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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


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


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


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


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.


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).


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


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.


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


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


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


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.


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


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,


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


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


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


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.


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


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. 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


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.


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


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.


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


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


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


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).


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


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.


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


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.


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


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.


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


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).


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.


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


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


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


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.


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


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


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.


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


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.


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


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


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.


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Stock Control in SCM