Inventory Management

• Inventory

  The raw materials, work-in-progress and finished goods held by a firm to enable production and meet customer demand
• Types of inventory

  • Raw materials & components
  • Work in progress
  • Finished goods
• Raw materials & components

  • Bought from suppliers, used in production process, e.g. parts for assembly or ingredients
• Work in progress


  • Semi or part-finished production, e.g. construction projects
• Finished goods

  • Completed products ready for sale or distribution, e.g. products on supermarket shelves; goods in the ASOS and Amazon warehouses
• Reasons for businesses to hold inventory

  • Enable production to take place
  • Satisfy customer demand
  • Precaution against delays from suppliers
  • Provide a buffer
  • Allow efficient production
  • Allow for seasonal changes between production processes
• Inventory management & control is a key part of a business operating efficiently
• The business damage from stock-outs or having the wrong inventory can be significant
• Inventory management is much easier due to widely available IT systems
• Key factors influencing quantity of inventory held

  • Need to satisfy demand
  • Need to manage working capital
  • Risk of inventory losing value
• Stock-out


  Where a business is unable to satisfy customer demand due to inventory being unavailable
• Re-order level


  The inventory quantity at which a replacement order is triggered
• Lead time


  The period between placing an order and the receipt of inventory
• Buffer stock


  Inventory held as a contingency in case of unexpected orders so that such orders can be met and in case of any delays from suppliers
• Costs of holding inventory

  • Cost of storage
  • Interest costs
  • Obsolescence risk
  • Stock out costs
• Benefits of low inventory levels

  • Lower inventory holding costs
  • Lower risk of inventory obsolescence
  • Less capital (cash) tied up in working capital-can be used elsewhere in the business
  • Consistent with operating "lean"
• Benefits of high inventory levels


  • Production fully supplied - no delays
  • Potential for lower unit costs by ordering in bulk/high quantities
  • Better able to handle unexpected changes in demand or need for higher output
  • Less likelihood of "stock-outs"