Inventory controlling policies

There are basic categories of policies for controlling inventories: fixed order quantity policies and fixed
time period policies.
In the first, as the name implies, the order quantity is always the same but the time between orders will vary depending on demand and the current inventory levels. Specifically, inventory levels are continuously monitored and an order is placed whenever the inventory level drops below a predetermined reorder point. For this reason, this type of policy is also called a continuous review policy.
In fixed time period policies, the time between orders is constant but the quantity ordered each time
varies with demand and the current level of inventory. Because ordering follows a fixed cycle, these policies
are also called periodic-review policies. We will focus on periodic-review policies in this note, but the major
insights and analyses are very similar to those for continuous review policies.

Inventory control

Inventory control is among the most important topics in management science. Since the development of the classical Economic Order Quantity formula in 1913 , a lot of celebrated results, such as the base stock
policy, have been obtained. One of the critical assumptions in this vast inventory literature has been that
the inventory level at any given time is fully observed. However, in reality, it is often not the case, and the
inventory level is only partially observed. In such cases, most of the well-known inventory policies such as the base stock policy are not even admissible, let alone optimal.
There are a number of reasons for partial observability of inventory levels. Demand may be incorrectly observed or observed with some delays. Inventory may be misplaced or stolen.
Even though partial observations in inventory systems are very common and serious, there has not been
much research activity in this area.

Stock-outs lead to loss of a sale or damage the company's goodwill. Most companies pay utmost attention
to an item when its inventory is non-positive. One way is for the employees to walk around the shelves to
see if the item is stocked out.

Inventory Control System

Inventory control is difficult to embrace. Inventory control is a system of maintaining inventories in order to prevent stock outage, to control overage and shortage, to reduce carrying charges (interest, storage, and insurance), and fend off theft. Documenting policies and procedures that provide the guidelines for effective and efficient inventory control is a must. Examples of Inventory Control requirements are:

• Inventory accuracy: Inventory records must be consistently accurate in order to control costs and to fulfill sales order requirements.
• Reduce internal lead times: Overall lead time of raw material, sub-assemblies, and finished goods must be reviewed in order to discover if any inefficiency exists.
• Speed up the time to replenish raw material: Replenishing raw materials in a timely manner, so that adequate inventory levels can meet customer demand, is critical. Knowing suppliers' lead times is the key to accurately replenishing raw materials.
• Review order quantities: As mention earlier, ordering large quantities, in order to get a "volume discount," is not always the best method for reducing cost. The Economic Order Quantity (EOQ) method of purchasing works well in lowering overall cost.

How to Convert Inventory into Cash effectively

Converting your inventory into cash is as critical a process for the health of your company's cash flow, as the process of converting Accounts Receivable into cash. The effective conversion of inventory into cash requires a methodical system that efficiently moves products from order to delivery. Without a well-defined inventory management system in place, inventory stock levels may become too low or too high, resulting in lost sales and increased costs. The longer an item(s) remains as inventory, the greater the chance for the item(s) to become either damaged or obsolete and this eventually results in an inventory write-down. Slow-moving inventory adds to a slower cash flow and consequently creates greater carrying costs that must finance the inventory. The degree of success, in converting inventory into cash, is directly related to the how well the inventory cycle is monitored and controlled.

Inventory management in business

Inventory management consists of a list of goods and materials held available in stock. Management of an inventory or Inventory management is all about handling functions related to the tracking and management of material.The task of ABC analysis, lot tracking, cycle counting support etc. can even be a part of inventory management.

