What does this article about stock control cover?
Types of stock: Includes raw materials, work in progress, and finished goods. Efficient management is crucial to avoid production halts.
Inventory control methods: Minimum inventory level, batch control, FIFO (First In, First Out), and JIT (Just In Time) each have their own advantages and disadvantages.
Stock control graphs: Used to manage stock levels, including maximum stock level, minimum stock level (buffer stock), lead time, and reorder level.
Advantages and disadvantages of JIT: JIT reduces storage costs and improves cash flow but relies heavily on reliable suppliers and can struggle with sudden demand spikes.
How does a business manage its stock?
Inventory control refers to the management of inventory and is essential for every business, from the local corner shop to large manufacturers. It helps businesses keep track of their products, manage costs, and ensure they can meet customer needs.
Let's look at the four main methods:
Minimum inventory level: This sets a lowest acceptable amount of stock. When stock reaches this minimum inventory level, new inventory is ordered, like when a shop orders more milk when they get down to their last 20 bottles. Helps prevent running out. Risk of stock running out if demand is not stable.
Batch control: Products are ordered or made in specific quantities, like a local bakery making morning goods in batches. Saves money through bulk buying. Needs more storage space. Helps trace quality issues to a batch.
First in, first out: Rotates inventory so that the oldest inventory is used first, important for fresh products. Reduces waste. Requires good organisation.
Just in time: Stock arrives when needed to meet demand. Saves on storage costs, but depends on reliable suppliers.
Choosing the right method depends on the business type, storage, and products. Good stock control balances customer needs with storage costs and involves building strong supplier relationships for success.
Businesses need to manage their stock in the most effective and efficient way possible.
Stock can consist of:
raw materials waiting to be used in production
work in progress
finished stock waiting to be delivered
For example, a car manufacturer’s stock could include car parts and components waiting to be fitted (raw materials), partially built cars (work in progress) and completed cars waiting to be delivered to customers (finished stock).
If the stock materials are not managed efficiently, it could mean production has to stop. As a result, the whole factory production line could come to a halt.
Procurement means getting the right supplies from the right supplier.
Effective stock control is important to both customers and businesses.
Customers expect to be able to go into a store and buy the products they desire.
Without appropriate stock control, businesses can run out of stock, which loses them sales and potentially customers. However, holding too much stock can also have negative consequences:
high storage costs, which may mean the business has to raise its prices
increased waste, if the products are perishable, eg fruit and vegetables
reduced income, if the business needs to sell off excess stock at a reduced price
What are inventory control methods?
Minimum inventory level:
This is the smallest amount of stock that a business aims to have on hand at any time. When inventory levels reach this point, it's a signal to reorder more stock to avoid running out.
For example, a small electronics shop always keeps at least ten units of each popular smartphone model in stock and orders more when they get close to this minimum level.
How do you interpret a stock control graph?
Interpretation of bar gate stock graphs
Speaker 1: How did we end up with so many t-shirts?
Speaker 2: Did we over order?
Speaker 1: Let's take a look at a bar gate stock graph. It will help us keep track of how much stock we have and when we need to order more. We will also be able to monitor the maximum amount of stock we can hold, to avoid situations like this.
Speaker 2: Okay so, the horizontal axis shows us time and weeks and the vertical axis is for the amount of stock. Now we only have so much space, so let's say the maximum inventory we can hold is one thousand t-shirts.
Speaker 1: I thought we were talking about stock?
Speaker 2: We are, inventory is another word for stock. Now we should always have at least two hundred t-shirts in stock, in case we get a really big order or deliveries from our suppliers get delayed. So, two hundred shirts is our buffer stock, the minimum we need to have so we don't completely run out, otherwise our customers might get annoyed and switch to a competitor. And five hundred is our re-order level, so even if there are delays we should never drop below two hundred.
Speaker 1: What are these zig zags though?
Speaker 2: That's our stock level. So, here is when we place new stock orders, when we only had five hundred t-shirts left, so that's here, here and here on the diagonal. Here's how much stock we had left when we received those new orders and here is how much stock we had when we added in those new items. That's what these vertical lines are, when our stock went up.
Speaker 1: But how did we end up with so many t-shirts this time?
Speaker 2: I ordered five hundred as per usual.
Speaker 1: Well it usually takes two weeks for us to receive new orders from our supplier, so that's a lead time of two weeks to receive new stock. But this time, the stock only had a lead time of one week, so it arrived earlier than usual, when we hadn't sold as much. That's why we have so much stock here.
One way of demonstrating how businesses manage their stock levels is to use a stock control diagram like the one below.
The maximum stock level is the largest amount of stock a business can store on site. In the bar graph example, it is 500 items of stock.
The minimum stock level is also known as buffer stock. This is the lowest amount of stock a business can store on site while still being able to operate effectively. In the bar graph, the minimum stock level or buffer stock is 100 items. Buffer stock ensures a business can still operate for a short while if there are delays to deliveries or there is a large spike in demand. It also allows a business to replace any damaged stock while continuing to meet customer demand.
Lead time is how long it takes from ordering stock for it to arrive. The bar graph shows that the lead time is two weeks.
