N5 Entrepreneurship
In a service business, inventory refers to any tangible goods to be sold and product components necessary to administer the service. Examples of such inventory are: • Parts (repair service) • Fertilisers (gardening service) • Goods for sale or rent (carpet cleaning)
The purpose of inventory control is to specify when items should be ordered and how large the order should be.
Other purposes of inventory control are: 1. To maintain independence of operations, meaning that manufacturing will not come to a standstill because of an out-of-stock situation
2. To meet variations in product demand 3. To allow flexibility in the production schedule 4. To provide a safeguard for variations in the raw material delivery time 5. To take advantage of the Economical Order Quantity benefits (EOQ)
Inventory costs include: 1. Carrying costs
2. Set-up costs
Costs for storage, insurance, handling, pilferage, depreciation and opportunity cost of capital
To make different products means that you must make changes to materials, re- arrange equipment, etc.
3. Ordering costs This includes both managerial and clerical costs
4. Shortage costs There is a trade-off between carrying too much stock and the costs that result from an out-of- stock situation
The inventory control system The inventory control system’s purpose is to maintain and control all the stock. The system is responsible for: • Ordering and receipt of goods • Timing the placements of orders • Keeping track of the ordered goods, how much and when • The system must also provide follow-up information such as whether a customer received the delivery.
There are two general inventory control systems. Systems designed ensure that stock will be available when needed. They are: • Fixed order quantity • Fixed time period
• Fixed order quantity Fixed order quantity is “event triggered” meaning that you will order stock only when certain minimum levels are reached. The level must be predetermined and is called safety stock. Each time an item is taken out of stock, it is noted and compared with the minimum stock level. If it reaches that point an order is made out. Therefore this system focuses on order quantities (Q) and reorder points (R).
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