Inventory Management and Stock Control
Stock control questions are numerical. Learn reorder level, safety stock, FIFO and FEFO, turnover and shrinkage, and know the documents: purchase order, GRN, indent, stock transfer note.
Core formulas
- Reorder level = (average daily sales × lead time in days) + safety stock.
- Safety stock absorbs demand and lead-time variability.
- Stock turnover ratio = cost of goods sold ÷ average stock at cost.
- Shrinkage % = (book stock − physical stock) ÷ book stock × 100.
- ABC: A items are about 70% of value from 10% of SKUs; C items about 5% of value from 50% of SKUs.
Methods
FIFO - first in, first out - suits non-perishables. FEFO - first expiry, first out - is compulsory for food, dairy and medicines. Perpetual inventory updates the record at every sale and is verified by cycle counts; periodic inventory relies on a full physical count at fixed intervals. GRN confirms quantity and condition received against the purchase order.
Worked example
Daily sales 40 units, supplier lead time 5 days, safety stock 100 units. Reorder level = (40 × 5) + 100 = 300 units, so raise the purchase order when stock reaches 300. If the lead time doubles to 10 days, the reorder level rises to 500. Stock falling to the reorder level with no order in transit means a stock-out is coming.
Traps that cost marks
- Forgetting safety stock or ignoring lead time.
- Using FIFO instead of FEFO in a dairy chiller.
- Defining shrinkage as shoplifting only; it also includes damage, expiry and paperwork error.
- Using selling price rather than cost in the turnover ratio.
- Counting stock without reconciling the book record.