Inventory control

  • Created by: noe
  • Created on: 31-03-20 10:46


Inventory includes:

- Raw materials and components:  purchased from suppliers before production and stores by firms to cope with changes in production levels or order delays.

- Work-in-progress (semi-finished goods).

- Finished goods: to cope with changes in demand and meet urgent orders.

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Inventory levels

Factors influecning invetory levels are:

  • Demand: enough stocks are needed to keep up with normal demand and buffer stocks is needed to cover unforeseen rises in demand or breaks in supply.
  • Stockpile goods: building up stocks for certain periods of the year.
  • Costs of inventory holding: the higher the cost, the less inventory held.
  • Amount of working capital available: a business short of working capital may not be able to buy more inventory even if needed.
  • Type of inventory: e.g. business producing perishabke goods can only hold small stocks.
  • Lead time (the time taken between placing the order and the delivery of goods): the longer the lead time, the higher the inventory levels will be.
  • External factors: e.g. future shortages might cause a firm to hold higher levels of raw materials in inventory.
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Holding too much inventory

  • Storage: inventory occupies space in buildings and it has to be maintained and kept safe.
  • Opportunity cost: capital tied up in inventory earns no reward and the money used to buy the inventory could have been used in other things, such as new machinery.
  • Spoilage costs: quality of some inventory may deteriorite over time or become out-of-date.
  • Administrative and financial costs: the cost of placing and processing orders, handling costs and costs of failing to anticipate price increases.
  • Unsold inventory: if demand falls, the business might be left with invetory it cannot sell.
  • Shrinkage: very large stocks might result in an increase in theft by employees as they might feel the business won't miss a small amount.
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Holding too little inventory


  • The business may not be able to cope with unexpected increases in demand and this might result in lost customers if they are let down.
  • If inventory deliveries are delayed, the firm may run out of inventory and have to stop production which can lead to inactive labour and machinery while the firm waits for delivery.
  • The firm is less able to cope with unexpected shortages of materials.
  • A firm which holds very low inventory may have to place more orders raising total ordering costs and missing out on discounts from bulk buying.
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Waste minimisation

A failure to control invesntory adequately can result in wasted inventory. Most likely if inventory is perishable (those which physically deteriorate after a certain amount of time and therefore cannot be used and therefore, thrown away. E.g. fruit, meat... Inventory can also be wasted if it has a limited lifetime and becomes obsolote after a certain amount of time.

Methods to minimise waste: 

  • If goods are perishable they must be placed in chilled storage (fridges or freezers can prolong the life of perishable goods).
  • Businesses have to make sure they forecast demand paterns correctly for perishable goods as if they overestimate demand they could be left with a lot of unsold stock. To predict this they can use historical data, the shelf life of prodcuts, lead times and storage costs.
  • A suitable stock rotation method (the flow of stock into and out of storage) should be used. E.g: 'first in first out' method to ensure old inventory is used up first.
  • Many businesses use computers to manage inventory control - systems programmed to automatically order inventory when the re-order level is reached. 
  • Some business might reduce prices to encourage purchases of goods which are about to go out-of-date,
  • Perishable goods need to be transported rapidly so that goods reach the marketplace more quickly and be available for sale in the best condition.
  • To minimise waste, a business might find creative methods in the disposal of goods that have passed their sell-by date.
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Lean production

JIT stock control is often an important element if a business is adopting lean production. Lean production aims to use fewer resourced in production. These producers use less time, less inventory, fewer materials, less labour, less space and fewer suppliers. Lean producers are likely to have a competitive advantage because the reduction in waste and resource use will lower production costs. Competitivess will be improves because lean production:

  • raises productivity.
  • reduces costs and cuts lead times.
  • lowers the number of faulty products.
  • improves reliability and speeds up design time.

With these improvements businesses will be able to charge lower prices, offer better quality and reliability and fight off rivals in the global marketplace.

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