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Advantages of Inventory Control Systems

Instructor: Allison Tanner

Allison has a Masters of Arts in Political Science

Inventory control is important for all organizations that need to keep inventory on-hand. This lesson will discuss how properly managing inventory through an inventory control system can benefit an organization.

Inventory Control

Jana, a long-term inventory manager, is teaching a course on inventory management. On the first day, she dives into the lesson by asking the students to imagine that they are selling vacuums. In order to have on-hand supplies, or stock that is readily available to sell, they order fifteen of the latest Super Sweepers. Next week they order ten more, even though they have only sold one Super Sweeper in the past 7 days.

Now, they have 14 Super Sweepers to sell, and recent trends indicate that the Super Sweepers will be around for a long time. Jana goes on to explain that having too many Super Sweepers indicates a problem with the inventory control system.

Inventory control systems are the procedures put in place to monitor and manage inventory in order to increase efficiency. The goal of inventory control is to increase profits by decreasing the costs associated with poorly managed inventories. Jana tells the class that, when inventory is managed properly, a company:

  • Can more effectively manage cash-flow and liquidity
  • Can ensure they provide great customer service
  • Can reduce the labor costs associated with inventory control

Moving forward, Jana explains that inventory control can impact cost-flow and liquidity, customer service, and labor costs. Properly managing inventory can greatly benefit the company in these areas, as well as others that may be industry- or organization-specific.

Cash-Flow and Liquidity

Moving forward, Jana directs the attention of the class back to the Super Sweepers. She explains that if you do not properly manage inventory, you might order things you don't need. Further, you might need inventory and not have it. Because of this, poor inventory control can negatively impact cash-flow, or the money that is moved in and out of the organization. Some inventory is not ready to sell, and thus, if there is too much of this inventory, the organization's liquidity, or the amount of available assets that can quickly become cash, is tied up in the inventory. If there is not enough inventory, then customers will not be able to buy the items they want, thus reducing profitability and liquidity.

This is especially problematic if you have a large amount of inventory that will spoil or isn't ready to sell. In this case, the organization may have to throw out the inventory or sell it for a price well below its worth.

Putting in place an inventory control system can assist the organization in managing the amount of inventory it has. This will reduce the risk that it will have too much or too little inventory, which can harm liquidity and cash-flow.

Customer Service

Taking a deeper look into the role of inventory and organizational success, Jana explains to the class that inventory is important for customer service, or the process of providing services to your customers. An inventory control system can help an organization ensure it has the products its customers need and want. Thus, it allows them to provide great customer service by meeting its customers' needs.

Jana directs the class back to the Super Sweepers and tells them to imagine that their company is constantly running out of Super Sweepers. Each time the Super Sweepers are on back-order, meaning it isn't available in their inventory, customers become agitated. Eventually the customers stop ordering their Super Sweeper and source them from somewhere else. Thus, the inability to accurately track and store inventory will negatively impact the organization's ability to provide great customer service, which in turn, can be harmful for profitability.

An inventory control system can increase customer service by helping the organization know how many Super Sweepers it needs, and how often it should order them. If Super Sweepers are always, or almost always, instantly available, then customers will have their needs and interests met.

Labor Cost

Finally, a proper inventory control system can save money on labor cost by helping the organization count inventory quickly and identify what it needs to order.

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