Inventory Control: Definition & Best Practices

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  • 0:04 What Is Inventory Control?
  • 0:58 Automation
  • 3:10 Reorder Point
  • 4:19 Quality Control
  • 4:53 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Companies need to control their inventory to ensure that they have the right amount available at the right time. In this lesson, you'll learn about some best practices for inventory control.

What Is Inventory Control?

Meet Ms. Plum, who owns Plum's Grocery Store in Junction City. Ms. Plum is concerned because she seems to be throwing out large amounts of food that isn't selling. She knows this is costing her money, and she would like some help putting some inventory control practices in place to eliminate this problem.

Inventory control refers to the methods a company uses to ensure that it has just the amount of inventory it needs on hand at all times. Having too much inventory can be expensive, and depending on the product, excess inventory can result in spoilage or even obsolescence, which means that the inventory cannot be sold because the product is outdated or no longer demanded by customers. All of these situations create extra cost for companies, and additional costs result in less profit. Using this information, let's see how we can help Ms. Plum.

Automation

Plum's Grocery Store started out as a small operation, and at the time a large investment in technology to manage inventory didn't make sense. Now that her business has expanded and she has a second location, it's time for Ms. Plum to make an investment in automated technology.

One of the benefits of implementing an automated computer system is increased accuracy, because Ms. Plum will know exactly how much of each product she has and she won't have to manually count all the inventory as often as she currently does. This will save her time and it will save her cost because she won't have to pay employees to count.

How might Ms. Plum add automation to her store? Since all her products have barcodes on them, she could start using handheld barcode scanners that would quickly and easily allow her to scan orders when they arrive from her suppliers. A barcode contains numbers and lines of different widths, and is unique to each product. Once the barcode is scanned, the information it contains about the product and the quantity received would be recorded in her computer system.

As customers purchase the items, her computer system would also record the decrease in inventory and she would have a much better idea of how much inventory she has on hand. She could also easily identify products that aren't selling well.

Inventory is expensive to store, and since Ms. Plum's inventory is perishable, it is important that she keep the amount of stored inventory she has under control to avoid spoilage. Ms. Plum needs to determine a normal stock level for each of her products to balance not having too much on hand with having enough on hand to meet customer demand.

To help solve this problem, Ms. Plum may want to consider a just-in-time (JIT) inventory system, which ensures that inventory arrives at the business just when it's needed, thereby minimizing the risk of having too much or too little inventory. However, JIT systems aren't without risk. While a JIT system would be helpful for Ms. Plum's cash flow since it means her inventory would be sold more quickly, problems could arise if a supplier is delayed or is unable to get the item to Ms. Plum's store, such as in a natural disaster.

Reorder Point

It's also important for Ms. Plum to determine how low she's willing to let her inventory stocks go before she reorders a particular product. The reorder point represents the minimum level of inventory before a company must reorder or replenish it. The reorder point will vary from product to product.

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