Learning Outcomes

After completing this lesson, learners will be able to:

• Explain inventory management and its role in meeting customer demand.
• Identify the main inventory types.
• Describe the key inventory-management processes.
• Explain how inventory flows through the supply chain.
• Apply basic inventory concepts such as lead time, reorder point, and safety stock.
• Explain Pareto analysis and ABC classification.
• Describe how technology supports inventory management.
• Identify global inventory-management challenges.
• Explain the inventory requirements of capital projects.

1. Inventory Management

Inventory management is the planning and control of the ordering, receipt, storage, movement, and use of goods and materials.

Its purpose is to ensure that the organisation has:

• The correct inventory
• In the correct quantity
• At the correct location
• In acceptable condition
• At the required time
• At an appropriate total cost

Inventory management balances two competing requirements:

• Maintaining sufficient stock to support operations and customers
• Avoiding unnecessary inventory and associated costs

2. Importance of Inventory

Inventory supports:

• Production continuity
• Customer-order fulfillment
• Product availability
• Protection against supply delays
• Seasonal demand
• Bulk purchasing
• Maintenance and repairs
• Emergency requirements

Too little inventory can cause:

• Stockouts
• Production stoppages
• Lost sales
• Emergency purchasing
• Delayed customer orders
• Reputational damage

Too much inventory can cause:

• Higher storage costs
• Capital being tied up
• Product expiry
• Obsolescence
• Damage
• Theft
• Additional insurance costs
• Warehouse congestion

3. Types of Inventory

Raw Materials

Materials purchased for use in production.

Examples include:

• Steel
• Timber
• Chemicals
• Fabric
• Food ingredients

Components

Items incorporated into a finished product.

Examples include:

• Electronic components
• Vehicle parts
• Packaging components
• Fasteners

Work in Progress

Partially completed products that are still undergoing production.

Finished Goods

Completed products ready for sale or distribution.

Maintenance, Repair, and Operating Supplies

Items used to support operations but not normally included in the finished product.

Examples include:

• Lubricants
• Cleaning materials
• Tools
• Protective equipment
• Replacement parts

Goods in Transit

Inventory being transported between suppliers, facilities, or customers.

Safety Stock

Additional inventory held to protect against uncertainty in demand or supply.

Seasonal Inventory

Stock accumulated in preparation for predictable periods of higher demand.

Anticipation Inventory

Inventory built before a known event, such as:

• Planned shutdown
• Supplier closure
• Promotion
• Strike
• Seasonal demand increase

Obsolete and Dead Stock

Obsolete inventory is no longer suitable or relevant because of changes in products, technology or demand.

Dead stock has no expected demand and is unlikely to be used or sold.

4. Inventory-Management Process

A typical inventory process includes:

1. Forecast demand.
2. Plan inventory requirements.
3. Determine replenishment quantities.
4. Place purchase or production orders.
5. Receive and inspect inventory.
6. Record inventory accurately.
7. Store and protect inventory.
8. Issue, pick or transfer inventory.
9. Monitor stock levels.
10. Count and reconcile inventory.
11. Manage excess, damaged or obsolete stock.
12. Evaluate inventory performance.

Each stage must be coordinated with procurement, production, warehousing, transport and customer-order management.

5. Inventory Flow

Supplier
   ↓
Goods in transit
   ↓
Receiving and inspection
   ↓
Raw-material or component storage
   ↓
Production
   ↓
Work in progress
   ↓
Finished-goods storage
   ↓
Distribution
   ↓
Customer

Information should be recorded whenever inventory changes:

• Quantity
• Condition
• Ownership
• Location
• Status

6. Demand Forecasting

Demand forecasting estimates future inventory requirements.

Forecasts may use:

• Historical usage
• Customer orders
• Sales trends
• Seasonal patterns
• Production plans
• Promotions
• Market information

Inaccurate forecasts may create either stockouts or excess inventory.

Forecast results should be compared with actual demand and updated regularly.