The reorder level is the point at which a business needs to order new stock in order for it to arrive before its stock falls below the minimum level. In the bar graph, the business would reorder stock when it has 300 remaining.
Many businesses use computer software that automatically reorders stock when it reaches a pre-set reorder level. For example, stock levels can be automatically updated every time a product is sold to a customer, as products are scanned at the checkout using a An electronic machine used to read printed barcodes. It can be used to monitor stock levels, meaning that the stock management system can automatically reorder stock when it reaches the minimum stock level.. This not only ensures accurate stock levels but also allows stock to be automatically reordered when it reaches a pre-set level.
What is batch control?
This method involves ordering or producing stock in specific quantities, known as batches. Each batch is treated as a separate lot, which helps in managing stock levels and ensuring consistency in production or sales.
For example, a clothing manufacturer produces 500 units of a particular T-shirt in one batch before moving on to produce a different item.
What is first in, first out (FIFO)?
FIFO is a method where the oldest stock (first in) is used or sold first (first out). This helps in managing stock rotation, particularly for perishable goods.
For example, a grocery store ensures that older cans of soup are placed at the front of the shelf so they are sold first, before newer stock is added.
What is just in time (JIT)?
JIT is a system where stock is ordered and received only when it's needed, rather than holding large amounts of inventory. This reduces the cost of holding stock but requires precise timing.
For example, a car repair shop orders parts only when a customer needs a repair, instead of keeping a large inventory of parts on hand.
Just-in-time (JIT) stock control
Just-in-time (JIT) is a stock control method where the business doesn’t store any raw materials. Instead, it has regular deliveries that bring only what is needed before its existing raw materials run out, so A minimum stock level a business holds at all times, to reduce the risk of running out of stock due to late deliveries. is not needed.
The business orders smaller but more frequent quantities of stock that are taken straight to the production line on the factory floor. For this method of stock control to be effective, a business needs a good relationship with its suppliers. Suppliers will ideally be local to reduce both delivery costs and The time it takes from ordering stock for it to arrive..
JIT stock control can have disadvantages. For example, there may be times when a business runs out of stock because of late deliveries. Businesses have to decide whether the advantages of JIT outweigh its disadvantages.
Advantages of JIT
- removing buffer stock space (which would previously have been used for storage) means more space can be used for sales
- smaller but more frequent deliveries mean that the products will be fresher. A business can also have new stock delivered more frequently, eg Decreases in quality over time. items such as fresh fruit and vegetables
- businesses will no longer have large amounts of The money and equipment invested into a business. tied up in stock that could go out of date or out of fashion. This capital can then be reinvested or spent elsewhere
- additionally, having less stock that could go out of date will reduce waste, saving money
- JIT reduces production costs, allowing businesses to price their products to give a more How a business endeavours to outperform its rivals..
Disadvantages of JIT
- it can be hard for businesses to react to unexpected changes in demand, eg a heatwave causing an increase in the demand for ice cream.
- businesses are unable to use A cheaper price offered to customers when they buy a large quantity of something.if they only buy in small quantities.
- customers could receive a poor service if the business misjudges the amount of stock it needs and allows products to go out of stock.
James May discusses just-in-time stock control on a car production line
Right, I've moved further back down the production line.
I'm with Greg and we are in IMF.
Which is, don't tell me… It is, Integrated Multi-modular Front-end. Modular front-end.
Modular, sorry, modular front-end. Which means the bumper, doesn't it?
Exactly, exactly.
It is, it is a fascinating component. Tell us where it's come from.
Yeah, so it comes about 30 miles away from Banbury. It comes to us exactly in sequence.
We hold no more than three quarters of an hour to an hour's worth of stock.
And what comes out of the facility is, the facility we call the rollercoaster, goes straight onto the car that comes along on the line.
So they come just in time, just in sequence.
The next car is the maroon colour. That is the maroon one. It's got all the bits on. That's exactly what 'Just in time' is all about.
Fill in the blanks
What are the advantages and disadvantages stock control?
| Inventory control method | Advantages | Disadvantages |
|---|---|---|
| Minimum inventory level | • prevents stockouts • better cash flow management • simplifies reordering | • risk of stockouts during demand spikes • over-reliance on suppliers • limited flexibility in bulk purchasing |
| Batch control | • cost efficiency through bulk discounts • consistency in production • easier tracking of batches | • higher storage costs • risk of waste if demand decreases • complex management of multiple batches |
| First in, first out (FIFO) | • prevents obsolescence and waste • better stock rotation • accurate costing for sold goods | • complex tracking and management • higher administrative costs • may not be necessary for non-perishable goods |
| Just in time (JIT) | • reduces storage costs • improves cash flow • increases flexibility to adapt to demand | • risk of delays if suppliers fail • lack of preparedness for sudden demand spikes • heavy reliance on reliable suppliers |
Try the stock control quiz
Final checks
What is the key advantage of using the Just in Time (JIT) inventory control method?
The key advantage of using the JIT method is that it reduces storage costs by ordering stock only when it's needed, thereby improving cash flow and increasing flexibility to adapt to demand.