Stock refers to products that the business has produced but have not been sold
They incur the following costs:
- Storage costs
- Depreciation costs
- Administration cost
There is also an opportunity cost of holding stocks, when a business is holding their products as stock they are not earning any revenues on them and are incurring costs
Businesses keep stocks to ensure they have enough products to meet customer demand
Buffer Stocks
- Buffer stocks – the minimum level of stock a business wants to hold at any one time
- These are additional stocks which allow a business to cope with unplanned changes in demand
Lead time
- This measures how long it takes to for an item to arrive once its ordered
- By keeping stocks a business means it is less vulnerable to changes in lead time
Maximum stock levels
This is the greatest amount of stock that a business is able to hold
This depends on:
- The amount of space a business has
- The opportunity cost of holding stocks
Stock rotation
- Stock rotation organises stocks so the oldest products are used first
- This is used in supermarkets where they put the new stock behind the old stock on the shelves
Stock wastage
- Stock rotation aims to decrease stock wastage If too much stock is held some may go off causing wastage for the firm
- This is a specific problem for perishable goods
