For a business, stock control is a vitally important aspect of business and it does play a part in the day-to-day operations of your company. Supplies of materials and goods are never assured and production may be interrupted by break-downs or strikes, thus you can never be certain when you will need a particular item to complete a job.
If you overstock items, you run the risk of tying up capital and valuable space. If you carry too little stock, you may not be able to complete a job or will lose a contract/sale if your customers go elsewhere.
The type of stock carried is also important. Too much slow moving stock will lead to slow turnover. This will deplete your cash flow. On the other hand, diversity may be important. Customers like choice, so it is important to know and provide what the customer wants.
Keeping stock – The Balancing Act
Stock management is the art of balancing the costs of having too little stock versus the costs of holding too much.
Costs of carrying too little stock are caused by:
- interruptions to production
- loss of sales.
Costs of holding stock in a business are two-fold:
- Costs of ordering
- Inventory costs.
Frequent orders will invariably lead to higher ordering costs. This consists of the purchase costs of stock, as well as administrative, handling and transportation costs.
Therefore, you need to create an ordering system. Order stock yourself or delegate the responsibility to one person. Many business owners make the mistake of letting just about anyone order inventory, but it is a specialised task that requires dedicated attention to detail.
Besides the specialisation involved, an efficient ordering system typically involves certain practices, such as never over-ordering just to save a few dollars, using just-in-time ordering whenever possible, shopping for suppliers periodically and asking for discounts.
Costs of holding stock
The more frequently you place orders the likely lower average stock levels you need to carry. As you replenish your stock, the less carrying costs there will be. Remember, carrying costs include storage, insurance, interest costs on funds tied up and the costs of spoilage and obsolescence.
Your task in stock control is to minimise stock holding costs at the same time as trying to limit the costs of being out of stock.
The stock issues you need to address can be summarised as follows:
- What is the optimum stock level
- The size of individual orders for stock
- Frequency of stock orders
- The level of care necessary to control stock.
The key issue for a business that has stock is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and, thereby, minimising the cash tied up in stocks.
Factors to be considered when determining optimum stock levels include:
What are the projected sales of each product?
How widely available are raw materials, components, etc.?
How long does it take for delivery by suppliers?
Can you remove “slow movers” from your product range without compromising “best sellers”?
It is fair to say that the optimum stock level does vary from business to business. It also varies from product to product. Needless to say, the fundamental rule is that stock levels should be kept to a minimum, but sufficient to satisfy customer demand. As a general rule, the greater level of sales, the higher stock levels you can carry.
Analysing the stock turnover rate
With higher stock levels comes the need to monitor its performance. Therefore, you need to work out the stock turnover rate for the business as a whole or product by product:
Rate of stock turnover (times per year) = Number Sold ÷ Average Stock on Hand.
For example, if you sell 15,000 widgets in a year and your average stock is 1500 widgets, then your rate of widget turnover is 10 times per year and you carry about five weeks supply.
Experience will tell you if this is too much or too little depending on how long it takes to replace stock sold, the seasonal demand and whether customers buy regularly or irregularly, and in large or small quantities.
Remember that stock sitting on shelves for long periods of time ties up money which is not working for you.
For better stock control, try the following:
Review the effectiveness of existing purchasing and inventory systems
Know the stock turn for all major items of inventory
Apply tight controls to the significant few items and simplify controls for the trivial many
Sell off outdated or slow moving merchandise – it gets more difficult to sell the longer you keep it
Consider having part of your product outsourced to another manufacturer rather than make it yourself
Review your security procedures to ensure that no stock “is going out the back door!”
The size of your order is also a relevant factor to consider. The fewer and bigger the orders, the lower the ordering costs will be, resulting in savings from quantity discounts, transport and paperwork.
On the other hand, this means you will have to hold more stock on average, which results in greater inventory costs. So, there is always a trade-off and you need to determine what is most suitable for your business.
To minimise inventory cost, you should ensure that fresh stock arrives just as the old stock runs out. To get this right, you need to know the lead time once an order is placed and the expected demand for the goods during the lead time. You can calculate the re-order point.
Re-Order Point = Lead Time x Usage
Assuming it takes two weeks to deliver new stocks of widgets and the average usage rate is 300 per week:
Re-order point = 2 weeks x 300 widget per week = 600 widgets
So you should order more widgets every time the stock falls to 600, with a day or two of extra stock as a safety margin. By calculating your re-order point, this will ensure your stocks are regularly replenished without carrying excess stock.
