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Inventory Control Systems: Manual & Automated

Instructor: Deborah Schell

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

The ability to control inventory is critical as businesses make money by selling inventory to consumers. In this lesson, you will learn about manual and automated inventory control systems.

What Is Inventory Control?

Let's meet Ms. Marsh, who owns a small grocery store. She currently uses a manual system to manage inventory, but as her business has expanded, she wonders if there is a better way to track and manage it. Let's see if we can help Ms. Marsh with this problem.

Inventory represents a list of items that are almost ready or ready to sell to consumers. There are three inventory categories depending on the type of business. In a manufacturing business or one that makes the goods that it sells, there will be raw materials, work-in-process and finished goods inventory.

Raw materials inventory represent those items that haven't undergone any processing yet. Work-in-process inventory are those items that have started the conversion process but aren't ready to sell to consumers yet. For example, a bakery would consider batter to be work-in-process as it is neither the raw materials of eggs, flour and sugar nor baked, decorated and ready to be sold to a consumer. Finished goods inventory represents inventory that is ready to sell to consumers. A merchandising business such as the one owned by Ms. Marsh purchases its inventory and only has finished goods inventory.

Inventory control systems are processes used to track and manage inventory to ensure the business has enough on hand, so it doesn't run out but not too much that it has to be stored which costs a company money. Inventory control can be manual such as the process currently used by Ms. Marsh or automated. Let's explore the characteristics of each system to help Ms. Marsh decide which one would be best for her.

Manual Inventory Control Systems

Manual inventory control systems are most appropriate for smaller businesses that don't have too many different kinds of inventory or don't keep too much stock on hand. Ms. Marsh's business is small, so she has been able to manage with a manual system up to now. Some advantages of a manual inventory control system are that it is less expensive to use than an automated solution and time doesn't have to be invested in learning to use it. Another advantage is that Ms. Marsh would have a greater sense of control over her inventory as she could visually tell when it was time to reorder and not rely on a computer to tell her.

Some disadvantages of a manual inventory control system are that it is prone to human error. Since Ms. Marsh is manually determining when it is time to reorder based on how much inventory she has on hand, she could miscount what she has and not order in enough time to prevent her from running out of stock.

A manual inventory control system is also labor-intensive as Ms. Marsh would have to count the inventory herself and keep track of all the transactions that affected each item she sold. It is likely that Ms. Marsh could be spending her time on managing other aspects of her business instead.

Automated Inventory Control Systems

Most large businesses use an automated solution to track and manage inventory as it allows companies to better manage the inventory they have on hand, identify slow-moving items and reorder fast-moving inventory before stock runs out.

Businesses can use several methods to track inventory including bar codes, RFID tags, and computerized systems. Bar codes contain a series of numbers and vertical lines to identify each inventory item uniquely. When inventory arrives at the loading dock, employees scan the bar codes, and the computer system will update the quantity of inventory on hand. When a store sells an item, the clerk scans the bar code over a reader, and the computer system reduces the quantity of the inventory on hand.

Radio frequency identification tags or RFID are computer chips with antennas that companies attach to inventory items. Since the tag uses radio waves, employees can read the information on the tag uses a special reader. When an employee scans the chip, it relays information about the quantity and type of inventory to the company's computer system.

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