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BOURNEMOUTH UNIVERSITY
Stock Control in Supply Chain Management
MEHMET EMIN YOLDAS
MSc IBMF
2011
Stock Control in Supply Chain Management ii
BUSINESS SCHOOL
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Stock Control in Supply Chain Management iii
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Stock Control in Supply Chain Management iv
Abstract
Supply chain management has become one of the critical functions of business management
today. The concept developed in the 1980s as manufacturers tried to improve cost
management in their factories to beat the stiff competition brought about by globalisation.
Stock control is usually at the heart of supply chain management due to the high value of
investment held in stock. The aims of the research were to establish the supply chain
management practices and stock control practices adopted by businesses today from both a
theoretical and practical perspectives and the establishment of the supply chain and stock
control techniques applied in Toyota since it has been credited as one of the most successful
supply chain management systems and the success of the company has been attributed to it.
Supply Chain has been used in the creation of value for the business, creation of competitive
advantage, and the matching of supply and demand. Stock Control on the other hand has
been used to address challenges related to the stock outs, holding costs and the risk of
changes in stock prices. The supply chain and stock control strategies adopted depend on the
nature of the organisation. The findings indicate that the Toyota Production System which is
the main supply chain management system in the company has many of the advantages
identified in the literature. The systems strength has been identified to lie in the adoption of
JIT supply chain management system use of simplified rules in processes and the culture of
its people.
Key Words: Supply Chain Management, Stock Control Systems, Just In Time, Toyota
Production System
Stock Control in Supply Chain Management v
Table of Contents
1.0 Chapter One: Introduction ................................................................................................... 1
1.1 Background ...................................................................................................................... 1
1.2 Aims of the Research ....................................................................................................... 3
1.3 Contributions of the Research .......................................................................................... 4
1.4 Structure of the Report ..................................................................................................... 5
2.0 Chapter Two: Literature Review ......................................................................................... 6
2.1 Supply Chain Management .............................................................................................. 6
2.1.1 Introduction ............................................................................................................... 6
2.1.2 Evaluation ................................................................................................................. 8
2.1.3 Summary ................................................................................................................. 18
2.2 Stock Control ................................................................................................................. 19
2.2.1 Introduction ............................................................................................................. 19
2.2.2 Evaluation ............................................................................................................... 20
2.2.3 Summary ................................................................................................................. 31
3.0 Chapter Three: Methodology ............................................................................................. 33
3.1 Introduction .................................................................................................................... 33
3.2 Research Design............................................................................................................. 33
3.3 Data Sources and Collection .......................................................................................... 34
3.4 Data Analysis ................................................................................................................. 35
3.5 Limitations ..................................................................................................................... 37
4.0 Chapter Four: Findings and Discussion ............................................................................. 38
4.1 Introduction .................................................................................................................... 38
4.2 Just in Time Production ................................................................................................. 38
4.3 The Four Rules ............................................................................................................... 42
4.4 The People in Toyota ..................................................................................................... 45
5.0 Chapter Five: Summary and Conclusions.......................................................................... 47
6.0 References .......................................................................................................................... 50
Stock Control in Supply Chain Management 1
1.0 Chapter One: Introduction
1.1 Background
Supply chain management is a relatively new concept in management since it can be traced to
the early 1980s when industry consultants in the United States started using the term.
However its application can be traced back to the industrial revolution. The supply chain
relates to the management of the products of an enterprise from the source of raw materials to
the delivery stage to the customer (Halldorsson et al. 2007). The whole process is impacted
on by many factors and as a consequence there it has developed to be a central business topic.
The supply chain can be used to create competitive advantage for the business and at the
same time it can result in disadvantages to the business when not well planned leading to
failure of the business. The importance of an efficient supply chain has been increasing over
the years as the business environment changes. During the industrial revolution, the major
concern was on how to produce more since the market was held to be always available. The
techniques that were used in the management of the supply chain focused on maximising
production. However the business environment has changed much and now the focus of the
supply chain management is the creation of competitive advantage while at the same time
minimising the cost related with the process and maintaining flexibility. The multiplicity of
the goals that have to be achieved using the supply chain has led to the development of
sophisticated procedures.
Several other business trends have emerged that have impacted on the science and practice of
supply chain management. Globalisation and the improvement in computing power are the
most important. Globalisation has made it necessary for companies to spread their supply
chains around the world (Gokhan and Needy 2010). Multinational companies that account for
the majority of the production in the world have their supply chains spread in several
Stock Control in Supply Chain Management 2
continents. The implication is that the supply chain management technique applied has to
cater for all the factors arising from geographical differences and huge distances. Simple
techniques like storing all the raw materials required of production implies that the company
would have to incur significant costs in transportation and also risk facing obsolescence of
the materials as the demand changed in markets far away from the production centres (Haag
et al. 2006). Having no stocks and making orders only when the materials are necessary also
implied that the business could risk shutting down due to the complicated transportation
systems involved. Obviously better techniques had to be found. The development of powerful
computers has also impacted on the supply chain management due to the increased quality
and quantity of information that business can be able to process at any given time on demand
and product systems. Companies now have more and better data about markets and suppliers
as well as transportation systems than ever before and the communication between the
various parties along the supply chain has become more efficient. The implication is that
companies can now develop more effective supply chain system even as the network of
involved parties becomes more sophisticated. One of the companies that have been able to
develop its system in the modern era of globalisation and information technology to meet
these challenges is Toyota. Toyota rose in the 1980s and 1990s to become the greatest car
manufacturer in the world and also among the top ten biggest companies in the world
(Cooper et al. 1997). The success of Toyota has been credited to its production system which
optimises its supply chain. The Toyota production system demonstrates that globalisation
and information technology can facilitate the development of a supply chain that can be the
source of competitive advantages (Liker and Franz 2011).
As the background indicates the management of stock or what is commonly referred to as
stock control is at the heart of the supply chain management process. A supply chain cannot
be efficient without an efficient stock control system. Stock control system however has
Stock Control in Supply Chain Management 3
several challenges. This research focuses on the evaluation of stock control in the context of
supply chain management. The stock control system therefore forms part of a bigger process
of optimising production and meeting consumer demands. The Toyota Production system
will also be evaluated to shed light on the practical implications of the concepts developed in
supply chain management.
1.2 Aims of the Research
The main objective of the research is to evaluate the stock control issues that companies have
to deal with in optimising their supply chains. This objective is however broad and is broken
down into a few objectives that will guide the study as follows:
Evaluate the concepts of supply chain management applied in modern businesses.
This objective is focused on identifying the most commonly applied theories of supply chain
management. The theory has guided the practice since the management thinkers who have
developed the concept of supply chain management have been involved in the management
of several businesses around the world. It is expected that the theories of supply chain
management are wide and therefore focus will be on the implications of the concepts on the
theories that are commonly applied today.
Evaluate the theories of stock control applied in supply chains in modern businesses.
Stock control as identified in the background is at the centre of the supply chain management.
The evaluation of the stock control theories that are being applied today will therefore help in
understanding the development of supply chain management in modern businesses.
Evaluate the Toyota Production System and its stock control procedures
The Toyota production system is one of the most successful supply chain management
systems in the world. Although the system has developed over time, it has been copied by
Stock Control in Supply Chain Management 4
many other businesses with limited success. As the source of competitive advantage for the
company, the evaluation will therefore provide an opportunity for the understanding of the
most important aspects of the supply chain and stock control system and their application in
businesses in modern business environments that are characterised by globalisation and rapid
development of information technology.
1.3 Contributions of the Research
The study is expected to make contributions to the growing body of knowledge on supply
chain management and stock control. Given the rapid development of globalisation and the
increase in the use of information technology, supply chain management has become a
critical source of competitive advantage. Globalisation impacts on all business whether
multinational or domestic because in one way or another all business have to use products
originating from foreign markets and also make products that will end up being pat of
products consumed in foreign markets. The effective management of the supply chain is
therefore an imperative to every business. The study will bring out the most important factors
in the development of an effective supply chain and also the most important factors in the
development and implementation of a stock control system. This information will help in the
understanding of the contribution of theory to the practice of supply chain management.
The study is also expected to add to the existing knowledge in the evaluation of the Toyota
Production System. The Toyota Production system was developed mainly by the managers of
the company and therefore may not be well described in theory. The evaluation will therefore
contribute to the existing theory of stock control system The research is also expected to
contribute to knowledge by identifying areas that may need further research in the future to
develop a better understanding of supply chain management. The business environment is
changing rapidly and the theories that have been developed this far cannot be expected to
apply in different environments in the future. Knowledge will therefore have to increase and
Stock Control in Supply Chain Management 5
change with changes in the environment. This can only be achieved if more areas of research
are identified and researched on.
1.4 Structure of the Report
Chapter One: Introduction: The chapter provides the background of the research, the
objectives of the study, and the aims of the study and also provides a guideline of the final
report. The objectives of the research are the ones that guide all the other parts of the
research.
