Inventory Management

Inventory Management

Inventory/stock: includes all the raw materials, semi-finished and finished products that are on the shelves or in storage.

  • Inventory management is necessary for operations to ensure efficient and effective control and monitoring of stock.
  • A business needs to have adequate stock on hand in order to keep customers happy by having products available in the store.
  • Shortages in stock may mean loss of valued customers who may turn to competitors to satisfy their needs.

Advantages and disadvantages of holding stock



· Ability to satisfy customers’ needs on time and maintain loyalty

· Opportunity to access discounts when bulk purchasing

· Gain a competitive advantage through efficient delivery and superior customer service

· Greater loyalty by customers

· Storage/warehousing requires large space, handling expenses, insurance, etc.

· Spoilage may occur

· Theft/pilfering of stock

· Stock may become outdated/obsolete à therefore may not be sold

· Overstocking may tie up cash à working capital


LIFO (last-in-first-out): used for products that do not have a use-by/best before date (ie recent stock is sold first). For example, machinery and tools.

  • LIFO = number sold x last price bought

FIFO (first-in-first-out): used for perishable items. For example, fresh produce.

  • FIFO = number sold x first price bought

JIT (just-in-time): minimum amount of stock is held as it aims to have the business produce just enough products to meet demand. Advantages:

  • reduction in storage costs
  • no spoilage
  • no tied-up cash
  • no warehousing necessary

can respond quickly to changes which can improve productivity

Extract from Business Studies Stage 6 Syllabus. © 2010 Board of Studies NSW.