7. Lead Time

Lead time is the period between initiating replenishment and having the inventory available for use.

It may include:

• Order preparation
• Supplier processing
• Production
• Transport
• Customs clearance
• Receiving
• Inspection
• System processing

Long or uncertain lead times normally require earlier ordering or additional protection against shortages.

8. Reorder Point

The reorder point is the inventory level at which replenishment should be initiated.

A basic calculation is:

Reorder point = Demand during lead time + Safety stock

Example

A business uses 50 units per day. Supplier lead time is six days, and safety stock is 100 units.

Demand during lead time = 50 × 6 = 300 units
Reorder point = 300 + 100 = 400 units

A replenishment order should be initiated when available stock reaches 400 units.

9. Safety Stock

Safety stock protects against:

• Unexpected demand
• Supplier delays
• Transport disruption
• Production problems
• Forecast errors
• Quality rejection

Higher safety stock reduces stockout risk but increases inventory-holding costs.

Safety stock should be based on risk and operational evidence rather than arbitrary estimates.

10. Economic Order Quantity

Economic Order Quantity, or EOQ, is the order quantity that aims to minimise the combined cost of ordering and holding inventory.

The principle balances:

• Ordering larger quantities less frequently
• Ordering smaller quantities more frequently

Large orders may reduce ordering cost per unit but increase:

• Average inventory
• Storage costs
• Capital requirements
• Risk of obsolescence

Small orders may reduce inventory holding but increase:

• Ordering costs
• Transport costs
• Risk of shortages

11. Inventory Costs

Purchase Cost

The amount paid for inventory.

Ordering Cost

The administrative and operational cost of placing and receiving an order.

Holding Cost

The cost of keeping inventory over time.

It may include:

• Storage
• Insurance
• Handling
• Security
• Damage
• Obsolescence
• Cost of capital

Stockout Cost

The cost created when required inventory is unavailable.

It may include:

• Lost sales
• Production downtime
• Emergency transport
• Customer penalties
• Reputational damage

12. Inventory Rotation

First-In, First-Out

First-In, First-Out, or FIFO, issues the oldest inventory first.

FIFO is especially important for:

• Food
• Pharmaceuticals
• Chemicals
• Products with expiry dates

Last-In, First-Out

Last-In, First-Out, or LIFO, assumes that the most recently received inventory is issued first.

Physical use of LIFO may be inappropriate for products that expire or deteriorate.

First-Expired, First-Out

First-Expired, First-Out, or FEFO, issues inventory according to its expiry date.

FEFO is often preferable where expiry dates differ between batches.

13. Perpetual and Periodic Inventory Systems

Perpetual System

A perpetual inventory system updates inventory records continuously as transactions occur.

Benefits include:

• Current stock visibility
• Faster discrepancy identification
• Improved replenishment decisions
• Better order promises

Periodic System

A periodic system determines stock quantities through physical counts at scheduled intervals.

It is simpler but provides less current information between counts.

14. Stock Counting and Control

Physical Stocktake

A full count of inventory at a particular time.

Cycle Counting

Selected inventory items are counted regularly according to a planned schedule.

Cycle counting allows discrepancies to be investigated without waiting for a full annual stocktake.

Possible causes of discrepancies include:

• Receiving errors
• Picking errors
• Incorrect units of measure
• Unrecorded movements
• Damage
• Theft
• Data-entry errors
• Incorrect product identification

15. Pareto Analysis

The Pareto principle suggests that a relatively small number of causes or items may account for a large proportion of the result.

It is often expressed as the 80/20 principle:

Approximately 20% of inventory items may account for approximately 80% of inventory value.

The percentages are a management guideline, not a fixed rule.

Pareto analysis helps identify the inventory items requiring the greatest management attention.

16. ABC Classification

ABC analysis classifies inventory according to value, importance or another selected criterion.

