Inventory is the stock of goods and materials a business keeps so it can sell products or make products for customers. Good stock control helps a business meet demand, avoid running out, and reduce money tied up in unsold items. It matters because every item on a shelf has a cost, including purchase price, storage, insurance, damage, and possible theft.
Managing what you sell means balancing availability with efficiency.
Key Facts
- Inventory = goods held for sale, materials used in production, or supplies needed for operations.
- Reorder point = expected demand during lead time + safety stock.
- Inventory turnover = cost of goods sold ÷ average inventory.
- Ending inventory = beginning inventory + purchases - cost of goods sold.
- Stockout occurs when customer demand is higher than available stock.
- Safety stock is extra inventory kept to reduce the risk of running out.
Vocabulary
- Inventory
- Inventory is the stock of products, materials, or supplies a business owns and expects to use or sell.
- Stock control
- Stock control is the process of tracking, ordering, storing, and protecting inventory so the right amount is available.
- Reorder point
- A reorder point is the stock level at which a business should place a new order before inventory runs out.
- Lead time
- Lead time is the amount of time between placing an order and receiving the stock.
- Inventory turnover
- Inventory turnover measures how many times a business sells and replaces its inventory during a period.
Common Mistakes to Avoid
- Ordering only when shelves are empty is wrong because supplier lead time can cause stockouts and lost sales.
- Ignoring slow moving stock is wrong because unsold items use storage space and tie up cash that could be used elsewhere.
- Setting the same reorder point for every product is wrong because items differ in demand, lead time, cost, and importance.
- Counting sales but not theft, damage, or errors is wrong because the records will not match the actual stock on hand.
Practice Questions
- 1 A shop sells 15 notebooks per day, supplier lead time is 6 days, and safety stock is 30 notebooks. Calculate the reorder point.
- 2 A business has cost of goods sold of 20,000. Calculate the inventory turnover.
- 3 A clothing store has many winter coats left over in spring, while basic T-shirts often sell out. Explain two stock control decisions the owner should make and why.