Procurement and managing stock
Procurement is the process of buying in the materials, components and services a business needs. Stock control is managing how much it holds.
Before you start
Make sure you're comfortable with these topics first:
Method
- Read the bar gate graph in the right order: the vertical axis is quantity of stock, the horizontal is time, and the sawtooth shape shows stock falling as it is used and jumping when a delivery arrives.
- Find the reorder level as the point where the line begins its final fall before the vertical jump, and find the lead time as the horizontal distance between that point and the jump.
- For a calculation, work out usage per day first, then multiply by lead time to find how much stock will be used while waiting for the delivery. The reorder level is that amount plus the buffer.
- When asked about a change, trace the cash: more stock means more cash tied up and more storage cost; less stock means less cash tied up but a higher risk of a stockout.
- Apply the answer to the actual product. Perishable or fashion goods make high stock levels far more dangerous than they are for screws or timber.
- For just in time questions, always name the dependency on suppliers, because that is where the marks and the real risk both sit.
Worked example
A cafe uses 40 kg of coffee beans a week, spread evenly across 5 opening days. Its supplier takes 3 days to deliver, and the cafe keeps a buffer stock of 16 kg. Calculate the daily usage, the reorder level, and explain what would happen if the supplier's lead time doubled.
- Find daily usage: 40 kg over 5 days is 40 / 5 = 8 kg a day.
- Find the usage during the lead time: 8 kg a day for 3 days is 8 x 3 = 24 kg.
- Add the buffer to get the reorder level: 24 + 16 = 40 kg. The cafe should place a new order when stock falls to 40 kg.
- Now change the lead time. If delivery takes 6 days, usage during the lead time becomes 8 x 6 = 48 kg, which is more than the current reorder level of 40 kg.
- Work out the consequence: stock would run out before the delivery arrived. The cafe would use its whole 16 kg buffer and still be 8 kg short, so it would run out of coffee for a day.
- Give the fix: raise the reorder level to 48 + 16 = 64 kg, or find a faster or second supplier. Raising the reorder level means holding more stock and tying up more cash, which is the trade-off.
Practice questions
Try each question, then tap to reveal the answer.
Q1Define lead time.Show answer
Answer: The time between placing an order with a supplier and receiving the goods.
Q2State two costs of holding too much stock.Show answer
Answer: Any two of: cash tied up that could be used elsewhere; storage and insurance costs; risk of damage, theft or obsolescence; for perishable goods, waste when stock expires.
Q3State two consequences of holding too little stock.Show answer
Answer: Production stops or orders cannot be fulfilled, losing sales and possibly customers permanently; the business may have to buy urgently at a higher price or pay for express delivery.
Q4A factory uses 300 components a day and its supplier's lead time is 4 days. It holds a buffer of 500 components. Calculate the reorder level.Show answer
Answer: Usage in the lead time = 300 x 4 = 1,200. Reorder level = 1,200 + 500 = 1,700 components.
Q5Explain one benefit and one risk of just in time stock control.Show answer
Answer: Benefit: almost no cash is tied up in stock and storage costs are minimal, which improves cash flow. Risk: there is no buffer, so a single late or faulty delivery halts production immediately.
Q6Why is stock control especially important for a business selling fresh food?Show answer
Answer: Stock has a short shelf life, so anything unsold by its use-by date becomes waste and a direct loss. Overordering destroys profit far faster than it would for a business selling non-perishable goods.
Q7Explain how buffer stock protects a business, and state its cost.Show answer
Answer: It is a reserve held above what is normally needed, so a late delivery or an unexpected surge in demand can be met without a stockout. The cost is the cash tied up in stock that is not being used, plus the storage space it occupies.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Kestrel Joinery uses 250 sheets of plywood a week over a 5 day week. Its current supplier has a lead time of 4 days and Kestrel holds a buffer stock of 300 sheets. A new supplier offers the same plywood 8 per cent cheaper but with a lead time of 10 days. (a) Calculate the reorder level with the current supplier. (b) Calculate the reorder level that would be needed with the new supplier, keeping the same buffer. (c) Analyse whether Kestrel should switch supplier.
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Evaluate whether a manufacturer should adopt just in time stock control.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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