2.4.3 Stock Management Flashcards
what are stocks?
the raw materials, work-in progress and finished goods held by a firm to enable production and meet customer demand
what are the three main categories of stock?
raw materials and components
work in progress
finished goods
what are the raw materials and components
these are bought by suppliers and used in the production process
e.g. parts for assembly or ingredients
what are the work in progress?
semi or part-finished production
e.g. construction projects
what are the finished goods?
completed products ready for sale or distribution
e.g. products on supermarket shelves
why do businesses hold stock?
-enable production to take place
-satisfy customer demand
-precaution against delays from suppliers
-allows efficient production
-allows for seasonal changes
-provides a buffer between production processes
why is stock management and control so important?
-businesses are greatly damaged from stock-outs (customers are not satisfied due to stock being unavailable) or having wrong stock
-it is crucial to manage stock carefully as it ties up lots of cash/ capital that could be used elsewhere in the business
-these days it can be made easier with the widely available IT systems
what are the main influences on the quantity of stock held?
-need to satisfy demand
-need to manage working capital
-risk of losing value
why is satisfying demand so important?
failing to have goods available to meet the demand and sell can be very costly, demand can be seasonal or unpredictable
why is managing working capital so important?
holding stocks ties up cash in working capital, there is an opportunity cost associated with stock holding
why is the risk of stock losing value so important to manage?
the longer stocks are held, the greater risk that they cannot be used or sold
name 4 costs of holding stock
-storage cost
-interest cost
-obsolescence risk
-stock-out costs
cost of storage for holding stock
more stocks require large storage space and possible extra employees and equipment to control and handle them
interest costs for holding stock
holding stock means tying up capital (cash) on which the business may be paying interest
obsolescence risk for holding stock
the longer stocks are held, the greater the risk that they will become obsolete which means unusable or not capable of being sold
stock-out costs for holding stock
a stock out may happen if a business runs out of stock, this can result in lost sales, cost of production delays, extra costs of urgency or replacement orders
what is the overall objective of stock control?
to maintain stock levels so that the total costs of holding stock is minimised
name key elements of a stock control chart
maximum level
re-order level
lead time
minimum stock level
buffer stock
maximum level in a stock control chart
the max level of stock a business can or wants to hold
re-order level in a stock control chart
this acts as a trigger point, so when stock falls to this level the next supplier order is placed
lead time in a stock control chart
the min amount of product the business would want to hold in stock
-assuming the minimum stock level is more than zero, this is known as buffer stock
buffer stock in a stock control chart
an amount of stock held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers
benefits of holding low stock levels
-lower stock holding costs e.g. storage
-lower risk of stock obsolescence
-less capital/ cash tied up in working capital, it can be used elsewhere in the business
-consistent with operating ‘lean’
benefits of holding high stock levels
-production is always fully supplied so there are no delays
-potential for lower unit costs by ordering in bulk, benefitting from purchasing economies of scale
-better able to handle unexpected changes in demand or need for higher output
-less likelihood of ‘stock-outs’
