Inventory and Stock Management
What the domain tests
This domain tests stock control: records, reorder levels, safety stock, stock rotation, verification, and shrinkage. You should be able to calculate a simple reorder level and explain why stock accuracy matters.
Core rules
- Inventory includes raw materials, work-in-progress, and finished goods; in a retail store it is mainly saleable stock and consumables.
- Reorder level = average daily sales × lead time + safety stock.
- Safety stock protects against demand spikes or delayed delivery. Lead time is the time between placing an order and receiving it.
- FIFO means first in, first out. FEFO means first expiry, first out and is used for perishables and medicines.
- Stock verification compares physical stock with records. Differences may be caused by theft, damage, mis-scanning, or recording errors.
- Shrinkage is loss from theft, fraud, damage, expiry, or administrative error. High shrinkage reduces profit.
- Stock turnover ratio = cost of goods sold ÷ average inventory; it shows how quickly stock moves.
Worked example
A store sells 20 units per day. The supplier takes 5 days to deliver. The manager keeps 30 units as safety stock. Reorder level = 20 × 5 + 30 = 130 units. When stock reaches 130, a new order is placed. The reasoning uses daily demand, lead time, and buffer together; using only safety stock or only lead-time demand would understate the trigger point.
Traps
Do not use reorder level as safety stock. Do not apply FIFO to expiring milk when FEFO is required. Do not ignore damaged or expired stock in shrinkage. Do not calculate stock turnover with sales value if the formula requires cost of goods sold.