The primary and foremost step in inventory management is acquiring accurate information for inbound operations. In order to better your work and progress further you can conduct a survey by asking supply chain executives to name the five most important area for improvement in operations support systems. The outcome of your survey will reflect better inventory planning as one of the target areas. You must pay special heed to establish an effective way to maintain inventory data integrity or setting up higher productivity and capacity utilization. Lack of efficient inventory data integrity can lead to large amount of non-productive labor, underutilized distribution center capacity and diminished customer service levels due to incomplete or late orders.
From past few years distributors were looking forward for a device that can help them control and manage their largest asset, inventory. As a result several computer software companies have developed comprehensive inventory management modules and systems.
Tough the software technique is a beneficial aid yet it cannot provide solutions to inventory management problems. In order for the inventory management system to live upto its potential and perform its best, make sure that you follow quite a few basic and extremely significant ways of good inventory management.
If you wish to add an inventory, you must get a purchase commitment from your customer. Make sure that you assign and use bin sites.
Effective inventory management also requires paper work (picking documents to be filled by the end of the day, entry of every single stock receipt in computer etc.) that is upto the mark, determination of the most beneficial replenishment strategy for each item in each warehouse, setting up some lucrative offers and awards for the buyers, specifying guidelines for setting the reorder method and setting up of an on-going dead stock and excess inventory control program.

Inventory control based on demand

In the decline stage, cash management, inventory control, and abandonment timing become critical.
Understanding this life cycle can help managers select logistical tactics, inventory levels and supply chain designs. The ultimate goal for companies should be to have just enough inventory to satisfy consumer demand.
High levels of inventory must be held to meet even minimal customer service levels.
Inventory levels are affected by customer service expectations, demand uncertainty, and the flexibility of the supply chain. Consumers are demanding more customer service from firms throughout the supply chain.Firms who understand their demand recognize stockout costs and carry appropriate levels of inventory are ultimately better able to effectively manage inventory and provide the desired service level to customers.

Inventory control approach

Inventory control and inventory is the focus point (and perhaps the linchpin) of successful supply chain management .
Firms hold inventory for two main reasons, to reduce costs and to improve customer service. The motivation for each differs as firms balance the problem of having too much inventory (which can lead to high costs) versus having too little inventory (which can lead to lost sales).
Firms use one of three general approaches to manage inventory. First, most retailers use an inventory control approach, monitoring inventory levels by item. Second, manufacturers are typically more concerned with production scheduling and use flow management to manage inventories. Third, a number of firms (for the most part those processing raw materials or in extractive industries) do not actively manage inventory.
Many agribusiness firms do not actively manage inventory. This does not mean that they ignore inventory. Rather, they hold large inventories because any potential savings from inventory reductions are far outweighed by the inventory-induced reductions in production, procurement, or transportation costs. Often economies of size cause long productions runs which lead to inventory accumulation. Simultaneously, seasonality leads to inventory buildups of key inputs like seed as well as outputs like corn. Economies in procurement such as forward buying in the food industry and quantity discounts increase inventories. Similarly, unit trains and other forms of bulk shipping discounts contribute to inventory buildups.

Yet, such firms must be alert to changing conditions that may require more exact inventory management. One example would be if crops are marketed as small lots of value-added grain instead of commodities. Production proliferation in the seed industry may be another instance. Finally, whether due to food safety concerns, GMOs, food labeling, or the growth of organic food markets, identity preservation requires more precise inventory control.
(c)Frank Dooley

Inventory control tips

As a business grows, it may find a need for a more sophisticated and technical form of inventory control. Today, the use of computer systems to control inventory is far more feasible for small business than ever before, both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers. Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer.

• Point-of-sale terminals relay information on each item used or sold. The manager receives information printouts at regular intervals for review and action.
• Off-line point-of-sale terminals relay information directly to the supplier's computer who uses the information to ship additional items automatically to the buyer/inventory manager.
• The final method for inventory control is done by an outside agency. A manufacturer's representative visits the large retailer on a scheduled basis, takes the stock count and writes the reorder. Unwanted merchandise

Inventory control

Inventory control.
Inventory is money on the shelf. National averages for a typical shop range from $10,000 to $20,000 worth of inventory and 30 percent of that inventory is dead! A 21-month study conducted recently on what shop owners sell and what they stock, revealed that 11 percent of shop owners sell spark plugs but don't stock them, while 18 percent stock spark plugs but don't have what they need.

