There are three types of stock that a business can hold:
Stocks of raw materials (inputs brought from suppliers waiting to be used in the production process)
Work in progress (incomplete products still in the process of being made)
Stocks of finished products (finished goods of acceptable quality waiting to be sold to customers)
The aim of stock control is to minimise the cost of holding these stocks whilst ensuring that there are enough materials for production to continue and be able to meet customer demand. Obtaining the correct balance is not easy and the stock control department will work closely with the purchasing and marketing departments.
The marketing department should be able to provide sales forecasts for the coming weeks or months (this can be difficult if demand is seasonal or prone to unexpected fluctuation) and so allow stock control managers to judge the type, quantity and timing of stocks needed.
It is the purchasing department's responsibility to order the correct quantity and quality of these inputs, at a competitive price and from a reliable supplier who will deliver on time.
As it is difficult to ensure that a business has exactly the correct amount of stock at any one time, the majority of firms will hold buffer stock. This is the "safe" amount of stock that needs to be held to cover unforeseen rises in demand or problems of reordering supplies.
Good stock management by a firm will lower costs, improve efficiency and ensure production can meet fluctuations in customer demand. It will give the firm a competitive advantage as more efficient production can feed through to lower prices and also customers should always be satisfied as products will be available on demand.
However, poor stock control can lead to problems associated with overstocking or stock-outs.
If a business holds too much buffer stock (stock held in reserve) or overestimates the level of demand for its products, then it will overstock. Overstocking increase costs for businesses as holding stocks are an expense for firms for several reasons.
The opposite of an overstock is a stock-out. This occurs when a businesses runs out of stocks. This can have severe consequences for the business:
Loss of production (with workers still having to be paid but no products being produced)
Potential loss of sales or missed orders. This can harm the reputation of the business.
In these circumstances a business may choose to increase the amount of stock they hold in reserve (buffer stock). There are advantages and disadvantages of increasing the stock level.
Advantages of holding stocks
Can meet sudden changes in demand
Less chance of loss of production time because of stock outs
Can take advantage of bulk buying economies of scale
Disadvantages of holding stocks
Costs of storage – rent and insurance
Money tied up in stocks not being used elsewhere in the business
Large stocks subject to deterioration and theft