Factors determining stock holding

  • Risk involved: this refers to the risk of not having material forth coming when required.
  • Operations needs of the outfit: This arises when the operational needs are higher than the need for higher stock holding and vice versa.
  • Availability of capital: Goods in stock presents working capital and business will have to provide this capital either from the inside or borrowing from outside. It is desirable to restrict the amount tied up in stock as far as circumstances will permit.
  • Time required to obtain delivery of goods: The lead time also determines stock holding levels. The higher the lead time the higher the stock holding and vice versa.
  • Cost of storage: The higher the cost the lower the stock holding and vice versa. The storage costs entail:
    • Operating expenses e.g. wages, salaries, rent, repairs and maintenance
    • Cost of insurance
    • Overhead costs
    • Handling costs
    • Stock taking costs
  • Users of stock holding: Stock holding are meant for consumption by the customers that are internal and external customers.
    a. Internal customers: This refers to the internal user departments that require supplies from the stock held within the stores. Normally the user department prepares a list of items to be issued by the stores department. It is imperative to note that for items under a distinct bill of material (BOM) within the production, the stores personnel is only restricted to issue items under that BOM.
    b. External customers: Refers to outside customer of stock held within the store house. The external customers often pay for the supplies of goods.
    It is important to note that both internal and external customers play an important role in the perfection of company‚Äüs day to day activities and therefore the following attributes should be addressed:

    • Provision of excellent customer service
    • Provision of the right quantity.
    • Provision of the right quantity of goods
    • On time deliveries
    • Reliability
  • Supply market conditions: In deciding on the stock holding arrangement, it is essential to analyze the supply market conditions. This attribute gives the storekeeper substantial ideas on deciding whether to hold stock or not depending on market forces. The supply market encompasses stable and unstable market.

a. Stable market: In this particular market prices are relatively stable. The market is also stable since prices of items under this market are insensitive to forces of demand and supply and therefore their stock level can be kept relatively low since replenishment cost is predictably low.
b. Unstable market: These are markets that exhibit substantial short run prices and supply fluctuations. The supply of items is influenced by many factors which may include: political, weather, speculative factors etc. These short run prices are therefore sensitive to general supply and demand forces. Their stock holding level will therefore depend on the prevailing market conditions.

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