What is Base Stock?

As it relates to inventory control, base stock is the minimum inventory that must be maintained in order for a business to operate with maximum efficiency. Sometimes known as normal stock, the idea is to keep the inventory as small as possible, thus reducing storage expenses and also tax liability. At the same time, keeping the base stock within reason requires creating an ordering schedule that ensures that essential stock, such as raw materials and replacement parts for operating machinery, always arrive before those resources are completely exhausted. Doing so means there is no interruption in production due to a lack of stock, and no profits lost because something essential was not on hand when required.

One of the most important concepts in maintaining a proper base stock is known as usage. In this setting, usage is simply understanding how quickly a business operation consumes a given stock item. The idea is to maintain 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 machine that is key to the production process will need a specific gear replaced on a monthly basis. The supplier of that gear requires three weeks from the order date to make delivery. Usage demands that the order be placed during the first few days of the month, so the gear is in hand several days before the scheduled replacement. As a result, there is no interruption in the production schedule and the base stock is kept at a minimum, with no additional tax burden created by keeping three or four costly gears on hand at all times.

Since the idea behind base stock is to keep inventory low without causing any issues with production, it is important to evaluate the usage of each stock item on a regular basis. Some stock items may go through a period where the usage increases. This is particularly true for businesses that are seasonal. For this reason, production managers should work closely with supply clerks and purchasing agents to make sure any scheduled increases in production that would lead to higher consumption of base stock items is identified in advance.

Doing so makes it possible to adjust the frequency of ordering new stock, as well as adjusting the number of units placed with each of those orders. At the same time, since the rate of consumption ensures that the additional units do not remain in inventory for extended periods of time, there are no worries about where to store the units until they are needed, or the cost of that additional storage. This strategy also means that no additional tax burden is created by base stock items remaining in stock any longer than necessary.