Stock Management in the Hotel Industry

Stock Management in the Hotel Industry

Stock Management in the Hotel Industry – Several authors have provided definitions on stock management. Thus the amount of worth carried out on the study of stock management in the Hotel is to a great extent important for the economic survival of the hotel Management.On his note, Greene [1979] defined stock management as the whole Development and administration of stock policies as well as procedures by They are implemented. He then classified stock into these headings: raw Material, work-in-progress, finished products, complementary parts and Suppliers.

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Lewis [1981] defined it as the science based art of control in the amount of stock held, in various forms to meet economically the demands placed in a business enterprise. Morgan, [1994] looked at stock Management as the ability to determine the optimum size of stock to carry. He noted that big challenge facing every managers is that of determining what amount of stock should be adequate for optimal for the business to carry.
According to Weld [1996] stock management is the regulation of the flow of items, where output stocks exist to accommodate short terms differences between demand and system output rates.

He also observed that the extent to which the level and composition of stocks varies is a measure of their usefulness and that a lack of variations might suggest the lack of need for stock. He also says that a good stock control is essential to the well being of the firm. Those responsible for buying must know the quantity of goods in stock so that future buying can be planned. If many goods are bought, capital which could perhaps be better used will be tied up. If few goods are bought, the store will be “out of stock” and customers will buy elsewhere or the buyer may have to buy hastily at the wrong time.

Ammer [1998] says stock management implies the existence of three types or categories of stock as finished goods or stocks readily for sales, work in progress or partly finished goods and Raw materials and suppliers to be consumed in production. Depending on the nature of their enterprises, the value of stocks may be substantial property, plant and equipment. Therefore adequate and appropriate classification and accurate determination of the quantity and cost of stocks-essential for proper determination of the operating results of an enterprise and the representation of current assets in its Balance sheet He also says that stock management and distribution system should identify what has been delivered. The information must be available to those responsible for the operations control mechanisms include verifying the bulk consignment on arrival, physical stock checks in the warehouses, individual ration cards. The nature of these mechanisms will depend on the circumstances, but they must be in place from the start and they must provide real and not just theoretical control. The suppliers actually distributed to beneficiaries must be reconcilable with those to have delivered, those remaining in shortage and those which are lost or damaged.

Nuolom[2000] says that the maintenance of stocks allows the production and marketing function to operate in an autonomous and economic manner. It means that quantity produced and the timing of the production are determined in the main by immediate production consideration. Inventory for production are held for the following four reasons:

1.    To maintain lot-size inventory.
2.    To avoid possible loss of sales or production time through variable in delivery time. This is achieved by maintaining a safety stock.
3.    To avoid disruption in production.

Lot size-inventory – lot size inventory is inventory arising from buying more stock than is immediately needed for production. This depends on the selling of inventory control is to determine the economic order quantity to order per period.

Safety stock – To avoid situations where order cannot be fulfilled because of non-availability of stock. It is often necessary to keep a certain amount of stock to guard against such eventuality. Safety stock are thus the amount of inventory which a firm entails to be fully satisfying any variations in the level of customer demand. A major task of stock management therefore is being able to determine the actual level of the safety stock to keep. This is usually determined based on probabilities and it dependent on the firms service policy.

Richard R [2000] According to him, stock are in effect, reservoir of goods held in anticipation of marketing sales, the of filling demands from further down along the incoming channel. Incoming quantities of the product ready for sale arrive usually at irregular internals and are added to the inventory reservoir. The outgoing product flow is more continuous but still fluctuates considerably. The volume in the inventory reservoir pulsates but not always with a regular rhyme from day to day. Changes occur in the rate and quantities of input and output. Therefore in deciding on inventory size, management must determine both maximum and minimum allowable inventory. In setting these upper and lower limits both sales and cost considerations are involved.

Sales considerations: The main purpose in maintaining inventory is to meet market demand, ie to make sales and to fill customers order. Since stock are kept in anticipation of market demand, the upper and lower control limits should be attained for forecasted sales. Thus, the more accurate, the sales forecast the greater opportunity to maximize gains from economically stock operations. The less the accurate, the forecast, the greater need for substantial buffer stock and some notion of its probable accuracy, a decision maker is prepared to set the control limits.

