Stock control chart, also known as inventory control chart, is a graphical tool used to visualize inventory movement over time.
These charts simplify inventory management by depicting key data points like deliveries, reorder levels, buffer stock, and usage rates.
Role of stock control chart
The role of stock control is to help businesses with their management of stock (inventories).
It can be used to minimize the cost of stock while maintaining adequate levels of stock to ensure adequate levels of stock for production and sufficient finished goods available for despatch.
It is also used for valuation purposes, to control cash tied up in stock and to control wastage and pilferage.
Features of stock control chart
Stock control charts depict inventory movement over time and incorporate several crucial elements for effective inventory management:
- Maximum inventory level. This level is determined by a combination of space constraints and the financial burden of holding excessive stock. It can be calculated by adding the Economic Order Quantity (EOQ) of each component to its designated buffer level.
- Buffer inventory. The higher the uncertainty regarding delivery times or production levels, the larger the buffer inventory needs to be. Additionally, the cost associated with shutting down and restarting production influences the optimal buffer level. Higher buffer inventory translates to potential cost savings but requires more storage space and capital. Buffer inventory represents the minimum stock level maintained to ensure production continuity in case of delivery delays or production increases.
- Reorder stock level. This level triggers a new order to the supplier. Modern inventory management systems often utilize computers to track sales and deliveries. The reorder quantity and reorder stock level can be programmed into the system, enabling automatic order placement when stock dips below the reorder level. Stock control charts can also be generated by these computer systems.
- Reorder quantity. This represents the number of units ordered each time. The economic order quantity concept influences the reorder quantity. In simpler terms, it’s the amount of new stock ordered.
- Lead time. This measures the time between placing an order and receiving the stock. Longer lead times necessitate larger buffer stocks. Unreliable suppliers further necessitate a higher buffer level to compensate for potential delays that could cause stock levels to fall below the desired minimum. Lead time refers to the total duration encompassing the time it takes a firm to send an order to the supplier and the supplier’s delivery time.
- Planned usage rate. This refers to the rate at which stock is depleted. Higher usage rates necessitate more frequent reordering. Businesses need to track stock usage over specific periods to understand these patterns. While annual usage may not be entirely consistent, predictable variations often occur due to seasonal trends or spikes in demand during holidays and festivals. These factors should be incorporated into any forecasting process.
By considering these key features, businesses can leverage stock control charts to optimize their inventory management strategies and achieve a balance between minimizing inventory holding costs and ensuring sufficient stock availability.
Benefits of stock control chart
Let’s take a look at the main benefits of constructing and using stock control charts in a business organization:
- Strategic ordering. By analyzing the chart, businesses can determine the ideal order quantity (number of units ordered each time) and reorder level (stock level that triggers a new order). This strategic approach minimizes the average inventory held, leading to cost reductions in storage, insurance, and obsolescence.
- Data-driven decisions. Stock control charts integrate seamlessly with the concept of Economic Order Quantity (EOQ). By analyzing chart data, businesses can calculate the Economic Order Quantity (EOQ), which represents the optimal order size that minimizes combined ordering and holding costs. This data-driven approach ensures cost-effective inventory management.
- Preventing stockouts. Stock control charts go beyond cost reduction. They play a crucial role in preventing stockouts (running out of a particular item). Stockouts can lead to lost sales, unhappy customers, and production delays. Here is how stock control charts address this challenge:
- Buffer inventory as a safety net. The concept of buffer inventory, clearly shown on the chart, acts as a safety net against unforeseen circumstances. Buffer stock protects businesses from unexpected demand spikes or delays in receiving new orders. By strategically adjusting the buffer size based on historical sales data, lead times, and supplier reliability, businesses can ensure sufficient stock is readily available to maintain smooth operations and prevent stockouts.
- Proactive inventory management. Stock control charts empower businesses to be proactive in their inventory management approach. By analyzing historical trends and potential scenarios (like competitor promotions impacting demand), businesses can adjust inventory levels accordingly. This proactive approach minimizes the risk of stockouts and ensures businesses are prepared for demand fluctuations.
- Enhanced inventory management. Stock control charts offer additional benefits:
- Accurate inventory valuation. Stock control charts provide a transparent picture of inventory levels at any given time, enabling businesses to calculate the value of their stock holdings with precision. This accurate valuation is crucial for financial reporting and maintaining healthy cash flow.
- Minimizing inventory loss. Stock control charts can help identify potential areas of inventory loss. Significant deviations from expected usage rates or stock level fluctuations beyond the charted parameters might indicate theft, shrinkage, or miscounting issues. By analyzing these discrepancies, businesses can implement measures to tighten controls and minimize inventory loss.
- Continuous improvement. The dynamic nature of stock control charts allows them to adapt to evolving inventory needs. As sales patterns change, lead times fluctuate, or supplier relationships shift, businesses can modify the chart’s parameters to maintain optimal inventory levels. This adaptability fosters continuous improvement in inventory management practices.
Stock control charts are powerful tools that empower businesses to make data-driven decisions and optimize their inventory management strategies. By providing a comprehensive understanding of stock flow, costs, and potential risks, these charts enable businesses to achieve a delicate balance between minimizing inventory costs and ensuring stock availability.
Their adaptability and ability to offer a visual representation of potential scenarios further enhance their value proposition. By leveraging stock control charts effectively, businesses can gain a competitive edge through efficient inventory management practices.
