Production processes: Inventory (Cambridge International IGCSE Business)

Why businesses hold inventory

Why do businesses hold inventory?

• Businesses hold inventories to support smooth operations and avoid disruptions

Main types of inventories

• Reasons for holding inventories include:

  • To **prevent stockouts and lost sales
  • To take advantage of bulk purchasing discounts
  • To buffer against supply chain delays
  • To ensure continuous production even when delivery of materials is uncertain

• However, holding too much inventory can increase storage costs and** risk of damage or obsolescence*, which is why inventory levels must be carefully managed

Factors affecting how much inventory businesses hold

Factors affecting how much inventory a business holds

• Choosing the right level of inventory is important to avoid waste, reduce costs and ensure smooth operations

The amount of inventory held will depend on factors such as the type of product, the level of demand and production needs

1. Type of product

• Perishable goods like fresh food must be kept in smaller amounts to avoid spoilage
• Durable goods such as electronics can be stored for longer

1. Nature of demand

• Businesses with fast-selling products need more inventory to avoid running out, especially during busy periods

  • For example, a toy shop holds extra stock of popular toys before Christmas

• On the other hand, low-selling items need less stock to prevent wastage

1. Supplier reliability

• If suppliers are unreliable or located far away, businesses may keep more stock as a backup in case of delays or poor-quality deliveries

  • For example, a car manufacturer may keep extra spare parts if overseas suppliers take weeks to deliver

1. Cost of holding inventory

• High storage costs may encourage businesses to reduce the amount of inventory they keep
• If warehousing is cheap or in-house, businesses might hold more stock

1. Production needs

• Manufacturers need enough raw materials or components to avoid stopping production

• If production is continuous, a steady supply of inputs is essential

  • For example, a bread factory must always have enough flour to avoid delays on the production line

Exam Hint Don’t assume holding more inventory is always a good thing– examiners expect you to weigh the advantages of meeting demand against the costs of storage and risk of waste