What is the purpose of inventory? Many shop owners think it's there to facilitate shop operation by reducing rack time and increasing gross profit. In reality, however, inventory exists to improve your level of service. How? The right amount of the right part numbers will provide you with what you need when you need it, without enormous stress on your operating capital.
Consider the following two methods of inventory control. Last In First Out (LIFO) means that when there is more than one of a given part number, you sell the last one received, first. The rationale being that the newest is probably the most expensive. First In First Out (FIFO) means that when there is more than one of a given part number, you sell the one you've had the longest, first. The rationale? To keep your stock rotating. Whether you use LIFO or FIFO, the actual transfers are only taking place on paper. The old dusty part may be pulled off the shelf, but it's the new expensive one that's reduced from inventory. Ask your bookkeeper which is the correct method for your business.

Compare the value of your inventory to the value of some piece of your equipment. When you purchased the expensive piece of equipment, you probably considered various things. You probably shopped for the best price and considered return on investment. If the equipment wouldn't pay for itself, you probably would not have purchased it. After the purchase, you monitored your investment to maximize its use and, therefore, its return.

All the same rules apply to your inventory investment. There are some fundamental differences, however, between your inventory investment and your capital investments. Your equipment is depreciable, while your inventory is taxable. Your capital investments happen suddenly, while your inventory value creeps up gradually. At some point, most shop owners end up with a large inventory investment on which they pay taxes, yet rarely do they monitor or control it properly. Face it, it's a time-consuming process in an industry that holds time at such a premium that you charge for it in six-minute increments.

Inventory management system

The Inventory Management system and the Inventory Control Process provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers. Inventory Management and the activities of Inventory Control do not make decisions or manage operations; they provide the information to Managers who make more accurate and timely decisions to manage their operations.

The basic building blocks for the Inventory Management system and Inventory Control activities are:
Sales Forecasting or Demand Management
Sales and Operations Planning
Production Planning
Material Requirements Planning
Inventory Reduction

The emphases on each area will vary depending on the company and how it operates, and what requirements are placed on it due to market demands. Each of the areas above will need to be addressed in some form or another to have a successful program of Inventory Management and Inventory Control.

Inventory management and inventory control

Inventory Management and Inventory Control must be designed to meet the dictates of the marketplace and support the company's strategic plan. The many changes in market demand, new opportunities due to worldwide marketing, global sourcing of materials, and new manufacturing technology, means many companies need to change their Inventory Management approach and change the process for Inventory Control.

Despite the many changes that companies go through, the basic principles of Inventory Management and Inventory Control remain the same. Some of the new approaches and techniques are wrapped in new terminology, but the underlying principles for accomplishing good Inventory Management and Inventory activities have not changed.

Inventory control

The appropriate production and inventory management (also known as inventory control) policy is a key factor for modern enterprises’ success in competitive environment.Production and inventory control systems such as MRP systems, and kanban control systems (KCS) have been the subject of intensive research for several years.
The most important objective or inventory control is to determine and maintain an optimum level of investment in the inventory. Most companies have now successfully installed one or the other system of inventory planning and control. The inventory control models range from very simple methods to highly sophisticated mathematical inventory models.

Inventory control

Inventories include raw materials, component parts, work in process, finished goods, packing and packaging materials, and general supplies. The control of inventories, vital to the financial strength of a firm, in general involves deciding at what points in the production system stocks shall be held and what their form and size are to be. As some unit costs increase with inventory...
* SKU

a code number, typically used as a machine-readable bar code, assigned to a single item of inventory. As part of a system for inventory control, the SKU represents the smallest unit of a product that can be sold from inventory, purchased, or added to inventory. Applied to wholesale, retail, or production operations, the SKU can assist in monitoring transactions, tracking customer spending...
*Inventory planning and control systems

Inventory control is another important phase of production management. Inventories include raw materials, component parts, work in process, finished goods, packing and packaging materials, and general supplies. Although the effective use of financial resources is generally regarded as beyond the responsibility of production management, many manufacturing firms with large inventories (some...
* UPC

UPCs encode individual products at the stock keeping unit (SKU) level, allowing a manufacturer or retailer to track the number of units sold during a specified time period. This type of tracking can be an important aspect of just-in-time inventory management. The UPC is maintained by the Uniform Code Council (UCC), a nonprofit organization located in Lawrenceville, New Jersey, U.S. Founded in...

