Inventory Control Techniques

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  • 0:00 What Is Inventory Control?
  • 0:52 Determining Stock Levels
  • 1:34 Economic Order Quantity
  • 2:50 Quality Control &…
  • 3:42 Using Technology
  • 4:42 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

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

A business can only make a profit when it has enough inventory to sell to its customers or enough for its production process. In this lesson, you'll learn about inventory control techniques.

What Is Inventory Control?

Let's meet Mr. Wuff, the owner of Wuff's Dog Food Company. He is concerned about managing his inventory and is looking for some assistance. Let's see if we can help Mr. Wuff with this problem.

Almost every business has inventory, which is the raw materials, work-in-process, and finished goods that are ready to sell to consumers. Inventory control ensures that a business has the right amount of inventory on hand. Having too little inventory could result in delays in the production line or depletion of stock for retailers. Having too much inventory can be expensive because extra storage may be needed or the inventory could spoil if it's perishable. Inventory could also become obsolete or outdated if it sits around too long.

Let's examine some techniques that Mr. Wuff can use to help control his inventory.

Determining Stock Levels

Mr. Wuff must decide how much raw material inventory he needs to maintain. Raw materials represent items used at the beginning of the production process that have not undergone any conversion. For Mr. Wuff, raw materials could be beef, chicken, and vegetables for his dog food. The goal is to keep enough on hand so that Mr. Wuff's production line is not idle, but not too much so that the meat and vegetables spoil before they are converted into dog food.

Mr. Wuff should determine a minimum and a maximum level of inventory for each raw material. This will allow him to reorder when he reaches the minimum inventory level and not order any additional items if an inventory item is at the maximum inventory level.

Economic Order Quantity

Economic order quantity is a tool that companies use to determine the optimal level of inventory to order from its suppliers. Determining an optimal level helps to lower costs as the frequency of orders will be reduced.

Let's look at the formula for calculating the economic order quantity (EOQ):

EOQ Formula

Mr. Wuff would like to calculate the economic order quantity for the vegetables he uses in his dog food. Let's assume that demand for Wuff's dog food is steady throughout the year at 1,000 bags per week and vegetables are ordered every week. Ordering costs per order are $25 and carrying costs are $5 per order. Carrying costs include insurance during shipping, material handling costs, and breakage costs.

Mr. Wuff's economic order quantity would be:

EOQ Example

Therefore, the order size that will optimize Mr. Wuff's costs would be 100 pounds of vegetables per week.

Quality Control & Just-in-Time Inventory

Mr. Wuff should implement a process to ensure that all products are examined when they arrive at his company. Any products that are damaged, spoiled, or not up to Wuff's standards should not be accepted. This practice will ensure that he isn't paying for products that can't be used in his dog food. Once the inventory has been inspected, it should be stored in a secure area to prevent theft.

A just-in-time inventory system ensures that raw materials only arrive in time for the production process. This system ensures that products do not spoil, become obsolete, or require additional storage. For example, Mr. Wuff could implement a just-in-time system for his raw materials to ensure that the ingredients are fresh. The risk of using a just-in-time system is that raw materials may not arrive when needed and employees may sit idle. If Mr. Wuff uses reliable suppliers, this risk should be minimized.

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