Describe briefly the major types of expenditure which are likely to be incurred by a business in maintaining its stocks. Describe those cost, which can be considerable, what reasons might businesses have for maintaining stocks?
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The major types of expenditure likely to be incurred by a business in maintaining its stocks include:
1. Procurement Costs: These are the expenses related to purchasing the stock from suppliers, which may involve negotiating prices, transportation costs, import duties, and any other expenses incurred in order to obtain the stock.
2. Holding Costs: These costs are associated with storing and managing the stock. They include rent for warehouse or storage space, utilities, insurance, security, and any expenses related to inventory management systems or software. Holding costs also involve costs related to employees who handle and manage the stock.
3. Stockout Costs: These costs arise when a business runs out of stock or has insufficient stock. It could lead to lost sales, loss of customers, damaged reputation, and expediting costs to rush order new stock. Stockout costs are typically higher than holding costs because they involve the potential loss of revenue and customer satisfaction.
4. Obsolescence Costs: These costs occur when stock becomes outdated, expired, or no longer in demand. Businesses may have to write off the stock or sell it at a significantly discounted price, resulting in a loss. Obsolescence costs can be significant, especially for businesses dealing with fast-moving consumer goods or technology products.
Reasons why businesses maintain stocks include:
1. Meeting Customer Demand: Maintaining stocks allows businesses to have products readily available for immediate delivery, meeting customer demand efficiently. This helps in retaining customers and increasing customer satisfaction.
2. Taking Advantage of Economies of Scale: Purchasing and holding stocks in bulk quantities often provide businesses with better pricing from suppliers due to volume discounts. By maintaining stocks, businesses can take advantage of lower procurement costs and reduce overall expenses.
3. Smooth Production and Operations: Businesses need stocks to ensure a smooth flow of production and operations. Having adequate stock levels minimizes the likelihood of production delays and allows for uninterrupted operations.
4. Protecting against Supply Chain Disruptions: Stocks act as a buffer against unexpected supply chain disruptions, such as delays in deliveries, natural disasters, or supplier issues. Holding stocks provides a safety net, ensuring that businesses can continue their operations even if there are disruptions in the supply chain.
In summary, businesses incur expenditure in procurement, holding, stockout, and obsolescence costs when maintaining stocks. They do so to meet customer demand, take advantage of economies of scale, ensure smooth production and operations, and protect against supply chain disruptions.