Managing and controlling your stock level is extremely important in a business. The importance of stock management is at times underestimated. Stock is extremely valuable and you have to ensure you have the correct stock level in your warehouse so as never to be shy from supplying your customers. No stock means customers will move on to another supplier whilst too much stock means an increase in holding costs. Thus one must try and figure out the best scenario for holding an ideal stock level.
Management of stock is extremely important in a business since stock is simply cash in disguise. There are various reasons why a company can hold stocks such as that to bridge time since there is no instantaneous production or delivery hence goods must be readily available when demanded by customers. Not only expected demand should be taken care of but also unexpected demand so as to meet out competition.
Furthermore, the production of excess stock will help lessen the costs of discontinuities in the production process. It is cheaper to produce excess stock than to start-stop-start a production. Another reason to hold stock is to hedge against future price increase of raw materials. Also, in manufacturing companies, if there is a shortage of stocks, the workers will remain idle and hence they will be getting paid but no work is being done hence increasing the costs.
Two key objectives of stock management are that to minimise stock levels and meeting demand. It is important to keep stock levels low because having a large number of stock held means more costs to the company. The financial manager must draw a line between a minimising the costs of maintaining the necessary stocks and the expected benefits of not experiencing a shortfall of stock.
In setting stock levels these 4 terms are important to guide the company in its stock management process:
1) Minimum Level – this is the minimum level that stock can reach. Stocks should not fall beyond this figure. It is practically a buffer or emergency stock.
2) Maximum Level – this is the level above which stocks should not normally rise
3) Re-order level – this is the level where a new order is placed. It is higher than the minimum stock level since you have to order before your stocks reach minimum level or else you would end up with a shortage.
4) Re-Order Quantity – this is also known as Economic Order Quantity and takes into consideration Ordering Costs and Carrying Costs
These are the costs that a company will have to pay for every order. They are usually fixed costs irrespective of the size of the order. In order to reduce on such costs, it is better to place a big order once a month, rather than four small orders once a week. Total ordering costs tend to rise with the number of times an order is placed during the operating period.
These are the costs that the company bears for holding its stocks. They usually include cost of storage, handling and insurance, cost of funds tied up in stock, depreciation, maintenance, security, etc... Theft and obsolescence constitute another cost both of which tend to increase as stock levels get higher. Carrying costs will increase as the quantity of each order increase.
Is Just-in -Time beneficial?
Just-in-Time stock management systems delve also into the production management since with this system the company orders the exact amount of stock needed for production. The cost of ordering new stock is reduced. Also suppliers are usually sought out in a close geographical area so as to have immediate delivery of the stock when needed and not delay production due to delivery time.
Total Qualtiy Management is where a relationship between the supplier and purchaser exists and both work together for each other. The supplier knows that is in his interest not to lose an important customer who may account for a significant part of his sales, and thus will do his utmost to keep the customer happy. The customer, in turn, benefits from this, not only because of a better price but also because the supplier generally is an expert his field and may be able to advise the customer on optimum specifications for the product.
Control of Stock
For any type of stock held by the company, there must be a proper stock control system since as already noted, stock is cash in disguise.
Proper Physical security should be present which would take care of:
- Selecting appropriate storage facilities which are dry, well-ventilated and adequately lit
- Keep the storage area locked, with limited access
- Shelves clearly labelled
- Limit fire hazard, and install fire safety equipment
- Frequent stock taking, possibly using a perpetual inventory system
- Any items affected by light and heat stored appropriately
- Items of high value should be given special attention
- Heavy items stored on ground level; items which are rarely used stored higher up
- Use a First-in First-Out System (FIFO) to guard against deterioration
Apart from physical security, the company must also ensure there is in place proper procedures and documentations for the control of the stock such as:
- Materials Requisition – a written request for stock by the company to its storekeeper to provide the goods required
- Purchase Requisition – a signed request issued by the storekeeper to replace stocks. This is issued when stocks reach the re-order level.
- Purchase order – issued by purchasing department to the chosen supplier for the purchase of new stock. Includes quantities, price, and reference code where applicable as well as delivery and payment terms
- Goods Received Note – issued by storekeeper when goods are delivered. Storekeeper should first check that quantities supplied are correct and the quality of the goods is fine.
- Invoice – the supplier’s bill to the company for goods ordered and delivered. Paid after goods are received have been verified
- Stock records – ledger kept by the storekeeper recording the quantity of all items of stock issued and received and the balance of every transaction.