This is the system used to ensure that the business always has sufficient stock available to meet customer requirements.
This is the minimum amount of stock that a business will hold before it re-orders from its suppliers. The re-order level will vary from business to business and from industry to industry.
For example, a supermarket is likely to have a higher re-order level than a car dealer, since in the time taken to receive its supplies, a supermarket is likely to sell far more stock than a car dealer.
The re-order quantity is the amount of stock and raw materials that a business orders from its suppliers each time it reaches its re-order level. This again will vary from business to business and from industry to industry.
For example, a business selling fast-moving consumer goods (e.g. chocolate bars or baked beans) is likely to order a far larger amount of stock from its suppliers than a manufacturer of goods with a slower stock turnover (e.g. televisions or washing machines).
There are several factors which will influence the amount of stock which a business orders, including:
- Lead times.
- The expected level of customer demand.
- The costs of stockholding.
- The type of stock, whether it is perishable or durable.
This is the minimum stock level which will be held by a business to meet any unexpected occurrences.
For example, A sudden large order from a customer, deliveries of raw materials not arriving on time, or computer re-ordering systems breaking down.
This is the amount of time that elapses between a business placing an order with a supplier for more stock or raw materials, and the delivery of the goods to the business.
The business will wish the lead-time to be as short as possible, so that it can meet its customer orders and minimise the time between paying for the stock and receiving the revenue from the customer.
However, this may not happen due to a number of factors, such as delays in the supplier receiving the order, or the breakdown of the suppliers' lorries delivering the stock to the business.
An effective stock control system, combining the above four elements, can be seen below:
From this diagram, it can be seen that:
- The re-order level (i.e. the amount of stock remaining when an order is placed) is 20,000 units.
- The re-order quantity (i.e. the amount of stock ordered from a supplier) is 20,000 units.
- The buffer stock (i.e. the minimum stock holding) is 10,000 units.
- The lead-time (i.e. the time delay between placing an order for stock and receiving it) is 8 days.
Many businesses use a stock rotation system. This is the process of ensuring that the older batches of stock are used first rather than the newer batches, in order to avoid the possibility that the older stocks will become obsolete or go past their sell-by-date.
This is often referred to as a First In First Out (F.I.F.O) system, to encourage the older batches of stock to be used first, therefore avoiding the possibility that the older stock will be left in a warehouse, possibly becoming unusable.
The production process and stock control systems in a business can be assisted by the use of Information Technology (I.T).
Sophisticated software packages can enable a business to keep detailed and accurate records on its purchases of stock and its sales to customers, using such systems as Electronic Point of Sale (E.P.O.S).
This records every transaction made by a business and can, therefore, enable it to monitor its stock levels and sales of products to a 100% level of accuracy. This system can automatically re-order stock when numbers fall to a certain level in the warehouse, as well as monitoring the quantity of each component that is used in the production process.
This enables a tight control to be kept on both costs and waste, as well as recording the amount of revenue received from customers and any outstanding customer debts.
Computer Aided Design (C.A.D) is the use of sophisticated computer software to design three-dimensional images of products quickly and relatively cheaply.
Computer Aided Manufacturing (CAM) is the use of computers and software for a wide variety of production tasks, including automated production lines and stock control systems.