4 No stockouts occur. 5 Costs of quality are considered only to the extent that these costs are components of ordering costs or carrying costs. 21.7 Costs included in the carrying costs of stock are incremental costs for such items as insurance, rent, obsolescence, spoilage and breakage plus the opportunity cost of capital or required return on investment. 21.8 Safety stock is held as a buffer against stockouts occurring because of unexpected increases in demand or lead time and unavailability of stock from suppliers. It is not a needless tie-up of capital in stock. The optimal safety stock trades off carrying and stockout costs. 21.9 Two cost factors that can lead organisations to make smaller and more frequent purchase orders are 1 A decrease in the estimated cost of placing each purchase order. 2 An increase in the estimated cost of holding goods in stock. Recognition of how costs of quality increase with higher stock levels is also motivating organisations to make smaller and more frequent purchase orders. 21.10 Advocates of JIT view stock system as a negative one. Stock obscures problems in production that should be solved. By allowing work in progress to accumulate, problems causing defective units are not immediately solved. Stock has a host of associated costs (warehouse facilities, insurance, breakage and soon) that do not directly contribute to the production or sale of high-quality goods or products. Stock- related costs are regarded as wasteful and non-value-added.
