MANAGEMENT OF STOCK CONTROL

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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

Businesses hold stocks in a variety of forms

* raw materials
* work-in-progress
* finished goods
* consumables
* plant and machinery spares.

The aim of stock control is to make sure that a business always has
sufficient stocks to meet its own needs and those of consumers. However,
it needs to keep the minimum amount of stock that it can so as to avoid
damage and waste, and to minimize the cost of holding stock.

Having too high or too low a stock is harmful. High stocks represent money
lying idle when it could be put to better use,

Where as low stocks could result in not being able to take on and meet
orders. The table illustrates the disadvantages of having the 'wrong' stock
levels:

Buffer Stock Levels

This level is the difference between minimum stock level

and zero level….The main purpose of buffer stock is to ensure that the
business never runs out of stock.

Maximum stock:
 Maximum stock level is highest quantity of stock the
business can hold during the manufacturing period.
Maximum stock level =Reorder level Reorder Quantity (Minimum rate of
consumption Minimum delivery period)

Minimum stock:
Minimum stock level is the lowest quantity of stock held by a
manufacturer during a period of production.

Minimum level=Reorder level-(Average rate of consumption Average

delivery period)

Re-order level:
This is the level of stock at which a new order is placed.The reorder
level depends on the lead time and the rate of consumption during the lead
time.(duration period)
Reorder Level=(Maximum consumption Maximum delivery period)

Re-order quantity:
Reorder quantity is the highest amount of stock held by a
manufacturer during a production period.

Lead time is the gap between the order being made and the delivery of
supplies.
The two axis display the Quantity of Stock held by the business and the
Time Period over which the stock is depleted. The Maximum Stock Level
is the highest quantity of stock the business can hold (i.e. the capacity of
the storage space/warehouse), and the Minimum Stock Level is the
lowest quantity the business feels is necessary to hold. The Re-Order
Level is the time at which the business must order more stock before the
risk of a stock-out occurs.

The period of time between the moment stock is reordered and when it
arrives is known as the 'Lead Time'. This is vitally important to the
business as it can calculate the moment when stock needs to be reordered
before the buffer stock begins to be depleted. As it is difficult to ensure that
a business has exactly the correct amount of stock at any one time, the
majority of businesses 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.