Stock control (A level BS)
From WikiTextbook
Its aim is to control sufficient quantity and quality of stocks to enable production and sales to continue whilst minimising costs.
Types of stock will in part depend on the kind of product or service is being provided. There are however three principal types listed below:
• Raw materials and components to be used in the making of products.
• Partly finished goods (referred to as work in progress) that are awaiting the next stage of production.
• Finished goods consisting of products ready for sale.
Contents |
Why do Organisations Need Stock?
1. Raw Materials - why store?• Cope with changes in production levels;
• Guard against delays in delivery from supplier/ non-delivery;
• Reduce risk of world shortages;
• If you expect the price to rise;
• Bulk discounts will encourage you to buy large amounts.
2. Work in Progress - why store?
• Holding stock at each stage of production allows you to continue production if a piece of machinery breaks down or if workers are absent.
3. Finished Goods - why store?
• You will be able to cope with unexpected increases in demand as products are ready for immediate delivery to customers. This can be an important factor in securing a competitive edge in the market place. This will avoid the need to step up production quickly, which means you have to pay overtime and there could be problems of morale as employees have to work very long hours;
• Allows a steady flow of work through the factory in order to smooth out seasonal changes in demand, e.g., ice-creams are produced and stored all year round even though most of the sales occur in the summer;
• The company may have to pay financial penalties if it is late delivering its goods, so holding stock of finished goods will guard against the breakdown of machinery, absence of workers, shortage of fuels or raw materials;
• Sometimes it is necessary to build up a stock of finished goods until an order is met or a large enough batch is accumulated to be sent to a distribution centre.
Views on the Role of Stock
Different parts of an organisation will have different ideas about the amount of stock to be held and this may lead to conflicts.
The Finance Department
They will always want low levels of all types of stocks, because it ties up money that could be used in potentially more profitable uses;
The production/operations department
They will seek high levels of raw materials and work in progress so they can maximise their output, but they will tend to be indifferent to the level of finished goods, because it is not part of their work;
The Marketing and Sales Department
They will want high levels of finished goods stock in order to be ready to meet any unexpected increases in consumer demand. They would hate to have to turn down a sale because they do not have enough stock. The sales department will not tend to mind what levels of raw materials and work in progress are held.
Costs of Holding Stock
Holding lots of stock can cost the company money in one of the following ways:
• Spoilage costs, e.g., quality will decrease as in the case of perishable goods or goods held too long may become outdated and difficult to sell;
• Insurance and security costs;
• Theft of the stock by employees and customers;
• Storage can be expensive, e.g., heating, lighting, labour, refrigeration and warehousing;
• Stocks tie up money which could be used elsewhere, e.g., new machinery, factory space could be used more productively or money invested elsewhere. This might have earned the business more money.
Stock Levels
Stock levels must be as low as possible in order that the costs of holding stocks are minimised. At the same time stocks must not be allowed to run out, so that production is halted and customers are let down. A number of factors influence stock levels:
• Nature of the product, e.g., is the good perishable, it is not practical to hold large amounts of stock that will go off very quickly;
• The facilities available, e.g., the more warehouse space you have the more stock you could hold;
• Suppliers, e.g., how often do they deliver and how reliable are they? If they deliver frequently and are reliable the company will not need to hold so many stocks, because they can get more quickly if necessary;
• Stock holding costs, e.g., if stock is expensive to hold (i.e., has to kept refrigerated or under security) then only a small quantity will be held;
• If demand changes greatly from one day to the next the business will hold buffer stocks. These are stocks that are held in case of unforeseen rises in demand;
• Lead time, this is the amount of time it takes for an order to be delivered and ready for use. If the lead time is fairly long the business will hold more stocks so they can continue to operate while waiting for delivery to arrive;
• Stock pile – companies may build up stocks to deal with seasonal demand;
• External factors that the company can not control, e.g., future shortages such as in the market for computer chips in the late 1990s.
Stock Take
Recording the amount and value of stocks the business is holding. It should take place annually or even monthly. The main objectives of the exercise are to:
• Verify the accuracy of stock records;
• Highlight losses owing to theft, fraud or wastage; //
The Effects of too Much Stock
There can be problems of holding too much stock:
• High cost, e.g., storage, insurance, lighting and handling;
• Factory space, e.g., loss of productivity due to wasted space;
• Large stock levels might result in unsold stock;
• Increased theft by employees as businesses will not miss a small amount of stock relative to the total stock.
The Effects of too Little Stock
There can be problems of holding too little stock:
• Unable to cope with unexpected increases in demand and therefore lose customers;
• If deliveries are delayed the business may run out of stock and have to halt production, which can lead to workers and machinery not being used;
• Unable to cope with unexpected shortages of materials;
• Lose discounts for bulk buying.
How to Control Stock
The three basic methods of controlling the level of stock are
• fixed order quantity approach
• periodic review approach
Fixed Order Quantity Approach
An order of fixed size is placed whenever stock falls to a certain level. The size of re-order will depend on the rate of consumption and the lead time (the time taken from ordering supplies to supplies arriving and being prepared for use).
We can see the level of stock (the red line) falls as goods are used. Once the level of stock falls to the re-order level, the company will order new supplies. The lead time measures how long it takes for the new stock to arrive. When the new stock arrives we see the stock level rise again to the maximum stock level.
The above diagram also shows what would happen if stocks were used up too quickly; stocks run out and there is a stock out so the company can now no longer operate.
The Periodic Review System (Fixed Re-Order Intervals).
Orders of various sizes are placed at fixed intervals, e.g., every day, week or month. Stocks are topped up on a regular basis.
We can see that stocks are replenished to the maximum level at the end of every period. The re-order quantity is equal to whatever the company uses in that week.
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