Controlling stock is essential to business success – overstocking can result in insufficient liquidity whilst under stocking can make it impossible to satisfy customer demands.
The company undertakes regular stock reviews to ascertain whether new stock must be ordered. This takes into account pre-determined figures that help business leaders make the decision to order new stock or hold off. Many businesses operate a minimum stock level, the lowest point stock is allowed to go before more is ordered.
This method involves ordering new stock either at fixed times, fixed levels or both. For example, a company may have a standing order for 500 units every third Sunday of the month. This type of stock control is particularly useful for companies with fixed contracts and stable demand, for those in which irregular orders are either unlikely or placed with a long-term delivery date.
Just in time (JIT)
This stock control system was originally used in Japan; as the name suggests stock is ordered as and when they are required in order to keep costs down and liquidity high. However, the increased cashflow comes at a cost. The company must be exceptionally organised in order to ensure orders are made at the right time, and suppliers must be reliable enough to fulfil requirements at all times. There is also a risk of running out of stock should a big order be placed.
Economic Order Quantity (EOQ)
EOQ is a complex mathematical formula that aims to keep stock at an optimal level, depending on the type of firm and the industry it operates within. EOQ calculations can be quite complex so you may find it easier to consult a professional, or alternatively invest in stock management software which should be able to make EOQ calculators out of the box. EOQ can be combined with other forms of stock management where required.
First in, first out
This system is particularly popular with businesses that work with perishable stock, and aims to ensure that stock does not deteriorate before use. Stock is identified by when it was received and moves onto the next stage of production before stock received at later date.
Batch control separates stock management and production into batches. This reduces complexity in the production process and helps ensure targets are met in the short-term. Batch control can also help keep costs down as firms only need the raw materials and components needed to satisfy the demands of an individual batch.
Vendor-managed inventory (VMI)
Vendor-managed inventory (VMI) is a relatively new model of stock management that emphasises shared risk between the buyer and supplier. The buyer provides information to the supplier as to their stock requirements; the supplier is then responsible for maintaining a particular level of stock at a specified location, normally the buyer’s point-of-sale. VMI helps reduce the chance of under-stocking and also reduces the time stock spends in the supply chain.