Inventory Control

What It Means

Every company that produces physical goods must maintain levels of inventory, which include its raw materials, unfinished products, and finished products that have not yet been shipped out of the company. All of the tasks and activities related to this maintenance are known as inventory control. This includes keeping detailed records on the amount and value of a company’s inventory and ensuring that materials and products are appropriately stored, accessible when needed, and not in oversupply. Inventory control also sometimes includes the final assessments and protection of the finished goods within the company before purchasers take possession; these activities involve recording the receipt of goods from production, inspecting them, and handling them in storage.

The purpose of inventory control is to ensure that the company has sufficient amounts of finished goods to meet consumer demand in a timely way without creating an oversupply of products, which are costly to store. Companies with inventory strive to maintain a smooth flow of acquiring the necessary materials, making products, selling products, moving the products out of the company, and collecting on the sale of the products. Inventory is linked to all other aspects of production and sales, since changes in sales strategies can affect the levels of inventory on hand.

The primary challenge of inventory control is to balance a company’s inventory ordering costs against its inventory carrying costs in an effort to keep down total costs. Ordering costs are all of the expenses that are incurred by a company in purchasing materials and supplies for its inventory. They can expenses for postage, telephone service, order-processing software, and the salary of employees who handle purchase orders. Carrying costs (also called holding costs) are those spent on “carrying” the inventory, meaning protecting and storing it. These costs can include expenses for property insurance, rent or storage, and any monetary losses if the materials or products deteriorate in value or are stolen. Generally, the more inventory a company has, the higher its carrying costs will be.

When Did It Begin

Inventory is regarded and managed very differently today than it was hundreds of years ago. The basis for individual enterprise for many centuries was land and land ownership. For example, an individual who had a successful farming operation could store his harvest on his land, and the more bountiful the harvest was, the wealthier he was considered. Likewise, a sheep farmer with a large, healthy herd could store his wealth, in the form of his sheep, on his land. Because commerce and trade did not move very quickly, it was not necessary to keep careful tabs on inventory.

The Industrial Revolution of the late eighteenth and early nineteenth centuries marks the time when machines were first used to mass-produce goods. The vast increase in the number of goods that a manufacturer could turn out also increased the volumes of raw materials and finished goods that it needed to control and maintain. Since that time, global trade and electronic commerce have stimulated competition around the world. This, in turn, has pushed down prices and put pressure on a company’s inventory control to guard stringently against excess stock so that the flow of products, and thus collections on the sales of the products, remain high.

More Detailed Information

The specific inventory control activities and tasks required of a manufacturing company depend on the types of inventory it needs to manage. For most manufacturers, inventory generally falls into one of three categories. One category is raw materials; that is, whatever materials the company uses at the starting point or elsewhere in the production process. For example, iron ore is used by steelmakers, and silicon chips are used by computer makers. A second category of inventory is work in progress, which is any kind of unfinished product the company has on hand. As the production process grows more complex and the number of components in the product rises, the amount of this inventory increases. For example, a tractor manufacturer would have a much larger work-in-progress inventory than a tire manufacturer. The third category of inventory is composed of finished goods, which are the products ready for shipment to customers.

Which category of inventory a particular material or good falls into depends on the business of the manufacturing company, because the finished product for one company can be a raw material for another. For example, the finished products of the silicon chip manufacturer are the chips themselves, which serve as a raw material for the computer maker.

In today’s business environment, computers handle most purchase orders for a company and keep track of goods as they are taken out of its inventory. Generally, when a computer processes an order, it also manages a variety of data about the product, including how its purchase affects the overall supply of inventory. The company uses such information about inventory to help shape its sales and production operations.

In addition to managing the flow of materials and products, inventory control manages the physical space in which goods are stored and protected. Many goods require specialized environmental conditions, such as controlled temperature or moisture, or sufficient space so that, for example, they are not stacked so high as to risk being damaged. It is common for manufacturers to check their computerized ledgers of inventory movement periodically against a human check of the physical inventory that is stored. This practice not only verifies financial records. but it also catches inaccuracies or mistakes in the system of processing inventory.

Recent Trends

Just as manufacturers employ inventory control to maintain a timely flow of goods and minimize the costs of inventory storage, so also do retailers in managing the movement of goods from producers to consumers. Beginning in the last decades of the twentieth century, retailers have worked to cut significant portions of inventory costs in innovative ways and with the help of advances in communications and information technology. In the United States the discount chains Costco and Sam’s Club and some home-improvement chains such as Home Depot and Lowe’s operate large warehouse-like retail establishments. There, customers make their purchases where the products are stored, which reduces the need of the businesses for renting or buying additional inventory space, one of the largest carrying costs. In large part because of their efficient handling of inventory, these “warehouse stores” are able to provide discounted products to consumers.

The American retailing giant Wal-Mart keeps its carrying costs low by using information supplied by the company’s suppliers about the availability of goods. Integrating that information with information about the rates of product sales in Wal-Mart stores allows the chain to keep only minimum amounts of inventory on hand. Additionally, Wal-Mart uses radio-frequency identification (RFID) technology to track items from the manufacturers’ factories to its distribution centers and then to stores. RFID is an automatic identification method that uses an information-encoded electronic tag attached to each item to be tracked and a scanner that can remotely detect the tag as much as several feet away. All the items in a sealed box, for example, can be identified by scanning the box at each location in the journey from producer to retailer to consumer. Using RFID in this way, a company can add a whole shipment of goods to its inventory system at one time without having to unpack the boxes and identify each item separately.