ABC Process

1. List inventory items.
2. Calculate annual usage value.
3. Rank items from highest to lowest value.
4. Calculate cumulative percentages.
5. Assign A, B and C categories.
6. Apply suitable controls to each category.
7. Review classifications regularly.

Annual usage value = Annual quantity used × Unit cost

ABC classification may also consider:

• Criticality
• Supply risk
• Lead time
• Availability
• Consequence of stockout

A low-cost item may still require tight control if its absence stops production.

17. Just-in-Time Inventory

Just-in-Time, or JIT, aims to receive inventory close to the time it is required.

Potential benefits include:

• Lower inventory levels
• Reduced storage costs
• Less waste
• Faster identification of quality problems

Risks include:

• Greater sensitivity to supplier delays
• Limited protection against disruptions
• Dependence on accurate schedules
• Possible production stoppages

JIT requires reliable suppliers, accurate information, and stable processes.

18. Vendor-Managed Inventory

Vendor-Managed Inventory, or VMI, allows a supplier to monitor and replenish inventory held for a customer.

It requires:

• Shared inventory information
• Agreed minimum and maximum levels
• Clear ownership
• Defined responsibilities
• Reliable systems
• Performance measurement

19. Inventory Technology

Technology can improve:

• Accuracy
• Visibility
• Traceability
• Replenishment
• Decision-making
• Productivity

Incorrect data or weak process controls can still produce unreliable system records.

20. Efficient Inventory Flow

Strategies for improving inventory flow include:

• Accurate forecasting
• Appropriate reorder points
• Suitable safety stock
• Reliable suppliers
• Standard product identification
• Accurate transaction recording
• Effective warehouse layout
• FIFO or FEFO rotation
• Regular cycle counting
• Removal of obsolete inventory
• Coordination between departments
• Monitoring relevant performance measures

21. Global Inventory Management

Global inventory management controls stock moving through international supply chains.

Requirements may include:

• Longer lead-time planning
• Customs documentation
• Import permits
• Product certification
• Duties and taxes
• Goods-in-transit visibility
• Currency planning
• International supplier coordination
• Multimodal transport
• Contingency inventory

Global Challenges

• Port congestion
• Border delays
• Long and variable lead times
• Currency fluctuations
• Different regulatory requirements
• Political instability
• Limited shipment visibility
• Communication differences
• International transport disruption
• Product damage or theft

Holding more inventory may reduce disruption risk but increase cost and exposure to obsolescence.

22. Inventory for Capital Projects

Capital projects include major construction, infrastructure, equipment installation and expansion projects.

Examples include:

• Building a warehouse
• Installing a production line
• Constructing a renewable-energy facility
• Expanding a transport terminal

Project inventory may include:

• High-value equipment
• Custom-manufactured components
• Long-lead-time materials
• Construction materials
• Spare parts
• Imported equipment

Unique Requirements

• Alignment with the project schedule
• Accurate material specifications
• Long-lead-time planning
• Milestone-based delivery
• Secure storage
• Preservation of equipment
• Serial-number tracking
• Inspection and certification
• Controlled issue to contractors
• Management of project changes
• Prevention of loss and damage
• Disposal or transfer of surplus materials

Material delivered too early may create storage and security costs. Material delivered too late may delay the entire project.

23. Inventory Performance Measures

Performance measures should be considered together. High turnover is not beneficial if it causes repeated stockouts.

24. Lesson Summary

• Inventory management controls the ordering, receipt, storage, movement, and use of stock.
• Inventory must support customer demand without creating unnecessary costs.
• Inventory includes raw materials, components, work in progress, finished goods, and operating supplies.
• Reorder points consider demand during lead time and safety stock.
• EOQ balances ordering and holding costs.
• FIFO and FEFO support appropriate inventory rotation.
• Pareto and ABC analysis prioritize inventory-management effort.
• Technology improves visibility, accuracy, and replenishment when supported by reliable data.
• Global inventory requires longer lead times, customs, and risk planning.
• Capital-project inventory must be aligned closely with project schedules and specifications.