What are Stocks?

• Stocks represent the raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand

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

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

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

The 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