On what depends the volume of raw materials in stock?

Raw materials in stock depends on current assets. If the current assets include a big portion of stock, it means that the current assets is not upto the mark and then we must take into account the acid test ratio of the organization.

If we use the chain management system then the chances are to have little stock of materials and the current assets of such organization would have little materials to be sold out for conversioning into cash meeting the current obligation and the cash to be used for day to day operational activities.

 

How much stock to be kept depends upon many factor ,some of them are-

• Demand and supply-if there is more demand of the product in the market then you may prefer to keep more stock of raw material so that ant any point of time supply doesnot goes below demand which will reduce your sale and profit.
• Method of production-if you are having production method suchh as JIT then you may  not require enough stock of raw material to kept
• Economic condition -if there is favourable condition prevailing and there is chance of iincrease in demand of the product then you must keep enough stock of raw material.
• Future rate -If you can predict the future price of raw material ,means if there is chances of increase in the  price of raw material then it is better to keep more stock of raw material so that rise in cost will not increase the cost of production

Most important factor to determine the volume of raw materials are sales volume and production plan of the specific product.

Moreover carrying cost, availability or delivery of raw material by the supplier, ordering time, cost and discount offered by.

Must be plan accordingly to avoid unnecessary tied up of the working capital which has a opportunity cost for the business.

 

There are many elements affecting volume of raw materials. Some of them I present below:

- expected production plan

- seasonal rebates from suppliers

- expected problems with supply

- expected currency volatility in import

- expected price increase, resell additional amount of raw materials on the market in near future

- used 'just-in-time strategy' and minimal required level of raw materials

- size of your warehouse and agreement with deposit warehouses

Fluctuations in demand, price fluctuations, transportation and delivery time, wholesale prices

if you ask about the volume of raw material that you use to produce stock that depends on stock map and quality of your production , but if you ask about the optimal volume of inventory you must use the hisyorical data for your demand of raw materials and link it with the total sales 

It depends on size and nature of the business, short term plans for sales budgeted, reliability and stability of suppliers for delivery, discounts offered from big purchase orders, costs and benefits from producing and tieing up your working capital, system of reorder point used based on company policy for inventory purchases, etc.

It is dependent on many factors, some of which are the anticipated sales which leads to budgeted production. Also, the reliabiltiy of the supplier of these raw and his production capacity as the company needs to have its required raw materials available when needed. A much more depended-on factor is the company's policy and its valuation method when it comes to stock. Another factor could be the expiry of these materials. Many factors play part in this and it is always dependent on the situation the company's in.

I am afraid, I need little more clarity on the question. Anyway let me assume you want to ask on what basis the volume of Raw Material to be kept in stock is decided.

It depends on your method of production. If you are following JIT (Just in time production method) you need to buy only that much which is requred for your current production. 

If you are not following JIT and instead you are following traditional production process, the volume of raw material in stock may vary on few factors. It depends on your storage capacity. Again for another factor let me cite an example. If management feels that there may be price hike for the raw material in near future, more raw material may be stocked and thus increasing the volume of RM stock. In this case another analysis is required. You need to see that the storage cost of large volume of RM does not exceed the expected benefit.

Thanks

The volume of raw material that a company should hold depends on a lot of factors:

The level of activity is a major factor as the company will like to hold a higher stock of frequently used material.

The ordering cost and delievery time also play a major role. For example, if ordering cost is high and delivery times are longer then a bigger stock seems the preferable option and vice versa.

Holding Cost also determine the level of stock the company would like to hold. Higher holding costs refrain companies from holding bigger stocks. Holding cost includes warehousing, maintenance and many other factors.

Fluctuating Prices can make companies order higher or lower quantities of a specific material thus changing the volume of stock held.

Liquidity Position of the company can make stock holding a lucrative or inhibiting option for the company. The nature of the business is really crucial in determination of level of stock held.

There are many other factor. The list is not exhaustive in any way.

 

There many;  

1. Sales demand

2. Production volume

3. Ordering cost

4. Carrying cost

5. Stockout cost

6. Lead time and safety stock

7. Price / Exchange rate  

8  etc