1 CHAPTER ELEVEN: INVENTORY

MANAGEMENT
38.-(1) of the PPA of 2023. The accounting officer
shall have the overall responsibility for the execution
of the procurement and supply processes in the
procuring entity, and in particular, shall be
responsible for-
(c) appointing the inspection and acceptance
committee. In case the experts are not
available within the procuring entity, the law
allow accounting officer to hire external
expert
2 CHAPTER ELEVEN:
INVENTORY MANAGEMENT
Regulation 322.-(1) Goods delivered shall be inspected, sampled and
tested by the procuring entity and they shall not be accepted if they are
below the standards stipulated in the contract.
(2) Contracts shall contain a clause that the supplier shall be responsible
for all costs and expenses incurred due to a justified rejection of his goods
on the ground that they are below standards stipulated in the contract
(3) Subject to sub regulation (1), goods rejected shall be collected by the
supplier from the premises of the procuring entity within seven working
days from the date of rejection of the goods
3 CHAPTER ELEVEN:
INVENTORY MANAGEMENT
The terms "stock" and "inventory" are often used
interchangeably, but there are subtle
differences depending on the context.
Another name of stock is inventory. These are
idle items but very useful.
Scope: Inventory has a broader meaning, while
stock specifically refers to finished goods
4 CHAPTER ELEVEN:
INVENTORY MANAGEMENT
1. Stock
• Definition: Refers specifically to the goods or
products that a business holds for sale to
customers.
• Common Use: Primarily used in retail and
manufacturing industries.
• Focus: Finished goods ready for sale
5 CHAPTER ELEVEN:
INVENTORY MANAGEMENT
2. Inventory
• Definition: Encompasses all the materials, goods,
and products a business holds, including raw
materials, work-in-progress, and finished products.
• Common Use: Broad term used across different
industries.
• Focus: Broader scope, including raw materials,
semi-finished goods, and items for operational use
6 CHAPTER ELEVEN:
INVENTORY MANAGEMENT

• Inventory, all the goods and

materials held by organization for
sale or use
• Inventories are very important to
manufacturing companies. They
usually represent from 20% to 60%
of total asset
7 CHAPTER ELEVEN:
INVENTORY MANAGEMENT
• In physical distribution, inventory refers to the
stock of goods or materials that a company
holds to meet customer demand or facilitate
production. It plays a critical role in ensuring
that the supply chain operates smoothly and
that products are available when and where
they are needed
8 CHAPTER ELEVEN:
INVENTORY MANAGEMENT
Inventory can include:
• Raw Materials: Items used in the production process but
not yet transformed.
• Work-in-Process (WIP): Goods in the process of being
manufactured but not yet finished.
• Finished Goods: Products that are fully manufactured
and ready for sale or distribution.
• Maintenance, Repair, and Operating (MRO)
Supplies: Items used to support production and
operations
9 Rationale of Holding Stocks In
Business Operations
i. Smoothening Operations: Holding
stocks, especially in the form of
inventory, helps businesses ensure a
steady flow of goods for production or
customer demand. This is important to
prevent stockouts that could disrupt
operations and customer satisfaction
10 Rationale of Holding Stocks In
Business Operations
• ii. Economies of Scale

By purchasing and holding stocks in bulk, businesses can

take advantage of bulk discounts, leading to cost
savings over time. This can improve profit margins and
operational efficiency
iii. Market Demand Fluctuations: Businesses often
hold stocks to meet demand fluctuations. By having stock
on hand, they can respond quickly to changes in
customer demand or unexpected spikes in sales,
especially in industries with seasonal demand
11 Rationale of Holding Stocks In
Business Operations
iv. Price Volatility Management
In industries where prices fluctuate, holding stock
allows businesses to purchase goods at a lower cost
when prices are favorable and sell them at a higher
price when market conditions are more advantageous
v. Risk Mitigation: Stockholding acts as a buffer
against uncertainties in supply chain disruptions, delays
in production, or transportation issues. This can be
crucial for maintaining consistent operations and
meeting deadlines
12 Rationale of Holding Stocks In
Business Operations
v. Financial Leverage:
Holding stocks can be an asset on the balance
sheet, and in some cases, it can be used as
collateral to secure financing or as part of a
company’s working capital strategy
vi. Meeting Customer Demand: For retail or
service-based businesses, holding stocks ensures
that customer orders can be filled promptly. This
is crucial for maintaining high customer
satisfaction and retaining business
13 Rationale of Holding Stocks In
Business Operations
• Vii. Competitive Advantage: For some businesses,
having a large inventory of popular or unique products
can give them a competitive edge, ensuring that they can
meet customer needs even when others are out of stock
• Viii. Buffer Against Supply Chain Disruptions:
Holding stock acts as a safety net in case of disruptions in
the supply chain, such as delays, shortages, or
unforeseen demand spikes. It helps maintain smooth
operations without having to wait for deliveries or new
production\
14 Rationale of Holding Stocks In
Business Operations
ix. Ensuring Consistent Production
For manufacturing businesses, holding raw
materials or intermediate goods ensures that
production processes are uninterrupted. This is
particularly important when suppliers have long
lead times or when demand is unpredictable.
15 Rationale of Holding Stocks In
Business Operations
• X. It eliminates idle time of workers: in
manufacturing industries such as textile
industries sufficient raw materials are needed
in order to ensure continuation of production of
goods. Shortage of these raw materials can
lead stoppage of machine that may open room
for idle time of workers
16 Cost of being Out of Inventory

