Inventory management or control is important for the success of a firm. Apart from managing stock shortages or excess stock, inventory control helps reduce wasted time and costs. The objectives of inventory control are to track sales and increase operational efficiency among other factors.
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What is Inventory Control
Inventory control is the regulation of the stock a company has on hand. This includes knowing how much inventory there is in the warehouse, monitoring the condition of the stock as well as ensuring efficient drop off and pick up of any products. An effective inventory control system keeps inventory costs down and doesn’t take too much employee time. In some instances, inventory control can involve monitoring and forecasting customer demand so that the right quantity of stock is purchased on time. Inventory control has to take into account the cycle times, safety stock, forecasts and seasonality among other factors.
An obvious objective of inventory control is to track sales. Inventory control makes it easy to track and review sales and returns on a regular basis. By monitoring product movements, it is easy to reduce dead stock and to identify and correct issues that result in returns. That way customer experience can be improved and any unnecessary costs can be reduced.
Forecasting Customer Demand
An important objective of inventory control is forecasting customer demand. By tracking sales, a company can study the trends for certain products or seasonal purchases of certain types of products and use that information to forecast the demand for such products. That way, a firm can purchase the right stock together with the correct amount for each season.
Ensuring Safety of Inventory
One of the many objectives of inventory control is to keep stock safe. Raw materials, work in progress and finished products need to be monitored and kept in a safe place where the stock cannot be stolen or misused. Also, inventory should be handled with care to avoid any breakages and losses. Broken, stolen or lost inventory costs the business thus, an effective inventory control system can minimise such risks.
Reducing Excess Inventory Costs
Holding excess inventory whilst trying to meet customer demand can be challenging for businesses of all sizes. Hence, reducing excess inventory costs is one of the objectives of inventory control. In order to prevent having too much money tied up stock, inventory management and control should be applied. This includes reducing the amount of money spent on products that sell slowly, instead hot selling items should be bought in reasonable quantities. Keeping too much stock is costly for a business in terms of storage and transportation costs in addition to the money already locked up in the stock. Overstocking perishable goods is also costly when the products need to be disposed when they rot. A number of companies have resorted to inventory systems and software solutions that help in reducing excess inventory costs.
Maximising Profit Margins
The other objective of inventory control is maximising profit margins. The management of inventory is an important function when it comes to meeting a firm’s overall profit margin. The gross profit margin refers to the difference between the sales revenue and the cost of goods sold. By tracking stock movements, a firm can determine which products sell slow, which are fast moving and customer favourites. That information can be applied for future purchases. When a business knows and understands its customers through tracking inventory, profit margins can be increased since it will supply what the customers want. Such information can make a difference in a company’s ability to earn a healthy profit and grow its business.
Avoiding Stock-Outs/Lost Sales
Avoiding stock outs which lead to lost sales is another objective of inventory control. A business needs to be able to provide what a customer wants when s/he needs it and that is another primary objective of inventory control. An effective inventory-control system has a well-planned replenishment system. Inventory software systems are usually used for this. Such software is able to detect beforehand when certain products are running out so that the stock can be purchased. In some cases, the software can trigger shipments from the supplier to replenish the stock.
To keep Goods Moving Efficiently
In addition to avoiding running out of stock, keeping goods moving efficiently is also an objective of inventory control. It saves time and money to quickly receive and store products as they come in and to efficiently take them out when distributing to various customers. An efficient inventory control system facilitates such processes. Any extra time used in such processes can be costly to a business. An efficient flow of distribution also keeps customers happy.
Recording Inventory Costs correctly
One of the primary objectives of inventory control is to record inventory costs correctly. There are different methods for inventory control or for tracking products which include Last in First out (LIFO), First in First Out (FIFO) and average costing. These methods help with stock valuation as well as accounting for the movement of products in a firm.
Managing Warehouse and Store Space
Although it may seem minor, another objective of inventory control is to help with the management of store and warehouse space. This is important because there are certain products that need to be readily available in stores and some that can be stored in warehouses further away from the store’s location. Inventory management helps retailors and manufactures determine which products should be stored in certain locations for easy access.
To Treat Inventory as An Investment
Inventory can be regarded as an investment with the objective of inventory control being to protect the company against inflation since the prices of materials or finished goods can fluctuate. Thus, investing in inventory is important. This can be risky because the stock may end up costing a company more in the event that it becomes excess stock and the holding costs exceed the benefit.
Other Objectives of Inventory Control
- To take advantage of discounts in bulk purchases
- To supply raw materials, work in progress and finished goods to customers at the right time
- To keep scrap and waste at a minimum level