Chapter Two: Literature Review: The literature review evaluates the major concepts of
supply chain management and also the major concepts of stock control in supply chain
management. The chapter ends with a summary of all the concepts identified.
Chapter Three: Methodology: The methodology states the philosophy of the research and also
provides the guidelines on which data will be collected and how it will be collected. The
chapter also discusses the limitations expected in the data collection and analysis and the
methods that will be used to overcome them.
Chapter Four: Findings and Discussion: The chapter provides the findings of the data
collection and analysis. The findings are expected to provide the major components of the
supply chain management system in the Toyota Production System. The discussion evaluates
the findings in the light of literature discussing the areas of overlap and divergence and the
implications to supply chain management and stock control.
Chapter Six: Summary and Conclusion: This is the last chapter of the report and it
summarises the objectives, the major concepts in literature the methodology used and the
major findings and the implications. Possible areas of future research will also be identified
in the conclusion.
Stock Control in Supply Chain Management 6
2.0 Chapter Two: Literature Review
2.1 Supply Chain Management
2.1.1 Introduction
The supply chain has been used to describe the network of businesses that is focused on
providing goods or service to the final consumers. The emergence of the concept of supply
chain management demonstrates the development in the understanding of stock management
to involve all the businesses and processes involved from the point of sourcing the raw
materials to the point of delivery of the final product to the consumer. The concept has been
defined variously depending on the context but the most comprehensive definition this far
was provided by the Association of Operations Management in the AIPC dictionary
(Lavassani et al. 2009). The definition identifies several strategies in supply chain
management such as the design, planning, execution, control and the monitoring in the
management of all the activities related to the sourcing, processing and delivery of products
to the consumers. The definition also provides main objectives in the management of the
supply chain. The main objectives identified are as follows:
Creation of net value: The business must manage its supply chain in the context of the overall
business objective which is to create net value. This objective shows that the supply chain
management is just one facet of the business which must be in line with the overall strategy
of the business.
Building of a competitive infrastructure: The supply chain management does not only help
the business earn a net value. The careful design of the supply chain activities can result in
advantages that other business may not be able to copy. This creates a competitive advantage
for the business as whole guaranteeing a margin in the market even when the competition is
stiff (Kennedy 2003).
Stock Control in Supply Chain Management 7
Leveraging world wide logistics: supply chain in the modern business environment has to
take into consideration the emergence of globalisation. The systematic management of the
supply chain is also aimed at taking advantage of the global structures of communication and
transport. Several logistic companies have also merged that serve global companies such as
DHL making it possible for companies to make the supply chain efficient even when they do
not have the structures themselves (Movahedi et al. 2009).
Matching Demand with Supply: The matching of demand and supply is one of the core
objectives of supply chain management in the rapidly changing business environment. This is
aimed at maintaining flexibility and reducing costs in stock management.
Measuring Performance in a global context: The emergence of the global supply chain also
necessitates the development of techniques that can be used to measure performance.
Performance in a global context is best done using the supply chain. When all the activities
are identified along the supply chain, the performance at each level can be compared to that
of other stages to determine its effectiveness and efficiency.
The development of the supply chain management concepts have followed identifiable steps
that are related to changes in business environment in terms of economic integration, changes
in competition and the changes in information technology. The concept was first developed
in the USA in the 1980s as a result of expanding industrial production and increasing
complexity in the management of supplies as well as increasing competition from other
international companies (Larson and Halldorsson 2004). The major developments in this first
stage were the Japanese system of production that focused on minimising costs and
establishment of standards procedures. This stage was followed by development of
integration processes. Integration processes was facilitated by the sharing of information
between departments. The Enterprise Resource Management packages emerged and the sales
Stock Control in Supply Chain Management 8
force could easily share information with the procurement department facilitating the
reduction of stock holding cost. This stage was as a result of the increase in information
handling capabilities. The integration stage was followed by the globalisation stage.
Globalisation which was enhanced by the rapid progress in information technology implied
that supply chains had now to be managed across national and continental borders. The result
was the emergence of business to business communication strategies across continents.
Global sourcing and marketing were the main indicators of the stage. The globalisation stage
has been followed rapidly by the specialisation stage which is still developing. The
specialisation stage has seen the emergence of outsourcing firms and logistics firms which
handle the supply chain for other business. The emergent supply chain management SCM 2.0
is a fusion of the globalisation and the specialisation stages of supply chain development
(Kouvelis et al 2006). The current stage focuses more on making predictions and achieving
superior flexibility.
2.1.2 Evaluation
As the introduction shows supply chain management like many other business concepts is
still a developing concept. There are actually no defined boundaries between one stage and
the next in the development of the concept. Also like in many other business concepts ,
application has always preceded the development of the theory due to the rapid changes
occurring and the increasing competition that business are experiencing forcing them to be
continuously creative (Mentzer 2001). The evaluation of the literature on supply chain
management in this study follows the functions that have been identified as critical in the
supply chain management. The following functions are the most common in the management
of supply chains.
Stock Control in Supply Chain Management 9
Distribution Network Formulation
The distribution network formulation is one of the most common and integral parts of the
supply chain management. The distribution network relates to the location of the suppliers,
the production facilities and the stores. The transport networks also fall under the network
configuration. For the supply chain to be effective and efficient, the network has to be
designed in a way that will minimise transportation costs (Ketchen and Hult 2006). The
configuration of the distribution network is heavily influenced by the type of business as well
as the type of products being handled. In companies that offer services, the network has
become less relevant with the emergence of information technology that has made it possible
for the services to be offered from large distances. An example is the call centres for
companies in the USA that are now located in Asian countries such as India (Movahedi et al.
2009). For companies offering easily digitised products the distribution network has become
virtual since no physical stores are necessary. This has been made possible by the emergence
of digital payment facilities. Logistics companies have emerged that are able to manage the
distribution network more efficiently for other companies enjoying economies of scale and
applying sophisticated algorithms to optimise distribution .
Distribution Strategy
The distribution strategy is another critical function that is integral to the supply chain
management. The distribution strategy relates to several strategies that the companies can
adopt in the management of the distribution of the products (Larson and Halldorsson 2004).
One such strategy is control. Control can be centralised or decentralised, in some business a
hybrid of the two approaches have been applied. The nature of control of the distribution
strategy has a huge impact on the success of the supply chain. However, just like the
distribution network the distribution control strategy depend on the type of organisation and
Stock Control in Supply Chain Management 10
the organisation goals. Distribution control affects the flexibility of the business. Centralised
control reduces the flexibility of the business where the network is widely distributed over
large geographical and economic regions. However, centralised control also helps achieve
better coordination and may therefore reduce the cost of stock management (Kouvelis et al.
2006). A hybrid or shared control system is applied when central control is required and
decentralised control necessary due to the nature of the products handled. The development
of powerful computers has made it possible for business that uses the centralised control
system to increase flexibility by sharing information with the branches on a real time basis.
Another aspect of the distribution strategy is the delivery scheme. The delivery scheme has a
direct impact on stock control strategy applied (Hines 2004). The delivery scheme adopted
also depends on the nature of products being handled. A good example of a delivery scheme
is the direct to the store delivery system that have been adopted by many big supermarkets
and manufactures. The manufacturers deliver the products directly to the store without the
need to go through other procedures such as warehousing or docking. The delivery system
has become more critical with globalisation. One of the strategies that have been used by
companies to optimise the delivery system is the location of the manufacturing facilities near
the supplies or near the markets. This way, there is no need for extensive planning on how the
materials or the final products should be delivered to the necessary locations. In the digital
businesses such as Amazon this function hs been delegated to the specialised companies such
as DHL which are able to organise for the delivery depending on their system. The
companies do not have to plan on how the delivery is to be conducted. When the products are
not tangible the deliver strategy is not relevant since the consumers can easily download the
products and the suppliers can also provide the suppliers from any location and at any time
directly to the producer. The mode of transport remains a critical decision and strategic area
of the distribution strategy. Early in the development of the concept of supply chain
Stock Control in Supply Chain Management 11
management transportation was thought to be a decision purely influenced by costs. This has
changed with emergence of manufacturing systems such as lean manufacturing. In such
system the value of the products to be delivered and the frequency necessitate the
development of a comprehensive strategy on the transportation mode to be adopted. Some
transportation systems do not provide the frequency that may be needed and others may be
uneconomical for the small batches of items that lean manufacturing may necessitate
(Ketchen and Hult 2006). Globalisation and information technology has impacted on
transportation modes immensely. With increase in distances to be covered faster modes of
transport are necessary. Information technology has facilitated the development of real time
communication of the business making it possible for transportation to be scheduled in a
synchronised manner. Logistics companies have also made transportation easier. Companies
now can outsource all their transportation needs from specialised institutions. Using
assignment algorithms these specialised companies are able to optimise on the transportation
reducing cost to the producers and also the customers. The implication to supply chain
management is that businesses now do not have to be able to design the transportation system
on their own. Specialised entities now handle most of the transportation needs. The mode of
transport used is related to the transportation control. The use of owner operated or contracted
transportation depends on the nature of the products and the nature of the supply chain. Big
businesses are able to develop their own transportation system and also operate departments
handling transportation only. However, the complexity of the global supply chain has made
this option very inefficient. Currently even big business use contracted transporters.
