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  1. 1-1-the-nature-and-purpose-of-business as
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  2. 1-2-forms-of-business as
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  3. 1-3-the-external-environment as
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  4. 2-1-management-and-leadership as
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  5. 2-2-management-decision-making as
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  6. 2-3-the-role-and-importance-of-stakeholders as
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  7. 3-1-marketing-objectives as
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  8. 3-2-understanding-markets-and-customers as
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  9. 3-3-making-marketing-decisions as
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  10. 3-4-the-marketing-mix as
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  11. 4-1-operational-objectives as
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  12. 4-2-operational-performance as
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  13. 4-3-efficiency-and-productivity as
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  14. 4-4-quality as
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  15. 4-5-inventory-and-supply-chain-management as
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  16. 5-1-financial-objectives as
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  17. 5-2-financial-performance as
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  18. 5-3-sources-of-finance as
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  19. 5-4-cash-flow-and-profit as
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  20. 6-1-human-resource-objectives as
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  21. 6-2-human-resource-performance as
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  22. 6-3-organisational-design as
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  23. 6-4-human-resource-planning as
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  24. 6-5-motivation as
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  25. 6-6-improving-employer-employee-relations as
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Exam code:7131

The importance of effective inventory control

  • Inventory is everything a business owns today for the purpose of selling tomorrow

    • It is sometimes called stock, and the terms are used interchangeably

  • Businesses hold inventory for immediate use in production or to distribute without delay to customers

Types of inventory

Diagram showing types of inventory: raw materials, components, work-in-progress and finished goods, with arrows pointing from a central box.
Inventory consists of raw materials, components, work-in-progress and finished goods

Type

Description

Example

Raw materials

  • Basic inputs not yet processed

  • Cocoa beans at a Nestlé chocolate factory

Components

  • Parts brought in and ready to fit

  • Screens and batteries waiting to go into Samsung smartphones

Work-in-progress

  • Items partway through production

  • A car chassis on Toyota’s assembly line

Finished goods

  • Products fully made and awaiting sale

  • Boxes of sports shoes in a JD Sports warehouse

Influences on the level of inventory

  • Demand variability

    • The more sales fluctuate, the more buffer stock may be needed

  • Lead-time length and reliability

    • Long or unpredictable supplier lead times force firms to carry extra inventory

  • Product perishability

    • Goods that spoil quickly must be ordered in smaller batches

  • Storage capacity and cost

    • Limited warehouse space or high rent encourages lower inventory levels

Inventory control charts

  • Inventory control involves carefully planning and controlling inventory flow to ensure that enough raw materials, work-in-progress and components are available to meet production demands

  • An inventory control diagram shows how inventory moves into and out of a business over time

An inventory control diagram

A graph showing inventory levels over 10 weeks with a maximum level of 1,600 units, a reorder level of 800 units and a minimum / buffer stock of 400 units, highlighting the lead time.
An example of an inventory control diagram for a small manufacturing business

Diagram analysis

  • The maximum inventory level is the maximum amount of stock a business is able to hold in normal circumstances (1,600)

  • The reorder level is the level at which a business places a new order with its supplier (800)

  • The minimum stock level is also known as the buffer stock level and is the lowest level to which a business is willing to allow inventory levels to fall (400)

  • The lead time is the length of time from the point of inventory being ordered from the supplier to it being delivered (one week)

  • The stock level line shows how inventory levels change over the given time period

    • As inventory is used up, a downwards slope is plotted

    • When an order is delivered by a supplier, the stock level line shoots upwards

Examiner Tips and Tricks

For inventory control charts, show how reorder level, lead time and buffer stock work together — many students mix them up

Worked Example

The diagram below shows inventory movements of kitchen shelving units sold by TamFix Limited.

A line graph showing stock levels over four weeks, starting at 1,000, reaching the reorder level at 500 and then declining to 200 before restocking, repeating weekly.

Identify the following points:

  1. The minimum stock level

  2. The reorder level

  3. The reorder quantity

  4. The lead time for kitchen shelving units

[4 marks]

Answer:

Step 1: Identify the minimum stock level

  • The minimum stock level is identified by the bottommost dotted line

  • In this case, it shows that the minimum stock level is 200 units (1)

Step 2: Identify the reorder level

  • The reorder level is clearly identified on the diagram

  • In this case, it shows that the reorder level is 500 units (1)

Step 3: Identify the reorder quantity

  • The reorder quantity is the difference between the maximum stock level (shown by the topmost dotted line) and the minimum stock level

equals space 1000 space units space minus space 200 space units space equals space 800 space units

  • The reorder quantity is, therefore, 800 units (1)
     

Step 4: Identify the lead time for kitchen shelving units

  • The lead time is the difference in time between the time an order is placed and the time the inventory is delivered

  • In this case, assuming a five-day working week, the lead time for shelving units is two days (1)

Examiner Tips and Tricks

Always clearly label your lead time, reorder level and buffer stock, and include units

Show your workings — examiners award method marks even if the final figure is off

The implications of poor inventory control

<img alt=”A flowchart on poor stock control, showing the sales and production effects of holding too much stock (storage cost, risk of spoilage and shrinkage, opportunity

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