Stock Control

Philip owns a soft drink factory which makes ‘Slurm’. The drink itself is made on site, using a
mixture of fruit and other ingredients. The cans are not made on site – they are bought from
a local can supplier. The drink costs Philip 20p to make and the can costs him 10p to buy – he
sells the drink to retailers for 50p.

Philip likes to make sure he has plenty of cans in stock because once, he ran out and it was
very costly to the business: The workers were unable to carry on making the drinks, but
Philip still had to pay them their wages for the day. Also, he had to delay a delivery to a local
supermarket, and they were so annoyed that they switched to another supplier.

Nowadays, Philip keeps at least 10,000 empty cans in stock at any one time. The advantages
of this are that he never runs out, plus he gets a discount for buying in bulk (an order of
10,000 works out at 10p per can, but an order of less than 10,000 works out to be 15p a
can).

However, there are some disadvantages to this system.

 Philip has had to rent out an extra storage room to keep the cans in at a cost of £500 per
month.
 He has also found that the cans sometimes get damaged as they are moved from the
storage room to the production line.
 Philip had another problem recently; he had just paid for a delivery of 10,000 cans
(£1,000) when he received a final reminder for his telephone phone bill (£75) which would
be cut off if he didn’t pay immediately. Philip had no money left in the bank account to pay
for the phone bill.
 Finally, Philip recently found that some of the cans in the storage room had gone rusty
and had to be thrown away.
Questions:

1. What are the advantages to Philip of holding high levels of stock?

The advantages of Philip holding high levels of stock is that if there is extra unexpected
demand, he won’t run out of stock meaning that he won’t have to turn customers down
and so potentially lose customer (which happened last time when the person who he was
sup. Another advantage is that if anything goes wrong with the supplier and they can’t
supply stock, Philip can last longer and still cater for his customers’ demands where
someone holding low levels of stock wouldn’t be able to as they would too quickly run out
of stock. Also holding high levels of stock reduces the frequency at which Philip has to re-
order stock, this means that their will be less admin costs and ordering costs then if he
held low levels of stock and so needed to re-order lots of the time.

2. Explain a disadvantage to Philip of holding high levels of stock? (4)

A disadvantage of Philip holding high levels of stock

3. Philip has heard that there is a stock control system called ‘Just-in-time’. Explain what this
means to his business and why it might be a good idea.

4. Calculate the contribution per can Philip currently makes (4)

5. What might happen to the profit per can if Philip stops buying in bulk?

6. Explain whether you think it is better for Philip to sell his cans to retailers, rather than
directly to customers himself? (4)