Factors affecting Inventory control Policy
A company’s inventory control policies determine how the company manages the movement of inventory under its control. Every company has a different philosophy on inventory management that guides how and why it sets certain policies, and an organization’s policies can vary based on the type of product managed. Various factors affect inventory control policies, including the organization’s management, the type of product managed and product cost and lead time.
The type of product greatly influences the inventory control policies assigned to manage the product. For example, products with short shelf lives, such as perishable foods, require a different policy than men’s dress shirts. Short shelf life products must rotate based on expiration date. Although it seems like a first in/first out (FIFO) policy works in this case, if at any time goods come into the warehouse out of expiration date sequence, a FIFO policy will fail to manage the inventory properly.
Medical device manufacturers that produce implantable products require a different policy than perishable products. Implantable products require a serial number on the external packaging and the actual product itself. Inventory control policies that govern these products must take into account the serial number of each individual item and track that item by serial number through every move into and out of the warehouse.
Many companies employ additional inventory control policies for high-value products. For example, many warehouses that inventory expensive audio-video equipment keep some of the most expensive equipment secured in cages; only a few of the warehouse personnel have access to this equipment. Along with having the products caged, most companies require a signature from authorized personnel before high-value products move from one location within a facility to another. Depending on the value of the product, a security guard may accompany the movement or transfer.
A major factor that affects inventory control policies is product lead time–the time from receipt of an order to the time of delivery. Some industries and products have extraordinarily long lead times. For example, most of a retailer’s furniture no longer is produced in North Carolina but is made overseas in China and Vietnam. When furniture was made in North Carolina, the furniture retailer could order furniture from its supplier and have it delivered within two to four weeks. This short lead time reduced the amount of inventory the retailer needed to carry because he could get more within a fairly short notice. When production moved to China, the lead time increased from two to four weeks to 90 to 120 days. This completely changed the retailer’s inventory policies. He now has to warehouse more inventory because of the increased lead time. The increased amount of inventory also increases the workload associated with managing the inventory, such as cycle counting, yearly physical inventory and general warehouse maintenance.