Inventory Control Definition and Best Practices – definition | best practices | control
Inventory Control Definition and Best Practices
Inventory control is the process of ensuring that there is the right amount of inventory on hand. Explore the definition and best practices of inventory control, and understand relevant factors, such as automation, reorder point, and quality control.
What Is Inventory Control?
Meet Ms. Mary who owns ABC’s Grocery Store in the City. Ms. Mary is concerned because she seems to be throwing out large amounts of food that isn’t selling. She knows this is costing her money, and she would like some help putting some inventory control practices in place to eliminate this problem.
Inventory control refers to the methods a company uses to ensure that it has just the amount of inventory it needs on hand at all times. Having too much inventory can be expensive, and depending on the product, excess inventory can result in spoilage or even obsolescence, which means that the inventory cannot be sold because the product is outdated or no longer demanded by customers. All of these situations create extra costs for companies, and additional costs result in less profit. Using this information, let’s see how we can help Ms. Mary
Automation
ABC’s Grocery Store started out as a small operation, and at the time a large investment in technology to manage inventory didn’t make sense. Now that her business has expanded and she has a second location, it’s time for Ms. Mary to make an investment in automated technology.
One of the benefits of implementing an automated computer system is increased accuracy because Ms. Mary will know exactly how much of each product she has and she won’t have to manually count all the inventory as often as she currently does. This will save her time and it will save her cost because she won’t have to pay employees to count.
How might Ms. Mary add automation to her store? Since all her products have barcodes on them, she could start using handheld barcode scanners that would quickly and easily allow her to scan orders when they arrive from her suppliers. A barcode contains numbers and lines of different widths and is unique to each product. Once the barcode is scanned, the information it contains about the product and the quantity received would be recorded in her computer system.
As customers purchase the items, her computer system would also record the decrease in inventory and she would have a much better idea of how much inventory she has on hand. She could also easily identify products that aren’t selling well.
Inventory is expensive to store, and since Ms. Mary’s inventory is perishable, it is important that she keep the amount of stored inventory she has under control to avoid spoilage. Ms. Mary needs to determine a normal stock level for each of her products to balance not having too much on hand with having enough on hand to meet customer demand.
To help solve this problem, Ms. Mary may want to consider a just-in-time (JIT) inventory system, which ensures that inventory arrives at the business just when it’s needed, thereby minimizing the risk of having too much or too little inventory. However, JIT systems aren’t without risk. While a JIT system would be helpful for Ms. Mary’s cash flow since it means her inventory would be sold more quickly, problems could arise if a supplier is delayed or is unable to get the item to Ms.
Mary’s store, such as in a natural disaster.
Reorder Point
It’s also important for Ms. Mary to determine how low she’s willing to let her inventory stocks go before she reorders a particular product. The reorder point represents the minimum level of inventory before a company must reorder or replenish it. The reorder point will vary from product to product.
For example, Ms. Mary’s perishable fruits and vegetables will need to be ordered more frequently than cleaning supplies or pasta sauce. While establishing a reorder point ensures that Ms. Mary will not have too much inventory, she must also be careful not to set the point too low and end up with too little inventory or she could face a stock-out situation that would negatively impact her customers.
Ms. Mary would also have to consider the seasonal aspect of some of her products. For example, if Ms. Mary lives in a university town, she would have to ensure that she has enough inventory of certain items as students return for the new school year and stock their apartments and residences. She’ll also need higher inventory amounts of certain items leading up to Christmas. Failure to recognize seasonal changes could result in Ms. Mary running out of inventory that her regular customers may require.
Quality Control
Finally, Ms. Mary should ensure that the products she receives from suppliers meet her quality standards. Staff in the store’s receiving department should be provided with a checklist of items to be quality-verified before a shipment is received.
For example, Ms. Mary would not want to receive fruits and vegetables that are already starting to spoil. Not only would accepting this inventory increase her overall inventory level, but she would also be unlikely to sell it to her customers. And if she tried to sell an inferior product to her regular customers, they may choose to shop elsewhere.
Lesson Summary
Let’s review. Inventory control refers to the methods a company uses to ensure that it has just the amount of inventory it needs at all times. This practice helps to minimize costs incurred from storing large amounts of inventory as well as obsolescence, which occurs when a product is outdated or not wanted by customers.
Inventory control methods include automating the inventory process by using barcodes and scanners to track the amount of inventory on hand and how quickly each product is selling, as well as just-in-time inventory systems that ensure inventory arrives at the store just as it’s needed. A just-in-time system minimizes the cost associated with having too much inventory, such as spoilage, storage, and obsolescence.
A company should also establish the reorder point for each of its products, which is the minimum level of inventory before a product must be replenished. In addition, quality control procedures should be put in place to ensure that only undamaged and unspoiled inventory is accepted.