Q. (a) Why is it important for a firm to ensure efficient stock management? (b) Outline and evaluate methods of stock management which firms use.
Stock management is defined as the control of stock to ensure that it is adequate for immediate needs without using up excessive financial resources. Stock costs are an important aspect of a firm's overall costs. This means that firms ensure that efficient stock management is used. Hence any proficient method of stock management used to reduce the cost of holding stock increases profitability and that is a major objective of any firm.
Firms understand that they have to incur an expense to hold stock but this will ensure that the business can remain functioning. So the central aim of stock management is to effectively minimize the cost to stock holding while allowing the business to operate smoothly by retaining sufficient stock. A firm must ensure efficient stock management to ensure that enough supplies of raw materials for the production process. The business must be supplied with enough raw materials to meet output requirements. If the firm cannot meet demand of the consumers because it does not have enough stock to do so, it will start to lose sales. This is especially true in the growth stage of the product's lifecycle where there is an anticipated increase in demand for the product.
This is also true of seasonal which have variations in demand. Too much stock can't be kept when demand is low otherwise depending on the nature of the stock it may go bad, become obsolete or lose its quality. If a business does not ensure efficient stock management then a lot of wastage can arise as a result. A stockout happens when a firm experiences total depletion or runs out of stock.
Stockouts lead to lost profits and loss of customer goodwill and loyalty therefore future sales. If the customers cannot get their goods at one firm they will leave and purchase it somewhere else that has it in stock. Continuously unfavorable stockouts by that firm will cause them to lose future sales. These are reasons is why it is of major importance for a firm to have efficient stock management. Stock management teams must use some method of stock management in order to ensure that they do not experience an unwanted stockout. The stock management team must decide whether to make large occasional orders to hold in stock or small frequent orders.
Two major methods utilized are the 'Buffer Stock' technique and the 'Just in Time's ystem. The Buffer stock technique is referred to as a conventional method of stock management. The firm has a fixed amount of stock held in inventory. They specify a certain stock level that if stock reaches that point, a reorder must be made to bring it back to normal level. There is a time lapse between the actual order of stocks and its delivery. During this time supplies are still decreasing.
A buffer stock is held as reserve stock in the event that the reorder takes longer than expected. Buffer stock ensures that the firm always has reserve stock, enough to fend off a stockout experience. The Just in Time System is a manufacturing practice developed by the Japanese in order to minimize holdings of stock. Suppliers deliver materials needed for production at the exact moment they are required. Goods are produced only as they are needed for the next phase of production. Stock is frequently delivered therefore there is a zero inventory situation.
The firm only produces something when there is actual customer demand for it (First sell it, then make it). The Just in Time system only work when there is high employee flexibility and commitment and a well coordinated production system to ensure quality and continuous improvements to minimize bottlenecks. The Buffer Stock method is beneficial given that they can benefit from purchasing economies of scale. Profits that derive from the rise of the price of stock they purchased at a previously lower price. They also have the security of an emergency source of supplies.
The Just in Time system has a much less risk of their stock becoming obsolete or going bad (losing its quality). The firm keeps a small inventory hence using less space required, lower maintenance costs and capital requirements. As a result of the 'First sell it, then make it' method of operation the right quantities are produced at the right time. There is increased workforce participation as a result of their employment flexibility and commitment.
The continuous emphasis on improvement and problem solving results in higher quality, customer service and reduced costs. Firms must place emphasis on their stock management system. This is a vital part of business operations because it affects crucial parts of the business such as profitability and customer relations. Their business' environment it will determine what method of stock management they employ and how effective it turns out to be..