Stock Levels

Stock levels must be kept as low as possible in order that the costs of holding them is minimised. At the same time stocks must not be allowed to run out. If they do run out production is not halted and customers are let down. A number of factors influence stock levels:

• The nature of the product. For example, are the stocks perishable? It is not practical to hold large amounts of stock that will go off very quickly.
• The facilities available. For example, the more warehouse space you have the more stock you can hold.
• Suppliers. For example, how often do they deliver and how reliable are they? If they deliver frequently and are reliable the company will not need to hold so many stocks, because they know they can rely on prompt delivery of more stocks if needed.
• Stock holding costs. For example, if stock is expensive to hold due to special requirements such as having to be kept refrigerated or under security, then only a small quantity will be held.
• If demand changes greatly from one day to the next the business will hold buffer stocks. These are stocks that are held in case of unforeseen rises in demand.
• Lead time. This is the amount of time it takes for an order to be delivered and ready for use. If the lead time is fairly long the business will hold more stocks so they can continue to operate while waiting for fresh deliveries to arrive.
• Stock pile. Companies may build up stocks to deal with seasonal demand.
• External factors that the company cannot control. For example, possible shortages, such as in the market for computer chips in the late 1990s.