Stock Management: A Comprehensive Guide

Posted on Nov 4, 2024 in Economy

Stock Definition and Classification

A) Definition of Stock

Stocks: Assets of the company for sale, processing, or incorporation into the production process. The main feature is mobility or rotation along the company’s economic cycle.

B) Classification of Stocks

According to the General Accounting Plan:

• Raw materials: Items used to obtain the final product. Example: Bread flour.
• Elements and assemblies incorporated: Added to raw materials later in the production process. Example: Car wheels.
• Materials for use and replacement: For maintaining the company’s structural capacity. Example: Repair materials.
• Work in progress: Materials in the production process at the fiscal year’s end.
• Semi-finished products: Unfinished goods yet to pass through all company departments.
• Finished goods: Completed products. Example: Bread.
• Goods: Purchased and resold abroad without further transformation.

According to Product Cost Determination:

• Direct materials: Easily identifiable with a particular product. Example: Wood for chairs.
• Indirect materials: Costs that cannot be directly identified. Example: Factory lighting.

Given the Storage Capacity:

• Storable material: A time lag exists between reception and use. All elements in Group 3 except “continuous supplies.”
• Non-storable material: Cannot be stored in physical locations. Group 62 and external services.

Purchasing Department Functions for Stocks

Material control distinguishes the phases of procurement, receipt, and storage.

The Purchasing Department provides necessary production elements purchased from abroad, ensuring the required amount at minimum cost.

The purchasing department performs three basic functions:

• Purchase functions
• Receipt of materials or supplies
• Storage functions

A) Purchase Functions

• Contacting suppliers: Negotiating favorable purchase terms.
• Establishing optimal order size.
• Negotiating the best price.
• Performing purchase orders: Requesting items from suppliers.
• Developing vendor strategy: Securing supplies at minimum cost and obtaining discounts. Authorized by management only.

B) Supply Functions

Provisioning: Operations performed to supply materials for production. Basic operations include:

• Estimating material requirements.
• Order processing.
• Reception and quality control.

Other functions include:

• Receiving and inspecting items.
• Preparing reports.
• Establishing a reception directory.
• Issuing a statement of acceptance.

Maintain minimum stock considering demand and suppliers.

C) The Role of Stock

Storing and safeguarding all materials, classifying and incorporating them into the production process.

Inventories prevent delays in customer deliveries and ensure production continuity.

Stock volume is determined by two variables:

• Demand
• Supplier lead time

D) Material Consolidation

Codification describes and locates products. Coding is twofold:

• Geographic identification within the company.
• Material identification

Types of Consolidation:

• Alphabetical
• Numerical
• Alphanumeric

Steps to Structure Encoding:

• Choose a system based on needs.
• Determine the number of digits and letters.
• Specify the stores: Link codes between warehouses.
• Create an index or master book, with divisions in families and subfamilies.

Internal Code

An example of an alphanumeric code. The steps are:

• Identify product families. A family is a group of products with a common feature. Example: All screws are in the TOR family group.
• Identify subfamilies within the family. Example: Specific screws for different car models. Model “Ibiza” could be Toribio; Model “Toledo”, Tortola.
• Assign a code to a screw based on a specific parameter. Example: A 3cm long “Ibiza” model screw could be TORIBI003.
• Indicate the warehouse. Example: TORIBI003A, where A is warehouse A.
• Assign a geographic reference code. Example: TORIBI003A123K, where K is shelf K on shelf 123.

Barcode

The European Article Number (EAN) and the Spanish Association of Commercial Encoding (AECOC) created barcodes to track inventory and facilitate computerization.

The EAN-13 code (for consumer goods) consists of thirteen digits:

• The first two digits represent the country of origin.
• The next five are assigned by the country’s assigning body.
• The following five are assigned by the manufacturing company.
• The last digit is a check digit.

Classification of Costs and Product Cost

a) Classification based on cost elements and allocation to the product:

• Direct cost: Costs directly charged to the product.
• Indirect costs: Indirectly assigned to the product.

b) Classification in relation to activity level variation:

• Fixed costs: Incurred regardless of production.
• Variable costs: Depend on production volume.

Breakeven Point

A company breaks even when it has no profit or loss, merely covering costs.

A. Breakeven Point Calculation

Expressed in terms of physical units sold, sales volume, or capacity utilization levels.

The breakeven point is reached when the trade margin covers fixed costs; each unit sold thereafter yields profit.

B. Breakeven Point Analysis

The following ratios are studied:

• Fixed cost absorption rate: Percentage of sales needed to absorb fixed costs.
• Trade efficiency index: Excess of sales over the same volume at the breakeven point (margin of safety).
• Fixed cost safety index: Increase in fixed costs that would result in losses.
• Variable cost safety index: Increase in variable costs that would result in losses.

Management of Stocks

Management Costs

The purchasing department manages production orders.

The total cost of the procurement function should be divided by the number of orders made in one year.

Seek profitability in order making; optimize the amount requested per order.

Costs related to order management include:

• Administrative staff placing the order.
• Telephone, fax, and administrative materials.
• Transport, packaging, and insurance.

Avoid or reduce the number of small orders. Procedures include:

• Grouping materials by family.
• Delaying orders and using pre-arranged shopping bulletins.
• Following internal regulations for cash payments.
• In some organizations, it’s more profitable not to solicit bids for low-value materials.

Storage Costs

Storage cost is a percentage calculated for each item. Factors include:

• Fixed expenses: Staffing, maintenance, inventory, etc.
• Variable expenses: Deterioration, loss, expense, etc.

Consider the ownership rate compared to similar stocks and volume.

This cost is part of a broader cost of ownership that includes:

• Interest on unproductive capital
• Lease or depreciation of premises
• Insurance
• Material preservation costs
• Inventory obsolescence risks
• Losses from impairment, loss, or misplacement
• Staff costs
• Warehouse overhead and management

Optimal Order Size (VOP)

Wilson Model:

• Ownership costs increase with order quantity.
• Management costs decrease with order quantity.

What order volume minimizes total costs? The optimum volume equals ownership and management costs.

Reorder Point

Set minimum stock levels to avoid stockouts. The amount needed to issue a new order.

Variation of Optimal Order Size (Wilson Formula)

Safety Stock and Associated Costs

When there’s a risk of stockouts, set a safety stock to handle higher-than-normal throughput.

Safety stock is the inventory level below which stocks should not fall to meet customer orders.

Stock rupture occurs when stock cannot meet regular consumption needs. Minimum stock refers to ordinary consumption; extraordinary consumption requires advance provision.

Cost breakdown includes potential losses from unmet demand due to unavailability.