Added by on 2012-09-12

When buying stock there are two crucial components. Firstly, you must have a system in place so you are fully aware of the stock you need to replace and methods to predict when stock may diminish. Secondly, it is vital you understand how the supplier’s ordering system works and how long it will take to get your stock, such as the supplier’s delivery cycle.

You could be left short if you are not fully aware of the supplier’s time and delivery constraints if you leave an order too late. Here we outline stock purchasing issues which you will need to consider when maintaining your stock levels.

Ordering stock

Make sure you ask your supplier about their order filling system. Some suppliers fill orders on a first in, first served basis. Others give first attention to larger orders while customers with smaller orders wait. You must also bear in mind a supplier’s delivery times.

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.

Suppliers will often set a minimum order on products. The minimum amount on a first order is usually higher than that on subsequent orders – this is to cover the costs of setting up the new account for the customers. Make sure you are aware of the quantity requirements or constraints when ordering from your supplier.

If you need to place regular orders, then designate a certain day in the month to order. Make sure one person has been tasked with placing all orders. As you are just starting the business, that person will probably be you but as you grow, keep stock ordering centralised and if possible, have another member of staff receive the goods for security purposes.

You should also aim to 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 Product A and you have monitored the sales to find that the average usage rate is 300 per week:

Re-order point = 2 weeks x 300 Product A per week = 600 Product A

So you should order more of Product A 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 limited 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.

Stock control issues

It is also important to remember that 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. 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.

Therefore, you need to create an ordering system. 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.

Stock Turnover Rate

A fundamental rule to keep in mind 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.

With higher stock levels comes the need to monitor product performance. This will help with ongoing orders and product pricing by allowing you to identify popular products and buying trends.

To help you do this, 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.

As your business begins trading, experience should soon 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 instance, having large quantities of stock can be an advantage, customers can almost be guaranteed you have what they want in stock, ordering and delivery costs are kept to a minimum and you can take advantage of bulk buying discounts.

However, these benefits can be outweighed in the long run by the costs associated with handling such large amounts of stock. For example, a business has 25% of its capital invested in stock and the annual cost of carrying the stock is about 20% of it value.

These costs could include:

Interest charges on the money invested in the stock

Stock lost through spoilage and damage or become obsolete

Insurance

Cost of space to store stock

Handling costs of moving stock in and out of storage

Possible shoplifting/stealing/unaccounted disappearance the longer the merchandise is in stock.
With these issues in mind, the benefits of a reduced stock position become clear. If you have $300,000 in stock and you pay $60,000 a year in carrying charge, reducing your stock position by one-quarter will save you $90,000 in the first year and $15,000 every year after. So, carrying only the minimum of stock while still being able to service the customers’ needs can be cost effective.

Stock buying systems

As you are just starting your business, you will want to consider the different stock buying systems. There are two main approaches to consider – just-in-time or buying in bulk.

You should make an informed decision based on your individual business needs, but also keep the issues concerning stock storage and control in mind when choosing your stock purchasing method.

Buying just-in-time or in bulk are two opposing approaches to stock purchasing. The following tables outline the advantages and disadvantages of both approaches. Your stock purchasing approach should be based on which method best fits in with your business.

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.

Just-In-Time Purchasing:

Advantages Disadvantages
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

Bulk Buying:

Advantages Disadvantages
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.

Monitoring stock

As you are starting a new business, keeping up-to-date stock records will help you monitor what is selling and what isn’t. This information will be vital when it comes to re-ordering stock too.

To do this you should create your own stock management system. Such a system will depend on how you run your day-to-day business operations, however, there are a few basic principals you can use as a guide. These are:

The 80:20 Rule: As mentioned previously, this is the general rule used by many retailers when it comes to stock management systems. It is the principle that a small number of stock items usually account for a large proportion of the value of stock held. As a result, most attention when it comes to stock maintenance, control and ordering should be focused on that 20 per cent.

Count Cycle: This involves a set time of the month at which you count your stock. Again this method depends on personal preference. Once the stock is accounted for, quantities can be recorded, either manually or stored on computer, to give an accurate reflection of stock levels. This can sometimes be time consuming and will also depend on how many products you stock.

Unit Control System: This is a method which involves a “ticket” system. Cards are kept with the stored stock. These cards list the stock number, description, maximum and minimum quantities stocked, cost (in code), selling price and any other information you want to include. These tickets correspond to office files that also list the stock number selling price, quantity, delivery times, etc. As stock is taken the ticket cards are updated with the new information.

Point-of-Sale (POS) stock tracking: Using a POS system and software allows retailers to record information about stock movement, sales and profits at the point-of-sale. It offers a streamlined computerised system which will automatically update stock levels. POS software tracks what you bought and sold today, yesterday, last week, etc.
Starting your new business with such a system will allow you to evaluate historical data on stock and sales as time goes by, in a year’s time for example. By entering all your stock in MYOB Retail Manager, for instance, you are able to:

Know what’s in stock and what’s on lay-by with split-second accuracy.

