Inventory Control: Objectives, Advantages
The Inventory control system is maintained by every firm to manage its inventories efficiently. Inventory is the stock of products that a company manufactures for sale and the components or raw materials that make up the product. Hence, an inventory comprises of the buffer of raw material, work-in-process inventories and finished goods.
Following are the popular Inventory Control Systems that are being used by big manufacturers and the retail units:
- ABC Inventory Control System
- Three-Bin System
- Just-in-Time (JIT) System
- Outsourcing Inventory System
- Computerized Inventory Control System
- Fixed Order Quantity
- Fixed Period Ordering
There are several inventory control systems that are in practice, and these range from simple system to a complex one depending upon nature and the size of the business operations. Talking about the simple system, several small manufacturing firms operate a Two-Bin System; wherein inventory is stored in two bins. Once the inventory in one bin is used, and the order is placed, meanwhile, the inventory from the other bin is used by the firm.
This system is quite inadequate for the larger firms that deal in several product lines and maintain a heavy sales counter. Thus, self –operating or an automatic computer system is to be employed to keep track on the inventory stock and place the order in case of a shortage.
(i) To minimize capital investment in inventory by eliminating excessive stocks;
(ii) To ensure availability of needed inventory for uninterrupted production and for meeting consumer demand
(iii) To provide a scientific basis for planning of inventory needs;
(iv) To tiding over the demand fluctuations by maintaining reasonable safety stock;
(v) To minimize risk of loss due to obsolescence, deterioration, etc.;
(vi) To maintain necessary records for protecting against thefts, wastes leakages of inventories and to decide timely replenishment of stocks.
Advantages of Inventory Control:
Scientific inventory control provides the following benefits:
- It improves the liquidity position of the firm by reducing unnecessary tying up of capital in excess inventories.
- It ensures smooth production operations by maintaining reasonable stocks of materials.
- It facilitates regular and timely supply to customers through adequate stocks of finished products.
- It protects the firm against variations in raw materials delivery time.
- It facilitates production scheduling, avoids shortage of materials and duplicate ordering.
- It helps to minimise loss by obsolescence, deterioration, damage, etc.
- It enables the firms to take advantage of price fluctuations through economic lot buying when prices are low.
Limitations of Inventory Control:
(i) Efficient inventory control methods can reduce but cannot eliminate business risk.
(ii) The objectives of better sales through improved service to customer; reduction in inventories to reduce size of investment and reducing cost of production by smoother production operations are conflicting with each other.
(iii) The control of inventories is complex because of the many functions it performs. It should be viewed as shared responsibilities.