Inventory management tips -part 3

Here are some of the most common techniques for lowering inventory levels.
11. Purchase Minimums: Compare the total cost of ownership for purchased products as quoted prices with no minimums to reduced prices with minimums to determine if the reduced prices really provide savings.

12. Implement SKU-specific Purchase Transaction Costs: Purchase transaction costs aren't normally SKU-specific. However, reflecting any extraordinarily low receiving costs associated with specific SKUs will serve to reduce inventory for them. The opposite, of course, is also true.

13. Get Demand Plans from Downstream: Hard information on upcoming needs from customers reduces demand variability, thus reducing the safety stock required for a given customer service level.

14. Send Demand Plans Upstream: Sharing demand forecasts with suppliers is more indirect, however, in the long run it will serve to reduce the supplier's finished goods inventory and associated costs and, with effective negotiation, perhaps yield lower prices.

15. Don't Stock It: Manufacturing or purchasing to order when the acquisition and customer lead time relationships and order quantity relationships allow it is a very direct way to reduce inventory, providing that the acquisition capacity exceeds the potential short-term demand rate.

16. Cross-dock Customer Shipments: With effective use of joint replenishment, the potential increases in inbound transportation costs associated with purchasing to order can be mitigated. Cross-docking customer shipments can facilitate purchasing to order even when the order quantity relationship would have otherwise dictated purchasing to inventory. In a similar manner, aggregating purchase requirements for multiple DCs into a single order and cross-docking to multiple DCs effectively reduces purchase transaction costs and reduces cycle stock inventory.

17. Keep In Stock, But Not Everywhere: In multiple DC tier environments, stocking certain SKUs in fewer/upstream facilities as opposed to more/downstream facilities yields obvious benefits. Likewise, within a single tier of DCs, not every SKU deserves to be stocked in every DC.

18. Extend Payment Terms: When negotiating long- term purchase agreements, getting the best payment terms at a given unit price is the most direct way to increase the portion of inventory funded by the vendor. If improving payment terms can be coupled with increased turnover, then the improvement in working capital effectiveness is significant.

19. Take Advantage of Price/Quantity Breaks: Taking price/quantity breaks into account when purchasing for replenishment seems an obvious way to reduce the inventory investment, but seems to be frequently overlooked. Often this is a result of either not quantifying breaks at the time of sourcing or negotiation, not having an effortless way to take them into account, or through lack of understanding of the impact of purchasing larger quantities at reduced unit cost.

20. Transfer Instead of Purchase: When inventory of an overstock SKU in one location needs to be purchased to replenish inventory in another location, transfers are a smart way to reduce inventory. Be careful that additional warehousing and transportation expenses aren't unnecessarily incurred so the reduction in holding cost does not exceed the cost to transfer.

Inventory management tips- part 4

Here are some of the most common techniques for lowering inventory levels.
Consider Liquidation: Although there will always be a short-term price to pay on the P&L and the balance sheet, when it is absolutely clear that the value to be gained through liquidation-whether through sale at reduced price, sale as distressed product, salvage, or charitable donation-is greater than the most optimistic estimate of future gross margin from conventional product sales, then liquidation is the best decision.

Try Merge-In-Transit: The concept of in-transit product merging-where, for example, two things are shipped from different locations and then married in transit so that they reach the customer as a single shipment-can be seen as a technique for reducing inventory if the need for the customer to simultaneously receive multiple SKUs is taken as a requirement. If the need for simultaneous receipt is a given, then the concept eliminates the need for inventorying the individual SKUs together. To some extent, merge-in-transit represents an extension of postponement beyond the distribution center walls.

