Stock is a form of material flow existence . On the way of movement from the source of occurrence to the final consumer, it can accumulate in any area. That is why it is customary to distinguish between stocks of materials, raw materials, finished products and other things.
Basic definition
It turns out that inventories are materials, raw materials, components, finished products, as well as other values that await personal or industrial consumption. The presence of such a benefit is fraught with significant costs and seriously affects the results of the enterprise. If the desired product is not available, this may cause a decrease in sales, as well as consumer dissatisfaction. Due to the lack of raw materials for production, a breakdown or change in the production program can occur, and this often results in a shortage of finished products and additional costs.
Nuances
It is bad even if there is an excess stock - this also becomes a source of problems. Due to the excess of certain volumes, the need arises for the use of additional storage facilities, working capital, and also involves the costs of paying taxes and insurance. Products stored in a warehouse may very well become obsolete, having lost part of their value. For many companies, stock is a significant part of assets. At the same time, it is a source of costs. If you reduce inventory by a few percent, you can significantly increase profits.
Features
It turns out that the content of stocks is a certain risk. If you use your own funds, it is quite possible necrosis of capital, and when attracting borrowed funds we can talk about an increase in interest expenses of the enterprise. Another risk is the possibility of theft or the transition of products into an unusable condition. If we add to this a considerable amount of investments in reserves, then the complex of these factors for any enterprise will constitute a significant part of the risk.
The degree and nature of the risk depends on how the company is located in the distribution channel. For example, in wholesale trade, due to the large assortment of goods, there may be a sharp increase in stocks, as well as costs for their maintenance, which are incommensurable with income from trade. In retail, the content of stocks is associated with significant costs associated with the high cost of retail space.
Dependence
Stocks of the enterprise is an important part, which is indispensable. This is due to the functions that are assigned to them.
First of all, stocks provide geographic specialization for individual economic units. Since production requires energy, raw materials, water and labor, it is very often located remotely from the main markets. Technological capacities required for the production of these components and assemblies are usually located as close as possible to the sources of material resources in order to reduce transport costs. So it is possible to ensure the economy of production.
At the same time, geographical isolation requires the transportation of components to the main production line . In addition, this factor creates the need for stocks required for production. Goods created in different places are collected in warehouses for the purpose of further picking, as well as shipment to consumers. And here it is important to properly manage inventory, which will optimize everything.
Second function
Such a moment as balancing supply and demand is fraught with the existence of a temporary gap between the consumer and production. The most obvious example is the seasonal production of products that are consumed during the year, such as juices, canned food and more. A reverse example could be antifreeze, the production of which is carried out year-round, and consumption falls solely on winter time. Accounting for inventories allows us to ensure that production will be economical in conditions of variable demand. A difficult planning problem is bridging the time gap between production and consumption. When it comes to the seasonality of demand, manufacturers, wholesalers and retailers of retail chains are required to create inventories before the peak of seasonal demand. Owing to the presence of stockpiles, a strong dependence of production and consumption on seasonal factors can be eliminated.
Another feature
Balancing involves investing in the formation of savings, which will be used in full for the season. In this case, inventory management is fraught with such a problem as determining the required volume to ensure maximum sales with minimal risk of transferring balances to the next season.
Another important point is protection against uncertainty. This function is transferred to insurance or buffer stocks, and it consists in smoothing out supply or demand fluctuations. Planning in this case requires determining the required amount of insurance savings. The need for them is associated with the uncertainty of future supplies and sales to replenish the resource base.
Safety stock is a way of protecting against two types of uncertainty. The first assumes that the demand within one functional cycle suddenly turned out to be more than expected. And the second type depends on the fluctuations of the functional cycle itself. As an example of the uncertainty of demand, the following can be cited: the consumer ordered a greater or lesser quantity of product than planned. There is still an uncertainty of the second type, which arises due to delays in receiving orders or processing them, or due to problems during transportation of products.
Extra moment
Another function of stocks is the consolidation of resources, which is realized through the accumulation of stocks of work in progress at the border of the stages of the production process, which allows for maximum efficiency of the production process at a single enterprise. Due to the presence of pre-accumulated stocks, the manufacturer has the opportunity to send large quantities of goods to customers at minimum tariffs.
Due to the consolidation of resources, it is possible to sell the accumulated or manufactured products in the required assortment. It turns out that this function is responsible for insuring the business enterprise against uncertainty.
conclusions
Functions of stocks are predetermining the value of investments in them, which are required to fulfill the plans developed by the enterprise. Any specific production and distribution strategy will reduce the volume only to the level at which the implementation of all four stock functions will be ensured. If there are accumulations in excess of this minimum level, then they are considered to be excessive. That is why inventory accounting at all stages of the production cycle of an enterprise of any industry is so important. Only in this case, it is possible to ensure the optimal ratio between resource revenues and accumulations of finished products.