Inventory Control: Policies & Procedures

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

A company's most valuable asset is often the value of the inventory it holds. In this lesson, we'll discuss some policies and procedures that can be used to protect those assets from expiration, theft, or other types of loss.

Inventory Control

Inventory is the term used in manufacturing and logistics to describe goods that are either inputs for production, finished products, or products that are in the process of being made. Since inventory items are physical goods, they are susceptible to expiration, theft, damage, or other types of loss.

In addition to protecting their inventory, companies want to make sure they have enough to meet demand, otherwise they may lose sales. On the other hand, holding too much inventory is costly--not only because of the risk of damage or loss, but because of the space required to store it. Managing the volume of inventory and the policies, procedures, and internal controls that protect inventory are called inventory control.

Inventory Control Policies and Procedures

Inventory control can be divided into two parts. The first part is how to protect inventory, and the second is about producing the right amount. In this lesson, we are going to focus on protecting inventory.

Protecting inventory

Protecting inventory is all about knowing ''how much'' and ''how old.'' To control it, you obviously need to know how much there is, how much is made, and how much is sold. Whenever those three numbers can't account for the inventory, there is an issue of slippage. Slippage is the inventory that is lost, regardless of the reason (i.e., damaged, misplaced, stolen).

There are a number of obvious policies and procedures that exist to protect inventory. For example, high-value inventory--a company's definition of high-value may vary--should be kept in a secure, locked location. When inventory (or tools to make the inventory) is received at the warehouse, a three-way match is usually done. A three-way match is matching the receiving document (such as a bill of lading), the invoice (the bill), and the actual amount of goods received. Since the invoice is used to know how much to add to the inventory records, if it doesn't match the actual amount received, inventory records will be off.

Another important policy is to physically count the inventory depending on how much assurance is desired regarding the accuracy of the count. At any given time, most organizations know how much inventory they have because, at some point, they counted all of it. They stop production and selling so they get an exact count. Usually, it's even double-counted. The accountants and managers will know exactly how much they have.

After there is a physical count, inventory levels are tracked by adding it as it comes into the shop and subtracting it as it is sold, or knowingly lost. There is often a paper count of inventory. A paper count is the amount of inventory on the records based on a previous physical count and then calculated for additions and subtractions. But, that paper count may differ from the physical count, which is the actual, physical amount of inventory that exists. They may differ because inventory is being lost in a way that isn't accounted for in additions and subtractions used for the paper count.

Why Accurate Inventory is Important

Having an accurate count of inventory is important for a few reasons.

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