There are three types of stock (or inventory):

• Raw materials - the natural resources for use in the production process.

• Semi-finished goods (also referred to as work-in-progress) - these are incomplete units of output, and

• Finished goods - the completed products that are ready to be sold to consumers.

An important aspect of just-in-case (JIC) is stock control. A stock control chart is a visual tool used to monitor and analyse a firm’s stock levels. It shows the rate at which stocks are used, when stocks are order, how long they take to be distributed, and when they are delivered. A stock control chart enables operations managers to make more-informed decisions about how best to manage their stock levels.

The main aspects of a stock control chart are:

• The maximum stock level – the most amount of stock that a firm wants to hold at any point in time, given its storage facilities and capacity. In the diagram below, the firm’s maximum stock level is 8,000 kilos of flour.

• The buffer stock – the minimum stock level that a firm wishes to hold at any point in time. Buffer stocks are used just in case there is an unexpected increase in orders from customers, late deliveries from suppliers, or damaged stocks. Firms might also use buffer stocks to offset price fluctuations. In the diagram below, the buffer stock is 2,000 kgs of flour.

• The reorder level – the level of inventory when a firm is required to reorder its stock. This ensures new stock is delivered in time before stocks run out. In the diagram below, the firm places a new order when its stock level reaches 5,000 kgs of flour.

• The reorder quantity – the amount of new stock that is ordered for production. In the diagram below, the reorder quantity is 6,000 kilos of flour (i.e. 8,000 kg – 2,000 kg).

• The usage rate – this shows the speed (rate) at which stocks are used in the production process. In the diagram below, it can be seen that 6,000 kilos are used in a four week period, i.e. the usage rate is 1,500 kilos per week.

• Lead time – the timeframe (or time lag) from when a firm places an order for stock and it receiving delivery of the stock. In the diagram below, the lead time is 2 weeks.

Stock control chart for Juke Bakery Co.

Usage rates increase during times of economic prosperity and peak-periods, whereas the usage rate drops during recessions and off-peak seasons. Stockpiling refers to the practice of a business ordering more stock than it would usually do or holding more stock than is necessary or efficient. This tends to happen in anticipation of higher levels of demand during economically prosperous times or due to poor stock control systems. By contrast, a stock-out exists when a business has no more stock for production or sale, i.e. it is out of stock. This creates problems for the business as production (including the sale of its inventory) also comes to a stop.

Stockpiling can be costly for businesses

The longer the lead time, the earlier the reorder needs to be and/or the larger the reorder amount needs to be. By contrast, the shorter the lead time, the lower the buffer stock level needs to be. Any delays in the lead time (the period of time taken for a supplier to process and deliver a stock order) will mean that stock levels fall below the desired minimum level, so the firm has to rely on its buffer stock. If lead times are short, lower buffer stock levels can be held as the producer knows new stock orders will be delivered soon (preventing significant delays to production).

The main drawback of using stock control charts is that it is rather simplistic, so does not present things in reality. Actual stock control graphs look rather different due to, for example, late deliveries, seasonal fluctuations in demand, and production delays.