Transportation control may impact on the whole supply chain. In the choice of the
transportation control system to be used, businesses have to pay attention to the special needs
of their production system and the customers (Larson and Halldorsson 2004). Where
flexibility is of high priority the company can have some from of owner operated transport
Stock Control in Supply Chain Management 12
system. This reduces the chances that the customers would be disappointed or the production
would have to be stopped because of delayed transportation. The trade off may however
result in high cost of transportation for the company. The general trend is towards the use of
specialised companies that are able to optimise the transportation system. The development
of information technology has enabled companies to be able to track the movement of their
products along the lines of the specialised transporters thereby facilitating better control and
planning. Distribution strategy also involves the formulation of the replenishment strategy.
Replenishment strategy is also directly related to the stock management system employed by
the company and also the manufacturing process used. The replenishment strategy can be
conveniently described under two categories. The first is the pull strategy. The pull strategy
relates to the process where the delivery of the suppliers is based n the needs of the next
stage. In supply chain management, manufacturing would only be done once the current
stock has bee delivered to the customer and the raw materials would only be sourced once the
existing materials have been taken in for production. Pull strategies are mostly applied in
areas where the products are of high cost or the storage cost can be very significant. The
second strategy is the push strategy. This strategy involves the production of items or
delivery of products before the demand has been secured. The products are then marketed to
the customers while in the store. This strategy is currently being phased out in a majority of
business partly due to the success of the pull strategies and also due to the rapid changes in
the consumer behaviour (Halldorsson et al. 2007). A third strategy is emerging that is a
hybrid of the first two and uses the techniques in both strategies. A hybrid of the pull and
push strategy is common in many business due to the need for flexibility. While the push
strategy appears to be inefficient it is applicable in markets where the raw materials may not
be easily acquired in a short duration.
Stock Control in Supply Chain Management 13
Trade Offs in Logistics
Supply chain management also involves the establishment and execution of tradeoffs. Some
of the objectives of the supply chain end up conflicting each other necessitating tradeoffs
(Cooper 1997). A good example is in the distribution strategy evaluated above. While the
operation of owner controlled transportation system may provide better flexibility than the
contracted transport strategy, it may also increase the cost of production as the operation of a
transportation system will introduce other cost not related to the manufacturing such as the
maintenance of the transportation vessels and insurance. The use of the pull replenishment
strategies while it lowers the stock handling costs also exposes the business to changes in the
prices of the raw materials that may increase production costs. The development of efficient
tradeoffs is therefore critical in the development of an effective supply chain system. The
tradeoffs have however been minimised by the development of information technology. The
interconnection of the world through the internet has made it possible for business to track
prices of raw materials and finished products in real time making it possible for them to
adjust their strategies accordingly. Tradeoffs have also been minimised by the development
of the specialised logistics companies. These companies are able to maximise the efficiency
of the supply chains of the customers since they are able to coordinate all their activities.
Information
Information is also a critical aspect of the supply chain. The rapid development in the concept
of supply chain in practice can be associated with the rapid improvement in information
technology (Gokhan and Needy 2010). An efficient supply chain relies to a great extent on
the quality of the communication between the various parties involved. Information
exchanged includes market forecast for potential collaboration. Companies need the sharing
of information between departments to be able to develop efficient supply chain management
Stock Control in Supply Chain Management 14
strategies (Movahedi et al. 2009). The demand forecast for example facilitates in the planning
for the sourcing of raw materials and the production processes. Collaboration has been the
main source of economic benefits to the logistics companies. By collaborating the supply
chain needs of different companies in different locations the companies are able to develop
strategies that leave all the companies involved better off and make a profit. For example
using the many stores of customer businesses, DHL is able to reduce the time need to make
the delivery of a product by sourcing it from the nearest store and then replenishing it later
using its extensive network of distributors. The collaboration reduces the cost for the
company as well as improving customer satisfaction through timey delivery. Apart from the
huge advantages that are enjoyed by companies with global supply chains from the sharing of
information between stores and departments, information has also reduced the cost of supply
chain management. In one scenario retailers are able to synchronise their information systems
with the suppliers such that when the reorder level is reached, the system automatically
delivers a purchase order to the supplier and the stocks are replenished. This reduces the cost
of handling stock to the retailer.
Stock Management
Stock management forms the most critical part of the supply chain management. Stock held
by businesses is of several types. The most common are; the raw materials, work-in-progress
and the finished goods. The strategy use in stock management also depends on all the other
factors evaluated above. The production system is also important in the management of stock
(Womack and Jones 2003). Supply chain management necessitates the accurate
determination of the levels of stock needed at any given time and the establishment of the
locations and the suppliers that would make it possible for the organisation to minimise the
cost of handling stock. While globalisation has made the handling of stock more complicated,
Stock Control in Supply Chain Management 15
information technology and specialisation in the logistics industry has made it easier for
businesses to manage their stock.
Cash Flows
As stated in the introduction to the chapter the supply chain management strategies of a
business are also part of the overall organisation strategy that aims at creating value for the
business. The implication is that all the strategies adopted by the business in its supply chain
management must be within the overall framework of value creation. One of the major
determinants if value in the business is the management of cash flows. Cash flows determine
the profitability of the business as well as the risk that the business faces. The cash flows also
determine whether a business can be able to take advantage of opportunities as they occur. In
many business especially manufacturing businesses, the stocks held form the greatest
proportion of the value of assets and the strategies applied in the management of stocks
therefore have a huge impact on the level of cash flows that the business has access to and the
amount of cash needed (Kieso et al. 2007). The management of the supply chain therefore
requires the coordination of the activities to minimise the amount of cash needed at any given
time and also to coordinate the payments to avoid incurring costs of holding cash.
Globalisation has increased the complexity of cash flow management within the supply chain
due to the economic differences in different regions of the world. Managers have now to
consider exchange rates as well as interest rates in the management of cash flows.
Information technology has however reduced the risk involved by making it possible for the
business to track the movements of interest rates and exchange rates on a real time basis.
Functional Levels
The management of the supply chain has also evolved along common business functions. The
activities and strategies applied in the supply chain can be identified with the common
Stock Control in Supply Chain Management 16
business management levels (Gokhan and Needy 2010). The implication is that supply chain
management involves the making of strategic, tactical and operational strategies.
Implementation also revolves around these functions as follows:
Strategic Level
At the strategic level the business must make decisions with regard to strategic alliances and
the number of stores to operate as well as where to operate them. At this stage the business
must also make decisions on whether to operate the various activities of the supply chain or
simply outsource them. The long term needs of the organisation must also be made.
Decisions made at this level are not usually easy to change and therefore require careful
analysis (Emiliani et al. 2007). Strategic alliances are also made at this level. The implication
to supply chain management is that some strategies made by the business on the supply chain
impact on the whole business, they also impact on all the other activities and strategies of the
supply chain. The success of the supply chain management strategy must therefore start at
the top in form of well aligned strategies and reliable forecast of the resources needs of the
business. The strategic level strategies in supply chain management are usually the source of
competitive advantage. By making decisions on whether to make or buy certain products the
businesses can be able to create cost advantages better than competitors and the advantage
may not be replicated without the incurrence of huge cost by the competitors. The strategic
levels decisions have to take advantage of the possible changes in the environment. Where
the strategies are too rigid the business may loose the flexibility needed to lower cost.
Tactical Strategies
The tactical level supply chain strategies relate to the sourcing of the contracts after decisions
have been made on the types of contract the business will engage in, decision on the planning
of the production system and schedules the planning of materials sourcing the routes and the
Stock Control in Supply Chain Management 17
location of the stores, performance management on the various departments to ensure that all
activities are in line with the overall strategy and management of demand and supply forecast
(Tan and Gershwin 2004). The tactical level strategies are very important in the success of
the supply chain management. Even when the strategic level decisions are superior the
tactical level strategies can lead to failure of the whole system. Issues such as cash
management are greatly impacted by the tactical level strategies since this is where the level
of stock is managed and the payments systems are also planned. Through benchmarking the
tactical level managers are able to evaluate the performance of all the activities within the
supply chain and develop strategies that improve the results.
