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    Controller Library Value Pack
    CFO Library Value Pack
    Accounting Standards Library
    Tuesday
    Feb082011

    What is inventory control?

    Inventory control is a set of policies and operating procedures that are designed to maximize a company's use of inventory, so that it generates the maximum profit from the least amount of inventory investment without intruding upon customer satisfaction levels.

    Some of the more common areas in which to exercise inventory control are:

    • 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.
    • 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 backorders 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).
    • 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.
    • Reorder point. 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.
    • Bottleneck enhancement. 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.
    • Outsourcing. 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).

    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.

    Related Terms

    Inventory control is also known as stock control.

    Related Topics

    How do I identify obsolete inventory?
    Inventory internal controls
    Types of inventory errors
    What is inventory shrinkage?
    What is the cost to store inventory?

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