Author: Jim Riley Last updated: Sunday 23 September, 2012
Managing stock effectively is important for any business, because without enough stock, production and sales will grind to a halt. Stock control involves careful planning to ensure that the business has sufficient stock of the right quality available at the right time.
Stock can mean different things and depends on the industry the firm operates in. It includes:
Raw materials and components from suppliers
Work in progress or part finished goods made within the business
Finished goods ready to dispatch to customers
Consumables and materials used by service businesses
In order to meet customer orders, product has to be available from stock – although some firms are able to arrange deliveries Just in Time, see below. If a business does not have the necessary stock to meet orders, this can lead to a loss of sales and a damaged business reputation. This is sometimes called a ‘stock-out’.
It is important therefore that a business either holds sufficient stocks to meet actual and anticipated orders, or can get stocks quickly enough to meet those orders. For a high street retailer, in practice this means having product on the shelves.
However, there are many costs of holding stock, so a business does not wish to hold too much stock either.
The costs of holding stock include:
The opportunity cost of working capital tied up in stock that could have been used for another purpose
Storage costs – the rent, heating, lighting and security costs of a warehouse or additional factory or office space
Bank interest , if the stock is financed by an overdraft or a loan
Risk of damage to stock by fire, flood, theft etc; most businesses would insure against this, so there is the cost of insurance
Stock may become obsolete if buyer tastes change in favour of new or better products
Stock may perish or deteriorate – especially with food products
Stock Control - application and evaluation
When a stock control situation is presented in an examination, it is likely to be in the context of a business that is facing change – so it is rarely as simple as the diagram in the tutor2u stock control revision note.
Candidates need to interpret and apply stock control principles to the particular situation, and make practical suggestions to help address the question.
Examples might include:
A business that is growing will need to review its re-order and buffer stock levels, and the frequency and size of orders
Look out for seasonality in a business; larger or more frequent orders may be needed in busy times
If the supplier is having trouble supplying goods on time, the firm might need to re-order at an earlier point (or seek a new supplier!)
Does the firm have a back-up supplier in case of delays?
Could small additional orders be made with a supplier as a stop gap if the firm’s stock runs out suddenly? Note - these orders would be more expensive because of extra transport costs and lower discount level