Operational
The operational activities in the supply chain relate to the day to day activities that are party
of the supply chain management strategy. The most important aspects of the operational level
activities are that they are the ones that update the overall strategy. In the modern highly
integrated business functions the performance of the company is tracked at a second level and
the system are updated almost continuously (Brown 2008). The operational staffs however
still hold a lot of responsibility with regard to the success of the supply chain strategy. This is
because they are the ones who apply the schedules developed at the tactical level. The
implication of the operational level activities is that people are also critical in the
management of the supply chain. While most of the other activities can be developed using
algorithms, the real implementation still relies on the people. Due to the improvement in
communication between the tactical level strategist and the operational level implementers as
a result of improvement in information technology, production can be coordinated across
continents while control is centralised. This facilitates the development of global supply
chains that are coordinated even at the operational level. The major objectives at the
Stock Control in Supply Chain Management 18
operational level are the minimisation of waste and the accumulation of information that can
be used to develop forecast and develop remedial actions when necessary.
2.1.3 Summary
The evaluation of the literature on the supply chain indicates that the concept is rapidly
evolving in light of new developments in the business environment. The major goals of
supply chain management have been identified as the creation of competitive advantage for
the business, creation of net value, and the matching of supply and demand. Although there
are other several objectives that emerge at various levels they can easily be related to these
three objectives. The evaluation has also revealed that supply chain management has evolved
over time from concept, integration stage, globalisation stage, the specialisation stage and the
current supply chain management 2.0 which combines elements of globalisation and
specialisation to form a new style of supply chain management that has a futuristic outlook.
The evaluation has also revealed that there are several functions that are critical to the supply
chain management as follows: distribution network, distribution strategy, tradeoffs in
logistics, information, stock management and the cash flow management. Each of these
functions must be handled carefully for the supply chain to achieve its objectives. Supply
chain strategies also have the common business management levels i.e. the strategic level, the
tactical level and the operational level. Each level is important in the achievement of the
overall goals. The major factors identified in the evaluation that have impacted on the
development of supply chain concepts are globalisation information technology and
specialisation. All the three factors have resulted in opportunities as well as challenges. The
supply chain strategies adopted depend to large extent on the type of the organisation and the
type of products that the business deals with.
Stock Control in Supply Chain Management 19
2.2 Stock Control
2.2.1 Introduction
Stock control and management is an important function of the supply chain management.
Stock control refers to all activities that the business engages in to optimise the handling of
stock. Stock can refer to the raw materials, work-in-progress or finished goods. In supply
chain management stock control implies the management of stocks in the simple
merchandising institution and also in the complex manufacturing systems and distribution
networks (Kennedy 2003). The definition of stock control is therefore highly contextualised
and may have different implications depending on the environment. However there are
common elements of the stock control system that are observable in all scenarios. In general
therefore stock control relates to several techniques that are applied by businesses in the
management of their stock. The main objectives of stock control are as follows:
Avoidance of stock outs: Stock outs refer the situation where the stocks are out and the
business has to stop its activities as additional stock is sourced. In a manufacturing entity the
stock out of raw materials may mean the shut down of the production system to avoid losses
(Taiichi and Mito1988). Many manufacturing process are optimised to run for extended
periods and the shutting down and restarting may necessitate incurring of additional costs. In
other cases the running out of stock may imply the damage of the production process. In
merchandising enterprises, stock outs imply that the customers would visit the business and
find none of the items they are looking for. This would not only deny the business the profits
but would also damage its reputation limiting future success (Johnson and Broms 2000).
Minimisation of stock holding costs: stock is usually a major component of the asset held by
a business at any given time. The implication is that the higher the amount of stock the higher
Stock Control in Supply Chain Management 20
the amount of value tied up in the stock and also the higher the requirements for security.
Businesses therefore develop stock control strategies to minimise the cost involved.
To hedge against rising prices: One of the objectives of the supply chain management is the
creation of value for the business. This may not be possible when the prices of the supplies
keep rising. In conditions of rising prices of the supplies businesses use stock to hedge the
business against high production costs (Tanaka, T., 1994). By purchasing large volumes
when the prices are still low the business is able to enjoy low stock values in the future when
the prices are higher. In the oil industry, this is a common practice due to the volatility of the
oil prices. Companies that use oil products such as the airline companies enter into forward
contracts for the purchase of oil frequently to minimise the effects of rising oil prices.
2.2.2 Evaluation
Stock Holding Costs and Risks
As the introduction demonstrates, stock control is directly related to the management of costs
related to stock handling. The success of the stock control system can therefore be easily
established on the basis of the cost minimisation (Anderson et al. 2006). However, stocks are
associated with several types of costs whose minimisation may lead to conflicts. The costs
that pose challenges to the management of stock are as follows:
Opportunity Costs
Opportunity costs relate to the interest foregone on the amount invested in stock. In
manufacturing organisations, stock which comprises of the raw materials, work-in-progress
and the finished goods comprises a substantial value of the investments. The value held in
stock can easily be invested in other short assets that would earn the company some interests
(Hines 2004). The stock control procedures therefore aim at minimising the value held in
Stock Control in Supply Chain Management 21
stock. Logic would imply that the business should not hold any amount in stock and only
source materials when needed. Although this has been a major concept in the development of
stock control procedures it is also identifiable that business may not be able to hold zero
levels of stock due to rigidities in the procurement system. The techniques that have emerged
in stock control that are aimed at minimising the amount of stock held are generally called the
pull techniques. Due to the complications in the procurement of stock such as the inability to
divide the supplies infinitely resulting in batches and lead time, it becomes necessary that
businesses keep some little amounts of stock in the stores. As a result of improvement in
communication system the level of stock held and therefore the opportunity costs incurred by
businesses has been reducing. The decline of the auto manufacturers in the USA has been
associated with the high levels of stock that they held resulting in high opportunity costs.
Storage Costs
Stock is also associated with storage costs. In stock control the storage cost comprises of
several types of expenses such as the warehousing costs and the insurance costs (Kieso et al
2007). Huge amounts of stock require insurance as well as storage places. Warehousing
emerged as a result of the need to hold stock either in transit or awaiting transfer to the
factory floor. Stock control system in supply chain management relate to procedures that
seek to minimise cost such as warehousing cost and insurance cost as well as the
minimisation of the volume of stock held since it has direct relationships with the storage
costs. Pull techniques of stock control have minimised the cost associated with holding
stock. However the development of logistic companies has also facilitated the reduction of
the storage costs. Businesses no longer need to store the stock they need as this can easily be
outsourced to specialised firms. The specialised firms are able to minimise the cost by
negotiating better terms with insurers and also coordinating the activities of the
manufacturers to minimise the amount that is held. Storage of stocks also limits the flexibility
Stock Control in Supply Chain Management 22
of the business to take advantage of new opportunities. The storage cost can therefore be
deemed to involve the loss of the ability to change the method of production in the short term
since this would imply loss of the specialised materials that have already been acquired.
Bank Interest
Businesses today are financed through debt and other options that require the payment of
interests. Holding of stock therefore involve the payment of interests on assets that are not
earning to cover the interest. Stock control procedures in supply chain management should
therefore involve strategies aimed at minimising the costs of borrowing. Although the
function sound like it is related to the financing of the business and unrelated to the supply
chain management, the contracts entered into in the procurement of goods can lead the
incurrence of huge amounts of interests (Womack and Jones 2003). The minimisation of the
interests cost on investments held in stock has been complicated by globalisation while being
made easier by the development of information technology. Financing of procurements in an
international supply chain requires the establishment of the exchange rates and the interest
rates. It also requires the development of good relationships with banks which most of the
time provide the credit that is required. The management of the borrowing costs therefore
necessitates specialised knowledge in finance. However the common procedure of trying to
minimise the borrowing cost is the minimisation of the amount of stock held since the
amount borrowed is proportional to the amount of stock held. Other techniques that have
been used such as the matching of the payments and the receipts for the stocks help in
minimising the risks such as exchange rate risks.
Stock Control in Supply Chain Management 23
Risk of Destruction
Transportation and holding of stock also involves the risk of destruction. Destruction can
result from a host of factors such as; fire, tempest, sinking in the sea. Stock control system in
supply chain management should be able to address all these factors (Tan and Gershwin
2004). One of the most common strategies used is the use of insurance. Insurance however
increases the cost that the businesses have to incur in the handling of the stocks. Stock
management therefore involves the negotiation of the best terms in insurance as well as the
development of destruction control policies and their implementation. One way of
minimising the risk of destruction and the consequent costs is the minimisation of the
amounts of stock held. If destruction from fire were to occur, the lower the amount of stock
held the lower the loss. The distribution strategy is therefore heavily influenced by the risk of
destruction faced by the companies. The type of stock held also determines the strategies
adopted in the minimisation of the risk of destruction. Highly fragile stock such as glass or
highly flammable items such as oil and gas require elaborate risk control procedures. The
coordination of the supply chain activities reduces the risk of destruction since demand is
matched with supply to ensure that the duration in which the stock is held is minimised.
