Inventory Control (AQA AS Business): Revision Note

The importance of effective inventory control

• Inventory is everything a business owns today for the purpose of selling tomorrow

  • It is sometimes called stock, and the terms are used interchangeably

• Businesses hold inventory for immediate use in production or to distribute without delay to customers

Types of inventory

Influences on the level of inventory

• Demand variability

  • The more sales fluctuate, the more buffer stock may be needed

• Lead-time length and reliability

  • Long or unpredictable supplier lead times force firms to carry extra inventory

• Product perishability

  • Goods that spoil quickly must be ordered in smaller batches

• Storage capacity and cost

  • Limited warehouse space or high rent encourages lower inventory levels

Inventory control charts

• Inventory control involves carefully planning and controlling inventory flow to ensure that enough raw materials, work-in-progress and components are available to meet production demands

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

An inventory control diagram

Diagram analysis

• 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 stock level and is the lowest level to which a business is willing to allow inventory levels to fall (400)

• The 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

The implications of poor inventory control

• Problems may arise from holding too much inventory

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

  • The risk of inventory shrinkage or spoilage is increased 

  • Excess inventory may need to be sold at a lower price, reducing revenue

• Similarly, holding too little inventory is risky

  • A business may run out of inventory, resulting in production stoppages and higher unit costs due to underused capacity

  • A business may not be capable of meeting a sudden increase in demand