Inventory control definition
/What is Inventory Control?
Inventory control is the management of a company's inventory to maximize its use. The goal of inventory control is to generate the maximum profit from the least amount of inventory investment without intruding upon customer satisfaction levels. Given the impact on customers and profits, inventory control is one of the chief concerns of businesses that have large inventory investments, such as retailers and distributors.
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Inventory Control Best Practices
Some of the more common areas in which to exercise inventory control are noted below, along with tips on how to do so.
Collect Data in Real Time Data
Effective inventory control is nearly impossible if inventory records are updated after the fact, in batch mode. The resulting data is too old to be of any use. A better approach is to make all changes in real time. This means that every transaction is recorded at once. By doing so, inventory control personnel can more easily see exactly where there are inventory problems, and start working on solutions right away.
Count Inventory Constantly
To build on our theme of working with real time data, the warehouse staff should constantly count the inventory, using cycle counting. This means counting a small portion of the inventory every day, comparing the results to recorded balances, and investigating errors. The last part is critical - if there are errors, be sure to examine the associated transactions to see where the error occurred, and fix the issue. Doing so reduces the risk that the errors found will occur again.
Secure Raw Materials Availability
There must be enough raw materials inventory on hand to ensure that new jobs are launched in the production process in a timely manner, but not so much that the company is investing in an inordinate amount of inventory. The key control designed to address this balance is ordering frequently in small lot sizes from suppliers. Few suppliers are willing to do this, given the cost of frequent deliveries, so a company may have to engage in sole sourcing of goods in order to entice suppliers into engaging in just-in-time deliveries.
Ensure Finished Goods Availability
A company may be able to charge a higher price for its products if it can reliably ship them to customers at once. Thus, there may be a pricing premium associated with having high levels of finished goods on hand. However, the cost of investing in so much inventory may exceed the profits to be gained from doing so, so inventory control involves balancing the proportion of allowable back orders with a reduced level of on-hand finished goods. This may also lead to the use of a just-in-time manufacturing system, which only produces goods to specific customer orders (which nearly eliminates inventory levels).
Reduce Work in Process
It is possible to reduce the amount of inventory that is being worked on in the production process, which further reduces the inventory investment. This can involve a broad array of actions, such as using production cells to work on subassemblies, shifting the work area into a smaller space to reduce the amount of inventory travel time, reducing machine setup times to switch to new jobs, and minimizing job sizes.
Adjust Reorder Points
A key part of inventory control is deciding upon the best inventory level at which to reorder additional inventory. If the reorder level is set very low, this keeps the investment in inventory low, but also increases the risk of a stockout, which may interfere with the production process or sales to customers. The reverse problems arise if the reorder point is set too high. There can be a considerable amount of ongoing adjustment to reorder levels to fine tune these issues. An alternative method is to use a material requirements planning system to order only enough inventory for expected production levels.
Manage Bottlenecks
There is nearly always a bottleneck somewhere in the production process that interferes with the ability of the entire operation to increase its output. Inventory control can involve placing an inventory buffer immediately in front of the bottleneck operation, so that the bottleneck can keep running even if there are production failures upstream from it that would otherwise interfere with any inputs that it requires.
Selectively Outsource Work
Inventory control can also involve decisions to outsource some activities to suppliers, thereby shifting the inventory control burden to the suppliers (though usually in exchange for a reduced level of profitability).
Install Quality Control
Proper inventory control calls for the tracking of inventory quality. This means identifying the quality of inventory at the point of receipt. By doing so, you can more easily summarize quality levels by supplier, the types of quality problems encountered, and how frequently these received items are returned to suppliers for replacement. This information is useful for deciding whether to replace suppliers, as well as to identify quality failures within the system.
A further use of inventory control in this area is the tracking of inventory age, so that older units are used first. Doing so reduces the risk of aged inventory having to be thrown out as unusable. This concept is especially important when the inventory has a short shelf life.
Enhance the Warehouse Layout
Inventory cannot be controlled if it is not properly stored within the warehouse. This means that the racking system must be structured in a logical manner, with each bin clearly identified within it. Also, all bins and their contents must be properly recorded within the inventory record keeping system. Without this basic structure in place, it is impossible to know where inventory is located or how much of it is currently in stock.