Another factor also must be taken into account it relates to what management considers an acceptable level of customer service. Experience shows that in a typical business, about eighty percent[80%] more inventory s needed to fill ninety five percent [95%] of the customers order out of stock on hand than to just fill eighty percent[80%]. Each firm must strike a balance between what it considers reasonable customers service and costs in line with management goals. It should also recognize consistency of delivery at least as unimportant as speed of delivery.
Turner P.H [2001] says that unless an organization has an effective system of controlling the quantities of items in stock, it soon finds itself in difficulties.
On the other hand, nothing ruins goodwill and reputation more quickly than being unable to supply customers with the orders because of goods are out of stock. On the other hand, overstocking means pointlessly typing up capital and unnecessary cramping of goods that are valuable storage space.

It also means taking risks regarding obsolesce, deteriorating,  burglary, and fire which could be avoided. In countries such as England and America, where supply can be obtained regularly, it is possible to control stocks within very fine limits. In most African countries, however the position is different. Local product is longely seasonal and consequently has to be obtained within short periods and re-order levels are significantly higher.

Stock control is not limited to the consideration of such questions as re-order time, perishability, storage space, and shelf like of commodities.
Stock security requires careful recording of periodic receipts and issues of stock and ensuring at all times, that the balance of stock on hand is what it should be. Again proper documentation is vital.
In a nutshell, there appears to be consensus on the definition of stock management. It is thus a system , which formulates policies pertaining to stock level within organizations and procedures for their implementation.

In view of the case study “Royal Palace Hotel Enugu”; the General Manager, Mr John Nwoye noticed that there is need to control stock.. He observed that stock is a continuous process whereby the stock level requires for independent periods are determined by project and forecasting based on data as presented demand, sales volume, capacity utilization etc are strictly maintained. The General Manager in conjunction with the staff are working round the clock to make sure that the best service is given to their customers.

2.2         THE NEED TO HOLD STOCK.
In order to determine the purpose to hold stock, stock act as a buffer between the varieties of demand and supply. Every organization has its own separate reason for holding some amount of stock which could range from the desire to ensure steady supply of goods to take advantage of large orders. However, there are three[3] general motives for holding stock:
1.    The transactive motives which emphasis the need to maintain stock to facilitate smooth production and sales operations.
2.    The precautionary motive which necessitate holding of stock to guard against the risk of unproductive changes in demand and supply forces and other factors.
3.    The speculative motive which influences the decisions to increase or reduce stock level to take advantage of price fluctuations.
Moreso, “Lewis” gave five[5] reasons for the need to hold stock. However, a more comprehensive sit of reasons was given by Morgan and it
Includes the following:
1.    To provide customers service in the face of sales fluctuations and other problems.
2.    To provide customer assurance of availability.
3.    To ledge against expected sources in sale due to promotions or price reductions.
4.    To permit flexibility in plant scheduling.
5.    To hold off  capacity
6.    To permit more flexible raw materials scheduling.
7.    To take advantage-cost of factors
8.    To keep storage equipment operational or firm shutting down [as in the case of still bottoms and pipelines]
9.    To hold materials that is a bye-product.
10.    To protect against strikes and work stoppages.
11.    To speculate against price and cost changes.
12.    To allow for errors in measuring and recording.
13.    To protect against hurricanes and other acts of God.

A company should maintain adequate stock of materials for a Continuous supply to store for an uninterrupted production. It is not possible
For a company to procure raw materials whenever it is needed. A time lay exist between demand for materials and its supply.

Also, there exist in time at many occasions, the procurement of materials may be delayed because of such factors as struck, transport disruption or short supply. Therefore, the firm should maintain sufficient stock of raw materials at a given time to streamline production. Other factors which may necessitate purchasing and holding of raw materials inventories are quantity discounts and anticipated price increase. The firm may purchase large quantity discount of bulk purchasing. At times, the firm would like to accumulate raw materials in anticipation of price rise.
Work-in-progress stock builds up because of the production cycle. Production cycle is the time between introduction of raw materials into production and emergence of finished product at completion of production cycle. Until production cycle completes, stock of work in progress has to be maintained. Efficient firms constantly to make production cycle formal by improving their techniques use in production.

Stock of finished goods has to be held because production and sales are not instantaneous. A firm cannot produce immediately when goods are demanded by customers. There is supply finished on a regular basis, their stock has to be maintained. Stock of finished goods has also to be maintained for sudden demand from customers.In the case  where the firms sales are seasonal in nature, sub-standard finished goods stock should be kept to meet the peak demand. Failure to supply products to customers, where demanded would mean loss of the firms sales to competitors.

