Stocks represent idle capital. The ideal situation would therefore be where we hold no stock of anything, but buy production materials as needed and product goods for specific orders which are sent out immediately they are complete.
Firms require stock due to:
- They allow the manufacturer to bridge time.
- Stocks are used to meet the competition.
- Stocks allow the firm to lessen the costs of discontinuities in the production process.
- Prices of materials tend to increase over time. Stocks serve as a form of hedging.
- Stocks protect against shortages of raw materials and the resulting costs of stoppages.