Stock Control

Managing stock effectively is important for any business, because without enough stock, production and sales
will grind to a halt. Stock control involves careful planning to ensure that the business has sufficient stock of the
right quality available at the right time.

Stock can mean different things and depends on the industry the firm operates in. It includes:

• Raw materials and components from suppliers

• Work in progress or part finished goods made within the business
• Finished goods ready to dispatch to customers
• Consumables and materials used by service businesses

As stock comes in, and gets used, new stock replaces it. This may cause problems in valuing the stock if they
have different values. Well ziperdeedodah! Who cares? This is important because stock value is one of the
components of profit.

There are three ways of valuing stock…

1. FIFO (First in first out). Stock is assumed to be used on the basis of the earliest stuff in was
the first used, so the stock left, and so the stock to be valued is the newest stuff in, and so the price
used to calculate it is the cost of the latest stock in.
2. LIFO (Last in first out). Stock is assumed to be used on the basis of the latest stuff in
was the first used, so the stock left, and so the stock to be valued, is the oldest stuff in. The value is
calculated depending upon the price for the oldest stock used.
3. Average cost. An average value is taken of the cost of all stock over the time
period.

In order to meet customer orders, product has to be available from stock – although some firms are able to
arrange deliveries Just in Time, see below. If a business does not have the necessary stock to meet orders,
this can lead to a loss of sales and a damaged business reputation. This is sometimes called a ‘stock-out’.

It is important therefore that a business either holds sufficient stocks to meet actual and anticipated orders, or
can get stocks quickly enough to meet those orders. For a high street retailer, in practice this means having
product on the shelves.

However, there are many costs of holding stock, so a business does not wish to hold too much stock either.

The costs of holding stock include:

• The opportunity cost of working capital tied up in stock that could have been used for another
purpose
• Storage costs – the rent, heating, lighting and security costs of a warehouse or additional factory or
office space
• Bank interest , if the stock is financed by an overdraft or a loan
• Risk of damage to stock by fire, flood, theft etc; most businesses would insure against this, so there
is the cost of insurance
• Stock may become obsolete if buyer tastes change in favour of new or better products
• Stock may perish or deteriorate – especially with food products

Stock Control - application and evaluation

IB Business & Management

Stock control
Neil.elrick@tes.tp.edu,tw
When a stock control situation is presented in an examination, it is likely to be in the context of a business that
is facing change – so it is rarely as simple as the diagram in the tutor2u stock control revision note.

Candidates need to interpret and apply stock control principles to the particular situation, and make practical
suggestions to help address the question.

Examples might include:

• A business that is growing will need to review its re-order and buffer stock levels, and the frequency
and size of orders
• Look out for seasonality in a business; larger or more frequent orders may be needed in busy times
• If the supplier is having trouble supplying goods on time, the firm might need to re-order at an earlier
point (or seek a new supplier!)
• Does the firm have a back-up supplier in case of delays?
• Could small additional orders be made with a supplier as a stop gap if the firm’s stock runs out suddenly?
Note - these orders would be more expensive because of extra transport costs and lower discount leve

IB Business & Management

Stock control
Neil.elrick@tes.tp.edu,tw
Stock shown graphically
A stock control chart is a graphical illustration of a simple approach to stock management over time. This ‘saw
tooth’ shaped diagram is normally shown as if sales were steady throughout each month. Whilst this
oversimplifies the situation for many businesses, the principles can be adapted to most situations.

The key features and terms are:

• Maximum stock level – this is the maximum amount of stock a business would wish to hold. This
could represent enough stock for a month or a week, it might be as much as the warehouse has space
for, or it might depend on the order size needed to qualify for a quantity discount – known as the
Economic Order Quantity (EOQ). On the diagram below, the maximum stock level is 600 units, and the
usual order quantity is 500 units
• Re-order level – this acts as a trigger point, so that when stocks fall to this level, the next order
should be placed. This helps take account of fluctuations in sales levels over time. When an order is
placed, there is a lead time that the supplier needs to meet that order. Ideally this new order will arrive
just before stocks fall below the minimum stock level. On the diagram below, 300 units
• Lead time – the amount of time between placing the order and receiving the stock On the diagram
below, just under two weeks
• Minimum stock level – this is the minimum amount of product the business would want to hold in
stock. Assuming the minimum stock level is more than zero, this is known as buffer stock – see below.
On the diagram below, 100 units
• Buffer stock – an amount of stock held as a contingency in case of unexpected orders so that such
orders can be met and in case of any delays from suppliers.

IB Business & Management

Stock control
Neil.elrick@tes.tp.edu,tw
Other bits and pieces on stock
Stock-taking
A simple approach to checking the level of stock in a business is to count it on the shelves – this is called stock-
taking. For many businesses, such as a small shop, this is a thoroughly practical approach. Most businesses
conduct an ‘annual stock take’ when stocks are checked in considerable detail to find any discrepancies between
what is physically and the stock records. This is also a good time to check for any obsolete or out of date stock
that needs to be disposed of.

Stock rotation
Most businesses try to use up older stock first to help avoid stock deterioration or becoming obsolete – this is
known as stock rotation. You have probably noticed that supermarkets always load the freshest stock to the
back of the shelves.

Computerised stock control

Large businesses such as the major retailers use computerised systems to manage stocks of tens of thousands
of items, some of which are replenished several times a day. As stock arrives, and again as it is sold, scanning
of bar codes keeps the levels up to date.

Automatic re-ordering of stock

As bar codes on products are scanned at the checkout, the system is taking those sales into account as part of
a program to re-order stock. Rather than manual stock-taking by counting product on the shelves or in the
warehouse, the supermarket has detailed real-time stock level information that the system uses to place re-
orders through EDI (Electronic Data Interchange).

Information such as weather forecasts, public holidays and major sporting events can be used to help
determine the stock level of seasonal products – such as beer, ice cream and food for barbecues. Huge
amounts of data are available from sales around the country to help determine what stock to have in place on
different days of the week and even at different times of the day.

The major supermarkets such as Tesco have developed stock management as one of their core competencies
and derive competitive advantage from having the right stocks on the shelves when customers want them.

Just-in-time (JIT) stock control

JIT stock control means that stock is only ordered to meet specific orders, and little or no product is held in
stock. This requires very responsive and reliable suppliers who can meet stringent requirements to deliver
exactly the right stock to a precise location and within a narrow time frame. See the revision notes on Lean
Production for more details of JIT.

IB Business & Management

Stock control
Neil.elrick@tes.tp.edu,tw