Risk of Obsolescence
The risk of obsolescence is related to the loss of value of the stock as a result of changes in
the business environment or production systems. The rapid changes in the business
environment both domestically and globally has been one of the greatest driving forces in the
development of stock control procedures in supply chain management (Womack and Jones
2003). Changes in the production system makes the stocks used in the outdated system
obsolete and may loose all their value. Supply chain management is aimed at increasing the
net value of the business. This requires the minimisation of the risk of obsolescence (Emiliani
Stock Control in Supply Chain Management 24
et al. 2007). One way of reducing obsolescence is the reduction in the amount of stock held
and also the reduction of the duration that stock has to be held. The implication to supply
chain management is that the amount of stock held has to be as low as possible and also the
stock has to be held according to the level of demand to reduce the risk. Lean manufacturing
has emerged specifically to address the loss of flexibility and the risk of obsolescence that
manufacturers face by holding huge amounts of stock. Risk of obsolescence faces all types of
business. With the acceleration of changes the risk is higher now than it was several years
ago.
Risk of Deterioration
Deterioration is also a risk that is faced by business related to holding of stock. Deterioration
mainly affects perishable commodities. Commodities such as vegetables and chemical
compounds may undergo deterioration rapidly (Haag et al. 2006). This necessitates the
development of supply chain techniques that reduce the amount of stock that needs to be held
at any given time and the duration that the stock is to be held. In the food retail industry the
retailers have been able to develop closed loop stock management systems with the suppliers
of the products. This way the retailers are able to hold only the amounts required for a short
duration and the suppliers keep the shelves replenished every time.
Systems of Stock Control
The development of stock control systems has also followed the evolution of supply chain
management techniques and the major trends in business management. The techniques used
to control stock vary from one business to another due to the variations in business
circumstances. The techniques can however be categorise into two groups; the pull systems
and the push systems. The following is an evaluation of the major techniques under each
group.
Stock Control in Supply Chain Management 25
Pull Systems
Replacement and Vendor Managed Systems
The replacement system operates in a very simple way and involves the replacement of the
stock that has been used. The procedure is common in simple types of stock such as grocery
and other low value consumer products. The procedure requires the establishment of a
designated place where the items are stored. Once the current stock is sold or taken to
manufacturing, new ones are ordered (Brown 2008). The vendor managed system is similar
to the replacement system except that in the second case the vendor or supplier of the stock is
integrated to the system and is informed automatically. This is common in consumer product
shops and in some simplified manufacturing environments. The benefit of the system is that it
is simplified and therefore easy to implement. The method also results in very little amount of
stock being held minimising all the stock holding costs and risk. However, the method cannot
apply in complex manufacturing where the movement of stock is influenced by many factors.
In areas where the stock takes longer than the manufacturing process to make, the technique
may also not apply. The technique was the precursor of the more sophisticated pull systems
in stock control. The method has however worked successfully in retails stores and in system
where the consumer serves themselves like in the automated dispensers.
Kanban Systems
The Kanban system is closely related to the replacement system. However the method is
applied in complex manufacturing too. The Kanban system was developed by Japanese
companies and specifically Toyota in the 1980s inspired by the coffee dispensers observed in
the United States (Morgan 2006). The system is associated with the 2 bin system as well as
the 3 bin systems that developed in manufacturing around the same period (Dyer and
Nobeoka 2000). The system involves the establishment of two or three containers as the
Stock Control in Supply Chain Management 26
names suggest where stock is held. When the container next to the production line is
exhausted it is turned to the back of the line and filled again. The method therefore functions
as the replacement system only with the introduction of some holding facilities. The method
was beneficial to the Japanese companies since it reduced the amount of stock that needed to
be held at any given time. This minimises all the stock holding cost as well as the risk
involved in holding stock. The method is also very direct and therefore easy to apply. The
movement of the bins could also be tracked allowing for the accumulation of data that could
be used to adjust the stock control procedures without the need to slow down the production
system. The method however suffers from the limitations of the replacement system. Where
the procurement systems are rigid it does not offer much relief and complex manufacturing
systems could also not easily be followed with the bin system.
Reorder Point Systems
The reorder system is one of the most sophisticated systems applied in the management of
stock in the pull system. The technique developed with the development of information
technology that could help determine the production levels, the quantities used, the cost
involved and also include predictions on the future costs of the stock (Grout 1997). Although
the method can be applied in its simplified form in normal business stock control procedures
it is also applicable in complex manufacturing where data can be tracked on the material
consumption and the lead time of the supplies as well as the costs. With the development of
the global supply chains, the method has become even more important due to the increase in
the data that has to be analysed to determine the stock levels. The benefits of the reorder point
system are that it introduces objectivity in the management of stock in complex systems. The
method also relies on the cost of the stock and the lead time involved. The method therefore
incorporates the major factors of stock control system which are the cost and the lead times
involved. It therefore results in the minimisation of the stock held at any given time and also
Stock Control in Supply Chain Management 27
results in the minimisation of the stock handling costs. Automation is also possible with the
technique and the stock control system can therefore be integrated with the suppliers systems.
The shortcoming of the method is that it involves the making of predictions on items such as
the prices of the stocks which are inherently unpredictable. Globalisation has also introduced
complexity in the prediction of stock prices. The improvement in computing power however
implies that the method can be used in complex manufacturing areas.
Push Systems
All time buy
All time buy, is a technique in stock control that involves the purchase of all the required
materials at once. The technique is the most simplified of all the push techniques of stock
control. The advantage of this technique is that it reduces the transaction cost significantly
since it involves only the making of one transaction (Johnson and Broms 2000). The method
also has a huge advantage in environments where cost only goes up. In such an environment,
if the stock is not of a perishable nature then the company would make substantial cost
savings by making the purchase once when the prices are low (Schonberger 1982). Such
environments are however rare, implying that the technique has limited applications. The
most common areas where the technique is applied are in the manufacture of high value and
sophisticated items such as aircrafts and electronics. In such manufacturing environments, it
would be very costly to change the manufacturing system in case the materials were not
available when needed. The production system in such environments also takes a very long
time to finish some taking several years which implies that the chances of the cost of the
materials going up is almost certain. The technique however results in the increase in all the
stock holding cost as well as the risk. In supply chain management such a technique can only
Stock Control in Supply Chain Management 28
be applied in specialised circumstances due to the high cost involved and the high amounts of
funds needed to operate.
Project Manufacturing
Project manufacturing is another technique that applies the push philosophy in the
management of stock levels. The technique is mainly applicable in projects or where the
manufacturing process can be divided in batches that can be evaluated independently as
projects (Miltenburg and Wijngaard 1991). The materials required for the whole project are
usually sourced in the beginning of the project or before the manufacturing begins. The
method has the limitations similar to the one time buy technique. It results in high volumes of
stock being held in the business increasing the stock holding costs significantly. The
transaction costs are however minimised. In the most advanced form of the technique the
PERT system that establishes the critical path are used to schedule the resource usage. In
specialised projects the method helps in minimising the chances of loss where the stoppage of
the project would result in huge losses. In projects that take a long time to finish it may also
help in hedging the rise in the prices of the inputs. The method is also applicable in complex
manufacturing processes that involve many steps due to the development of algorithms that
can assist in the prediction of the material requirements. The high amounts of funds required
to operate the technique implies that its application is limited to high value projects and in
manufacturing where access to finances is adequate.
Period Batch Control
Periodic batch stock control technique is very common in manufacturing companies
currently. Although the technique is essentially a push technique it has most of the elements
of the pull techniques. The technique relies on the breakdown of the assembly line into
several stages and the establishment of the time period taken on each stage (Norman 2009).
Stock Control in Supply Chain Management 29
The materials are then sourced to only cover the time period it takes to process them in the
next stage. The process therefore follows a cyclic order where materials are ordered in
batches fit for the process for one cycle. The application however results in a continuous
process. The method was the precursor to the now famous Just in Time (JIT) stock control
process that delivers the stock only when they are needed for the next process. The technique
has been applied widely in manufacturing under several names such as the Cyclic Reordering
and JIT and is also incorporated in other stock control techniques such as the Materials
Planning method. The technique results in the reduction of the stock holding costs due to the
reduction in the level of stocks held at any given time. The method is also applicable in
complex manufacturing systems that involve many stages. However, where the assembly line
has several branches, the application of the technique becomes limited.
Material Requirements Planning 1 & 2
Materials requirements’ planning is the modern technique of stock control that relies heavily
on information technology. The technique has developed through stages incorporating the
schedules applied in the periodic batch processing (Anderson and Dekker. 2009). In the first
stage the MRP 1 uses the schedules in periodic batch control and computers to develop
highly efficient cycles for ordering and scheduling production. In the next stage of the
technique which is known as MRP 2 many other techniques including the JIT techniques are
incorporated with the help of information technology system. The result is a highly optimal
stock control system that closely follows production in the stock management. The method is
also very close to the pull techniques. The techniques results in very low stock levels and also
timely ordering of new stocks. All the costs associated with holding of materials are therefore
minimised and the flexibility of the business improved. The use of computers also makes it
possible for the technique to be applied in complex manufacturing environments where there
is branching and complex procedures. The only limitation with the technique is that it does
Stock Control in Supply Chain Management 30
not incorporate price variables or other factors that may not be related to production that may
affect the stock management process such as changes in technology that may make the
production system obsolete. The techniques also require a good understanding of the complex
computer algorithms required to develop the system.