Generally speaking, a small number of items will usually account for a large proportion of the value of stock held. This is sometimes referred to as the 80:20 rule – 80 percent of stock is made up of 20 percent or fewer items.
Given the likelihood that few stock items make up most of your stock, this would justify your effort in gathering the cost information discussed above. So, for your major stock items, we suggest that re-order points, etc. should be calculated.
For other smaller value items, determine the re-order point by past experience.
Buying just-in-time versus bulk buying
You should consider two opposing approaches to stock purchasing to see which fits best with your business. These are just-in-time purchasing and bulk buying.
You may well find that it pays to bulk buy some items while others should be purchased as needed. Here are the advantages and disadvantages of both approaches.
|Purchasing stock for your immediate needs makes it easier to determine your requirements, e.g. weekly, fortnightly or monthly||Smaller stocks could lead to customers going elsewhere if your deliveries don’t arrive in time|
|Stocks cost money. A just-in-time system reduces the amount of money tied up in stocks||Buying in smaller quantities will mean that you miss out on quantity discounts|
|Stock can become obsolete, so this will reduce the risk of deterioration or obsolescence||Freight costs are higher because of more frequent deliveries|
|Avoids a loss if prices fall||Handling and other overheads will increase due to the many small orders|
|Lowers stock holding and insurance costs||Production schedules can sometimes be disrupted if delivery delays occur|
|You should be able to obtain lower prices which may mean higher gross profit||Bulk buying may only be offered on substandard or superseded stock|
|Sales could increase if you pass on lower prices to your customers||May tie-up cash if the stock purchased proves to be slow-moving|
|Fewer orders mean you gain through lower transport and handling costs||You need more storage space|
|No danger of running out of stock or production hold-ups||Increased likelihood of losses due to stock deterioration or obsolescence|
|Pilfering increases where large volumes are held on the shelf because staff may feel that one item out of many won’t be missed|
Your choice of stock control measures depends on the circumstances of your business, your existing storage capacity and working capital, whether the items deteriorate in storage and what cost savings you can make from bulk buying. Review each of these factors and then make an informed decision on your own stock control measures.
Analysing how much stock you need and when is only one aspect of stock control. To be really effective, you will also need to implement a stock control system.
It is no good knowing that you will need 600 widgets if there is no system in place to ensure the correct number is ordered at the right time.
If you need to place regular orders, then designate a certain day in the month to order.
Make sure a staff member has been tasked with placing all orders (ie. have a
designated purchasing officer). If you have the staff, you may want to also designate someone else to receive the goods for security purposes. For larger businesses, separation of duties is an important security measure.
You should conduct regular stock audits, depending on your stock turnover rate. If you have a high stock turn rate, regular checks are advised. Your stock checks should give you an indication on what sells, and how fast, and if increased quantities are needed.
Audits also allow you to see if a trend is developing. If certain widgets are selling faster than usual or you are seeing an increase in orders for a certain product, then you can check if increasing your order or buying in bulk will give you a purchase discount.
That way you are increasing your gross profit margin and reducing your costs. It also allows you to take advantage of the sales surge and not lose sales because of a stock shortage.
Adding value to stock
Some service/retail businesses, such as motor vehicle, electrical goods and shoe repairers, hold goods belonging to customers and during the repair process, add value to stock by their labour and new parts.
In this case, most of the stock held does not belong to the business, so it is important to properly control the individual items by implementing a job control system.
Job control systems may consist of a simple two- or three- part form or docket, which is usually individually pre-numbered.
Customers’ goods are stored in the workshop in an agreed sequence. This may be:
- date received order
- docket number order
- client name
- type of job.
This type of system is very important in any sort of repair/service-type business where customers may be returning some time later to collect their goods. It is also a good way of assuring the customer that you acknowledge the customer’s ownership of the goods.
As an added bonus, any docket that you give the customer should state clearly that repairs to the owner’s goods need to be paid for in full before goods will be returned.
Without good storage your stock control plans can be wasted. Here are some handy tips on storing stock.
You need a storage facility that:
protects your stock from the possibility of damage and breakages
reduces stock deterioration due to external factors such as heat, damp, sunlight
makes stock easy to access for inspection and counting
makes stock readily available for sales staff and easy to find
allows easy movement of stock both inwards and outwards
discourages theft by staff or customers, for example, by adding security tags to goods
has efficient fire-fighting equipment that staff knows how to operate.
Inspect your storage facilities regularly and let your staff know what you are doing. Your interest will demonstrate that the area is important to the business. At the same time, talk to staff to find out which items are slow moving and encourage them to tell you about any other problems they can see.