Stock, also known as inventory, is the lifeblood of many organizations. It encompasses the various items and resources that keep a business running smoothly, from raw materials and component parts to finished products and supplies.
Effective inventory management is a cornerstone of operational efficiency and customer satisfaction.
Purpose of holding stock (inventory)
Beyond simply having items on hand, there are strategic reasons why businesses maintain stock. Here is a closer look at the key benefits:
- Maintaining operational independence. Stock serves as a buffer against disruptions in the supply chain. By having a reserve of materials and components, businesses can continue production even if there are temporary delays or shortages from suppliers. This ensures a more stable and predictable production flow.
- Accommodating fluctuations in demand. Customer demand can be dynamic, with seasonal peaks and troughs. Holding inventory allows businesses to fulfill orders during periods of high demand without experiencing stockouts that could lead to lost sales and dissatisfied customers.
- Production scheduling flexibility. Having readily available stock provides more leeway in scheduling production runs. This can be particularly beneficial for businesses that manufacture a variety of products or cater to customized orders. The ability to adjust production schedules based on stock levels and incoming orders helps optimize resource allocation and meet customer needs efficiently.
- Safeguarding against raw material delivery delays. Unexpected delays in raw material deliveries can significantly disrupt production. Maintaining a buffer stock helps mitigate this risk by providing enough materials to keep production going while waiting for new deliveries to arrive. This ensures a more predictable production timeline and minimizes potential disruptions.
- Taking advantage of bulk purchase discounts. Buying raw materials and supplies in bulk can often lead to significant cost savings. Inventory management allows businesses to leverage these discounts by strategically purchasing larger quantities when prices are favorable. This helps reduce overall procurement costs and improve profitability.
Optimizing stock levels with inventory systems
Effective inventory management goes beyond simply having stock on hand. It’s about maintaining the right amount of stock at the right time.
This is where inventory systems come into play. These systems are sets of policies and procedures that streamline stock control by monitoring stock levels, determining ideal stock quantities, and setting reorder points and order quantities.
Different inventory system models are employed depending on the specific needs of a business. Here are two common categories:
- Single-period inventory models. These models are best suited for one-time purchases, such as vendors selling seasonal products at events. The primary goal is to find the optimal purchase quantity that balances the costs of overstocking (storage costs, potential obsolescence) and understocking (lost sales due to stockouts).
- Multi-period inventory models. Designed for repeated purchases, these models assume factors like constant demand, lead time (order to receipt time), and unit price remain consistent. They consider various costs like holding inventory, placing orders, and potential stockouts to determine optimal stock levels and reorder points. There are two main variations within this category:
- Fixed-order quantity models. Reorders are triggered when stock reaches a predetermined level (e.g., when stock runs out). These models are suitable for businesses with predictable demand patterns.
- Fixed-time period models. Reorders happen at specific intervals, regardless of stock levels (e.g., monthly). This approach is often used for items with steady demand or when lead times are long and frequent monitoring is necessary.
The operations department plays a vital role in collaborating with other departments, such as purchasing and sales, to strike a balance between production needs and stock holding costs.
By implementing appropriate inventory systems and maintaining optimal stock levels, businesses can ensure efficient resource utilization, minimize waste, and achieve their production goals.
Tracking and maintaining accurate inventory records
Accurate stock tracking is essential for effective inventory management.
Traditionally, stock levels were tracked manually using bin cards, which can be time-consuming and prone to errors. Modern businesses increasingly rely on electronic inventory management systems that utilize databases or spreadsheets. These systems allow for real-time updates, provide more accurate running balances, and reduce the need for frequent physical stock counts. Additionally, automatic reordering can be set up based on pre-defined reorder points, streamlining the replenishment process.
Here are some key stock level metrics that businesses should track and understand:
- Maximum stock level. This is the upper limit a business sets on the amount of stock they are willing to hold. It is determined by factors like available storage space and anticipated demand. Maintaining this limit helps control storage costs and prevent overstocking.
- Economic stock level. This is the level that ensures uninterrupted operations but minimizes holding costs associated with storing excess inventory.
- Reorder level. This is the trigger point at which a new order should be placed. It typically considers daily usage and lead time to ensure stock does not fall below the minimum level before a new shipment arrives.
- Reorder quantity. This is the amount of stock needed to bring inventory levels back up to the maximum level by the time the new order arrives. Ideally, the reorder quantity is automatically triggered when the reorder level is reached.
- Minimum stock level. This is the safety stock level that guarantees enough stock for production to continue while factoring in ordering and delivery lead times.
Inventory accuracy and stocktaking
Inventory accuracy refers to how closely the recorded inventory levels match the actual physical stock on hand. Discrepancies between these figures can lead to production disruptions, stockouts, and inaccurate financial reporting.
Regular physical stock checks, often conducted annually, are crucial for verifying inventory accuracy and accounting purposes. Additionally, spot checks on specific items can be done more frequently to help monitor for potential theft or shrinkage (inventory loss due to damage, spoilage, or errors).
By effectively managing stock levels, employing appropriate inventory systems, and maintaining accurate records, businesses can optimize resource utilization, minimize waste, and achieve their production and financial goals. This ensures a smooth-running operation, improved customer satisfaction, and ultimately, a stronger competitive advantage in the marketplace.
