The Business Book

(Joyce) #1


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


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. ■


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.
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