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What are stocks?
They represent the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand
What are the three main types of stock?
Raw materials and components
Bought from suppliers
Used in the production process
E.g. parts for assembly or ingredients
Work in progress
Semi or part-finished production
E.g. construction projects
Finished goods
Completed projects ready for sale or distribution
E.g. products on supermarket shelves; goods in Amazon warehouses
What are the key reasons to hold stock?
Enable production to take place
Satisfy customer demand
Precaution against delays from suppliers
Allow efficient production
Allow for seasonal changes
Provide a buffer between production processes
What are the main influences on the amount of stock held?
Need to satisfy demand
Failure to have goods available for sale is very costly
Demand may be seasonal or unpredictable
Need to manage working capital
Holding stocks ties up cash in working capital
There is an opportunity cost associated with stockholding
Risk of stock losing
The longer stocks are held, the greater the risk that they cannot be used or sold
What are costs of holding stocks?
Cost of storage: More stocks require large storage space and possibly extra employees and equipment to control and handle them
Interest costs: Holding stocks means tying up capital (cash) on which the business may be paying interest
Obsolescence risk: The longer stocks are held, the greater the risk that they will become obsolete ( not capable of being sold)
Stock out costs: A stock out happens if a business runs out of stock. This can result in:
Lost sales and customer goodwill
Cost of production stoppages or delays
Extra costs of urgent, replacement orders