Finally, the need for every business to hold some amount of stock is therefore justified and cannot be overemphasized. This has led Patterson and silver to  state that the efficiency of the operations of any enterprise is directly related to the stock situations existing within an organization.
However, some organization prefer not to invest in stock and such organizations are faced with the following options:

1.    To make product on demand
2.    To make stock in another product
3.    To acquire additional or more flexible production facilities
4.    To buy from some other organizational firms
5.    To loose business
6.    To expedite supply through increased cost as it might be more desirable to ship by air flight than to stock a small amount at an outlying warehouse

2.2    THE NEED FOR STOCK MANAGEMENT.
To determine the objective of stock control policy. It is important to find out the need for controlling stock. Thus according to Morgan , could be due to any of the following reasons.
1.    To maximize cost
2.    To maximize profit
3.    To avoid running out of stock
4.    To maximize return on investment
5.    To keep stock level from getting too high
6.    To keep stock within available storage
7.    To control capital investment
8.    To minimize human effort
9.    To maximize sales or share of materials etc.

More often than not, there will be two or more reasons why an organization needs manage its stock as the above mentioned reasons are not mutually exclusive.

2.3    APPROACHES TO STOCK MANAGEMENT.
Basically, there are two[2] approaches to the study of stock
Management and they are:
[a]    Requirement management approach
[b]    Requirement planning approach

[A]    REQUIREMENT MANAGEMENT APPROACH
This approach looks at the materials Manager as the regulator of the Flows of materials from suppliers through various manufacturing    departments to the customers. In organizations where this approach is adopted the materials managers is responsible not only for raw materials work but also for finished goods and even work in progress. Stock under his jurisdiction are the purchasing, production stock and traffic departments as well as such secondary activities as shipping, receiving non production, stores and materials handling. In this structure, the material Manager not only is responsible for purchased materials but also is directly involved in manufacturing for purchased materials but also is directly involved in manufacturing and marketing management.

According to Ammer, this approach attracts the following advantages:
1.    Forced cooperation between purchasing and production control
2.    Tighter stock control
3.    Efficiency in coordination
4.    Better communication

He also stated that these advantages notwithstanding this approach to Stock management has not been widely adopted by organizations because of the following reasons:
1.    Resistance to change
2.    Fear not its effect on relative positions in such organizations
3.    Failure to top management to recognize that material management is a money making rather than a service activity.

[B]    REQUIREMENT PLANNING APPROACH
Thirston claims that specialists on stock have succumbed to the lure of statistical tools in the management of parts inventories. He stressed that the statistical based approach has its shortcomings in a number of situations and that requirements planning or a combination of both could had to substantial savings. Basically, requirements planning sets aside the average process of statistics in managing stock and substitutes of  with a specific enumerations of what parts to place in stock and when.

The approach depends on a high order of accuracy in stock records, in routing and lead time information, in records of sales and purchase commitments and in store load schedule. According to Thurston, the [erroneous] substitution of statistically  based tools for requirement planning record a big boost from the difficulty Encountered by the manager in break in out and keeping trade of thousand
Of require points. This has however, now been lessened by the introduction of  computers for better information handling and processing. He went ahead to production options for further stock management.

To skip the statistical approach in those cases where the requirement planning approach is better suited or to employ a tailored combination of the two?

2.3    COST OF HANDLING AND STORING STOCK.
These include such expenses as those of handling products in and out of store, storage cost such as head and rent, insurance and taxes, obsolescence  and spoilage cost and capital cost. Stock obsolescence and spoilage cost make several forms including
1.    Outright spoilage after a fixed period of time
2.    Risk that a particular unit of stock  or a particular product number will.
[a]      Become technologically unstable, except perhaps at a discount as spare Parts
B         Go out of style
C          Spoil.

2.6        STOCK LEVELS:
This is one of the methods of controlling stock. Stock control measures are aimed at controlling a firms investment in all items of stock. Stock levels are those predetermined measures that enable an organization to overcome the incidence of overstocking, under stocking, or out of stock.. The measure of stock control levels differ among companies-Obeleagu Nzeribe G.C[1996] A big company will virtually require higher stock control levels than small ones. The common thing is that the same basic principles apply in all companies using stock items.
The following concepts are relevant in stock control measures Kehler G.I.1978
LEAD TIME:
When an order is placed for stock, it takes time to be recovered by the purchaser. The time lag between ordering and receipt of stock is thus called “lead time” or procurement time; lead time can occur when a department request for goods from the stores department.

RE-ORDER QUANTITY:
This is the pre-determined quantity for each material order. Re-order quantity can be reviewed either downward or upward depending on the need of each company.