Out of stock is an inventory condition, stating that

an item is not currently available for sale or use.
An out of stock condition can cost a company a
sale.
Out of stock" means that a particular item or
product is currently unavailable for sale because
the supply has been depleted. It typically indicates
that the product is sold out and will not be
available until the supplier or store restocks it
17 CONT…

• The management of inventory is

to maximize the level of
inventory , not minimizing it
because the costs of running out
of stock can be as high as keeping
too much of any one item.
18 CAUSES OF STOCK OUT

i. Poor Inventory Management

• Lack of real-time inventory tracking or failure to
reorder stock on time can result in stockouts.
ii. Supplier Delays
• Late deliveries from suppliers disrupt stock availability
and lead to distribution issues
iii. Transportation Problems
• Delays in shipping due to vehicle breakdowns, weather
conditions, or customs issues can create supply gaps
19 CAUSES OF STOCK OUT

iv. Production Issues

• Equipment breakdowns, labor strikes, or raw
material shortages in manufacturing can
reduce inventory levels
v. Sudden Demand Spikes
• Unexpected increases in customer demand,
such as during promotions or seasonal peaks,
can quickly deplete stock
20 CAUSES OF STOCK OUT

vi. Limited Safety Stock

• Failure to maintain buffer stock increases the risk of
stockouts when unexpected issues arise (Safety/ buffer
stock refers to extra inventory maintained by a
business to protect against uncertainties in supply and
demand)- is a reserve of materials that is held for
emergencies
vii. Financial Constraints
• Budget limitations may prevent a company from
purchasing adequate stock in advance.
21 CAUSES OF STOCK OUT

vii. Ineffective Reordering Processes

• Late placement of orders or delays in approval
processes.
• Errors in calculating reorder points or
quantities.
viii. High Dependency on Single Suppliers
• Over-reliance on a single supplier can create
bottlenecks if the supplier fails to deliver
22 CAUSES OF STOCK OUT

ix. Stock Pilferage or Damage

• Theft, mishandling, or spoilage of goods
reducing available inventory
x. Miscommunication or Coordination Issues
• Lack of communication between sales,
warehouse, and procurement teams.
• Poor coordination across departments or
regions.
23 CONT..

Other Causes of Stock out

• Inaccurate data
• Failure to re-order in a timely manner
• Supplier refusing to deliver
• Poor communication or relationships with your
suppliers.
24 Cont.….

Effects of Stock out costs:

i.Loss of sale. The most obvious consequence of
stockouts is lost revenue. If a customer goes to
place an order and the item is out of stock, you lose
the profit of that sale
ii.Loss of goodwill and delayed payment
from customers if orders are not
delivered in full
25 EFFECTS OF STOCK OUT
COSTS:

iii. High transportation costs in order to

ensure that rush orders are fulfilled-
a request from a customer for goods to be
supplied very quickly. The term "rush
orders" refers to orders that need to
be processed, fulfilled, and delivered
faster than the standard timeline
2 EFFECTS OF STOCK OUT
6 COSTS:

iv. Customer Dissatisfaction:

Customers facing repeated
stockouts may lose trust in
the business, damaging the
brand's reputation.
27 EFFECTS OF STOCK OUT COSTS:

V. Damage to Brand Image: Frequent

stockouts can harm the perception of reliability
and professionalism.
28 THE STRATEGIES TO REDUCE
OUT OF STOCK CONDITIONS
• i. Improve Demand Forecasting
• Use historical sales data, market trends, and customer
insights to predict demand more accurately.
ii. Supplier Collaboration
• Establish strong relationships with suppliers for better
communication and quick replenishment
• Partner with reliable suppliers and maintain clear
communication channels.
• Develop contingency plans with multiple suppliers to reduce
reliance on a single source
29 THE STRATEGIES TO REDUCE
OUT OF STOCK CONDITIONS
• iii. Safety Stock and Buffer Inventory
• Maintain a safety stock to cover unexpected
demand spikes.
• Regularly review and adjust safety stock levels.
• iv,. Replenishment Optimization
• Set reorder points and automate reorder
processes.
• Use Just-In-Time (JIT) inventory practices
carefully to balance stock availability
30 THE STRATEGIES TO REDUCE
OUT OF STOCK CONDITIONS
• v. Product Substitution Strategies
• Offer customers alternative products when their
preferred items are unavailable.
• Train staff to suggest substitutions proactively
• vi. Regularly Audit Stock
• Conduct routine stock audits to identify discrepancies
and improve accuracy.
• Analyze patterns of stock discrepancies to address
recurring issues
31 THE STRATEGIES TO REDUCE
OUT OF STOCK CONDITIONS
vii. Monitor and Address Root Causes
• Regularly analyze the reasons for OOS
situations (e.g., poor demand planning, delayed
deliveries).
• Address these issues with process
improvements or technology upgrades.
32 THE STRATEGIES TO REDUCE OUT OF
STOCK CONDITIONS

Other strategies includes

• conduct a daily review of store shelves, to manually
verify if there are any empty spots that require a
replenishment order.
• increase the frequency with which replenishment
orders are sent to suppliers.
• to increase the amount of safety stock retained on
the premises
33 SELF ASSESSMENT QUESTIONS

Question One:
a) What is Inventory?
b) Explain why do we hold
inventories
34 .

Question Two:
a) Explain five(5) causes of Stock out in
the organization:
b) Explain five(5) Stock out costs in the
organization:
c) Explain five(5) strategy to prevent
Stock out costs in the organization:
35

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