What is the 2 methods of inventory management?

Retailers and manufacturers must be well versed with inventory control. They should follow it for better inventory management for their organisation. The article helps you choose between various inventory control methods or types and how each function.

Meaning of inventory control with its importance

Inventory control refers to an activity of checking stock at a shop. The term stock control also bears the same meaning. It requires maintaining the desired levels of inventories in the best economic interest of an entity. The objective is to keep the cost low while meeting consumer demand to maximise profits. 

In simpler words, inventory control involves monitoring stock usage, movement, and storage in a business. Stock control or inventory control is carried out whether the inventory is located at its warehouse or in different locations.

For instance, an inventory control manager discovers a batch of products lying in stock that isn’t selling. It becomes a deadstock and takes up considerable space in the organisation’s warehouse. The manager must convert this into revenue by performing inventory reduction. They can use the bundling or kitting option for tying it up with the sale of an in-demand product. This is one of the inventory control methods.

Inventory control by businesses is done to ensure an adequate stock quantity. It guides entities on quality control, operational control and ensures accounting accuracy. Businesses must track inventory levels regularly. It will help the business meet the projected demand with the least inventory holding cost and plan purchases ahead of time. It also helps businesses avoid any product obsolescence and spoilage.

Inventory control functions and steps

Inventory control is connected to the purchasing function of an organisation. Functions of inventory control managers involve product ordering, storage, and maintenance of stock or inventory in a cost-effective manner.

Steps involved in inventory control are as follows-

Step 1: To decide the minimum level of inventory

A production team must maintain a good equation with the sales and marketing teams since the latter two teams work closely with customers. It will help them decide the levels of inventories, such as the maximum and minimum limits. A business owner can understand whether or not raw materials are going to get obsolete before production begins. Also, this information helps them stock up scarcely available raw materials to produce finished goods without delays.

Step 2: Setting the re-order levels

With ever-changing customer tastes and preferences, there may be increased demand for a product to meet as a business. It requires advanced preparation and decision to produce the ideal quantity to meet the demand. This step requires planning to re-stock the raw materials within a committed time to produce the finished products to the customer.

Step 3: Opting for a sound inventory control method

The method that a business chooses must help it determine the re-order quantity at any given time. Businesses can pick any popular inventory control methods such as ABC analysis, Just In Time (JIT), FSN method known as Fast, slow, and non-moving classification, and the Economic order quantity (EOQ).

Popular inventory control methods in use

Some of the popular inventory control methods are as follows-

Economic order quantity-

Economic order quantity, also called EOQ, refers to a formula. It is the ideal inventory quantity that a company must purchase considering various variables such as total production costs, demand rate, etc.

It helps to free up any tied cash in inventory for most entities and reduces the direct costs. Also, inventory management software can also be used to manage inventory in a better way.

ABC analysis-

It involves categorising inventory into three buckets called A, B and C depending upon the importance of the inventory to its profit. A category consists of expensive items, and hence a small inventory is held. B category has average-priced inventory with medium sales frequency. Category C inventories are low in value but with high sales frequency. It requires less inventory control compared to A or B.

Just-in-time (JIT) inventory management-

It is a technique to arrange raw material orders from suppliers in sync with the production schedules to reduce inventory costs. There will be no excess inventory stored beyond the production requirements, and hence it leaves no scope for deadstock in the organisation.

Safety stock inventory-

Businesses can order an extra quantity of inventory as buffer stock above the projected demand. It acts as a correction for underestimating demand.

Fast, slow, and non-moving (FSN)-

It involves the classification of inventories into fast-moving, slow-moving and non-moving stock for deciding the pace at which a business can place orders.

Implementing Inventory control systems-

Organisations can use technology-based inventory control systems. Such systems integrate various inventory tasks such as purchasing, shipping, receiving, warehousing or storage, tracking, and re-ordering. The system will ensure the availability of the right inventory at the required locations when needed to meet product demand. Two types of inventory control systems are available to choose from. These are perpetual and periodic systems depending upon whether a business wants to track inventory daily or not.

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