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