Managing Stock (AQA GCSE Business)

Revision Note

Written by: Lisa Eades, Business Content Creator

Reviewed by: Steve Vorster, Economics & Business Subject Lead

Approaches to Managing Stock

Stock, also known as inventory, includes the goods and materials a business holds for the ultimate goal of resale, or for use in production

Types of Stock in Vehicle Production

Raw materials	Components
These are the natural resources or goods that are used to make other products Examples in vehicle production include steel, plastic and oil	The parts used in the production of goods Examples in vehicle production include circuit boards, body panels and gearboxes
Work-in-progress	Finished goods
This includes partially finished products awaiting completion In car production, this could include vehicles awaiting spray-painting or quality control checks	These are completed products which require no further manufacturing In car production, these are vehicles ready for sale to the final customers

The management of stock is an important consideration for businesses
- Problems may arise from holding too much stock
  - Storage costs (e.g. warehouse rental, security costs) will be higher than necessary
  - The risk of spoilage and stock [popover id="kO4zTS0JSdd0vRc~" label="shrinkage"] will be increased, leading to increased costs
- Similarly, holding too little stock is risky
  - A business may run out of stock, resulting in production stoppages and higher unit costs related to underused capacity
  - A sudden increase in demand may not be capable of being met and this leads to a loss of potential sales revenue

Diagram: Implications of Poor Stock Control

A range of problems can be caused by holding too much or too little stock

In some cases, the benefit of being able to meet customer demand outweighs the cost of holding excess stock
- In these instances, a just in case stock management approach is most suitable
  - E.g. IKEA relies on having sufficient stock to meet customers' immediate needs, so makes use of large warehouse spaces at each of its regional stores
In other cases, the loss of purchasing economies of scale is outweighed by significant storage cost savings
- In these cases, a just in time stock management approach is most suitable
  - E.g. Sports brand Nike uses a just in time stock management system, which allows it to quickly respond to changes in customer demand and reduces the risk of having to sell obsolete stock at low prices

Just in case Stock Management

Just in case stock management involves a business holding a quantity of raw materials, components or finished goods as buffer stock
- Stock is held in case of shortages so as to provide a competitive edge over rivals unable to meet demand
The decision to keep buffer stocks is one that businesses have to weigh up very carefully
- Holding stock incurs storage and security costs and can increase waste, as stock could be damaged, become obsolete or stolen
- Failing to hold enough stock could mean a business is unable to meet demand, potentially missing out on sales revenue

Evaluation of Just in Case Stock Management

Advantages	Disadvantages
Buffer stocks ensure a stable supply of goods, allowing a business to respond to increases in demand Extreme price fluctuations due to shortages of stock can be avoided Businesses that are dependent on particular raw materials avoid supply disruption Businesses with a regular supply gain a reputation for always being able to meet customers' needs	Holding buffer stocks can be expensive, as it requires storage facilities and inventory management systems Buffer stocks can become obsolete if the demand for a particular product or input declines Holding buffer stocks ties up cash that could be invested in other areas of the business

Just in time Stock Management

Just in Time (JIT) stock management is a process in which raw materials and components are ordered as required and delivered 'just in time' to be used in production
Raw materials and components are ordered from a small number of trusted key suppliers at the moment that they are to be used
- Close, long-term relationships with these suppliers need to be developed
  - They must be flexible and reliable
  - They may be required to hold stock on behalf of a JIT-operating customer
  - They are often in close proximity to their key JIT-operating customer
    - E.g. Around half of businesses using JIT stock management systems aim to source raw materials and components from local or regional suppliers

Evaluation of Just in Time Stock Management

Advantages	Disadvantages
Stockholding costs including storage rental and security, are minimised Stock and finished goods are less likely to be damaged in storage Close working relationships are developed with a small number of trusted suppliers Cash flow is improved as money that is not tied up in stocks can be put to other uses Unused storage space is available for productive use or can be disposed of	Bulk buying economies of scale are not generally possible Unable to respond to unexpected increases in demand without precise forecasting of demand High administration costs due to frequent ordering of stock Unreliable suppliers (e.g. late or poor quality deliveries) can quickly halt production External factors can delay delivery of stock, e.g. increased border checks on imported goods since Brexit

Advantages

Disadvantages

Stockholding costs including storage rental and security, are minimised
Stock and finished goods are less likely to be damaged in storage
Close working relationships are developed with a small number of trusted suppliers
Cash flow is improved as money that is not tied up in stocks can be put to other uses
Unused storage space is available for productive use or can be disposed of

Bulk buying economies of scale are not generally possible
Unable to respond to unexpected increases in demand without precise forecasting of demand
High administration costs due to frequent ordering of stock
Unreliable suppliers (e.g. late or poor quality deliveries) can quickly halt production
External factors can delay delivery of stock, e.g. increased border checks on imported goods since Brexit

Examiner Tip

If you're asked to consider the most appropriate stock management approach, carefully consider the context of the business. Some businesses absolutely must hold stock or face significant damage to their reputation, e.g. a sandwich shop running out of bread.

Last updated: 17 April 2024

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