Inventory Management

• Inventory


  Any item or resources owned by the business
• Types of inventory


  • Finished goods
  • Work in progress
  • Raw materials
  • Maintenance and operating supplies
• Importance of holding inventory

  • Materials can be purchased in bulk to benefit from bulk discount and also to reduce the cost of transportation for regular purchases of lower quantity
  • Holding stock ensures that materials are readily available when needed for production
  • The firm can respond to changes in demand quickly
  • For expected future surges in prices
  • Stock is held as a safeguard in case the supplier encounters unforeseen problems and the lead time becomes longer than expected
• Inventory control


  Carefully assessing the material needs of the firm, given its projected output, providing proper and secure storage and issuing materials as required by the Production Department
• Aims of inventory control

  • Minimize the overall time that stock is held
  • Convert raw materials quickly into finished goods and then sell those goods as soon as possible
• Maximum stock level


  The maximum amount of stock that the business can hold, based on its objective or storage space
• Reorder level


  The point at which a new order will be placed to replenish the stock
• Reorder quantity


  The amount that is ordered once the stock level reaches the reorder level
• Minimum stock level


  The lowest amount of stock the firm would want to hold at any given time
• Lead time


  The amount of time between placing an order and receiving the order
• Consequences of holding too much stock

  • Wastage as a result of spoilage
  • Increased cost of storage
  • Liquidity problems, since cash is tied up in stock
  • Stock may become outdated
• Consequences of holding too little stock

  • Production hold-ups and loss of sale revenue
• Economic order quantity


  1. Determine a specific point when an order will be placed and the amount of stock that will be purchased so that it does not over- or under stock the business

  2. Calculate the quantity of stock that will minimize total costs