Stocking is one strategy in inventory management. There are three main types of stocks. Those are raw materials, work in process, and finished goods. The items that exists in the inventory is called stock in. The items that does not exist in the inventory is called stock out. Both the ‘Stock in’ and ‘Stock out’ have effect to the business.
There are several reason why the business keeping the stock.
- Economies of Scale or cycle stock
- Anticipating uncertainty or safety stock
- Anticipating of large increase in demand or anticipation stock
- Speculation, quantity discount
- Smoothing production level
A lot of business will make the stock to anticipate the uncertainty of demand. It is often called safety stock. Unlike for products with stable demand, the trade off is occurred between overstocking and shortage cost. Overstocking is when the product is sold with markdown cost or even disposed. While a business keep the stock, they will lead to high inventory holding cost and expensive cost of capital. But keeping the stock always available may increase the service level to customer, preventing run-out of stock, and easier to overcome the fluctuation of the demand. On the other hand, stock out will give bad effect such as losing customers, and may lead to turn off the business. This condition called shortage. Therefore, the balance in the stocking inventory need to be maintained in order to make sustainable business.
Several methods to get the effective inventory is by calculating the Economic Order Quantity (EOQ) or Economic Production Quantity (EPQ). Those both methods will obtain the effective quantity in ordering the materials or quantity in producing the product with minimum total cost. Furthermore, it is necessary for business to calculate the reorder point (ROP). ROP shows the time when a business need to purchase the stock. (lala)