Advanced Planning & Scheduling
Advanced planning and scheduling is another technique that has emerged with the
development of powerful computers that can be able to analyse complex manufacturing
systems (Carr and Karmarkar 2005). The technique uses several other techniques all of which
require computer optimisations such as the network analysis and multiple constraint analysis.
It also incorporates the JIT method and the critical path analysis. In a global supply chain the
technique can be very complex. The implications are that the method results in the
minimisation of the stock holding costs since very little stock is held at any given time. The
production system is optimised in accordance with the stock management technique. In this
technique the production system is also adjusted to fit the models used in stock control. The
technique is applicable in very complex manufacturing systems thereby providing a tool for
control of stock where many other tools would not apply (Irano and Makota 2006). However,
the technique relies heavily on information technology and therefore requires some
considerable training to apply. The computer system may also add the costs to the stock
control process that would not be there while using other simpler techniques. The model also
does not provide a technique of predicting the prices of the stock which would be very critical
in the management of stocks. The technique benefits from the rapid improvement in
computing power and the cost may therefore fall with time.
Stock Control in Supply Chain Management 31
ERP Systems
ERP systems of stock control can be analysed separately since they apply both of the
philosophies of the push and pull systems. ERP systems emerged as a result of improvement
in information technology (Gokhan and Needy 2010). Since most of the business processes
are computerised it becomes possible to develop one systems that would be able to adjust all
the parameters related to stock levels whenever an event occurs that affects the variables
related to stocks such as a sale, changes in prices, changes in suppliers, changes in the
production systems and also changes in stock levels. ERP are organisational wide and are fed
with data from many sources. The benefits of the ERP system is that they are able to adjust
the stock management system when any factor that influences the business and the stock
management system is interfered with and also produces real time information on the overall
status of the business. They therefore tie stock control to other functions of the business
which is beneficial to the whole supply chain management system, low volumes of stock are
maintained in the business and also the business maintains its flexibility as information is
integrated into the system in real time. The system however requires investment in
technology and training which may increase the cost of stock management.
2.2.3 Summary
The evaluation of the literature on cost control techniques indicates that there are several
challenges that businesses face in the management of stock. The challenges are related to the
stock outs, holding costs and the risk of changes in stock prices. The costs associated with the
holding of stock are the opportunity costs, bank interest costs and storage costs. There are
also risk associated with holding of stock such as the risk of destruction, the risk of
obsolescence and the risk of deterioration. The importance of the risks and cost differ from
one organisational to another depending on the type of stock managed and the production
system applied. The evaluation of the techniques used to control stocks reveals that
Stock Control in Supply Chain Management 32
techniques are many and have also followed the changes in business environment and
technology. The techniques can be grouped into two categories i.e. the pull and the push
system. The pull techniques focus on delivering stock only when it is required while the push
techniques deliver stock in preparation for production. The push techniques have developed
to closely resemble the pull techniques. Another type of stock control technique is the ERP
system that functions as organisational wide systems. The success of the stock control
technique depends on its ability to maintain low levels of stock, integrate the information
arising from the markets and production, maintain flexibility of the organisation and utilise
information technology. The development of information technology has resulted in
sophisticated stock control systems that use complex algorithms to schedule production and
stock delivery.
Stock Control in Supply Chain Management 33
3.0 Chapter Three: Methodology
3.1 Introduction
The research methodology is based on the research objectives set out in the Introduction. The
aims necessitate the evaluation of literature as well as the evaluation of the production system
applied by Toyota. The philosophy behind the methodology is that the elements of the supply
chain and stock control are based on the functions and capacities of the business as well as
the development of knowledge on the area. As a consequence it is possible to observe and
record the various aspects of the supply chain. This approach is inspired by the scientific
research method which is anchored on objectivity. The approach is also informed by the aims
of the research. The research is expected to produce information that can be used by
academics and business leaders in understanding the supply chain and stock control systems
better. In this regard the information is expected to be objective enough and the suggestions
generated capable of being applied in different scenarios. The following sections evaluate the
research design, data collection and analysis and the limitations that are likely to be
encountered in the collection and analysis of the data.
3.2 Research Design
The aims of the research are to evaluate the supply chain and the stock control measures
applied in modern business in the context of Toyota car manufacturer. The research design is
therefore descriptive. The descriptive research design is appropriate for this research since it
provides the opportunity to objectively analyse the elements of the supply chain as applied in
the company. It is expected that the supply chain is highly customised. Businesses apply the
strategies that are appropriate to their circumstances. The description of the factors that have
been considered in the design of the supply chain will give the objective information that will
help in the achievement of the research aims and objectives. The research also takes a
qualitative approach in the collection and analysis of the data. Qualitative research
Stock Control in Supply Chain Management 34
necessitates the use of qualitative methods in the analysis of the data. Qualitative research is
appropriate in this study because it provides the opportunity for induction in the analysis of
the supply chain. The information provided by companies on supply chains are mainly
descriptive and qualitative, as a consequence the qualitative research provides more data
sources than a quantitative research in this case.
3.3 Data Sources and Collection
The research uses secondary data for all the areas. The data sources include official statistics
on the performance of the motor vehicle industry, technical reports by related agencies,
scholarly journals on the subject of supply chain management, trade journals and reference
books on the subject and related areas. Secondary data is appropriate for this research due to
the following:
Adequate: The area of supply chain management and stock control has gained a lot of interest
in the recent past and as a consequence it has been studied widely in different fields. This
provides adequate information for the conduct of the research. Also, Toyota is one of the
leading companies in the world both by size and industry dominance. The company’s
production system and its supply chain has been the subject of numerous studies as
organisations tries to copy it. However, given the high rate of failure in its adoption by other
companies it can only be concluded that the system is still not well understood, which one of
the inspirations for this study. Information is therefore available from various sources on the
company.
Resources: The resources available for the conduct of the research are limited; as a
consequence, a study that would cover Toyota using primary data collection methods is not
applicable. Use of secondary data sources reduces the resources required since most of the
required information is accessible form the internet and the library.
Stock Control in Supply Chain Management 35
Comparison: The knowledge on the supply chain management and stock control is still
developing and the formation of a common point of view requires the comparisons of varied
sources of information. The use of secondary data in the study provides the opportunity for
making comparisons in the discussion of the findings.
Data collection involves the search and collection of all the sources indentified above that has
information on the subject and the area of the research. In the collection of data the major
considerations are as follows:
Original Purposes of the Data: It is not expected that there will be data collected for the same
aims as the aims of this study. The collection will therefore involve the establishment of the
original purpose of the data collection to ensure that only unbiased data is collected.
Credentials of the Source: The validity of the data is heavily influenced by the credentials of
the sources. The collection will therefore involve the establishment of the author and the
organisation commissioning the data collection. Only reliable data whose sources can be
verified will be used in the research.
Time of Publication: Reliability and relevance of the data is also heavily influenced by time.
The factors impacting on the supply chain are changing rapidly. Historical data may therefore
not provide a very accurate picture of things as they are. Current data will be given priority
over historical data.
3.4 Data Analysis
The analysis of the data is based on the data sources used. The nature of the research as
pointed out earlier requires the use of a vast array of data sources. The analysis fast involves
the classification of the information in terms of reliability. Reliability is determined by the
degree of integrity of the source and the nature of the work done (Bryman, 1988). The
Stock Control in Supply Chain Management 36
description on the purpose of the work and how the data was collected is also used in the
classification of data by reliability (Clonts, 1992).
Once the reliability of the data is established, the next step involves the assessment of the
relevance of the data. It is possible that the works used do not address the main area of the
research as the major issue. Only works that have a relation with the subject matter of the
research are used. The date of publication is also important in the ascertainment of the
relevance of the data.
After the reliability and the relevance of the data are ascertained, the data is reviewed for the
identification of the major findings on the subject matter. The evaluation involves
comparison of source addressing the same problem and the evaluation of the data used on the
works collected. The objective at this stage is to identify all the possible issues that Toyota
considered when developing supply chain strategies and stock control techniques. The major
limitation likely to be encountered in the evaluation is that the sources are likely to only state
the issues that the company has faced. A complete description of the issues that have been
faced would involve the evaluation of the reasons. The reference books will be used to
provide the justifications where necessary. The theory of supply chain management is used to
explain some of the observations made. The nature of the information to be collected is
qualitative and therefore quantitative techniques are not applied in the analysis. The
qualitative data analysis process applied is that of Noticing, Collecting and Thinking
(Hathaway, 1995). This process is applied as follows:
Noticing: This is achieved through reading through the materials. The major issues related to
the research topic are noticed and recorded (Maxwell, 1992).
