Smarter stock management could save companies twenty to thirty percent of what they spend on maintaining stocks. Companies do not know enough about the possibilities of deploying a different strategy, claims Ruud Teunter, Professor of Operations Research at the University of Groningen. According to Teunter, considerable savings could be made, particularly in the area of what is known as technological deterioration.
Although the problem of managing stock is nothing new, serious scientific research into stock control has only been carried out since the Second World War. ‘Bakers have always needed to know how much bread to bake’, says Teunter. ‘The alternative is disappointed customers or throwing away leftover loaves at the end of the day.’ But although this has always been an ongoing problem, it is actually a new subject in terms of research, continues Teunter. ‘Bakers have to deal with physical deterioration of their product, but nowadays we also have the problem of technological deterioration. Take computers, for example. If they lie around on the shelves for three months, there is a good chance that they will be overtaken by a new and improved model.’
A lot of research needs to be carried out into the aspect of technological deterioration, says Teunter. Many companies, particularly service organizations, are faced with high stock management costs. ‘A producer of consumer electronics, for example, wants to provide service on products for a period of about ten years. The main question is how to ensure that his stock of spare parts will run out in exactly ten years’ time. Too much stock leads to high costs, but not enough stock leads to customer dissatisfaction.’
According to Teunter, companies do not have a definitive answer to this dilemma. As a result, the total disposal costs at the end of the ten-year period are often much higher than the cost of keeping parts in stock. If companies were to rethink the underlying principles, they would be able to manage their stock much more effectively.
‘The standard system is to rank articles according to demand and price’, explains Teunter. ‘An A article is an expensive article that is in high demand, and so on. As turnover for the parts at the top of the ranking is higher, companies tend to focus on the A articles, stocking up on expensive parts and keeping stocks of the cheaper parts to a minimum. However, they should be doing the exact opposite.’
Try looking at stock control from a different angle, suggests Teunter. ‘It’s okay for companies to stock up on the better-selling articles, but they should also keep up their stocks of lower-priced articles. The lower the price, the larger the stock should be.’ Mathematical models have shown that ranking articles according to demand divided by price is considerably cheaper than ranking them on the basis of the more usual formula of demand multiplied by price. The fact that this latter formula is still used by the vast majority of companies is probably because nearly all the software for stock control is based on this standard ranking system.
Teunter is keen to stress that less stock can lead to higher profits. ‘Of course, it could also lead to more dissatisfied customers’, he continues. ‘But the vast majority of companies could avoid this by adopting a systematic approach.’ A different approach does not have to be complicated, says Teunter. Even a small or medium-sized business with basic knowledge of spreadsheets can set up and run a different stock control system in Excel. ‘You need to apply a little basic logic, but it can certainly increase your profits’ he adds.
But this new idea of stock control is not the only innovation that Teunter has developed; he and his department are also working hard to broaden stock theories in other fields, such as service logistics networks, combined stock and transport problems and the effect of demand forecasts and uncertainty on stock management. Teunter: ‘How, for example, can an international business with warehouses in various countries make sure that stock is optimized in all its warehouses across the entire company? There is a lot of room for improvement here, as most companies have a centralized main warehouse and local stock management. This is a very expensive solution. The models we are developing should help to improve this situation.’
Another theme that Teunter is working on and where he thinks that savings can be made, is combining machine maintenance with stock control of the spare parts involved. Together with researchers in Groningen, Eindhoven and Tilburg and eight companies, Teunter is developing pioneering strategies that challenge the need for scheduled periodical maintenance. This research, which is partly funded by the national top institute for logistics Dinalog, is being carried out in association with World Class Maintenance (WCM).
‘We want to move towards ‘condition-based maintenance strategies’, whereby sensors monitor the condition of the machines. Maintenance is delayed for as long as possible. The question is: how do you manage the logistics so that everything can spring into action as soon as it becomes necessary. Here too, there are considerable savings to be made.’
Prof. R.H. Teunter is Professor of Operations Research. He works for the Operations Management department. This department of the Groningen Faculty of Economics and Business is an international leading light, developing important insight into improving logistic chains and production processes. The department has played an important part in developing the national logistics sector, which was assigned top sector status by the Balkenende Cabinet.
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