Base stock is the minimum inventory required for efficient business operation. Utilization is key to maintaining an adequate stock base, ensuring essential items arrive before depletion. Regular evaluation of usage is necessary to adjust ordering frequency and quantity, avoiding storage expenses and tax liability.
In regards to inventory control, base stock is the minimum inventory that must be managed for a business to operate at maximum efficiency. Sometimes known as normal stock, the idea is to keep inventory as small as possible, thus reducing storage expenses and also your tax liability. At the same time, keeping basic stock within reasonable limits requires creating an order schedule that ensures that essential stock, such as raw materials and spare parts for operating machinery, always arrives before those resources are completely depleted. This means there is no production disruption due to lack of stock and no lost profits because something essential was not available when required.
One of the most important concepts in maintaining an adequate stock base is known as utilization. In this setup, usage is simply an understanding of how quickly a business operation consumes a given inventory item. The idea is to keep enough on hand to meet that need, but also to reorder that item so that new units are received just before they are needed.
For example, a car that is key to the manufacturing process will need a specific gear replaced on a monthly basis. The supplier of this equipment requires three weeks from the date of the order to make the delivery. Usage requires that the order be placed during the first few days of the month, so the equipment is available several days before the scheduled replacement. As a result, there is no disruption to the production schedule and base stock is kept to a minimum, with no additional tax burden created by keeping three or four expensive gears on hand at all times.
Since the idea behind base stock is to keep inventory low without causing problems with production, it’s important to regularly evaluate the usage of each stock item. Some in-stock items may go through a period of increased usage. This is especially true for businesses that are seasonal. For this reason, production managers should work closely with supply clerks and purchasing agents to ensure that any planned increases in production that would lead to higher consumption of basic items are identified in advance.
This allows you to adjust the frequency of ordering new stock, as well as adjusting the number of units placed with each such order. At the same time, because the consumption rate ensures that additional drives don’t remain in inventory for long periods of time, there are no worries about where to store the drives until they’re needed or about the cost of that additional storage. This strategy also means that no additional tax burden is created by core items remaining in inventory longer than necessary.
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