Get Help From Friends: Collaborative Planning and Replenishment (CPFR) is an open set of pre-defined business processes and IT/communications standards created to facilitate collaboration between supply chain partners. CPFR can reduce inventories through inventory balance, forecast, demand and other data visibility and associated collaboration in the planning area.

Use Vendor-managed Inventory (VMI): With the appropriate incentives, allowing suppliers to assume the responsibility for replenishment of your inventory, because of their visibility into both their own inventory and production schedule and your demand data, can almost always reduce your inventory.

Implement Vendor Stocking Programs (VSP): Used primarily for maintenance inventories but applicable to all, VSPs require a supplier to commit to an extremely high service level for delivery of specific SKUs within a fixed time at a pre-defined mark-up over cost. VSPs can reduce or eliminate inventories for slow-moving products.

Inventory management tips -part 2

Here are some of the most common techniques for lowering inventory levels.
6. Forecast Events: If one-time demand clutters the sales history, or if one-time demand events are part of the future, then they need to be taken into account in any forecasting done-both in terms of editing them from history and in terms of incorporating future events into the routine demand forecast.

7. Think Postponement: For parent products from which multiple SKUs can be manufactured, only partially completing manufacturing, placing semi-finished product in inventory, and then completing manufacturing of the final SKUs to order reduces total inventory. In a similar manner, component products from which final SKUs may be assembled can be purchased to inventory and then the final SKUs assembled to order, providing that the time for assembly doesn't exceed the customer lead time.

8. Rationalize SKUs: Removal of inappropriate product from the product line can be a controversy-ridden process, but may reduce inventory significantly if handled in a constructive manner, as follows:

* Develop consensus on the objective of maximizing profit
* Develop activity-based costs for each SKU and separate them into three groups:
o Those with selling prices that create positive gross margin
o Those with selling prices that cover their variable cost but do not completely cover their fixed cost
o Those with selling prices that do not cover their variable cost
* Quantify the sales volume correlations between SKUs, based on the analysis of both individual orders and aggregate order patterns by customer
* Identify the combination of SKUs which maximizes profit on a fully-absorbed basis

9. Reduce Lead Times for Product Acquisition: For either manufactured or purchased product, any reduction in lead time, whether supplier lead time, transportation time or receiving cycle time, provides a one-time, permanent reduction in cycle stock inventory proportional to the throughput level of the SKU and the degree of lead time reduction. In a similar manner, reducing lead time variability and increasing inbound unit-, SKU-, or order-fill rates both increase supply reliability and reduce safety stock inventory for a given customer service level.

10. Implement Common Supplier Joint Procurement for Purchased Products: Joint procurement of multiple SKUs from a common supplier serves to effectively reduce unit purchase transaction costs and thereby reduces both cycle stock inventory and annual purchase transaction expenses. In a similar manner, joint procurement of multiple SKUs from different suppliers located in close physical proximity and consolidation of inbound (LTL) volume to form full TLs serves to reduce the incremental transportation cost portion of purchase transaction costs and reduce cycle stock inventory.

Inventory control-2

There are many administrative tasks associated with stock control. Depending on the size and complexity of your business, they may be done as part of an administrator's duties, or by a dedicated stock controller.

For security reasons, it's good practice to have different staff responsible for finance and stock.

Typical paperwork to be processed includes:

* delivery and supplier notes for incoming goods
* purchase orders, receipts and credit notes
* returns notes
* requisitions and issue notes for outgoing goods

Stock can tie up a large slice of your business capital, so accurate information about stock levels and values is essential for your company's accounting.

Figures should be checked systematically, either through a regular audit of stock - stocktaking - or an ongoing programme of checking stock - rolling stocktake.

If the figures don't add up, you need to investigate as there could be stock security problems or a failure in the system.
Health and safety

Health and safety aspects of stock control are related to the nature of the stock itself. Issues such as where and how items are stored, how they are moved and who moves them might be significant - depending on what they are.

You might have hazardous materials on your premises, goods that deteriorate with time or items that are very heavy or awkward to move.

