Stock Control (Edexcel A Level Business): Revision Note

Interpretation of stock control diagrams

• A stock control diagram illustrates the flow of stock (inventory) into and out of a business over time

Example stock control diagram

Diagram analysis

• The maximum stock level is the maximum amount of stock a business is able to hold in normal circumstances (1,600)

• The reorder level is the level at which a business places a new order with its supplier (800)

• The minimum stock level is also known as the buffer stock level and is the lowest level to which a business is willing to allow stock levels to fall (400)

• The lead time is the length of time from the point of stock being ordered from the supplier to it being delivered (one week)

• The stock level line shows how stock levels change over the given time period

  • As stock is used up, a downward slope is plotted

  • When an order is delivered by a supplier, the stock level line shoots upwards

Buffer stock

• Buffer stock is a quantity of goods/raw materials kept in case of stock shortages

  • This can provide a competitive edge over rivals unable to meet demand

  • This approach is commonly called "just in case" stock control

• The decision to keep buffer stocks is one that businesses have to weigh up very carefully

  • The decision will be influenced by the nature of the business and the product/service it provides

Advantages and disadvantages of holding buffer stock

Implications of poor stock control

Too much or too little stock: implications

• Problems may arise from holding too much stock

  • Storage costs (e.g. warehouse rental, security costs) will be higher than necessary

  • The risk of spoilage and stock shrinkage will be increased, leading to increased costs

• Similarly, holding too little stock is risky

  • A business may run out of stock, resulting in production stoppages and higher unit costs related to underused capacity

  • A sudden increase in demand may not be capable of being met, which leads to a loss of potential sales revenue

Just-in-time stock management

• Just-in-time stock management is a process in which raw materials are not stored on-site

  • Stock is ordered as required and delivered by suppliers "just in time" for production

• Careful coordination is needed to ensure that raw materials and components are delivered by suppliers at the moment that they are to be used

Advantages and disadvantages of just-in-time stock management

Waste minimisation

• Waste in a business can occur for a number of reasons

  • Stock becomes obsolete unless used by a particular date

  • Perishable stock (food and medicines) that is not used before it deteriorates will need to be thrown away

  • Stock may be damaged as a result of poor storage conditions and may not be suitable for use in the production process

• Allowing waste to go unchecked will increase the unit costs of production and reduce both efficiency and productivity

• Businesses may take a range of steps to minimise waste

Ways to minimise waste

• The minimisation of waste will depend on the nature of the product

  • For perishable items, refrigeration and careful stock rotation can reduce waste

• Staff training and computer inventory management systems may also reduce waste, as fewer errors are likely to be made

• Effective sales forecasting can help reduce the amount of wasted stock

Competitive advantage from lean production

• Lean production involves the minimisation of the resources used in production

  • Less time is required, as the production process is organised in the most efficient way

  • Fewer materials are used, as there is a focus on waste reduction

  • Less labour is used, as lean production is typically capital-intensive

  • The space required for production is reduced as a result of just-in-time stock management

  • A small number of trusted suppliers work closely with the business

• The use of lean production is likely to lead to a competitive advantage 

  • Lower unit costs are achieved due to minimal wastage, so prices may be lower than those offered by competitors

  • Better quality of output is likely, as a result of supplier reliability and carefully managed production processes