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stock controlThe process of controlling STOCKS of finished products, work in progress and raw materials, in order to minimize warehousing and other stockholding costs, while maintaining an adequate level of stock to meet usage requirements.
The object of a stock-control procedure is to maintain records of existing stock levels, compare these with planned stock levels and place orders for new stock to make good the difference between the two. Replenishment of stock is achieved by placing outside orders for purchased raw materials or components, or by initiating further production for finished goods or components.
Fig. 80 illustrates the general principle by depicting a simple stockholding problem where usage of stock is known in advance, rate of usage is constant and where stocks can be replenished completely once they run out. Once the firm is out of stock then it will immediately order and bring into stock fresh items to build its stock up to the maximum level M. After this the stock level will again fall as items are used. The average stock level A will depend upon the size of the orders placed and how frequently they are placed, with large orders placed at infrequent intervals necessitating high average stocks. In placing orders the firm may establish a stock reorder level R, placing orders for new stocks when stocks fall to the reorder level. The stock reorder level will be set to take into account usage of the stock item during the reorder period or lead time between placing a new order and delivery of the replacement items into stock. Operating on this principle the firm would replenish stock at order intervals between reorder points T1, T2 and T3. The minimum stock level, S. is the smallest stock level which the firm is prepared to tolerate immediately prior to replenishment. This minimum stock level is usually greater than zero because the firm will wish to hold a certain amount of safety stock or buffer stock to meet unexpectedly rapid usage or delays in delivery which extend the lead time. Without a safety stock, usage and lead time variability could lead to costly ‘stockouts’ with disruptions to production or delivery delays to customers. The size of safety stock carried will seek to balance the extra stockholding costs such as warehousing costs and interest charges associated with safety stocks on the one hand, and the cost of stockouts on the other hand. Since the precise cost of stockouts is difficult to determine the firm may start by deciding the ‘service level’ or number of stockouts per period considered acceptable, then estimate the safety stock necessary to ensure this level of service.
The stock-control system depicted here is known as the reorder level system. One specific version of the reorder level system is the two-bin system which is frequently used where large quantities of inexpensive items are concerned, the stock being held in two bins or containers. Stock is drawn from one bin only until it is empty, at which stage a further full bin of items is ordered. Whilst this is being obtained, stock is drawn from the second bin. This is a simple and effective system which requires the minimum of clerical work and administration, since the physical division of stock into two areas (bins) makes the order decision almost automatic. The same result can be achieved by marking the reorder level on a single bin.
Sealed minimum stock systems operate along similar lines, where the reorder stock level is sealed in a bag and orders are placed when ‘open’ stock is exhausted and the bag must be opened.
Finally, base stock systems make provision to place a replenishment order every time a withdrawal is made from stock, ordering an amount which exactly replaces the amount withdrawn so as always to maintain a given level of base stock. Operation of reorder level systems requires the firm to maintain perpetual stock records, that is, up-to-date daily records of the stock situation of all items.
As an alternative to reorder level systems, firms may operate reorder point systems, placing orders for variable amounts of an item at fixed time intervals. With such reorder point or periodic review systems the stock of each item is checked at preplanned intervals and orders of varying size placed to replenish stocks. Such replenishment at fixed time intervals is administratively cheaper, allows orders for several items from a common supplier to be combined, and requires stocks to be checked only at the order point avoiding the expense of daily stock checks. One specific version of the reorder point system is the single-bin system where the desired maximum stock is marked on the side of a single bin and orders are placed for an amount to replenish the contents of the bin up to that mark at regular intervals. See STOCKHOLDING MODEL, MATERIALS MANAGEMENT, MATERIALS REQUIREMENTS PLANNING, JUST-IN-TIME (JIT) SYSTEM, STOCK-TURNOVER RATIO, OPTIMIZED PRODUCTION TECHNOLOGY.