(19).WORKING CAPITAL MANAGEMENT-THE MANGEMENT STOCKS.

The Management Stocks.

Almost every company carries stocks of some sort,even if they are only stocks of consumables such as stationery.For a manufacturing business,stocks ( sometimes called inventories),in the form of raw materials, working progress & finished goods,may amount to a substsntial proportion of the total assets of the business.

Some business attempt to control stocks on a scientific basis by balancing the costs of stock shortages against those of stock holding.

The "scientific"control of stock may be analyzed into parts;

• The economic order quantity ( EOQ ) model can be used to decide the optimum order size for stocks which will minimize the costs of ordering stocks plus stock holding costs.
• If discounts for bulk purchases are available , it may be cheaper to buy stocks in large order size so as to abtain the discounts.


• Uncertainty in the demand for stocks & /or the supply lead time may lead a company to decide to hold buffer stocks ( there are by increasing its investment in working capital ) in order to reduce or eleminate the risk of stock-outs ( running out of stock ).

Stock Costs.

Stock costs can be conveniently classified into four (4) groups;

1. Holding costs.
2. Procuring costs.
3. Shorage costs.
4. The cost of the stock itself.

Stock Models.

There are several types of stock model & these can be clissified under the following headings

• Deterministic Stock Model.
• Stochastic Stock Models.

A deterministic stock model is one which all the "parameters"are known with certaily.In particular the rate of demand & the supply lead time are known.

A Stochastic model is one in which the supply lead time or the rate of demand for an item is not known with certainly.However, the demand or the lead time follows a known probability distribution ( porbably constructed form a historical analysis of demand or lead time in past ).