unit will be lowest due to cost being spread over the highest possible number of units
Minimum stock level (buffer)
Stock level that ensures that there should be stock available for production.
Stock shouldn’t fall below this point a production then may have to stop
Re-order level
Level at which new stock should be ordered.
Re-order quantity
The quantity of stock that has to be ordered to bring levels back to the maximum stock level
Lead time
The time between stock being ordered and stock being delivered
Advantages of centralised storage
- More cost effective than maintaining many small storage areas
- Supervised by specialist staff
- Increased efficiency in distribution
- Agreed procedures for ordering
Disadvantages of centralised storage
- Time wasted going to and from stores
- Cost of specialist staff
- Cost of dedicated storage area
Advantages of decentralised storage
- Stock always available
- Orders of stock will reflect actual usage
- Faster turnover of smaller amounts of stock reduces likelihood of decay
Disadvantages of decentralised storage
- Less rigid control - theft and loss more likely
- Takes up space in production areas
What is a Just-In-Time production process
A JIT aims to get the highest volume of output at the lowest unit cost.
If there’s no demand for the product there is no production. It is the anticipated or planned consumer demand that triggers the production process
Advantages of JIT
- Improves cash flow since money is not tied up in stock
- Reduces storage costs
- Reduces waste, obsolete and damaged stock
- Less vulnerable to fashion changes
What does overstocking mean and what are the problems?
Overstocking means that a business has bought in more stock than it regularly needs.
Problems:
- High labour costs for security staff to prevent theft of stock
- High labour costs for warehouse staff to manage stocks
- High storage costs for large premises to store stock
- High insurance costs for large amounts of stock
Disadvantages of JIT
- Advantages of bulk buying may be lost
- Difficult to keep up with sharp changes in demand
- Increased ordering and administration costs
- Possible loss of reputation if customers are let down by late deliveries
What is labour intensive production
Where a business uses a larger proportion of human input than machinery to complete the production process
When is labour intensive production used
- When the cost of labour is relatively cheaper than the cost of machinery
- The production process requires specific skills
- The use of machinery would be impractical due to the lack of space or mobility
- When the production process relies on the ability for humans to think, problem solve and act on initiative
Advantages of labour intensive production
- Additional flexibility due to human skills - one off items
- More responsive to change
- Lower start up costs than capital intensive, no initial outlay on machinery
- Use of human judgement is needed, can improve process
Disadvantages of labour intensive production
- A skilled workforce can be expensive to recruit, pay and train
- Business cannot take advantage of economies of scale
- Staff illness or absence can impact on production process
- Additional quality control measures may be required due to human error
What is capital intensive production
Where the production process relies more on machinery and other capital equipment relative to human input
Capital intensive production is used when:
- the supply of labour is limited
- the production process is routine and repetitive
- Use of machinery improves quality and accuracy of production
- use of machinery improves efficiency and consistency of output
Advantages of capital intensive production
- Machinery can operate 24/7
- Quality of output is standardised and consistent
- High volume of goods can be produced
- Removes chance of human error
Disadvantages of capital intensive production
- Large initial outlay to purchase machines
- Costs of maintaining and repairing equipment can be high
- Can lead to redundancies
- Worker motivation is low and they’re deskilled
Describe each method of production (3)
Job production is when each job is completed in its entirety before another job is completed. The items are produced to the customers own specifications.
Batch production is the production of groups of smaller products. The products will have a degree of similarity, although different ingredients may be used. No item moves to the next stage until all are ready.
Flow production uses a production line and the product passes through various stages along the line, with component parts being added in each stage.
Advantages of job production
- Motivating for the person making the product - each product is unique
- suitable for ‘one off’ orders that can be designed specifically for the requirements of a particular customer
- Specifications can sometimes be changed during production
