Stock planning is a concept that involves more than just maintaining adequate quantities of certain goods in the warehouse. It involves analyzing how your enterprise handles goods at every single stage of the supply chain. It’s an integral part of controlling costs and maintaining efficiency throughout an enterprise. Therefore, it’s critical for supply chain managers and inventory planners to understand the different aspects of stock control.
What Is Stock Planning?
Stock planning is the process of determining the optimal quantities of a certain good an organization needs to keep at any one time. For most organizations, the optimal stock is the amount that they are capable of producing or storing to facilitate timely fulfillment of all orders. Stock planning involves making accurate forecasts of the amount of stock the enterprise holds at different times to meet customer demand. Stock management involves ordering, warehousing, tracking, and controlling inventory levels.
The Different Types of Stock
Most enterprises deal with four main types of stock:
- Raw materials are the stock used to manufacture goods
- Work in progress (WIP) includes all the unfinished goods
- Finished goods are items that ready for sale
- Consumables are goods that aid in the day to day running of the organization such as stationery
Value Based Classification
You can categorize your stock according to value. Value based classification helps inventory managers prioritize some goods if there is a shortage of resources, such as cash flow or limited storage space. Most organizations have the three categories:
- Low
- Medium
- High value
The Two Methods of Stock Management
There are two major approaches to stock management:
Periodic stock management: involves taking manual accounts of the inventory at specific intervals. It’s most suited to small businesses with small warehouses and minimal stock.
Perpetual stock management: involves managing inventory on a continuous basis. It relies on electronic systems of recording and tracking inventory. It’s more expensive than the manual method, but produces accurate and up-to-date records of stock levels.
Factors That Determine Stock Levels
When deciding the amount of inventory to keep in your warehouse, you should consider several factors. These factors include:
- The reliability of the suppliers and alternative sources of goods
- The predictability of demand
- Price volatility
- Discounts for buying in bulk
Stock Control Methods
Enterprises use different methods to determine the optimal amounts of inventory to keep in their stores and forecast demand. Some use one method while others use two or more methods for different types of goods.
Reorder Level
In this approach, the enterprise makes orders when the stock reaches a minimum level.
Economic Order Quantity (EOQ)
This is an arrangement where inventory managers use a complex mathematical formula to determine the optimal amount of stock to keep. EOQ calculations require managers who are trained in management accounting. Most organizations use EOQ calculators to determine the amount of stock to order at different times.
Just in Time (JIT)
In the JIT system, the enterprise commits to minimizing costs by keeping stocks at the lowest level possible. The inventory manager only makes orders when items are needed and ensures that they are used immediately. This approach works in integrated supply chain systems where suppliers can be relied to fulfill orders on time. Enterprises that use this method risk running out of stock when there’s a sudden rise in demand (something we saw recently, with N95 mask suppliers, for example.)
Stock Reviews
In this approach, the inventory manager takes regular reviews of the amount of stock in the warehouse and makes orders when the inventory reaches a particular level. Most enterprises have a threshold that promotes them to make orders for different items. This threshold is called the minimum stock level.
Fixed Time
This method involves making new orders at a fixed time. For instance, an enterprise can decide to be ordering 500 units of a particular item at the end of every month. This approach is most suited to organizations with fixed contracts to supply certain goods in batches.
First In, First Out (FIFO)
FIFO is a method that is popular with firms that deal with perishable goods or Fast Moving Consumer Goods (FMCG). The inventory managers ensure that stock that arrived at the earliest time is the one that moves to the next stage. This reduces the risk of goods deteriorating or expiring in the warehouse.
Batch Control
In this approach, stock is managed in batches such that items go through different production processes as a single batch. This approach reduces the complexity of managing stock that is at various stages of processing. It also enables managers to secure all the raw materials needed to manufacture a particular batch.
Vendor Managed Inventory (VMI)
This is an ethical approach to stock management that was pioneered by the retail industry. In this approach, the buyer, who is often a retailer, provides the supplier with information about stock levels in their stores. The supplier uses this information to control production and inventory levels in their warehouse. VMI helps firms minimize costs and reduces the time goods spend in the supply chain.
Stock Control Systems
The management of stock requires certain tools and technologies that make it easier to automate the process.
Stock Cards
This is a manual stock monitoring method that describes items in terms of their identity, value, supplier, location, and lead times.
Codes
Barcodes help keep track of the inventory and its location along the supply chain.
Radio Frequency Identification (RFID)
This method involves tagging goods with readers that send signals to a tracking device.
Electronic stock management systems can make orders when inventory reaches the re-order level. RFID systems enable managers to track individual items and batches throughout the supply chain. It makes it easier to track and remove defective goods. Technology also enhances stock security by triggering alarms at exit points when there is theft of goods.
If you are overwhelmed by stock planning processes, StockIQ is here to help you develop a supply chain management suite that will improve the accuracy of your forecasts. Contact us to discuss the type of software solution you need.
