Inventory Management

1. Procurement &
Inventory
ManagementSection 10
Objective 5
by G. Flanders-Hinds

2. OBJECTIVES
i. Explain the importance of inventory
management:
(a)Prevention of pilferage
(b)Control of inventory
(c)Signaling of market trends
(d)Availability of capital
(e)Optimization of storage space
(f) Just-in-time (JIT)

3. WHAT IS STOCK OR INVENTORY?
‘Stock’ or ‘inventory’ refers to the goods and materials kept by
an organization in a warehouse or storeroom. Stock is
important as it is a current asset and so adds to the value of a
business.
Types of stock are:
• Raw materials and components
• Work in progress – unfinished goods
• Finished goods
• Consumable stock – stock purchased for use in the business
• Stock-in-trade – stock purchased for resale

4. WHAT IS STOCK CONTROL?
Stock control involves the storing and
handling of goods. The primary goal of
stock control is to minimize the cost of
holding stock while ensuring that there is
adequate material for production to continue
and to be able to meet customer demand.

5. WHY CONTROL STOCK?
It is important that businesses need to maintain
adequate stock levels: there should not be too much
stock or too little.
Drawbacks of keeping little (or no) stock are
- The firm might run out of stock and not have
enough raw materials and components to maintain
production;
- The firm might lose customers because of missed
orders.
However, keeping small amounts of stock might suit
a firm if these items are perishable or if replenishing
stock is quick and easy.

6. Disadvantages of keeping
too much stock
• Goods might deteriorate e.g. perishable goods such as
fruits and vegetables’
• Higher storage fees and insurance costs
• Higher security costs to prevent theft from
warehouse/storeroom
• Stock may become obsolete or go out of fashion
• Capital that could be spent otherwise may be tied up in
cash
• Stock will take up space in the warehouse

7. Maintaining stock levels (maximum,
minimum and reorder levels
Keeping a lot of stock may suit a business whose sales are difficult to
predict. To prevent the problems of overstocking or understocking,
maximum and re-order levels needs to be set:
(a) Minimum stock level – this is the lowest amount of stock that
should be held. Going below the minimum stock level will mean
that the firm runs the risk of running out of stock needed for
production or of losing customers because of its inability to meet
demand;
(b) Maximum stock level - this is the largest amount of stock to be
kept in the organization: keeping more than this amount means
that the warehouse may become overcrowded

8. Minimum and maximum stock levels are
decided on based on factors such as:
- The type of product – if it is perishable or
if it is very large e.g. a truck;
- The amount of storage space available
- The amount of funds available to purchase
stock
- Delivery charges that will be applied by
suppliers

9. (c) Re-order levels can also be maintained.
It is the level of stock at which a further
replenishment order should be placed.
When selecting an re-order level, the
lead time must also be considered. The
lead time is that period of time between
when goods are ordered and when they
are delivered. With modern computer
systems keeping track of stock use, this
may be an automatic process

10. The importance of stock control
• To monitor in the marketplace – stock control allows
and organizations to identify those items that are selling
quickly and those that are not. It will allow the
organization to assess which goods it should order more
or less of, based on the demand in the market;
• To keep track of available storage space – have an
efficient stock control system allows a business to
identify when goods are sold and to see how much
storage space is available to accommodate additional
stock.

11. • To monitor the availability of capital – if proper
stock control measures are in place it will allow
the business to maintain a suitable level of
stock and to prevent much needed cash from
being tied up in stock;
• To ascertain items that are overstocked or
understocked – properly monitoring the stock;
• To identify pilferage – efficient and accurate
stock control measures allow a business to
identify theft of stock quickly (Pilferage – the
theft of a small quantity of stock)

12. REFERENCES
Carysforth, C., Neid, M., Maxime, C. & Metz, Y. (2012). Office Administration
for CSEC. A Caribbean Examination Council Study Guide. Nelson Thornes.
Finisterre, S., Payne, L., & Reid, J. (2004). Longman Office Administration for
CXC. Pearson Education Limited.
Kontuš, E. (2014). Management of Inventory in a Company. Retrieved from
file:///C:/Users/C14labuser/Downloads/kontus_eleonora.pdf.
Trendfield-Newsome, A. & Walker, C. (2011). Office Administration for CSEC
Examinations. Macmillan Publisher Limited.
Trendfield-Newsome, A. & Walker, C. (2011). Office Administration for CSEC
Examinations. Macmillan Publisher Limited.