Methods of Inventory Management (Cambridge (CIE) A Level Business): Revision Note

The purpose of inventory

• Inventory is the goods and materials a business holds for the ultimate goal of resale or for use in production

Types of inventory

Costs and benefits of holding inventory

• The management of stock is an important consideration for businesses

• Problems may arise from holding inventory

  • Storage costs (e.g. warehouse rental, security costs) will be higher than necessary 

  • The risk of spoilage and stock  shrinkage  is increased, leading to increased costs

  • Money tied up in stock could be used elsewhere in the business

  • Time and resources are needed to monitor and track stock levels

• However, if a business holds inventory, it means that

  • Products are available when needed, improving customer satisfaction

  • Buying quantities of inventory and storing it may reduce unit costs due to bulk buying discounts

  • Production isn't held up by supply issues

  • Extra stock helps meet peaks in sales, such as during holiday periods

The importance of supply chain management

• The supply chain is the network of organisations, people, activities and resources that move a product from its basic raw material right through to the final customer

• It includes the following:

  • Stock control: planning, implementing and monitoring the movement of raw materials, components, work-in-progress and finished goods

  • Quality control: ensuring output meets standards so that the end product is safe and meets customer expectations

  • Transport networks: ensuring efficient deliveries of goods to customers, taking account of speed, reliability and costs

  • Supplier networks: developing strong relationships with suppliers willing to work collaboratively to improve quality

• Global supply chains require these activities to be coordinated across international borders

  • Some stages can be completed at lower cost in certain countries

    • E.g. China has a reputation for producing high quality, low-cost electronics components

  • Labour-intensive processing, such as clothes manufacturing, is outsourced to countries with low labour costs, such as Vietnam

  • Scarce raw materials may only be available in certain countries/regions

Building an effective supply chain

Why does an effective supply chain matter?

1. Faster delivery to customers

   • When every link is well-coordinated, products move quickly from factory to shelf, beating slower rivals

2. Lower operating costs

   • Just-in-time (JIT) deliveries and bulk purchasing agreements reduce storage, handling and material expenses

   • E.g. Aldi negotiates long-term contracts with a small group of trusted suppliers, helping it minimise warehouse inventory and keep prices low

3. Consistent quality

   • Close, long-term relationships with suppliers make it easier to enforce standards and fix problems early

4. Greater resilience to shocks

   • A well-planned supply chain includes backup suppliers and effective data sharing so the business can adapt when something goes wrong

Inventory control charts

• An inventory control diagram shows how inventory moves into and out of a business over time

An inventory control diagram

• The maximum inventory level is the maximum amount of stock a business is able to hold in normal circumstances (1,600)

• The reorder level is the level at which a business places a new order with its supplier (800)

• The minimum stock level is also known as the buffer inventory level and is the lowest level to which a business is willing to allow inventory levels to fall (400)

• Lead time is the length of time from the point of inventory being ordered from the supplier to it being delivered (one week)

• The stock level line shows how inventory levels change over the given time period

  • As inventory is used up, a downwards slope is plotted

  • When an order is delivered by a supplier, the stock level line shoots upwards

Buffer inventory

• Buffer inventory is a quantity of stock kept in case of shortages

  • This can provide a  competitive edge  over rivals unable to meet demand

  • This approach is commonly called ‘just in case’ stock control

• The decision to keep buffer stocks is one that businesses have to weigh up very carefully

  • The decision will be influenced by the nature of the business and the product/service it provides

Evaluating the use of buffer stocks