Stock Control in Supply Chain Management 37
Collecting: The issues noticed are collected by categories according to their relatedness. One
issue is likely to be evaluated in more than one work in several ways. Collecting facilitates
the development of common themes.
Thinking: The thinking part relates to linking the issues identified to the theory in reference
books. It is possible that some issues are related to supply chain management theory and
some are not.
The use of the three step process in qualitative data analysis has the following advantages for
this research:
Iterative and progressive: the process facilitates the repeat of the same process for each
material. Each new issue identified builds on the issues already collected and improve on
them. This facilitates progress and comprehensiveness (Maxwell, 1992; Corbin et al. 1990).
Recursive: Each new issue related to another is linked back to the original point. This
facilitates the development of common themes (Miles and Huberman, 1994; Charmaz, 1983).
Holographic: The whole process moves on as one project. At any given point a summary of
the major findings can be done. This facilitates control on time (Newman and Macdonald,
1993).
3.5 Limitations
The only limitation expected is that the scope of the secondary data may not cover all the
areas necessary for the research. This limitation will be addressed by the use of materials
from many different sources to triangulate the problem. In the discussion, limitations of the
data available will also be disclosed to inform decisions based on the report.
Stock Control in Supply Chain Management 38
4.0 Chapter Four: Findings and Discussion
4.1 Introduction
The Toyota production system was developed in the 1970s and the 1980s when the auto
industry was dominated by the American companies like Ford. In the Early 1980s the
officials of Toyota went for a study tour of the American Auto makers in an effort to learn the
success strategy (Sobek and Smalley 2008). Their visit did not go as they expected and they
did not like the processes applied. Of greatest concern were the high volumes of stock that
were held by the companies at any given time. By the end of their visit they learnt from the
supermarket coffee dispensers that it is possible to develop a production system that only
made a product when the current one has found a market. This way the level of stock needed
would be only the amount necessary for the manufacture of the next batch of items. The
major figure in the system was the company engineer during the period Taiichi Ohno. The
Findings on Toyota Production system and the implications to supply chain management can
be discussed under the following headings:
4.2 Just in Time Production
The system was changed after the Second World War to adopt the just in time processing
technique. The JIT system has come to be identified with Toyota due to its successful
implementation in the company. In Toyota, the JIT supply chain management system and
production system is based on the philosophy that stock is a cost and a waste (Liker and
Franz 2011). According to the literature it is identifiable that stock has high holding costs and
exposes the businesses to many risks (Sobek and Smalley 2008). The philosophy that stock
was a waste of resources in the Toyota’s JIT is therefore a source of value for the company.
However it is also notable that the JIT process involves the frequent purchase of supplies
which may in turn increase the transaction costs. In Japan it has been established that the
suppliers of companies using the JIT system charge a premium on the supplies due to the
Stock Control in Supply Chain Management 39
additional transactional and transportation costs (Morgan 2006). The success of the system
therefore relies on balancing the cost in other areas. The operation of the JIT system in
Toyota has the following aspects:
Flow Process: The production process is designed in form of a flow. This involves the linking
of all the production system and synchronising operations. One of the most notable aspects
of the flow process is the adjustment of the workstations to run at comparable capacity. This
implies that the company can be able to track the movement of a single item from the
beginning to the need of the process (Womack and Jones 2003). In the literature it was
established that the success of the supply chain and stock control systems relies on the
accuracy of the information tracking. The process flow is therefore another source of strength
for the Toyota system.
Total Quality Control: Quality control is another critical element of the JIT process applied
by Toyota. In Toyota poor quality is a source is waste and disruptions and cannot therefore be
tolerated (Sobek and Smalley 2008). The elimination of poor quality implies that the stock
purchased is only that required for the production and there is no scrap in the process. This
reduces the stock holding costs creating value for the company. Scrap is one form of stock
that in most cases would need rework or disposal increasing the cost of stock. In the literature
prediction of stock needs was also a critical element of stock control system. Poor quality
reduces the accuracy of predictability and therefore reduces the effectiveness of the stock
control system.
Stable Schedules
The stabilisation of schedules also simplifies greatly the management of stock. In the
evaluation of the stock control techniques, the simplicity of the manufacturing process could
be related with the effectiveness of the stock control technique. The stable schedules make it
Stock Control in Supply Chain Management 40
possible for the company to use information system and also make predictions on stocks
needs. This improves the effectiveness of the supply chain management strategy of the
company (Taiichi and Mito1988).
Kanban Pull System
The demand pull system observed by Toyota officials in the American supermarkets remains
an integral part of the stock control system. The system has seen the reduction of the lot sizes
to the minimum. The implication is that the company only makes purchases when there is
need for production and production is done only when there is demand in the market (Tanaka
1994). The demand pull stock control system is a mark of success in the company since the
raw materials for the manufacture of motor vehicles are high cost items that would make the
company incurs huge costs in stock holding. The demand pull system also ensures that the
stock control system matches the cash flows of the company.
Working with Vendors
Toyota has also developed association with the suppliers of the raw materials such that their
system are synchronised. The benefits of the relationship with vendors are the reduction of
the lead times and the guarantee of quality of the supplies. In the evaluation of literature, it
was established that the changes in information technology has made it possible for
manufacturers to link their system with those of vendors for frequent and timely delivery.
Toyota has been able to capitalise on vendor collaborations (Magee 2007).
Reduction of Stock in all Areas
The reduction of stock in the JIT process and supply chain strategy adopted by Toyota does
not relate to the raw materials only (Taiichi 1988). At all the stages of manufacturing in the
company focuses on the elimination of the need to hold stock, The result has been carrousel
Stock Control in Supply Chain Management 41
and conveyor belts in all the production system to reduce the motion of the workers and the
need to have stores or bins.
Improvement of Design
The design of the product is also an important aspect of the supply chain management and
stock control in Toyota. In the evaluation of literature it was established that the more
sophisticated stock control system involved the design of the production process according to
the nature of the stock handled. In Toyota the process is designed with regard to product
design. The company has been able to achieve standardisation in all the stages of production
and has reduced the number of parts needed considerably (Takeuchi et al. 2008). The result is
a highly predictable production process whose materials requirements can be determined
accurately well in advance. This eliminates the need to have any stock in the store when the
relationships with the vendors facilitate the movement of the stock from the vendor to the
factory when needed.
As the analysis of the JIT process in Toyota indicates the process has been the source of
several advantages for the company which may have contributed to the increase in value for
the company. However there are several weaknesses that are identifiable in the process that
are against sound stock control policies as established in the literature review as follows:
Transaction Cost: The JIT supply chain model and the resultant stock management
techniques reduce the level of stock that is held by the company (Liker 2004). As a big
manufacturer however the company is expected to be running throughout. The implication is
that the company will require the delivery of stock in many small batches many times each
day. This greatly increases the transaction costs. A good stock management technique should
be able to reduce the amount of cost required for the operation of the technique.
Stock Control in Supply Chain Management 42
Price Volatility: The changes in the prices of stock can have a significant impact on the value
creation of the company if it is not addressed adequately. The frequent purchase of stock
implies that the company has to experience many different prices in markets where the prices
change rapidly. When the prices are rapidly rising, the company may not be able to take
advantage of low prices early in production. The frequent purchase of the stocks also makes
prediction of stock prices irrelevant. Prediction of stock prices in industries that use
commodities such as metals and oil whose prices changes rapidly and by large margins can
result in cost savings. The JIT process may therefore lead to loss of competitive advantages
when the prices are changing rapidly and by large margins.
Demand and Supply Stability: The JIT system in Toyota is also based on the assumption that
the demand and the supply of the products are constant and reliable. However good cost
control techniques realises that the demand and the supply may not always be reliable. To
reduce the effects of instability some stock may be held for later use. In capital intensive
production system such as in the car manufacturing the instability of supply and demand can
lead to huge losses for the company (Kato and Smalley 2010). If supply were to be cut for
one day for example, the result would be system idle time and a cut in the supply of motor
vehicles since the production is done to be taken to the market directly rather than first
storing the finished products. The stability of demand and supply also implies that the quality
is assumed to remain constant. This may not always be the case and may therefore result in
huge losses in the company if the quality were to deteriorate. Toyota tries to reduce the
effects of deterioration in quality by establishing long term relationships with the vendors.
4.3 The Four Rules
The production system of Toyota and the resultant supply chain management style and stock
control technique can also be evaluated in terms of rules that the company applies. The
Stock Control in Supply Chain Management 43
findings show that there are four key rules that are followed by all the workers in Toyota
(Liker and Franz 2011). The rules are as follows:
Rule 1: The content, sequence, timing and outcome of all work should be clearly specified.
The rule ensures that the materials needed for each process are clearly identified and
described. This eliminates the chances of confusion in the handling of materials which is
usually the cause of wastage. The clear specification of the content also implies that the
quality of the products is guaranteed all the time reducing the cost of scrap and waste as a
result of poor quality. The sequences are also identified clearly implying that there are no
chances of loss in between the production stages. Clear sequencing also facilitates the
tracking of costs and movement of materials. It also facilitates automation. In cost control
automation and the tracking of cost are determinants of the level of success of the technique.
