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
Advantages | Disadvantages |
· 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 · Spoilage may occur · Theft/pilfering of stock · Stock may become outdated/obsolete à therefore may not be sold · Overstocking may tie up cash à working capital |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.