Identify Discrepancies
A good way to spot record keeping errors is to build a system of discrepancy identification into the inventory control system. This means having the system spot cases of negative inventory balances or cases in which reported inventory levels to do not sync up with reported inventory usage levels. However, these reports are useless unless there are ongoing procedures to investigate them, spot the underlying problems, and correct them - which requires constant vigilance.
Summary
The issues noted here highlight how difficult it can be to manage the inventory control function. Your operating boundaries are to either invest too much in inventory, or to have too little inventory on hand to satisfy the production manager or customers.
Advantages of Inventory Control
There are numerous advantages to having a system of internal control, including the following:
Lower investment. A business will have a reduced investment in relation to the volume of sales generated. By minimizing this investment, a business can preserve its available funding for other uses, such as purchasing fixed assets or acquiring other businesses.
Reduced associated costs. Having less inventory on hand naturally reduces certain expenses, so that profits are increased. For example, there are fewer obsolete inventory charges, as well as reduced inventory storage costs and charges associated with damaged inventory.
Better accessibility. The reduced inventory level makes the remaining inventory more readily accessible, rather than being stored off-site, so it easier to monitor inventory levels.
Easier counts. Having less inventory makes it easier to count. This reduces the time required to complete a physical count, which also means that the warehouse is shut down for a shorter period of time during counts.
Challenges of Inventory Control
It can be difficult to operate an effective inventory control system. It requires substantial staff time, especially when you are tracking large inventory quantities across multiple locations. To be cost-effective, the inventory recordkeeping system should be computerized, with bar code scanning used to to identify all transactions. In addition, ongoing cycle counting should be employed, both to verify that inventory records are correct and to identify recordkeeping problems that require further investigation. Further, employees should be regularly running reports on inventory usage levels, to identify dead stock that may need to be dispositioned, as well as to spot increases in customer demand that may call for increased on-hand quantities. The staff should also look for discrepancies in the data, such as negative on-hand balances and differences between the amounts received from suppliers and the amounts billed. In short, employees need to review the inventory data on an ongoing basis in order to maintain an effective system of internal control.
Types of Inventory Control Systems
There are several systems that can be used for inventory control, each with its own advantages and disadvantages. At the most basic level, a business can track its inventory balances with an electronic spreadsheet. This approach is inexpensive and works well when there is little inventory on hand. However, it is prone to operator error, requires a substantial amount of labor to update, and will need to be swapped out for a more advanced system once inventory levels increase.
An alternative is the periodic inventory system. This approach relies on occasional physical counts of the inventory to bring the inventory records into alignment with what is actually on hand. An advantage is that the related accounting is simple. However, the inventory records are only accurate immediately after a count has been completed and the records updated. After that, inventory records become increasingly inaccurate due to ongoing receipts and withdrawals not being recorded in the system. It is an inadequate system when transaction volumes are large and the company needs to have up-to-date inventory records.
The best system is the perpetual inventory system. Under this approach, the inventory records are updated with each individual inventory transaction as soon as it occurs. A business might use cycle counts, which are small incremental counts, to verify that the recorded inventory balances are correct. This approach generally requires the use of bar coded inventory tags, to minimize manual data entry and increase record accuracy. Ideally, inventory record accuracy can be maintained at a very high level, allowing for employee confidence in reported inventory balances.
Inventory Control Measurements
There are several measurements that can be used in an inventory control system. You can track them on a trend line to spot any changes in inventory performance levels that may require further review. One of these is the sell-through rate, which compares the amount of inventory sold in one month to the amount shipped to the business by its suppliers. Ideally, the sell-through rate should be fairly high, since this means that the business is investing in a relatively small amount of inventory in comparison to the amount of sales being generated.
Another useful inventory control measurement is the order fill rate, which is the percentage of customer orders that are filled without having to backorder any items. A high fill rate increases customer satisfaction, but requires the business to invest in more inventory. Thus, the ideal fill rate may be less than 100%, depending on the proportion of backorders that customers are willing to accept.
Another measurement worth calculating is the percentage of inventory more than 90 days old. A high percentage can be indicative of several underlying issues, such as taking excessive advantage of supplier volume discounts, not being able to forecast sales effectively, and not disposing of older inventory through discount resellers on a timely basis.
Terms Similar to Inventory Control
Inventory control is also known as stock control.