Inventory Management and Stock Control
Inventory purposes and costs
Inventory supports sales and protects against uncertainty, but it costs money: holding cost, ordering cost, shortage cost and obsolescence. The exam tests reorder point, safety stock, economic order quantity (EOQ), ABC analysis and stock-taking methods.
Core rules
- Reorder point (ROP) = average daily demand × lead time + safety stock.
- Safety stock covers demand and lead-time variability.
- EOQ balances ordering and holding costs; it is an order size, not average stock.
- ABC analysis ranks items by annual usage value; A items need tight control.
- FIFO/FEFO: first-in-first-out for general stock; first-expiry-first-out for food, medicine and cosmetics.
- Stock count: periodic physical count, cycle counting and reconciliation against records.
Worked example
A store sells 40 units per day of a product. Lead time is 5 days and safety stock is 60 units. ROP = 40 × 5 + 60 = 260 units. When stock reaches 260, the store places an order. If demand rises to 50 units per day, the old ROP will be reached too late; safety stock or review frequency must change. The reasoning: ROP protects sales during replenishment lead time.
Traps
Do not use EOQ as the reorder level. Do not apply FIFO to milk or medicines where expiry matters-use FEFO. Do not ignore lead-time variability when setting safety stock. Record damages, returns and expiry separately so shrinkage is visible.