Timing is also vey critical in supply chain management and stock control. Time is related
with opportunity cost, risk of destruction or deterioration and finance cost. The optimisation
of timing in the Toyota production system therefore provides the company with cost
advantages by reducing lead time and delays. The certainty of the outcome also provides the
company with the opportunity to plan for the movement of the finished goods and the
establishment of the markets. The result is very low finished goods stocks held and low stock
holding costs.
Rule 2: Direct Customer- Supplier Link with unambiguous communication lines
This rule underlies the supply chain management system in the company. For each product
that the company produces there is a direct link from the customer to the supplier of the
inputs whose quality of communication is very high. In the literature it was identified that one
of the critical elements of the supply chain management is information. Information about the
customers, the suppliers the production capacity available are critical to the success of the
Stock Control in Supply Chain Management 44
supply chain. In Toyota the information is guaranteed by the high quality of the
communication which is based on simplicity. The communication is so simplified such that
the answers can be as simple as a yes or no on any request. When the customer makes a
request the answer can be given within minutes in terms of a yes or no on whether the
product can be available according to the specifications. The simplified communication links
makes it possible for the company to leverage on communication technology.
Rule 3: Simple and direct product and service path ways
The emphasis on simplicity is anchored on standardisation of processes in the company. The
company has been able to create simple procedures for the processing of all its products. The
services the company receives are also simplified by having definite production stages.
Simplicity makes it possible for the company to understand all the causes of cost overruns
and also the possible causes of errors. The result is a very efficient and effective error control
mechanism.
Rule 4: Scientific method to be applied for any improvement involve a teacher and it must
reach the lowest level of the organisation
The company focuses on continued improvement. The improvement is done in design,
process and the people themselves. The company requires that every improvement be done
according the scientific method. The scientific method requires the establishment of the root
cause of the problem, the establishment of all the causes of the problem and the development
of a diagnosis that addresses the root causes. In the improvement system the company also
uses teachers who are from the quality circles. The teacher understands the problem
completely and teaches it to all the related members of staff from the top to the bottom of the
organisation.
Stock Control in Supply Chain Management 45
4.4 The People in Toyota
The Toyota supply chain and production process has been studied by many organisations in
an attempt to replicate it in their factories. However, the results have not been as expected.
The inability of others to copy the production system of Toyota and its supply chain
management system has prompted others to analyses the cultural aspects of the people stating
that the culture is the missing link between the openly available information on the processes
and the success of their implementation (Morgan 2006). The analysis of the company
documents indicates that the company holds the relationship and the approach of the people
to work very seriously which indicates that the culture might indeed be a part of the supply
chain management strategy. In what is described as the ‘Toyota Way’ to describe the culture
of the people in Toyota, several elements relating the supply chain are identifiable as follows:
Long term focus: The people have a long term focus. Long term focus ensures that the
company focuses on creating systems that will last for long periods of time. In the long term
the production system and the demand are predictable. The approach therefore makes the
workers constantly improve themselves. The long term approach also ties the goals of the
company and the supply chain together. The supply chain is not viewed in isolation and the
stock management system is also not viewed in isolation but as one aspect contributing to the
long term goals of the company. In the evaluation of literature it was identifiable that there
are elements in stock control and supply chain management that requires tradeoffs. Tradeoffs
are only possible if the whole organisation is seen as having one common goal in the long
term. The long term focus is also related to the meeting of challenges. The company states it
goals in form of challenges that the people are expected to meet in the end. The supply chain
and production system therefore ties together the behavioural aspects of the people with the
organisational goals. Behavioural science indicates that people are motivated by challenges
Stock Control in Supply Chain Management 46
more than by routine task. The company is therefore able to capitalise on human behaviour
(Sobek and Smalley 2008).
Respect and Team Work: The culture of the workers in Toyota is also based on respect and
team work. Respect ensures that each person’s diversity and view is appreciated and team
work ensures that people share skills and knowledge. The management of diversity and the
team work has been associated with creativity and innovation. Team work has also been
associated with continuous improvement as people share skills and knowledge creating
synergy.
Continuous Improvement: Continuous improvement is another quality that is with the people
in Toyota. Continuous improvement is upheld in the process and also in the people. This
strategy ensures that the people always try to solve the problems on an incremental basis and
nothing is left to chance (Liker and Franz 2011). The specificity of the procedures adopted in
the production process is also used in the improvement of the people. Any problem is
evaluated from its root cause and the solution is usually holistic.
The relationship between the culture and the supply chain in Toyota is however not very clear
from the outside. The studies done only describe the culture using the models developed by
the company and it is therefore not possible to establish whether there are other elements of
culture that impact on the supply chain.
Stock Control in Supply Chain Management 47
5.0 Chapter Five: Summary and Conclusions
Supply chain management has become one of the critical functions of business management
today. The concept developed in the 1980s as manufacturers tried to improve cost
management in their factories to beat the stiff competition brought about by globalisation.
Stock control is usually at the heart of supply chain management due to the high value of
investment held in stock. The research sought to establish the supply management practices
and stock control practices adopted by businesses today from both a theoretical and practical
perspectives. The aims of the research also involved the establishment of the supply chain
and stock control techniques applied in Toyota since it has been credited as one of the most
successful supply chain management system and the success of the company has been
attributed to it. The evaluation of literature revealed that supply chain management has been
used to achieve several goals; the most important goals are the creation of value for the
business, creation of competitive advantage and the matching of supply and demand. The
literature has revealed that supply chain management has evolved over time from concept,
integration stage, globalisation stage, the specialisation stage and the current supply chain
management 2.0 which combines elements of globalisation and specialisation to form a new
style of supply chain management that has a futuristic outlook. The evaluation has also
revealed that there are several functions that are critical to the supply chain management as
follows: distribution network, distribution strategy, tradeoffs in logistics, information, stock
management and the cash flow management. Supply chain strategies also have the common
business management levels i.e. the strategic level, the tactical level and the operational level.
Each level is important in the achievement of the overall goals. The major factors identified
in the evaluation that have impacted on the development of supply chain concepts are
globalisation, information technology and specialisation. All the three factors have resulted in
opportunities as well as challenges. The supply chain strategies adopted depend to large
Stock Control in Supply Chain Management 48
extent on the type of the organisation and the type of products that the business deals with.
The evaluation of the literature on stock control issues indicates that there are several
challenges that businesses face in the management of stock. The challenges are related to the
stock outs, holding costs and the risk of changes in stock prices. The costs associated with the
holding of stock are the opportunity costs, bank interest costs and storage costs. There are
also risk associated with holding of stock such as the risk of destruction, the risk of
obsolescence and the risk of deterioration. The importance of the risk and cost differ from
one organisational to another depending on the type of stock managed and the production
system applied. The evaluation of the techniques used to control stocks reveals that they are
many and have also followed the changes in business environment and technology. The
techniques can be grouped into two categories i.e. the pull and the push system. Another type
of the cost control technique is the ERP system that functions as an organisational wide
system. The success of the stock control technique depends on its ability to maintain low
levels of stock, integrate the information arising from the markets and production, maintain
flexibility of the organisation and utilise information technology. The development of
information technology has resulted in sophisticated stock control systems that use complex
algorithms to schedule production and stock delivery. The findings indicate that the Toyota
Production System which is the main supply chain management system in the company has
many advantages identified in the literature. The system’s strength has been identified to lie
in the adoption of JIT supply chain management system, use of simplified rules in processes
and the culture of its people. The JIT system of supply chain management in Toyota has
seven key elements that incorporate all the best practices of supply chain management and
stock control; Flow Process, Quality Control, Stable Schedules, Pull System of stock
management, collaboration with vendors, reduction of stock in all processes and
improvement in product design. The JIT as applied by Toyota is however found to have
Stock Control in Supply Chain Management 49
several weaknesses. The major ones are the assumption of the stability of demand and supply,
lack of prediction models of supplies prices and increase in transaction costs. The rules
followed by Toyota in the process are four; the content, sequence, timing and outcome of all
work should be clearly specified, direct customer-supplier link with unambiguous
communication lines, simple and direct product and service path ways and scientific method
to be applied for any improvement involving a teacher and it must reach the lowest level of
the organisation. Although the Toyota supply chain and stock control techniques have been
studied widely no company has been able to copy it successfully in the management of their
processes and stock levels. As a result some studies have concluded that the success of the
system must be in the culture of the people. An analysis of the culture reveals that there are
indeed some practices that improve the company performance with regard to stock and
processes management. The major aspects of the culture are the long term focus, respect and
team work and the focus on continuous improvement.
In the evaluation of the supply chain and stock control in Toyota it has been established that
the link between culture and supply chain is still not well understood and would need further
research.
Stock Control in Supply Chain Management 50
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