Page 297 - (DK) The Business Book

DELIVERING THE GOODS 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

final product or to replace defective costs: warehouse space is
materials. This strategy ensures that expensive, and employees are
production can continue in the needed to manage it. It can also
event of a delay from the supplier; lose value if it perishes or becomes
companies are more likely to hold technologically obsolete. There is
stocks of raw materials if their also an opportunity cost associated Because of our inventory
supplier is unreliable. They may also with holding stock; the cash tied management, Dell is able to
keep stocks of “work-in-progress,” or up in stock could be earning offer some of the newest
semicompleted products. Work-in- interest, or be invested elsewhere. technologies at low prices
progress stock can keep production The goal is to hold just enough while our competitors struggle
flowing even if a machine on the stock to meet demand, with to sell off older products.
assembly line breaks down. minimum delay to the customer and Paul Bell
at minimum cost to the company. A US former senior executive, Dell, Inc.
Stock control sophisticated computer program at
Good stock management balances McDonalds, called Manugistics,
meeting product demand with helps the chain forecast sales and
minimizing stock-holding costs. If a ensure the correct quantity of stock
company runs out of stock, it may is ordered for the week ahead.
have to turn orders away, or deliver
late and risk losing returning Buffer stock amount of buffer stock needed. If
customers. In 1993 toy manufacturer Most companies hold buffer demand is stable and predictable,
Bandai was caught off guard by the stock—stock that exceeds the the need for large quantities of
popularity of its Power Rangers amount needed to meet current buffer stock is reduced.
figures, and had to impose a “one demand. It takes time to replenish Online companies may not
figure per customer” rule in the UK stocks, so companies will reorder need a storefront. However, unless
until manufacturing could catch up from suppliers well before their their product can be digitally
with the huge demand. inventory falls below the buffer downloaded, many will still require
On the other hand, if a company level. The longer the lead time—the a physical storage facility, with the
is overly cautious and holds too time between placing an order and same need to manage inventory
much stock, it incurs unnecessary the goods arriving—the greater the and keep buffer stock. ■

Hornby lengthened its lead times: it
takes six weeks to transport
To help recover the nearly freight by sea from China to the
$14 (£9) billion cost of staging the UK. Hornby has to supply
London 2012 Olympics, the UK customers from stock, rather
sold rights to produce Olympics than current production, so sales
merchandise. Hornby paid for the of Olympic products had to be
right to produce official 2012 toys, predicted well in advance.
including Corgi models of London Forecasts proved to be
taxis and buses, its model trains extremely optimistic. Hornby
marked with the Olympics logo, hoped to make a profit of $3.2
and the Olympic mascots Wenlock (£2) million from the Olympics. In
and Mandeville. the end, the contract cost it $2
Surplus buses and other London Hornby produces most of its (£1.3) million. To sell off stock,
and Olympic-themed models went products in China and India to take Hornby was forced to cut its
unsold after optimistic oversupply advantage of low costs. However, prices by as much as 80 percent,
caused a glut in retail outlets. outsourcing production has ruining its profit margins.