Goals & Objectives of an Inventory-Control System
An inventory-control system is the mechanism within a company that is used for efficient management of the movement and storage of goods and the related flow of information. Product resellers have access to technology-driven software programs that help optimize inventory control, which is critical in achieving business success. Getting product to customers on time and as inexpensively as possible are the main goals of an inventory-control system.
Avoid Stock-Outs
Making sure that your customers have access to products when they need or want them is a key service issue in inventory control. Your system should include a well-outlined replenishment system, where critical inventory levels at a store result in swift shipments from your distribution center or directly from a vendor. Given the time and effort put into promoting products to attract customer interest, you want inventory on hand when they come to buy.
Avoid Excess Inventory
Optimized inventory control actually balances a fine line between too much and too little. In fact, a main reason companies have gone to just-in-time systems and advanced software solutions is to avoid having excess inventory while trying to meet demand. Carrying too much inventory in distribution centers or retail stores is costly. It takes up space, employee time, utility costs and limits floor space for selling. Plus, perishable items or products with expiration dates must be thrown out if you can’t sell them.
Move Goods Efficiently
Efficiency in inventory means the ability to quickly receive and store products as they come in and retrieve and ship when they go out. Every extra second spent in these processes adds to the costs of inventory management. Plus, efficient distribution is a customer satisfaction issue for trade channel sellers and retailers. Retailers expect suppliers to meet prescribed delivery timetables, and customers expect customized orders and products to arrive on time.
Maximize Profit Margins
Well-managed inventory control is often a key in meeting profit margin objectives. Gross profit margin is the difference between revenue earned from sales and the costs of goods sold. Take away fixed costs including buildings, utilities and labor and you get to operating margin. Investing as little as possible in inventory control while meeting the other objectives is critical in earning profit and growing your business.
How to Design an Inventory Control System
The purpose of an inventory control system is twofold. The primary function is to ensure that a small business meets customer needs — that products are available when customers want them. But proper inventory control can also help maximize profits for a small-business owner, while reducing potential theft and loss. Large firms, such as Walmart, maximize profits by using supply-chain or just-in-time inventory-control methods. Small businesses can use a mix of technology, proper accounting and effective operations to ensure inventory is always available for customers while avoiding costly overstock problems.
Step 1
Determine your customer needs — that is, how much product are your customers buying, and how much do you expect them to buy in the near and distant future? Use a method called “forecasting” to determine what your customers are likely to buy in the next day, week, month and year, based on what they bought in the previous 12 months. Since forecasts are never 100 percent accurate, plan to have an amount of “safety” inventory on hand to cover potential shortages. You can also plan to include a safety lead time that will let you have inventory delivered quickly to meet increased customer demand if the supplier is close enough — or the delivery system is quick enough — to allow for that method.
Step 2
Based on customer needs you have forecast, establish an approved stock list for each warehouse you use. Determine whether you will warehouse the inventory at your business or use companies that specialize in holding and shipping inventory. Small businesses often order unnecessary stock that sits dormant in the warehouse. This increases your costs and decreases your profits. Before adding inventory, obtain a customer commitment to purchase particular items. Use drop shippers — who will warehouse items and deliver them directly to customers without shipping them to your business — as a means of reducing inventory-holding costs. Reduce potential theft by restricting access to your warehouses to employees directly involved in moving the merchandise.
Step 3
Determine the method of inventory management you will use. The first, in-first-out — or FIFO — method involves selling the oldest items, or those products that have been in the warehouse the longest, first. In an inflationary period, FIFO will lead to higher profits, since you are selling goods that theoretically cost you less when you purchased them at current, inflated, prices. Of course, the effect would be the opposite in a deflationary period. Using the last-in, first-out — or LIFO — method would be desirable if the items you received more recently are perishable or time-sensitive. Use weighted average if you have relatively few items to sell. In this method, you recalculate the cost of your entire remaining inventory every time you sell one item.
Step 4
Keep track of the exact number and cost of items you have on hand, including how much inventory comes in and goes out daily. Do this by hand if you have a relatively small amount of items in your inventory. But for most inventory counts, use available technology to help track inventory. For example, barcode printers can create labels that list product numbers you can then attach to each item. Barcode scanners let you quickly scan the product item numbers, while small handheld computers let workers quickly input inventory information. The information is then transmitted to a computer, where inventory-control software tracks the disposition of each inventory item.Tip
Just-in-time shipping can help a business greatly reduce costs by timing the arrival of inventory to just before the customer is likely to buy it. Big-box retailers use this method to great effect. Small businesses might not have the funds to buy and use expensive inventory-tracking products. But they can use methods such as forecasting, barcode-inventory management and drop shipping to achieve some of the same cost-saving results that large firms gain with just-in-time inventory management. What Is the Principle of an Inventory Control System?
