Efficient stock control

 

Efficient stock control can limit the effects of problems in the supply chain whilst at the same time reduce the amount of capital which is being tied up with excessive stock.

Many companies have adopted the “just in time” ordering policy and as a result have little or no buffer stock.

Whilst this does translate to a reduction in working capital and lower storage costs there are potential problems such as the inability to deal with an unexpected spike in demand.

This policy also means that the purchasing company has little control and is therefore reliant on the efficiency of its suppliers.

The other side of the coin is to maintain a relatively high level of stock holding which ensures that the company never runs out of material and may afford some economies of scale by bulk buying.

As with all things it comes down to a judgement call.

The best measure is stock turnover ratio equals cost of goods sold during a specific time frame, divided by the average stock holding during the period.

The result of this ratio gives the "number of days that on average money is tied up in stocks". The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere.

An stock turnover ratio of 20 means that the average amount of stock holding during the year has been renewed, or turned over, 20 times over the course of the year.

Dividing the number of days in the period under consideration by the turnover ratio tells you how many days it takes, on average, for the warehouse to empty and then be refilled. The number of days in a year, 365, divided by 20 is 18.25. So the entire stock is fully sold and replenished every 18.5 days, on average.

As a general rule, the higher the stock turnover ratio, the more efficient and profitable the firm. A high ratio means that the firm is holding a low level of average inventory in relation to sales.