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:
materials and components to be used in the making of products.
finished goods (referred to as work in progress) that are awaiting the
next stage of production.
goods consisting of products ready for sale.
Why Organisations Need Stock?
Materials - why store?
with changes in production levels.
against delays in delivery from supplier/ non-delivery.
risk of world shortages.
discounts will encourage you to buy large amounts.
2. Work in
Progress - why store?
stock at each stage of production maintains the independence of stages and
enhances the flexibility of operations.
Stock helps to stabilise the operation, which would otherwise be
affected because of the varying speeds of the different parts of the
Goods - why store?
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 can lead to overtime and then problems of morale.
a steady flow of work through the factory in order to smooth out seasonal
variations in demand.
financial penalties accompanying the breakdown of machinery, redundancies,
shortage of fuels or raw materials or industrial action.
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
Views on the Role of Stock
Different parts of an organisation will have different perceptions about
the role of stock and this will lead to conflicts.
- They will always want low levels of all types of stocks, because it ties
up valuable resources that could be used in potentially more profitable
- They will seek high levels of raw materials and work in progress to
facilitate the operations, but will tend to be indifferent to the level of
finished goods, because it is not part of their work.
Sales Department -
They will want high levels of finished goods stock in order to be ready to
meet variable consumer demand. The
sales department will tend to be indifferent towards stock levels of raw
materials and work in progress.
Costs of Holding Stock
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goods held too long may become outdated and difficult to sell.
and security costs.
can prove costly, e.g., heating, lighting, labour, refrigeration and
and financial costs, e.g., placing and processing orders, handling costs
and costs of failing to anticipate price increases.
of stock costs, there will be a loss of goodwill if customers are let down
and therefore a loss of revenue.
cost, 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 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.
of the product, e.g., is the good perishable.
facilities available, e.g., warehouse space.
e.g., how often do they deliver and how reliable are they?
holding costs, e.g., if stock is expensive to hold then only a small
quantity will be held.
e.g., "buffer stocks" will be held for unforeseen rises in
demand (or supply).
time - the amount of time it takes for a stock purchase to be placed,
received, inspected and ready for use.
The longer the lead time the higher the minimum level of stock
pile - build up stocks to deal with seasonal demand.
policies, e.g., just-in-time production reduces the stock levels.
factors, e.g., future shortages.
Recording the amount and value of stocks that the firm is holding.
It should take place annually or even monthly.
The main objectives of the exercise are to:
the accuracy of stock records.
losses owing to pilfering, fraud or wastage.
It aim is to control sufficient quantity and quality to enable production
and sales to continue whilst minimising costs.
The Effects of too Much Stock
They are often cited as being:
cost, e.g., storage, insurance, lighting and handling.
space, e.g., loss of productivity due to wasted space.
cost will be high.
stock levels might result in unsold stock.
theft by employees as businesses will not miss a small amount of stock
relative to the total stock.
The Effects of too Little Stock
They are often cited as being:
to cope with unexpected increases in demand and therefore lose customers.
deliveries are delayed the firm may run out of stock and have to halt
production, which can lead to idle labour and machinery.
to cope with unexpected shortages of materials.
discounts for bulk buying.
Approaches to Stock Control
A system of stock control needs to find answers to three basic questions:
items should be stocked?
should an order be placed?
much should be ordered?
If we can assume that the necessity of an item has already been agreed,
then stock control should focus on the other two questions.
We shall be looking at the following three methods of stock control:
Demand Stock Systems.
Requirement Planning (MRP).
(see later notes).
Independent Demand Stock Systems
The two basic approaches used within this system are the fixed order
quantity approach and 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).
The Periodic Review System
(fixed re-order intervals).
Orders of various sizes are placed at fixed intervals.
Stocks are topped up on a regular basis.
Materials Requirement Planning (MRP)
This system is designed to ensure that a firm has the parts and materials
needed to supply its producers and services at the right time and place and
in the correct amounts. It
proved invaluable in systems involving complex product assembled with parts
and materials from outside suppliers. The
system starts by seeing what production is planned and then develops a
timetable for orders so the materials arrive in time for their use.
Thus the resulting stock of materials depends directly on the known
Advantages of MRP
is related to demand, therefore there should be fewer shortages of
materials and consumer satisfaction should be higher.
stock turnover will be higher, which should have positive implications for
the quality of the materials present in the final product.
of finished goods should be more reliable.
will be improved plant efficiency, because facilities will be utilised
when required, as the materials will be ready for immediate use.
Disadvantages of MRP
successful implementation of MRP requires the construction of a detailed
master schedule of all the parts that will be required in the production
process. If this master schedule has not been drawn up, the
system can't operate.
if there is a master schedule, it may not be accurate and hence there may
be shortages or surpluses of stock.
are frequently changed and/or not made far enough in advance causing
problems in accurate scheduling.
the master schedule is to be accurate, information about current stocks,
orders outstanding and the reliability of stock surpluses will be
will be necessary to have information on the length of time it takes to
acquire deliveries of stock in time for use.
These disadvantages have been reduced in significance by the advent of
low cost computer systems that have enabled the widespread use of MRP in the
planning and control of different manufacturing processes.
Differences Between MRP and Independent Demand Systems
The main difference is the normal level of stock.
MRP stocks are generally low, but they rise just before production starts
as orders are delivered. This
stock is then used and the level returns to its normal level.
Independent demand system maintains a high level of stock, as stocks
aren't related to the production plans.
These levels will be reduced during the production process, but will
then be replenished as soon as production finishes. The diagram below shows
how stock levels change with MRP
The diagram below shows how stock levels change with independent demand