ECONOMIC ORDER QUANTITY [EOQ]:
The objective of stock control system is to determine the economic order quantity for each items. This is the number you must order so as to achieve the lowest total cost. Nzeribe G.O[1996]. Typical cost associated problem in holding cost in placing fresh order and in storing ordered. Stocks Economic order quantity tries to strike a balance between the two carrying costs are made up of opportunity costs of tying down capital in inventory taxes and insurance on inventory. To calculate the total cost of carrying inventory. It is assumed that inventory is depleted used up at a constant rate and that in the year only half of the total operators inventory is held in stock carrying costs per unit increase with the quantity ordered per period. This is because with a large order size, each unit of the ordered item stays longer in inventory than otherwise. With a given level of demand, the number of order equal to total demand divided by the size of order. The cost of ordering for any period then is the number of order placed multiplied by the cost of an order. Another influence on ouder-cost which must be mentioned here is the desire for express service on the part of the customer doing the ordering. Ordering costs increase with the number of orders per period and vice versa. In other words, ordering costs per unit decreases with the quantity ordered per period. The total cost per unit of inventory is the unit of ordering cost plus the unit carrying cost. Again the flexibility and the ability of the system to react to abnormal and changing situations must be considered alongside the visible cost of stock management.

MINIMUM STOCK:
The level of stock allowance set aside in insurance against the risk of forecasting errors. It is also known as buffer or safety stock.

MAXIMUM STOCK.
This represents the anticipated highest level of stock desirable to the firm or business organization. It helps the company to check overstocking and tying down of capital.

RE-ORDER LEVEL:
This pre-determined level of which new order should be placed. This is dependent on the actual demand and lead time. Hence re-order is a product of demand or lead time. Factors to be considered in setting up stock level includes:
a.    Rate of consumption of the materials
b.    Time necessary to obtain delivery and re-order quantity of the material.

2.7    FACTORS AFFECTING THE APPLICATION OF MATERIALS MANAGEMENT CONCEPT.
Although the concept emphasize cost reduction, optimum service level, quantity assurance and co-ordination, the application is not unusual because of the following factors:
A.    NATURE OF THE ORGANISATION- Some organization are production oriented, which others are either distribution, service or integrated. This factor determines the number of activities that could be carried under an established materials management department.
B.    SIZE OF THE ORGANISATION: The size of the organization also affects the full application of this concepts. In most small and medium size firms, functions are fussed together for both of personnel or enough capital to finance the establishment of this concept.
C.    QUALIFICATION AND CAPABILITY OF RELEV AND PERSONNEL: The concept advocates all materials related activities under a section head. Activities like purchasing, stores etc need skill personnels to help them. The essence of such qualification personnels will adversely affect the existence of this concept.
D.    THE TOTAL AMOUNT SPENT ON MATERIALS: Where the amount spent on materials is two small, the idea to fuse must of these materials related activities is these encouraged for lost reduction.
E.    THE USE OF COMPUTER FOR MATERIALS PLANNING AND CONTROL:
The factor limits the number of units that could be established in a material control set up.

2.8    BENEFITS OF MATERIAL MANAGEMENT CONCEPT:
Fearon H.E[1973] cites sixteen[16] benefits which a material Management organization like “ROYAL PALACE HOTEL” will gain for operating the concept. But few will be mentioned here:
1.    ELIMINATION OF BATCH PASSING: By the definition of the concept, centralize all materials functions under one heading provide a central control to the purchasing and issuing system users of materials find it easy for and issued with required materials without much bottle neck.
2.    FASTER STOCK TURNOVER: Because of greater speed, accuracy and effective communication regarding materials requirement and usage rate, it is often possible to reduce the total investment in stock with resultant savings in stock cost.
3.    REDUCED MATERIAL LEAD TIME: With the function of stock control. Production planning and purchasing. Under one roof, the communication gap is reduced, thus a reduction in the time taken to identify the need to replace materials and the actual delivery of such materials.
4.    LESS DUPLICATION OF EFFORTS: Duplication of records of both material and personnel reduced because of the centralized nature of materials management type organization.
5.    LOWER PRICES FOR MATERIALS: Wise buying requires accurate information and prompt supplies. Because of the centralized nature of this materials management, purchasing take advantage of quantity buying to attract discount.

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work/Material Topic STOCK MANAGEMENT IN THE HOTEL INDUSTRY.(A CASE STUDY OF ROYAL PALACE HOTEL ENUGU)

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