Stock Management Principles and Inventory Types

Core Concepts of Inventory and Stock

Key Definitions

• Stock (General): A collection of products accumulated in space and time, possessing economic value, remaining stored until used.
• Economic Stock: Material belonging to the firm, which is either in transit or at fixed points (e.g., supplier warehouses).
• Physical Stock: Items that have weight and volume, occupy physical space, and possess economic value. This stock must be managed.
• Assortment: A set of different products (variety) offered.
• Warehouse Stock: The total amount accumulated in the warehouse. Note: A wholesaler typically maintains a large stock but a small assortment.

Provisioning and Inventory Policy

Provisioning Process

Provisioning is the set of operations carried out by the company to source the necessary products. This process involves:

1. Planning.
2. Shopping for stocks and warehousing.
3. Security provisioning techniques.

Advantages of Stock

Maintaining sufficient stock offers several advantages:

• Leveraging advantageous stock prices (volume discounts).
• Avoiding warehouse shutdowns.
• Covering demand fluctuations and delays.

Stock Breach (Out-of-Stock)

A stock breach occurs when there are insufficient existences of a product, negatively impacting the ability to serve customers. This paralyzes processes and leads to client loss.

Causes of Stock Breach:

• Inappropriate orders (e.g., ordering errors or omissions).
• Ordering and delivery delays.
• Completely running out of stock.

Provisioning Policy Goals

The provisioning policy aims to manage inventory and maintain an optimum volume while minimizing the investment in stock. Key goals include:

• Reducing costs associated with losses (e.g., obsolescence).
• Providing accurate inventory reports.
• Ensuring cooperation with the purchasing department.

Classifications and Types of Stocks

Stocks can be classified based on their function or status:

• Active Stock: The quantity of each item needed to cover demand for a specific time period.
• Security Stock: A reserve quantity of product covering unforeseen events or demand spikes.
• Optimal Stock: The quantity based on an optimistic forecast, designed to cover expected needs efficiently.
• Zero Stock (Just-in-Time - JIT): Provisioning the exact amount required at the precise moment it is needed.
• Seasonal Stock: Articles sold only for a few days or months (e.g., holiday items).
• Transit Stock: Products that are either in the process of production or are currently in transit (on the way to the warehouse).
• Recovery Stock: Items used for reuse (e.g., pallets or containers).
• Dead Stock: Articles that are disused, old, or new but no longer cover current needs. Their output is typically scrap or junk.
• Speculation Stock: Products purchased in advance because the supply situation is advantageous (e.g., anticipating price increases).

Stock Management Principles

Stock Management Objectives

Stock management is the set of operations designed to maintain inventory levels that provide the maximum service support at the minimum cost. Core questions addressed are: How much? and When?

Problems in Stock Management

Effective management must address several challenges:

• Ensuring adequate provision and choice of products.
• Managing delivery and supply logistics.
• Controlling repetitive costs.
• Avoiding losses and maximizing advantageous purchases (e.g., volume discounts).

Steps in Stock Management

Effective stock management requires:

1. Maintaining sufficient inventory.
2. Minimizing investment (reducing losses and obsolescence).
3. Knowing the required volume.
4. Balancing the cost of ordering (CO) and the cost of holding (CH).

Variables of Stock Management

Successful stock management depends on analyzing key variables:

1. Service Level Offered: The capacity to fulfill orders immediately when purchased (aiming for high fulfillment).
2. Sales Forecasting: Deciding the optimal level of goods based on:
   • Sales evolution and average sales.
   • Changes over previous years.
   • Market situation and competition.
3. Management Costs:
   • Acquisition cost.
   • Storage costs (e.g., amortization, utilities).
   • Provisioning costs (e.g., communication, travel expenses).
4. Cost of Stock Rupture: The financial impact resulting from a lack of stock.

Supplier Delivery Lead Time

This is the time elapsed from issuing the order until the product is received. The process typically involves four stages:

1. Order preparation.
2. Merchant shipping (processing).
3. Transportation.
4. Reception.

Balancing Stock Level and Size

The stock level and size must be balanced with the production and sales of each product to achieve several goals:

1. Covering production needs during the provisioning period.
2. Coping with production needs during the supplier delivery lead time.
3. Maintaining sufficient stocks to meet anticipated demand.
4. Being prepared for oscillations between production and sales.

Components of Total Stock

Total stock is composed of various functional elements:

• Normal Stock: Inventory required to replenish the store based on two consecutive orders.
• Exposure Stock: Articles that are displayed or exposed for sale.
• Security Stock: A reserve stock maintained to meet unanticipated demand.
• Just-in-Time (JIT) Stock: Only the amount stored for immediate daily consumption.