Production processes: Inventory (Cambridge (CIE) IGCSE Business): Revision Note

Why do businesses hold inventory?

• Businesses hold inventories to support smooth operations and avoid disruptions

Main types of inventories

• Reasons for holding inventories include:

  • To prevent stockouts and lost sales

  • To take advantage of bulk purchasing discounts

  • To buffer against supply chain delays

  • To ensure continuous production even when delivery of materials is uncertain

• However, holding too much inventory can increase storage costs and risk of damage or obsolescence, which is why inventory levels must be carefully managed

Factors affecting how much inventory a business holds

• Choosing the right level of inventory is important to avoid waste, reduce costs and ensure smooth operations

1. Type of product

   • Perishable goods like fresh food must be kept in smaller amounts to avoid spoilage

   • Durable goods such as electronics can be stored for longer

2. Nature of demand

   • Businesses with fast-selling products need more inventory to avoid running out, especially during busy periods

     • For example, a toy shop holds extra stock of popular toys before Christmas

   • On the other hand, low-selling items need less stock to prevent wastage

3. Supplier reliability

   • If suppliers are unreliable or located far away, businesses may keep more stock as a backup in case of delays or poor-quality deliveries

     • For example, a car manufacturer may keep extra spare parts if overseas suppliers take weeks to deliver

4. Cost of holding inventory

   • High storage costs may encourage businesses to reduce the amount of inventory they keep

   • If warehousing is cheap or in-house, businesses might hold more stock

5. Production needs

   • Manufacturers need enough raw materials or components to avoid stopping production

   • If production is continuous, a steady supply of inputs is essential

     • For example, a bread factory must always have enough flour to avoid delays on the production line