Stock Management For Maintaining Finance

Neal Loskovitz — CFO, Germantown Minor Medical

The managers of a firm have to conduct few tests to choose the right inventory technique to make sure that the finance is not tied up and the business does not suffer from a liquidity crisis. There are a few methods that ensure that the stock management is done properly. The chiefs need to analyze the business and choose the right stock management or purchasing policies. The stock can be purchased in bulk or just in time, or whatsoever. 

Buffer inventory

These are the minimum stocks that should be held to ensure that production could still take place, should a delay in delivery occur or production rates increase. The greater the degree of uncertainty about delivery time or production level, the higher will have to be the buffer stock level.

Re-order stock level

This is the level of stocks that will trigger a new order to be sent to the supplier. The managers have to analyze the production process and the storage system properly and set a reorder level. For example, the reorder level is 10000 units, so the managers place a new order whenever the stock drops to this level. 

Lead time

This is the normal time taken between ordering new stocks and their delivery. The longer this period of time, the higher the reorder stock level should be. If the managers know that the order will take a month to arrive, then they will keep the reorder level higher to avoid running out of stocks.

Re-order quantity

The management will seek to discover the reorder quantity that minimizes the total inventory costs. The optimum level of quantity ordered at a given point in time is termed as the economic order quantity.

A typical inventory or stock control chart displays the inventory control. The stock control chart assists the management in taking and analyzing numerous interrelated decisions such as the size of the buffer or reserve stock, the maximum level of stock to be held, the size of the batch to be ordered and the level which will trigger the reordering of the stock.