Management Of Stock

> Normally the objective of holding stocks is to increase sales and thereby increase profit. In addition to that, by holding stocks it offer wider variety of products that customers demanded and more immediately satisfied as the product is available.

> From the above the motive of holding stock can be summarized as follow:
a) Transaction motive – e.g. purchase in bulk to obtain trade discount.
b) Precautionary motive – stock is held in case the business receive a sudden order or risk regarding future deliveries of stock.
c) Speculative motive – stock has been bought in case of future prices rises.

> However, there are certain costs which are closely related to stock:
a) Purchase / Production cost of the stock (PC) – it become part of the relevant cost to be considered especially there is a bulk purchase discount offered by supplier (note: this only apply for bought in item).
b) Procuring costs (OC) – it depend on how the stock is obtained but will consist of ordering costs for goods purchased externally such as clerical costs, telephone charges, transportation charges, etc. 
c) Holding / Carrying / Storage costs (HC) – it comprise of cost of capital tied up (opportunity costs), warehousing and handling costs deterioration, insurance of stock and pilferage.
d) Shortage / Stock out costs (SC) – it include items like:
  - Loss of sale and the contribution which could have been earned from the sale.
  - Extra cost of having to buy an emergency supply of stocks at a higher price.
  - Cost of lost production and sales, where the stock out bongs an entire process to a halt.
  - Loss of goodwill.
Note: It is impossible to reduce / minimize all the four items of cost above at the same time.

Hence the 2 major quantitative problems of ‘re-order level’ (ROL) and ‘re-order quantity’ (ROQ) are essentially problems of striking the optimum balance between OC & HC.

> Essentially 3 main inventory problems needed to be answered
a) How much to order? (Re-Order Quantity)
b) When to order? (Re-Order Level)
c) What stock control system to use?