Business Functions (Stock Control, Research and Development, Economies and Diseconomies of Scale)

Stock

Stock represents the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand

Types of stock

Raw materials, components, work-in-progress, finished goods.

Reasons to hold stock

- enable production to take place
- satisfy customer demand
- precaution against delays from suppliers
- allow efficient production
- allow for seasonal changes
- provide a buffer between production processes

Costs of holding stock

Cost of storage
Interest costs
Obsolescence risk
Stock out costs

Influences on amount of stock held

- need to satisfy demands
- need to manage working capital
- risk of stock losing value

Why use stock control charts?

The overall objective of stock control is to maintain stock levels to that the total costs of holding stocks is minimised

Max level

Max level of stock a business can hold

Reorder level

The level at which stock has to be reordered

Lead time

Time interval between ordering and receiving the order

Min stock level

Min amount of products a business wants to hold

Buffer stock

An amount of stock held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers

Factors affecting when/how much stock to reorder

- lead time from the supplier
- implication of running out
- demand for the product

Advantages of low stock levels

- Lower stock holding costs (e.g. storage)
- Lower risk of stock obsolescence
- Less capital (cash) tied up in working capital - can be used elsewhere in the business
- Consistent with operating 'lean'

Advantages of high stock levels

- Production fully supplied - no delays
- Potential for lower unit costs by ordering in bulk / high quantities
- Better able to handle unexpected changes in demand or need for higher output
- Less likelihood of stock outs

Just-in-time (JIT)

stock required for production arrives just as it is needed
- lean production \= minimal capital tied up in stocks

Implications of JIT

- no need for buffer stock
- stock holding costs are minimised
- lead times are very short
- requires highly reliable suppliers and sophisticated IT systems to work properly

Extra notes on stock control

- stock management and control is a key part of operating efficiently
- the business damage from stock-outs or having the wrong stock can be significant
- however, it is crucial to manage stock carefully as it often ties up a significant value of capital that could be used elsewhere in the business
- these days, stock management is much easier due to widely available IT systems

research and development (R&D)

Involves the identification of new ideas and turning them into products, services and processes

Innovation

The commercial exploitation of an invention
- new idea into the marketplace/workplace
- not cheap
- governments try to encourage innovation within the business community because an innovative culture will help grow the whole economy, creating both employment and wealth

Research

The inquiry into, and discovery of, new ideas

Research methods

- pure research - research just to find out how or why, with no product objective
- laboratory - eg testing on animals
- evaluation of existing products - are there problems?
- brainstorming using discussion groups - thinking outside the box

Development

The process which changes ideas that result from the research process into commercially viable products or processes
- costly and very time consuming
- success is not always guaranteed
- shorter product life cycles are now the norm to reduce the development time of new products

The product design and development process

1 Identification of problem
2. Research
3. Development of ideas and solutions to solve the problem
4. Development of prototypes
5. Final design
6. Testing
7. Manufacturing and launch.

Benefits of R&D

- reduction in costs and improves the company's image
- launch new products in order to gain a competitive edge
- benefits customers with a greater variety of goods and services
- improves the working environment - making it safer and cleaner
- needed because in most markets there is a constant requirement for invention and innovation to keep up with competition and attract customers

Effective research and streamlined development shortens life cycle

one effect of shortening product life cycles is that small businesses find it hard ti survive because of the resulting R&D costs

Market research and R&D

- MR is the foundation of targeted R&D
- products need to be developed to meet this demand
- this product development to satisfy market demand is part of being market orientated
- MR is used to help develop existing products

economies of scale

Where it is cheaper to produce a range of products - cost savings from product diversification

diseconomies of scale

a business may expand beyond the optimal size and see rising Long Run Average Costs (LRAC)

EofS in the long run

the effect is to reduce average costs over a range of output

External economies of scale

Involves changes outside of the business
When expansion of an industry leads to the growth of ancillary services causing a downward sloping industry supply curve eg road side cafes increase when roads built increase

External

- expansion of the industry of which the firm is not a member
- benefits most/all firms
- agglomeration economies are important
- helps to explain the rapid growth of many cities

Internal economies of scale

Arise from increasing returns to scale in the long run
eg financial, purchasing, managerial, risk-bearing, network economies

Internal

- expansion of the firm itself
- lower LRAC as output
- increasing returns from large scale production
- range of economies eg technical/financial

Evaluating economies of scale

- all businesses can exploit some internal economies of scale
- the nature of production/technology requirements will influence the size of MEs relative to market demand
- EofS may run out at a certain point but constant returns to scale means that unit cost will be stable
- many economies depend on businesses achieving a high rate of capacity utilisation - this lowers the fixed cost per unit
- dynamic pricing strategies help them to achieve this
- small businesses can thrive and prosper even in markets dominated by scaled businesses

Economies of scope

Happen when it is cheaper to produce a range of products rather than specialise in a limited number

causes of diseconomies of scale

They result from business expanding beyond an optimum size and losing productive efficiency
- poor control and communication
- poor co-operation
- negative effects of internal politics, information overload, unrealistic expectations among managers and cultural clashes between senior people with inflated egos

- higher regulatory costs for bigger businesses
- office politics/ industrial relations
- risk aversion among salaried staff
- waste/inefficiency in large organisations

Key Effects of Diseconomies of Scale

DofS means that:
- a business has moved beyond their optimum size
- businesses are suffering from productive inefficiency
- higher unit costs will reduce total profits
- businesses may then have to charge higher prices in order to cover their increased costs
- lost competitiveness could lead to declining market share and also a fall in their share price