Stock control

Stock control is particularly important where:

• The organisation is involved in quasi-commercial trading, such as running shops or mail-order businesses
• There are stocks crucial to the operation of the organisation - for example, dressings in a care home.

Not all organisations have significant stocks.  If your organisation has only about a hundred pounds tied up in stationery, for example, then it is not cost effective to have complicated procedures to manage your stock.

The problem

If too much stock is held, the organisation wastes money through a variety of factors:

• Money is tied up in stock when it could be put to better use.
• There are superfluous warehousing and storage costs.
• Stock may deteriorate.
• There is a potentially greater risk of theft.

On the other hand, too little stock can lead to stock-outs which can:

• Halt activity
• Lose income
• Cause discomfort or distress to clients

However, finding the correct level of stock for any one particular item is complex.  This is because there are many influencing factors including the anticipated demand for the items and the cost-efficient use of the organisation's resources.  The aim is to find the right balance.

The solution

The first place to start is to look at your income forecast. This will give you an indication of your demand and how much stock you will need to meet it.  If you do not currently forecast income in any detail then an analysis of past demand can help.  Go back through your figures for the last two or three years to see if you can identify any demand patterns.

Your analysis need not cover the whole of your stock needs.  A large proportion of your stock value is likely to be tied up in a small proportion of the total items.  This is sometimes called the 80:20 rule: it is likely that 80% of the value is contained in 20% of the items.  Concentrate your management time on these.

When determining your stock levels you will also need to look at lead times.  Lead time is the time it takes from ordering a product to the point at which it is received. Something which can be obtained within a few hours is much less of a problem than something which has to be imported and can take up to a month to arrive.

The major difficulty is deciding how much of the demand you want to keep in stock at any one moment.  Should you have sufficient to meet one week's needs? One month? Three months?

The factors to consider when deciding how much to hold include:

• Purchasing costs

It may be possible to reduce the cost of purchases by placing a large order: this will reduce average unit delivery costs and may result in being given quantity discounts.  However, it is not worth having to carry five years supplies in order to get a 1% discount!

• Essential supplies

There may be some items of stock that it is absolutely vital not to run out of.  A good supply of these must be kept.

• Stock holding costs

Here you have to consider costs of insuring, warehousing, and any bank interest paid or foregone as a result of holding that amount of stock.

• Nature of the organisation

A cake shop or a florist attached to a hospice will require minimum stocks, perhaps sufficient only to cover one day's sales.  However, a charity selling goods made by the disabled in developing countries will need much higher levels.

Where next?

Back to Working capital management