Business Studies – 4.1.1 Production processes | e-Consult

Businesses face a constant challenge in balancing the costs of holding inventory with the risk of stockouts. Several factors influence this crucial decision. Demand Forecasting is paramount; accurate predictions of future demand allow businesses to order the right quantities. If demand is expected to be high, businesses will hold more inventory. Conversely, unreliable forecasts lead to either stockouts or excess inventory.

Lead Time is another key factor. The time it takes for a business to receive an order after placing it directly impacts inventory levels. Longer lead times necessitate higher inventory levels to cover periods of demand while waiting for supplies. Shorter lead times allow for lower inventory holding.

Cost of Holding Inventory directly influences the quantity held. This includes costs like storage, insurance, obsolescence, and capital tied up in stock. Higher holding costs incentivize businesses to minimize inventory.

Economic Conditions play a significant role. During periods of economic growth, demand tends to increase, requiring higher inventory levels. Conversely, during recessions, demand falls, leading to lower inventory needs.

Finally, Supplier Reliability is important. A reliable supplier with consistent delivery schedules allows for lower inventory levels compared to a supplier with unreliable deliveries. Businesses may hold safety stock to buffer against potential supplier delays.