Accuracy
An accurate inventory control system gives the number of units of components that are in stock. The systems achieve a high accuracy for the quantities on hand by counting the number of units that are placed in inventory and subtracting the number of units taken out of inventory. You periodically have to physically count the number of units that remain in stock and compare the amount with the total given by the inventory control system. While minor deviations are normal, follow up and explain all discrepancies to ensure that the system stays as accurate as possible.
Security
A key function of an inventory control system that supports the main principle is to keep material in inventory securely. The system must control access to the warehouse where the inventory is kept and store the material so it doesn’t suffer damage. When material is damaged during handling or while in inventory, you have to track the damaged items through the inventory control system to analyze how the damage happened and prevent a recurrence. At the same time, you have to make sure the inventory control system removes the damaged material from the quantity that’s available for use.
Location
An effective inventory control system has to tell you the exact location of the material you need as well as how many units are in inventory. Typical warehouses are organized on a grid with aisles, row numbers and numbered shelves. When an item is placed in inventory, the system tracks it to its
location and records where it is placed. When the item is needed, employees can find it by consulting the inventory control system. Tracking the physical location of material in inventory makes the periodic physical verification of inventory less time consuming.
Demand
Before an inventory control system can produce the desired commodities, you have to purchase or manufacture these items and place them in inventory. To ensure that the amounts you need will always be there, your inventory control system has to estimate future demand. If your company’s situation hasn’t changed, the system can project demand based on historical records. If demand is likely to change, you have to manually adjust the inventory control system projections and the demand estimates. An Introduction to Inventory Management Systems
Inventory management systems are central to how companies track and control inventories. Having the ability to measure inventory in a timely and accurate manner is critical for having uninterrupted business operations because inventory is often one of the largest current assets on a company’s balance sheet. Two inventory management systems exist: perpetual system and periodic system. Each system has its pros and cons, and companies may choose based on their own needs for inventory control and available company resources.
Choosing a System
The perpetual inventory system offers direct measurement of inventory balance but often requires a computerized system to connect inventory purchases and sales with the inventory account. On the other hand, the periodic inventory system does not require setting up a direct link between inventory purchases and sales and the inventory account, but may not be able to easily track inventory changes in real time. Companies with limited business transactions and company resources may consider to adopt the periodic inventory system for easier implementation. As businesses grow, the need for tighter inventory control may require the use of perpetual inventory system for up-to-date inventory information. What Is the Difference Between Inventory and Warehouse Management?
Solutions
When it comes to inventory management software versus warehouse management software, warehouse management software tends to offer a business the opportunity to analyze and alter its inventory and storage as needed, whereas inventory management software generally does not do this. Various communications devices used in warehouse management generally make it possible to analyze and make changes as necessary, resulting in a more streamlined and efficient operation. What Causes Obsolete Inventory to Rise?
Inventory Systems
Businesses with outdated inventory management systems may rely on sales employees to project what will sell the next season. The purchasing department purchases merchandise based on the sales team’s gut feeling instead of using a computerized forecasting system. Continued inaccurate assumptions could lead to a rise in obsolete inventory. Changing the inventory system from uncertainty to accuracy with proper planning and automatic replenishing systems can diminish exposure to obsolecense.
Production and Planning
When a business doesn’t use a sales and operations planning process for its ordering schedules and lot sizes, it could result in obsolete inventory due to inaccurate assessment of product life cycles. For example, for a marketing campaign, a team plans its production and ordering schedule. Based on the production, the promotions team works with the inventory team to determine lot sizes so the right products are available for the promotion.
Warehousing
When a business does not address its obsolete stock, it will just continue to grow, taking up warehouse space that should be used for productive inventory. The inventory may be in the warehouse just because the company cannot afford to show a write-off on its books. It also may be a case of poor management operations not clearing out the stock. Whatever the reason, without warehouse stock management to take steps for reduction, obsolete stock will increase.
Management
In some organizations, management assigns the responsibility of inventory to various employees. When obsolete inventory levels become too high because employees are not aware of whose responsibility it is to manage the situation, the mandate to reduce inventory gets lost in the shuffle. By assigning one team to focus on inventory reduction for consistency in inventory processes, a business often can prevent obsolete inventory levels from rising.
