Inventory Management and Stock Control
This domain tests stock accuracy, replenishment maths and the cost of carrying or losing stock. Numeric questions on stock turnover, reorder point and shrinkage are common, so learn the formulas and the units they use.
Core formulas
- Stock turnover ratio = cost of goods sold / average inventory at cost.
- Days of inventory = 365 / turnover ratio.
- GMROI = gross margin in rupees / average inventory at cost.
- Reorder point = (average daily demand x lead time in days) + safety stock.
- Shrinkage % = (book stock - physical stock) / book stock x 100.
Stock control practice
- FIFO for general goods; FEFO (first expiry, first out) for food, dairy and pharma.
- GRN checks quantity, damage and invoice before stock enters the system.
- Perpetual counts update continuously; periodic counts are full physical counts; cycle counting counts a slice daily.
- Shrinkage sources: theft (customer and staff), supplier short supply, damage, admin and pricing errors, and unrecorded markdowns.
- Dead stock ties up cash; identify by zero sales over 90 days and clear through markdown or return to vendor.
Worked example
Daily demand is 40 units, lead time is 5 days and safety stock is 60 units. Reorder point = (40 x 5) + 60 = 260 units. If the store orders only at 200 units, stockouts are likely during any delivery delay, because the buffer is already consumed by normal demand.
Traps
- Using sales at retail instead of COGS in the turnover formula.
- Forgetting safety stock in the reorder point.
- Applying FIFO to perishables instead of FEFO.
- Counting shrinkage only as theft and ignoring paperwork and markdown errors.