The Business Book

295

See also: Luck (and how to get lucky) 42 ■ How fast to grow 44–45 ■ Avoiding complacency 194–201 ■ Promotions and
incentives 271 ■ Why advertise? 272–73 ■ Forecasting 278–79 ■ Lean production 290–93 ■ Simplify processes 296–99

DELIVERING THE GOODS

final product or to replace defective
materials. This strategy ensures that
production can continue in the
event of a delay from the supplier;
companies are more likely to hold
stocks of raw materials if their
supplier is unreliable. They may also
keep stocks of “work-in-progress,” or
semicompleted products. Work-in-
progress stock can keep production
flowing even if a machine on the
assembly line breaks down.

Stock control
Good stock management balances
meeting product demand with
minimizing stock-holding costs. If a
company runs out of stock, it may
have to turn orders away, or deliver
late and risk losing returning
customers. In 1993 toy manufacturer
Bandai was caught off guard by the
popularity of its Power Rangers
figures, and had to impose a “one
figure per customer” rule in the UK
until manufacturing could catch up
with the huge demand.
On the other hand, if a company
is overly cautious and holds too
much stock, it incurs unnecessary

costs: warehouse space is

expensive, and employees are

needed to manage it. It can also

lose value if it perishes or becomes

technologically obsolete. There is

also an opportunity cost associated

with holding stock; the cash tied

up in stock could be earning

interest, or be invested elsewhere.

The goal is to hold just enough

stock to meet demand, with

minimum delay to the customer and

at minimum cost to the company. A

sophisticated computer program at

McDonalds, called Manugistics,

helps the chain forecast sales and

ensure the correct quantity of stock

is ordered for the week ahead.

Buffer stock

Most companies hold buffer

stock—stock that exceeds the

amount needed to meet current

demand. It takes time to replenish

stocks, so companies will reorder

from suppliers well before their

inventory falls below the buffer

level. The longer the lead time—the

time between placing an order and

the goods arriving—the greater the

amount of buffer stock needed. If

demand is stable and predictable,

the need for large quantities of

buffer stock is reduced.

Online companies may not

need a storefront. However, unless

their product can be digitally

downloaded, many will still require

a physical storage facility, with the

same need to manage inventory

and keep buffer stock. ■

Hornby

To help recover the nearly

$14 (£9) billion cost of staging the

London 2012 Olympics, the UK

sold rights to produce Olympics

merchandise. Hornby paid for the

right to produce official 2012 toys,

including Corgi models of London

taxis and buses, its model trains

marked with the Olympics logo,

and the Olympic mascots Wenlock

and Mandeville.

Hornby produces most of its

products in China and India to take

advantage of low costs. However,

outsourcing production has

lengthened its lead times: it

takes six weeks to transport

freight by sea from China to the

UK. Hornby has to supply

customers from stock, rather

than current production, so sales

of Olympic products had to be

predicted well in advance.

Forecasts proved to be

extremely optimistic. Hornby

hoped to make a profit of $3.2

(£2) million from the Olympics. In

the end, the contract cost it $2

(£1.3) million. To sell off stock,

Hornby was forced to cut its

prices by as much as 80 percent,

ruining its profit margins.

Surplus buses and other London

and Olympic-themed models went

unsold after optimistic oversupply

caused a glut in retail outlets.

Because of our inventory

management, Dell is able to

offer some of the newest

technologies at low prices

while our competitors struggle

to sell off older products.

Paul Bell

US former senior executive, Dell, Inc.