Topic 2:

Stock
and Inventory
Presented by: Mrs. Catherine U. Malig
Learning Objectives
§ Understand the ideas that lie behind inventory
management.
§ We define the terms used, describe the
general features of stocks, their purpose,
§ importance and use.
§ discuss the reasons for holding stock
§ review the role of stocks in a supply chain;

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 All organizations hold stocks. These
are the stores of materials they keep until
needed.
Whenever an organization has
materials that it does not use immediately,
it puts them into stock

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Stocks are stores of materials that are kept until needed.
Stock consists of all the goods and materials that are stored
by an organization. It is a store of items that is kept for future
use. Stock: 100
bottles of Coke
Inventory : 50
Inventory is a list of items held in stock. bottles of 1.5 liter
30 of 1 liter
20 of 500 ml

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An item is a distinct product that is kept in stock:
it is one entry in the inventory.
A unit is the standard size or quantity of an item
Item: 3 items
Unit : 100
50 bottles of 1.5
liter
30 of 1 liter
20 of 500 ml

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 STOCK CYCLE
Units are Stock is
Stock is
held in reduced by
replenished by
stock until relatively small,
relatively large,
needed frequent
infrequent
withdrawals to
deliveries from
meet customer
suppliers
demand

Stock of Items
Suppliers Deliveries Withdrawals Customers
(Organization)

At some point the stock gets low and

suppliers are asked to make another 6
delivery
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Reasons for Holding Stocks
§ Giving buffer
§ allow for demands that are larger than expected, or at
unexpected times;
§ allow for deliveries that are delayed or too small;
§ allow for mismatches between the best rate of supply
and actual rate of demand
§ avoid delays in passing products to customers;
Reasons for Holding Stocks
§ take advantage of price discounts on large orders;
§ allow the purchase of items when the price is low and
expected to rise;
§ allow the purchase of items that are going out of
production or are difficult to find;
§ make full loads for delivery and reduce transport
costs;
§ give cover for emergencies.
 Types of Stocks
1. raw materials, which have arrived from suppliers and are kept until
needed for operations;
2. work in progress, which are units currently being worked on;
3. finished goods, which are waiting to be shipped to customers.
One organization’s finished goods are another organization’s raw materials.
Some organizations (notably retailers and wholesalers) have stocks of
finished goods only, while others (manufacturers, say) have all three types.
Some stock items do not fall easily into these categories, we can define
two additional types as:
4. spare parts, for machinery, equipment, etc.,
5. consumables, such as oil, paper, cleaners, etc 10
 Types of Stocks
Another less widely used classification of stock describes its overall
purpose:
6. Cycle stock is the normal stock used during operations.
7. Safety stock is a reserve of materials that is held for emergencies.
8. Seasonal stock is used to maintain stable operations through
seasonal variations in demand.
9. Pipeline stock is currently being moved from one location to another.
10. Other stock consists of all the stocks that are held for some other
reason.
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 Stocks in the Supply Chain

A supply chain consists of the series of

activities and organizations that materials
move through on their journey from initial
suppliers to final customers.

Logistics or supply chain management is the

function responsible for this flow of materials.
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 Stocks in the Supply Chain
Every product has its own unique supply chain, with
materials moving through raw materials suppliers,
manufacturers, finishing operations, logistics centers,
warehouses, third party operators, transport companies,
wholesalers, retailers and a whole range of other
operations.
In a simplified view, the supply chain for a product
consists of tiers of suppliers feeding materials from original
sources into its operations, and then tiers of customers
moving materials out to the final customers.
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 Supply Chain of Stock
Customer
Supplier

Supplier Customer
Customer
Supplier

Organization
Customer
Supplier

Supplier Customer

Customer
Supplier

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 Stocks in the Supply Chain

A key point is that every organization on a

supply chain holds its own stocks. If the supply
chain is very long, or very broad, there is a lot of
material held in storage and this is likely to move
slowly towards final customers.
So one factor in the design of a supply chain
is the total amount of stock held

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 Stocks in the Supply Chain
An empirical observation suggests that the
aggregate amount of stock held in a number of
locations is:

AS(N2) = AS(N1) × √N2 / N1

where: N2 = number of planned future facilities

N1 = number of existing facilities
AS(Ni) = aggregate stock with Ni facilities
AS(N2) = aggregate stock with future facilities
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 SAMPLE PROBLEM
1.) Worked example: AJT Transport of Manchester is planning to increase its
services to mainland Luzon. It currently has 12 depots with aggregate stock
valued at Php12 million and plans to expand to 16 depots. With a carrying cost
of 20 per cent of value a year, what is the likely cost of this change?
Solution:
N1 = 12 depots
N2 = 16 depots
AS(N1) = Php12 million
Then we can substitute these values to get:
AS(N2) = AS(N1) × √N2 /N1
= 12 × √16/12
= P4 million
The additional depots will raise stock holding costs by:
(14 − 12) × 0.2 = 0.40 million or P400,000 a year
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• The best shape for a supply chain
depends on many factors, such as:
• 1. product’s value
• 2. bulk
• 3. perishability
• 4. availability
• 5. profitability
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“ As a rule, a short, narrow
supply chain gives an
organization a lot of
control over its logistics”
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“
Organizations often have to
find the best balance
between costs and customer
service.
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End of Topic 2
Thank you so much!

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