Inventory Control Basics
The goal of inventory control
is to maintain a level of inputs and finished products at the lowest cost possible.
Inventory refers to both the raw inputs used to produce goods and the finished
products. While most inventory control methods relate to physical goods, many
of the concepts are applicable to service-oriented businesses as well.
Companies need strong management of all inventories for efficiency, profit and
control.
Inventory Levels
The level of inventory needed
on hand at a is dependant upon the speed of production, shelf life of goods,
acquisition difficulty levels, costs and space considerations. Keeping
inventory at a minimal level decreases overhead, management concerns and
ultimately correlates to increased profits. Inventory levels that are too low
can result in production delays and lost sales. High inventory levels can
produce waste, spoilage, increased insurance costs and decreased profit.
First In First Out
First In
First Out (FIFO) is an inventory control method where all inventory is used
based on the time or date it was acquired. This method simply decreases waste
and spoilage and requires stringent control of inventory based on date.
Just In Time
Just In Time (JIT) is an
inventory control method where parts or supplies are delivered at the moment
they are needed. JIT refers to all types of inventory. This method requires a
high level of coordination and trust with suppliers and a highly efficient
production process. The just-in-time inventory method creates very low
inventory overhead and cost. There is little room for error or delays with this
method. Any problems with transportation, production or supply could cause
widespread inventory outages.
Other Inventory Control Methods
Fixed
order is the most basic type of inventory control, in which inputs are ordered
at a set level on a set time frame such as weekly or monthly. Economic order
quantity is a formula-driven mathematical approach to inventory control, in
which multiple inputs such as annual usage, order cost and carrying costs are
used to determine inventory levels.