Complete a stock audit trail showing all sales, purchases, and adjustments.

Know what’s hot and what’s not in terms of number of sales, turnover, and gross profit.

Manual Tag System: This is a system of stock tracking where tags are taken and kept at the point of sale and cross-checked, at the end of the day for instance, against stock records to keep track of stock levels.

Stock audits and stocktakes

Once you have started “moving” your stock it will be important to conduct regular stock audits. This will depend 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 products 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.

How often you conduct a stock audit, or stocktake, will depend on the level of stock. Many retailers conduct stock audits on a quarterly basis and the majority of retail businesses will hold a major stocktake at the end of the financial year.

The main aim of the stocktake is to know the value of your trading stock. There are two ways of doing a stocktake:

by physically counting stock where every item is listed and counted.

by keeping a continuous running record of all stock at the start of the trading period, all purchases, all returns and all stock held at the end of the trading period. This is where regular stock audits can also be of assistance.
When a business has a lot of small products in large abundance, a physical count may be time consuming and sometime inaccurate due to the sheer volume of items to count.

These days, a computerised stock management system has helped to alleviate the nightmares often associated with retailers’ stocktakes. However, relying on computer records is fine as long as they are accurate and regularly updated. If possible, a combination method of using computer records and physical counting may just get you a more accurate tally.

Once the count has finished the stock should be given a monetary value. To do this, it is normal practice to give stock a cost value as opposed to its sales value.

The main aim of the stocktake is to make sure the amount of physical stock you have on hand corresponds with the amount shown on your inventory/stock records.

Any discrepancies between the amount of stock on hand and the amount recorded in the inventory records, can be put down to various reasons, such as:

  • Shoplifting
  • Mistakes in the amount of stock ordered compared with what was delivered
  • Merchandise being sold to customers without being billed, etc.

You will want to rectify these problems if your stocktake yields discrepancies in stock amounts.

Stock deliveries

When stock is delivered to your business there should be a series of checks you should undertake. Consider the following points when accepting delivered stock:

The prime objective upon receipt of the stock is to ensure that the goods received are of the quality, quantity and price specified when the order was made

Document goods received against the purchase order

Weigh all products purchased by weight and count all products purchased by quantity

You should also open all cases to check for broken or deformed containers/products, make a full count and ascertain whether there has been any damage or spoilage

If you discover any shortages or damaged goods, make immediate adjustments to the invoice, which you and the delivery person should initial

Check all calculations on the invoice and when you are satisfied that everything is correct, stamp or write on the invoice “received”

You should try to store your stock straight after receiving it. If you leave products strewn over the floor, you will inevitably find that some items disappear or are damaged.

Over stocked

Too much stock creates extra overheads which in the long run costs you money. Stock that remains in your storeroom does not generate sales or profits, it actually costs. The natural reaction of any retailer to excess stock is to move it out and have a huge sale. Although it solves the overstocking problem, it also reduces the return on your investment.

In all your projections the figures are based on receiving full retail price at the time or purchase. If you overstock and must reduce your prices by 15 to 25 per cent to clear out the excess, you are ultimately reducing your profits. This is particular true for seasonal, fad and fashion merchandise, where demand diminishes rapidly after a short period of time. You may, however, be able to use some of this stock as ‘loss leaders’.

The inexperienced retailer may respond to an excess in stock with overly cautious re-ordering. When you reduce orders, however, you run the risk of creating a stock shortage.

This too is another hidden cost, just like overstocking. This can manifest in the form of lost sales as customers go to your competitor or who may not return as they have lost faith in your ability to service their needs, and generally negative word-of-mouth.

Delivering products to your customers

Delivering products to customers is not as difficult as some retailers may think. If a customer asks for a large quantity of stock, which you don’t have at your premises, you can always contact your supplier and have them deliver the stock to the customer on your behalf.

It is always wise to speak to your supplier to strike an arrangement concerning stock deliveries to your customers. Ask your suppliers if they can fill one-off large orders and have them delivered straight to the customer or to your business so you can then arrange for delivery.

If deliveries are to be a regular event, you may also want to consider starting an account with a courier/delivery service.

Business stocks and supplies

It is likely you will have your own business stocks to consider, such as specially designed packaging like bags, boxes, letterhead, cards, containers, etc. Keep an inventory of your own business stock, the same way as you would for your products. If you deliver your products, customers are unlikely to forgive a delay in delivery because you have run out of packaging material or boxes.

This is especially important if you use custom packaging such as EBC. If you need to have your bags or boxes printed, you must ensure that you always have this stock on hand, keeping in mind the time it may take to have personalised packaging created.

If you know you have roughly two weeks supply but it takes three weeks for the packaging to be printed and delivered, you have left the order too late. You would need to order a month in advance.

You should also consider the amount of space these business supplies will take up on your premises, particularly if space is limited. It may be better to make an arrangement with your printer to hold some of your stock for you until you need it so you can still save by ordering in bulk.

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