Lesson 1, Topic 1
In Progress

1.3 The problems that occur in a specific business unit if there is insufficient stock are indicated and a plan is compiled to ensure that the required stock is available when needed.

ryanrori January 13, 2021

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The size and nature of your business decided how much stock to keep, and the type of stock involved. If you are short of space, you may be able to buy stock in bulk and then pay a fee to your supplier to store it, calling it off as and when needed.

Keeping little or no stock and negotiating with suppliers to deliver stock as you need it


  • Lower storage costs
  • You can keep up to date and develop new products without wasting stock
  • Efficient and flexible – you only have what you need, when you need it


  • Risk of running out of stock
  • Meeting stock needs can become complicated and expensive
  • You are dependent on the efficiency of your suppliers

This might suit your business if it’s in developing environment or if your stock is expensive to buy and store. This method is also useful if your stock is perishable or is able to be replenished quickly.

Inherent in any system of inventory control is the concept of appropriate stock levels – normally expressed in physical units sometimes in monetary terms.

The objective of establishing control levels is to ensure that excessive stocks are never carried (and working capital thereby sacrificed) but that they never fall below the level at which they can be replenished before they run out.

The factors to consider when establishing the control levels are:

  • working capital available and the cost of capital;
  • average consumption or production requirements;
  • reordering periods – the time between raising an order and receiving delivery of goods;
  • storage space available;
  • market conditions;
  • economic order quantity (including discounts available for quantity);
  • likely life of stock – bearing in mind the possibility of loss through deterioration or obsolescence; and
  • the cost of placing orders including generating and checking the necessary paperwork as well as physical checking and handling procedures.

Control policies should include designating responsibility for raising and authorising orders, signing delivery notes and authorising payment of invoices.

Four basic levels will need to be established for each line/category of stock.

These are the:

  • maximum level – achieved at the point a new order of stock is physically received;
  • minimum level – the level at the point just prior to delivery of a new order (sometimes called buffer stocks – those held for short term emergencies);
  • reorder level – the point at which a new order should be placed so that stocks will not fall below the minimum level before delivery is received; and the
  • reorder quantity or economic order quantity – the quantity of stock that must be reordered to replenish the amount held at the point delivery arrives up to the maximum level.

Problems if a business unit has too much stock are explained and an indication is given of how stockpiling impacts on the bottom line of the business. 

  • Not good for perishable goods
  • Stock may be come out of date before it is used
  • Stock may depreciate with time
  • Higher storage and insurance costs