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
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