Stock Control (Junior Cert Business Studies): Revision Notes
Stock Control
What is stock control?
Stock control is about finding the perfect balance in your business inventory. It means having sufficient quantities of the right products available to satisfy customer demand, whilst avoiding the financial burden of holding excessive stock levels. Think of it like Goldilocks and the three bears - not too much, not too little, but just right!
When businesses get this balance wrong, they face significant challenges that can impact their success and profitability.
The concept of stock control applies to all types of businesses - from small retailers to large manufacturing companies. Every business that holds inventory must find their optimal balance.
Problems with poor stock control
Getting stock levels wrong creates serious issues for businesses. There are two main problems: having too much stock (overstocking) or having too little stock (understocking).
Overstocking issues
When businesses hold excessive inventory, several costly problems arise:
Financial problems:
- Money becomes trapped in unsold products instead of earning interest in the bank or being invested in growing the business
- Cash flow difficulties can prevent businesses from paying suppliers or expanding operations
Product deterioration:
- Perishable goods may expire before they can be sold, leading to direct financial losses
- Fashion items can become outdated, making them difficult to sell at full price
- Products face increased risk of damage the longer they remain in storage
Operational costs:
- Higher insurance premiums are needed to cover the increased value of stored goods
- Additional security measures may be required for large inventories
- More warehouse space may be needed, increasing rental costs
Real-World Example: Overstocking in Retail
If Tesco holds too much fresh dairy produce, it risks products going past their sell-by dates, resulting in waste and lost revenue. For instance, if they stock 1000 litres of milk but only sell 600 litres before expiry, they lose money on the remaining 400 litres plus the storage and handling costs.
Understocking issues
Having insufficient stock creates different but equally serious problems:
Lost business opportunities:
- Customers will purchase from competitors when products are unavailable
- Sales revenue is directly lost when customer demand cannot be met
Reputation damage:
- Customers may lose confidence in the business's ability to meet their needs
- Word-of-mouth recommendations may decrease as customers share negative experiences
Inefficient operations:
- Warehouse space may be underutilised, meaning rent is being paid for empty storage
- Staff may not have enough work during quiet periods
Real-World Example: Understocking Impact
If Penneys runs out of popular clothing items during peak shopping seasons, customers will likely shop at Zara or H&M instead. This not only results in immediate lost sales but may also mean losing customers permanently to competitors.
The optimum level
The optimum level is the most efficient stock quantity for a business to maintain. Achieving this level helps avoid the costs and problems associated with both overstocking and understocking.
Finding and maintaining the optimum level requires careful planning, accurate forecasting, and efficient systems to monitor stock movements.
Modern stock management systems
Technology has revolutionised how businesses manage their inventory, making it easier and more accurate to track stock levels. Modern systems provide real-time information and reduce human error significantly.
Stocktaking
Stocktaking involves counting and recording all goods held by a business at a particular point in time. This process helps businesses understand exactly what inventory they have and identify any discrepancies between recorded and actual stock levels.
Modern technology has made stocktaking much more efficient and accurate than traditional manual counting methods.
Electronic point of sale (EPOS)
Electronic Point of Sale (EPOS) systems use barcode scanners to automatically track stock levels when products are sold.
EPOS systems work by scanning product barcodes at the checkout. Each scan automatically:
- Records the sale in the business's accounts
- Reduces the recorded stock level by one unit
- Can trigger automatic reordering when stock reaches predetermined minimum levels
This automation reduces human error and provides real-time information about stock levels.
EPOS in Action: SuperValu
When you buy groceries at SuperValu, the barcode scanner automatically updates their stock records. If you purchase a loaf of bread, the system immediately reduces their bread inventory by one unit and can alert managers when stock levels drop below reorder points.
Just in time (JIT)
Just in Time (JIT) is a stock control approach where businesses order inventory only when it's needed, rather than maintaining large stockpiles.
JIT systems offer several advantages:
- Significantly reduced storage costs
- Lower insurance and security expenses
- Decreased risk of stock becoming damaged or obsolete
- Improved cash flow as money isn't tied up in unused inventory
However, JIT requires excellent relationships with reliable suppliers who can deliver quickly when needed.
JIT Example: Bakery Operations
A bakery might arrange for flour deliveries early each morning rather than storing weeks' worth of flour on-site. This reduces storage costs and ensures fresh ingredients, but requires a dependable supplier who can deliver consistently.
Stock valuation
Understanding how to value stock is crucial for accurate financial reporting and business decision-making.
Cost price vs retail price
Businesses deal with two different values for their stock:
Cost price is the amount the business paid to purchase or produce the goods. This is the value used when recording stock in business accounts.
Retail price is the amount charged to customers when the goods are sold. This includes the cost price plus additional markup to cover expenses and generate profit.
Stock Valuation Example: Arnotts
If Arnotts purchases a jacket from a supplier for €50, this is the cost price. Even though they might sell it to customers for €80, the jacket is recorded in their accounts at the €50 cost price, not the €80 selling price.
Exceptions to cost price valuation
Stock is only valued at selling price in accounts when the selling price falls below the cost price. This situation occurs when businesses need to reduce prices to clear slow-moving stock.
A loss leader is a product deliberately sold below cost price to attract customers, with the expectation that they will purchase other profitable items.
Understanding markup
Markup is the percentage amount added to the cost price to determine the selling price and generate profit.
The markup calculation is:
Markup Calculation Example: Curry's
If Curry's purchases a television for €400 and makes a gross profit of €160:
Markup =
This means they've added 40% to their cost price to reach the selling price.
Understanding margin
Margin represents the percentage of the selling price that consists of gross profit.
The margin calculation is:
Using the same television example:
- Selling price = €400 + €160 = €560
- Margin =
This shows that 28.57% of every euro collected from customers represents profit.
Practical example
Complete Example: Elverys Sports Shop
Consider an Irish sports shop, Elverys:
- They purchase football boots for €60 (cost price)
- They sell them for €90 (retail price)
- Gross profit = €90 - €60 = €30
Markup calculation:
Margin calculation:
This means Elverys adds 50% markup to their cost price, resulting in a 33.33% margin on sales.
Key Points to Remember:
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Stock control balances customer needs with cost efficiency - having enough stock without tying up excessive money in inventory
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Poor stock control creates serious problems - overstocking wastes money and increases costs, whilst understocking loses customers and damages reputation
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Technology improves stock management - EPOS systems provide real-time tracking, whilst JIT systems minimise storage costs
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Stock is valued at cost price in accounts - this represents what the business paid, not what they charge customers
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Markup and margin are different measurements - markup shows percentage added to cost price, margin shows percentage of selling price that's profit