Inventory control (also known as inventory management) refers to the systems and strategies businesses use to ensure that they have adequate supplies of raw materials for production and finished goods for shipment to customers, while also minimizing their inventory carrying costs. Storing excess inventory is costly, because the space and financial resources invested in the goods can often be put to better use elsewhere. At the same time, however, inadequate inventory stores can result in costly production shutdowns or delays in filling customer orders. Inventory control systems help companies to find the delicate balance between too little and too much inventory.
"It is nearly impossible to overemphasize the importance of keeping inventory levels under control," Ronald Pachura wrote in an article for IIE Solutions. "Whether the problems incurred are caused by carrying too little or too much inventory, manufacturers need to become aware that inventory control is not just a materials management or warehouse department issue. The purchasing, receiving, engineering, manufacturing, and accounting departments all contribute to the accuracy of the inventory methods and records."
Pachura created a checklist to aid companies in assessing their inventory controls. He recommended that business managers examine the accuracy and effectiveness of their: bills of materials (BOM); receiving policies; engineering changes; scrap reporting; vendor lead times; reorder triggers; and warehouse locator systems. The inventory turnover ratio is a tool that can help companies to determine whether they are producing and carrying too much inventory. The basic measure of inventory turnover is defined as cost of goods sold divided by average inventory on hand. But Pachura noted that managers may gain more information by segmenting average inventory into raw materials, work in process inventory, and finished goods, and then computing a separate turnover figure for each. Comparing these figures often reveals opportunities for improving inventory controls.
In today's business environment, even many smaller businesses have come to rely on computerized inventory management systems. Certainly, there are plenty of small retail outlets, manufacturers, and other businesses that still rely on manual means of inventory tracking. Indeed, for some businesses—such as convenience stores, shoe stores, or nurseries—the purchase of an electronic inventory tracking system might constitute a wasteful use of financial resources. But for firms operating in industries that feature high volume turnover of raw materials and/or finished pro-ducts, computerized tracking systems have emerged as a key component of business strategies aimed at increasing productivity and maintaining competitiveness. Moreover, the recent development of powerful computer programs capable of addressing a wide variety of record-keeping needs—including inventory management—in one integrated system have also contributed to the growing popularity of electronic inventory control options.
Given such developments, it is little wonder that business experts commonly cite inventory management as a vital element that can spell the difference between success and failure in today's keenly competitive business world. Writing in Production and Inventory Management Journal, Godwin Udo described telecommunications technology as a critical organizational asset that can help a company realize important competitive gains in the area of inventory management. According to Udo, companies that make good use of this technology are far better equipped to succeed than those who rely on outdated or unwieldy methods of inventory control.
Automation can draidatically affect all phases of inventory management, including counting and monitoring of inventory items; recording and retrieval of item storage locations; recording changes to inventory; and anticipating inventory needs, including inventory handling requirements. This is true even of stand-alone systems that are not integrated with other areas of the business. But many analysts indicate that productivity—and hence profitability—gains that are garnered through use of automated systems can be increased when a business integrates its inventory control systems with other systems, such as accounting and sales, to better manage inventory levels.
According to Dennis Eskow in PC Week, business executives are "increasingly integrating financial data, such as accounts receivable, with sales information that includes customer histories. The goal: to control inventory quarter to quarter, so it doesn't come back to bite the bottom line. Key components of an integrated system … are general ledger, electronic data interchange, database connectivity, and connections to a range of vertical business applications." David Cahn, a director of product strategy for business applications at a firm in New York, confirmed this view in an interview with Eskow: "What drives business is optimization of working capital. The amount of control you have on inventory equals the optimization of the capital. That's why it's so important to integrate the inventory data with everything else."
In the late 1990s many businesses were investing heavily in integrated order and inventory systems designed to keep inventories at a minimum and replenish stock quickly. But as Eskow noted, business owners have a variety of system integration options from which to choose, based on their needs and financial liquidity. "Integrated inventory systems may range in platform and complexity," he noted.
