Stock control 2

Question 1

What are the implications of too much stock?

Answer 1

1. Opportunity cost - holding the firm’s wealth in the form of stock prevents it using its capital in another way
   E.g investing new machinery or R&D on a new product
2. Cash flow problems - may be insufficient cash to pay suppliers
3. Increased storage costs - rental costs of the space needed to hold the stock
   Higher the stock value the higher the cost of insurance
4. Increased stock wastage - the more stock that’s held the greater the risk of it going out of date
5. Increased finance costs - if the capital for the extra stock is borrowed the firm will pay interest which will add to annual overhead

Question 2

What 2 ways can a business cut costs (destocking) ?

Answer 2

1. Cut orders to suppliers
   Cash outflows decrease
   Net cash flow improves
2. Boost sales to customers
   Cash inflows increase
   Net cash flow improves

Question 3

What are the implications of too little stock?

Answer 3

1. Lost orders of urgent customers cannot be met because there is too little finished good stock
2. Worker downtime, if essential components have been delayed in arriving from suppliers
3. The loss of the firm’s reputation and any goodwill

Question 4

What happens when stock levels rise?

Answer 4

Stock levels rise
The cost of holding the stock increases
Cost of being out of stock decreases