Businesses hold stocks in a variety of forms:
- raw materials
- finished goods
- plant and machinery spares.
The aim of stock control is to make sure that a business always has sufficient stocks to meet its own needs and those of consumers. However, it needs to keep the minimum amount of stock that it can so as to avoid damage and waste, and to minimise the cost of holding stock.
Having too high or too low a stock is harmful. High stocks represent money lying idle when it could be put to better use, whereas low stocks could result in not being able to take on and meet orders. The table illustrates the disadvantages of having the 'wrong' stock levels:
Buffer stocks can be built up as a preventative measure against running out of stocks due to unexpected variations in demand. A minimum level will be set, below which it will be hoped that stocks will not fall though this may depend upon the lead-time between placing an order and its receipt.
The diagram below shows an ideal situation in which stock never falls below the set minimum stock level or goes above the set maximum stock level. Stocks will be replenished just at the point at which the minimum stock level is about to be breached.
Maximum stock: The most stock that the firm is willing or able to hold.
Minimum stock: This is the stock below which it is felt to be unsafe for the firm to operate.
Re-order level: The point at which the firm will re-order stock.
Re-order quantity: This is the number of new items that will be bought in when stocks fall to the re-order level.
Page 2: Types of stock
Stock is the physical product a company buys, creates or sells. Every business has three main types of stock:
The raw materials are the ingredients that will go into producing the finished product. For McDonald's, these will include the buns, beef patties, paper cups, salad ingredients and packaging. These are delivered to the restaurants between 3 and 5 times a week. The raw materials arrive together on one lorry with three sections so that each product can be stored at a suitable temperature.
The three sections are:
- ambientwhich means foods that can be stored at room temperature. This applies to items such as coffee or sugar sachets.
Work-in-progress refers to stocks that are in the process of being made into finished product. A Big Mac consists of a bun, two beef patties, lettuce, cheese, pickles, onions, sauce and a small amount of seasoning. The restaurant will only combine these items just before the customer orders them so the Big Macs are hot and fresh when served.
Finished products are goods that are ready for immediate sale to a customer. At any one time, a restaurant will have a range of products ready for sale. Many of these will include finished products like Filet-o-Fish, Big Macs and side salads.
At McDonald's, all raw materials, work-in-progress and finished products are handled on a First In, First Out (FIFO) basis. This means raw materials are used in the order they are received. Therefore stock is always fresh because products are sold in the order they are made. If the process First In, Last Out (FILO) was used, then the finished product would be dry and unappealing because the first one prepared is the last one sold.