At the same time that these integrated systems have increased in popularity, business observers have suggested that "stand-alone" systems are falling into disfavor. Tom Andel and Daniel A. Kind, for instance, cited a study by the International Mass Retail Association in Transportation and Distribution: "The study concludes that stand alone Warehouse Management System (WMS) packages acquired today to perform individual functions will probably be abandoned in just a few years because they do not integrate well with other systems. Systems investments must be considered in context of future systems objectives."
Another development of which business vendors should be aware is a recent trend wherein powerful retailers ask their suppliers to implement vendor-managed inventory systems. These arrangements place the responsibility for inventory management squarely on the shoulders of the vendors. Under such an agreement, the vendors obtain warehouse or point-of-sale information from the retailer and use that information to make inventory restocking decisions.
The move toward automation in inventory management naturally has moved into the warehouse as well. Citing various warehousing experts, Sarah Bergin contended in Transportation and Distribution magazine that "the key to getting productivity gains from inventory management … is placing real-time intelligent information processing in the warehouse. This empowers employees to take actions that achieve immediate results. Real-time processing in the warehouse uses combinations of hardware, including material handling and data collection technologies. But according to these executives, the intelligent part of the system is sophisticated software which automates and controls all aspects of warehouse operations."
Another important component of good inventory management is creation and maintenance of a sensible, effective warehousing design. A well-organized, user-friendly warehouse layout can be of enormous benefit to business owners, especially if they are involved in processing large volumes of goods and materials. Conversely, an inefficient warehouse system can cost businesses dearly in terms of efficiency, customer service, and, ultimately, profitability.
Transportation and Distribution magazine cited several steps that businesses using warehouse storage systems can take to help ensure that they get the most out of their facilities. It recommended that companies utilize the following tools:
Some companies choose to outsource their warehouse functions. "This allows a company that isn't as confident in running their own warehousing operations to concentrate on their core business and let the experts worry about keeping track of their inventory," wrote Bergin. "There are third party services available for managing warehouse operations. SonicAir, for one, provides companies with an analysis of products and spare parts, evaluations of their time sensitivity, and current installations and locations of vendor's distribution centers." Inventory control systems such as the one utilized by SonicAir, said Bergin, provide businesses with the ability to do real-time updating of inventory, cross-docking and dispatch, verification, and up-to-the-minute tracking of inventory item location. Such systems are also capable of providing "a strategic stocking analysis which looks at the customer's equipment locations to determine which strategic stocking locations should be used, the expected transit time, and projected fill rate," added Bergin. Of course, businesses weighing whether to outsource such a key component of their operation need to consider the expense of such a course of action, as well as their feelings about relinquishing that level of control.
SEE ALSO : Inventory Accounting
[ Kevin Hillstrom ,
updated by Laurie Collier Hillstrom ]
Andel, Tom, and Daniel A. Kind. "Flow It, Don't Stow It." Transportation and Distribution, May 1996.
Bergin, Sarah. "Make Your Warehouse Deliver: New Developments in Warehouse Management Systems Inspire New Productivity in Needy Operations." Transportation and Distribution, February 1997.
Betts, Mitch. "Manage My Inventory or Else!" Computer-world, 31 January 1994.
Eskow, Dennis. "Rising Stock: Integrated Inventory Systems Help Companies Shoot Economic Rapids." PC Week, 5 June 1995.
Pachura, Ronald. "When Is Enough, Enough? Inventory Control Contributes Directly to a Company's Profitability." IIE Solutions, October 1998.
Udo, Godwin J. "The Impact of Telecommunications on Inventory Management." Production and Inventory Management Journal, spring 1993.
Weisfeld, Barry. "Automated Ordering Puts Profits in Sight." Transportation and Distribution, February 1997.
Comment about this article, ask questions, or add new information about this topic: