What is Stock Management and why is it important?

A company's inventory/stock is one of its most valuable assets. In retail, manufacturing, food services, and other stock-intensive sectors, a company's inputs and finished products are the core of its business. In business terms, stock management means the right stock, at the right levels, in the right place, at the right time and at the right cost. If you need more information about stock management or just seems interesting topic, give this a read.

What is Stock Management and why is it important?

First things first: Inventory vs. Stock

Inventory is often called stock in retail businesses. Managers frequently use the term “stock on hand” to refer to products like apparel and housewares. Across industries, “inventory” more broadly refers to stored sales goods and raw materials and parts used in production.

Some people also say that the word “stock” is used more commonly in the U.K. to refer to inventory. While there is a difference between the two, the terms inventory and stock are often interchangeable.

In this article we will use term “stock” which refers to finished goods, raw materials, unfinished goods (work in progress), MRO goods (maintenance, repair and operating – stock used to support the manufacturing process), safety stock etc.

What is Stock Management?

Stock management involves ordering, storing, organizing, controlling, tracking and monitoring stock level and applies to every item a business wants to sell or uses to produce its products or services. In other words, stock management covers every aspect of a business’s stock and can help business owners know when it’s time to reorder and minimize cost at the same time.

Stock management also involves keeping records of changes over time. This helps decision makers to have the right amount of each product or item in stock to keep up with customer demand.

Why is Stock Management Important?

  1. Business cashflow: Stock is a major business asset that represents tied-up capital. By managing stock effectively, it will allow the business to free up cashflow to be used in other aspects of business operations. To be efficient, you should be able to track how much stock you currently have, when you’ll run out based on forecasted sales and when to replace stock. Doing this will ensure that you have more cash set aside that isn’t tied up in stock.
  2. Saves money: With effective stock management, you can avoid situations where you lose money from products being out of stock or when too much money is spent on excess stock that is taking up space in the warehouse. It is essential that your business is able to accurately predict and forecast the demands for the product, making possible to have enough stock to meet customer demand. Stock management also helps saves you money by avoiding product spoilage. If your business is selling products that are perishable and has an expiry date (e.g. food, drugs, drinks or personal care products), then it can go bad if not sold on time. You can also avoid losing money on dead stock, that are products that cannot be sold.
  3. Customer satisfaction: If you are running online retail, customers are eagerly awaiting their orders, and there’s nothing worse than when their orders arrive not-as-described, late or damaged. When that happens, buyers are less likely to purchase from the brand again. On the other hand, good stock management leads to orders being fulfilled more quickly and shipped out to customers faster. This builds a strong repertoire with customers – and keep them coming back for more.

This dead stock seams interesting. What is Dead Stock?

Dead stock refers to any unsold items which are lying in your warehouse or your store for a long time (stock that doesn’t turn over – that doesn’t sell). Dead stock is detrimental to any business, because it not only takes up valuable space but also acts as a bad investment for your company.

There is a lot of reasons for dead stock, such as: ordering inconsistencies (ordering too many items at once, or ordering them at the wrong time), poor sales, defective products or lack of stock management system.

How to manage stock effectively?

  1. Set minimum stock levels: This is the lowest amount that must be in stock at all times so when the number goes below this predetermined level, you know that it’s time to order more. The minimum stock level varies for different products and it depends on your business and the demand for your products. Take note that overtime conditions may change so remember to keep updating minimum stock level.
  2. First In, First Out (FIFO): “FIFO” stock rotation method/rule means that stocks acquired first (first-in) should get sold first (first-out). This is very useful, especially for perishable goods, so stocks don’t end up being spoilt, worn out or obsolete. To effectively put this system in place, you should place your new products at the back and make sure your existing products stay in the front for easy access. However, FIFO is often replaced for FEFO (First Expired, First Out), because some products come in later but will expire first.
  3. Have a good relationship with your suppliers: Good stock management requires your business to be able to adapt quickly if there are any changes or challenges. Maintaining a strong relationship with your suppliers will help you out in the long run. They will be more willing to help solve any restocking problems, negotiate minimum order quantities and potentially lower prices. To have a good supplier relationship, you need clear two-way communication. Let suppliers know whenever something is expected to change (perhaps an unexpected increase in sales) so they can adjust their productions accordingly. In return, they should also be letting you know if a delivery is running behind schedule so that you can take measures to prepare for the lack of stock. However, always be prepared to switch partners and find new suppliers.
  4. Have a contingency plan: A contingency plan is often used to help an organization respond to an unexpected event or situation. Contingency plan can also be referred to as “Plan B”. There are many issues that can arise, such as an unexpected increase in sales and you run out of stock, running out of storage room, lack of cash flow to pay for stocks, late stock delivery and many others. Think about how you will react, what steps need to be taken and how to minimize the negative impact.
  5. Balancing and accurate forecasting: The backbone of stock management comes down to accurately forecasting demand and stock balancing. It is quite hard to maintain perfect stock level, because of many factors that could get in the way. But, there are a few things that can be considered when predicting demand, such as market trends, seasonal factors, upcoming promotions, social and technological trends, company yearly growth rate etc.
  6. Invest in stock management technology: If you're a small business, managing a couple of stocks manually, with spreadsheets and notebooks or other manual tools, is doable. But as your business grows, you'll spend more time on stocks than you do on your business, or risk your stock getting out of control. Knowing when to reorder, how much to order, where to store stock, and so on can quickly become a complicated process. Good stock management software or system makes all these tasks easier.

We have been talking about Stock Management and have not mentioned Just In Time model.

Usually, when we mention or thinking about stock and stock management, the main association is Just In Time (JIT) and we shall spend a few word on this topic.

This manufacturing model originated in Japan in the 1960s and 1970s. Toyota Motor (TM) contributed the most to its development. The method allows companies to save significant amounts of money and reduce waste by keeping only the stock they need to produce or sell products. This approach reduces storage and insurance costs, as well as the cost of liquidating or discarding excess stock.

JIT stock management can be risky. If demand unexpectedly spikes, the manufacturer may not be able to source the stock it needs to meet that demand, damaging its reputation with customers and driving business toward competitors. Even the smallest delays can be problematic; if a key input does not arrive "just in time", a bottleneck can result.

Final thoughts

As you could read through this article, proper stock management is highly important, especially as stock volume increases, and can be crucial for business success.

Depending on the type of business or product being analyzed, a business will use various stock management methods and software solutions, as previously mentioned.

Feel free to comment and let us know if you found information you were looking for.


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