Inventory control

Successful, well-organized businesses rely heavily on inventory management systems to make
certain that adequate inventory levels are on hand to satisfy their customer demand. The Inventory
Control module for the Sage BusinessWorks Accounting system provides this level of control by
offering high-end features normally reserved for large companies, including light manufacturing
capabilities, serial number tracking, and multi-warehouse support. Inventory Control even features
an image library that allows you to assign a picture to each part.
Improved customer service leads to increased profitability. And, when integrated with the Accounts
Receivable and Order Entry modules, Inventory Control can significantly boost your customer
service levels while operating as the cornerstone of an effective manufacturing or distribution
solution. For more complex project management, Inventory Control can be coupled with the
Job Cost module to help track all inventory-related expenses for a project. Inventory tracking is
enhanced even more when integrated with the Custom Office module, which creates detailed
spreadsheets to provide further analysis of inventory performance.
The Inventory Control system offers comprehensive reporting capabilities to keep you on top of
inventory status. It can help you bring about the creation of new or improved purchasing policies,
sales policies, pricing methods, and even enhanced customer service. By leveraging Sage
BusinessWorks, you have the tools to create an inventory system with the depth to meet your
company’s needs for years to come.

Inventory Control and Stock

Stock control, otherwise known as inventory control, is used to show how much stock you have at any one time, and how you keep track of it.

It applies to every item you use to produce a product or service, from raw materials to finished goods. It covers stock at every stage of the production process, from purchase and delivery to using and re-ordering the stock.

Efficient stock control allows you to have the right amount of stock in the right place at the right time. It ensures that capital is not tied up unnecessarily, and protects production if problems arise with the supply chain.

Inventory control

The basic function of stock (inventory) is to insulate the production process from changes in the environment .

Note here that although we refer in this note to manufacturing, other industries also have stock e.g. the stock of money in a bank available to be distributed to customers, the stock of policemen in an area, etc).

One point to note from the above diagram is that most of the activities are a cost - it is only at the final point (sales of finished goods) that we get revenue to set against our costs and hopefully make a profit (= revenue - cost). Hence if we have cost associated with stock we need to deal with that stock in an Effective, Efficient and Economic manner (the 3E's as I tend to term it).

The question then arises: how much stock should we have? It is this simple question that inventory control theory attempts to answer.

There are two extreme answers to this question:

a lot

• this ensures that we never run out
• is an easy way of managing stock
• is expensive in stock costs, cheap in management costs

none/very little

• this is known (effectively) as Just-in-Time (JIT)
• is a difficult way of managing stock
• is cheap in stock costs, expensive in management costs

We shall consider the problem of ordering raw material stock but the same basic theory can be applied to the problem of:

• deciding the finished goods stock; and
• deciding the size of a batch in a batch production process.

The costs that we need to consider so that we can decide the amount of stock to have can be divided into stock holding costs and stock ordering (and receiving) costs as below. Note here that, conventionally, management costs are ignored here.

Holding costs - associated with keeping stock over time

• storage costs
• rent/depreciation
• labour
• overheads (e.g. heating, lighting, security)
• money tied up (loss of interest, opportunity cost)
• obsolescence costs (if left with stock at end of product life)
• stock deterioration (lose money if product deteriorates whilst held)
• theft/insurance

Ordering costs - associated with ordering and receiving an order

• clerical/labour costs of processing orders
• inspection and return of poor quality products
• transport costs
• handling costs

Note here that a stockout occurs when we have insufficient stock to supply customers. Usually stockouts occur in the order lead time, the time between placing an order and the arrival of that order.

Given a stockout the order may be lost completely or the customer may choose to backorder, i.e. to be prepared to wait until we have sufficient stock to supply their order.

Note here that whilst conceptually we can see that these cost elements are relevant it can often be difficult to arrive at an appropriate numeric figure (e.g. if the stock is stored in a building used for many other purposes, how then shall we decide an appropriate allocation of heating/lighting/security costs).

To see how we can decide the stock level to adopt consider the very simple model below.