How to Design an Inventory Control System
Business owners must constantly balance the need to meet customer demand against the need to control inventory costs. A well-designed inventory control system that encompasses all aspects of managing inventory is an essential balancing tool. Electronic inventory control systems that integrate purchasing, shipping, receiving, tracking, warehousing and storage, turnover and reordering components into one system are the most efficient for all but the smallest businesses. Regardless of whether a business uses an electronic or manual system, however, the process of designing an inventory control system is basically the same.
Excess inventory is subject to damage and depreciation and if the product is perishable it can outlast its shelf life. Insufficient inventory can frustrate customers, reduce sales revenues and damage your reputation. System design starts by forecasting demand and determining when demand peaks and dips. Review inventory and sales records for the previous one to three years as well as sales forecasts for the coming year to make accurate demand and timing forecasts. A new business won’t have historic sales data but can use a combination of market research and sales revenue predictions.
In-house inventory storage options include centralized and distributed storage. Storing inventory in a secure, single location is preferable to distributed storage. Centralized storage is more efficient and allows for better internal control even if distributed control involves storing inventory in different areas of the same building. If the business operates via a website or takes telephone orders, consider using a drop-shipper when it’s possible. Drop-shippers eliminate the need to stock inventory items; they deliver from their warehouse directly to your customer.
Set up a method for checking inventory items in at delivery and out when items are moved to the sales floor or packaged for delivery. Accurate tracking methods are crucial for identifying which items are in stock, how many of each are on order, and the date orders are expected to arrive. A good tracking system allows management to run inventory reports as a method of internal control. For better and more accurate inventory tracking, avoid using a manual tracking method. Bar codes and scanners or point-of-sale systems are cost effective and significantly more efficient.
Inventory valuation is a component in calculating the cost of goods sold and can have a significant impact on the amount the business must report as taxable income. The most common options are first-in first-out and last-in first-out valuation. FIFO assumes that the first unit to enter stock is the first one sold while LIFO assumes that the last unit to enter stock is the first one sold. This final step in designing an inventory control system is often one in which the accounting department rather the designer decides which is the best option to use.