Stock can be maintained at the entry of a production process, in between the process and at the exit of the process. As far as entry level stocks are concerned, many organizations strive to reduce the quantity of stock in this phase by adopting techniques like JIT (Just In Time). In-process stock level is determined by the reliability of the machinery while the end-process stocks are determined by the consumer demand.
There is always a cost involved in maintaining stock. However, not all kinds of stock incur same amount of cost. Some items are highly costly if kept in stock while some are very cheap. The ABC analysis of the various items maintained in the stock help us to identify the cost of keeping different items in stock.
A category items: form 10% of the inventory items but cover 70% of the total inventory cost; require tight control of the stock
B category items: form 20% of the inventory items but cover 20% of the total inventory cost; require a good amount of control
C category items: form 70% of the inventory items but cover 10% of the total inventory cost; even a loose control can suffice.
There are two methods of maintaining stock:
Periodic Method: Stock level is monitored after a fixed interval of time and replenishment is done in case the level has dropped below the threshold point. It is adopted for C category items.
Continuous Method: Stock level is monitored continuously and as soon as it drops below the threshold level, replenishment is done. It is adopted for A category items.
The Basic intentions behind stock maintenance:
Time: There is always a time lag in the supply chain which forces organization to maintain certain amount of stock.
Uncertainty: It can erupt at the supplier side as well as the demand side.
Economies of Scale: Many times ordering large quantities gives enough discounts to compensate the holding cost.
Appreciation in Value: Some inventory like beer in brewing industry appreciates in its value if stored for a long time.