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Stock Control


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.


Why 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.
  • Expect price rise.
  • Bulk discounts will encourage you to buy large amounts.


2.  Work in Progress - why store?

  • Holding 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 process.


3.  Finished Goods - why store?

  • Satisfy 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.
  • Allows a steady flow of work through the factory in order to smooth out seasonal variations in demand.
  • Reduce financial penalties accompanying the breakdown of machinery, redundancies, shortage of fuels or raw materials or industrial action.
  • 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 perceptions about the role of stock and this will lead to conflicts.

  • The Accounting Department - 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 uses.
  • The production/operations department - 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.
  • The 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

  • 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.
  • Storage can prove costly, e.g., heating, lighting, labour, refrigeration and warehousing.
  • Administrative and financial costs, e.g., placing and processing orders, handling costs and costs of failing to anticipate price increases.
  • Out of stock costs, there will be a loss of goodwill if customers are let down and therefore a loss of revenue.
  • Opportunity 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

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.
  • The facilities available, e.g., warehouse space.
  • Suppliers, e.g., how often do they deliver and how reliable are they?
  • Stock holding costs, e.g., if stock is expensive to hold then only a small quantity will be held.
  • Demand, e.g., "buffer stocks" will be held for unforeseen rises in demand (or supply).
  • Lead 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 needed.
  • Stock pile - build up stocks to deal with seasonal demand.
  • Management policies, e.g., just-in-time production reduces the stock levels.
  • External factors, e.g., future shortages.


Stock Take

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:

  • Verify the accuracy of stock records.
  • Highlight losses owing to pilfering, fraud or wastage.


Stock Control

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:

  • High cost, e.g., storage, insurance, lighting and handling.
  • Factory space, e.g., loss of productivity due to wasted space.
  • Opportunity cost will be high.
  • 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

They are often cited as being:

  • Unable to cope with unexpected increases in demand and therefore lose customers.
  • If deliveries are delayed the firm may run out of stock and have to halt production, which can lead to idle labour and machinery.
  • Unable to cope with unexpected shortages of materials.
  • Lose discounts for bulk buying.


Approaches to Stock Control

A system of stock control needs to find answers to three basic questions:

  • What items should be stocked?
  • When should an order be placed?
  • How 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:

  • Independent Demand Stock Systems.
  • Materials Requirement Planning (MRP).
  • Just-in-Time (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 demand.


Advantages of MRP

  • Reduced stock levels.
  • Stock is related to demand, therefore there should be fewer shortages of materials and consumer satisfaction should be higher.
  • The stock turnover will be higher, which should have positive implications for the quality of the materials present in the final product.
  • Delivery of finished goods should be more reliable.
  • There will be improved plant efficiency, because facilities will be utilised when required, as the materials will be ready for immediate use.


Disadvantages of MRP

  • The 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.
  • Even if there is a master schedule, it may not be accurate and hence there may be shortages or surpluses of stock.
  • Plans are frequently changed and/or not made far enough in advance causing problems in accurate scheduling.
  • If the master schedule is to be accurate, information about current stocks, orders outstanding and the reliability of stock surpluses will be required.
  • It 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 system.




E-mail Steve Margetts