CIE As Level Business | 4.2 Inventory Management - Operational Management

Inventory

*Materials and goods* held by a business which are required to allow for the *production* of products and their *supply* to customer

4 different types of inventory

1. Raw materials

2. Components

3. Work in progress

4. Finished goods

Inventory Management

The process of ordering, storing and using a company's inventory.

Advantages of *holding inventories*

1. *CONTINUOUS SALES*

—> Large supply of goods ensures continuous sales process.

—> ✅: *Avoids loss of sales to competitors.*

2. *CONTINUOUS PRODUCTION*

—> Readily available materials + components.

—> ✅: *Improved efficiency + reduced down-time costs.*

3. *ECONOMIES OF SCALE*

—> Buying in large quantities may reduce average costs.

—> ✅: *Improved profit margins.*

Disadvantages of *holding inventories*

1. *HIGH HOLDING (STORAGE COSTS)*

—> Rent, insurance, security, and handling.

—> ❌: *Reduced net profit.*

2. *OPPORTUNITY COST*

—> Tied up cash in stock cannot be used elsewhere.

—> ❌: *Limits cash flow.*

3. *RISK OF OBSOLESCENCE*

—> Products may go out of date due to fashion, technology, or expiry.

—> ❌: *Waste.*

Supply Chain

The network of all the businesses and activities involved in creating a product for sale — starting with the delivery of raw materials and finishing with the delivery of the finished product.

Supply Chain Management (SCM)

The handling of the entire production flow of a product to minimise costs but improve customer service.

Advantages of an *effective supply chain*?

1. *Faster delivery to customers*

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

2. *Lower operation costs*

—> JIT deliveries + bulk purchasing reduce storage, handling, and materials costs.

3. *Consistent quality*

—> Close, long-term relationships with suppliers make it easier to enforce standards + fix problems early.

4. *Greater resilience to shocks*

—> Backup suppliers + effective data sharing = the business can adapt quickly.

Maximum inventory level

The maximum amount of stock a business is able to hold.

Buffer inventory

*Minimum inventory level* that should be held to ensure that continuous production is possible should delivery delays occur or output increase

Re-order level

The level of inventory that triggers a new order to be sent to the suppliers.

Re-order quantity

The number of units ordered each time.

Lead time

The time between ordering new supplies and their delivery.

Economic Order Quantity (EOQ)

The *optimum* or *least-cost* quantity of stock to re-order taking into account *delivery costs* and *stock-holding* costs.

Just-in-time (JIT)

Inventory management approach in which supplies arrive just when needed for production or resale.

Advantages of *just-in-time (JIT)*

- *Stockholding costs* are minimised.

- Inventory + finished goods are *less likely to be damaged* in storage.

- Close working relationships are developed with a *small number of trusted suppliers.*

- *Cash flow is improved* as money that is not tied up can be put to other uses.

- *Unused storage space* is available for productive use.

Disadvantages of *just-in-time (JIT)*

- Economies of scale *not possible*.

- Unable to respond to *unexpected increases in demand* without precise forecasting.

- *High administration costs* due to frequent ordering.

- *Unreliable suppliers* can quickly halt production.

- *External factors* can delay delivery of stock.

Just-in-case (JIC)

Inventory management approach which aims to reduce the risk of running out of inventory by holding high buffer inventory levels.

Advantages of *just-in-case (JIC)* (name 2)

- Larger buffer stocks ensure *continuous production + sales* even if suppliers fail —> avoids loss of sales.

- *Economies of scale* from buying large quantities.

Disadvantages of *just-in-case (JIC)*

- High *storage* and *holding costs*

- *Opportunity cost* from cash tied up in inventories.

- *Risk of obsolescence*