Inventory Management and Stock Control
Inventory is the largest working-capital item in most stores, so this domain tests stock levels, ordering logic, counting methods and shrinkage control. Numerical questions on reorder level, EOQ and stock turnover are common.
Core rules
- Holding stock costs money: carrying cost typically runs 20–25% of inventory value a year (rent, insurance, interest, obsolescence). Ordering cost is incurred per purchase order. The balance point is EOQ = √(2DS ÷ H), where D is annual demand, S the ordering cost and H the carrying cost per unit per year.
- Reorder level = (average daily sales × lead time) + safety stock. Safety stock absorbs variability in demand and in lead time.
- Stock turnover ratio = cost of goods sold ÷ average inventory at cost. Days of cover = 365 ÷ turnover.
- Classification tools: ABC by value, VED by criticality, FSN by movement speed; JIT and two-bin systems for fast movers.
- FIFO for dated but durable goods; FEFO (first-expiry-first-out) for perishables, because the earliest expiry must leave first even if it arrived later.
- Shrinkage sources: customer and staff theft, supplier short supply, damage, paperwork error. Physical verification, cycle counts and blind counts keep it visible; every inward needs a GRN and every vendor return an RTV.
Worked example
A store sells 20 units a day, lead time is 5 days, and management keeps 30 units as safety stock. Reorder level = (20 × 5) + 30 = 130 units. If annual demand is 7,300 units, ordering cost ₹200 and carrying cost ₹40 per unit per year, EOQ = √(2 × 7,300 × 200 ÷ 40) = √73,000 ≈ 270 units per order.
Traps that cost marks
- Using an average lead time with no safety stock when demand swings.
- Dividing COGS by inventory at selling price - turnover must use cost.
- Treating FIFO and FEFO as identical.
- Not recording damages and returns, which quietly inflates shrinkage.