Inventory control or stock control helps businesses calculate all costs associated with their products and keep track of what they have on hand. Inventory control is a crucial part of any business that requires products or items be kept in stock. The greatest struggle businesses face is finding the balance between having too little or too much inventory for the business to make the most profit. All costs must be considered in order to find the right formula.
Inventory control methods vary depending on the demands the business experiences. There are two types of demand: derived demand and independent demand. Derived demand is the demand for raw materials used in manufacturing or production. Inventory control can be met through calculations of manufacturing output as well as demand forecasts for the given product. Independent demand is consumer-driven, which is much more susceptible to fluctuations in the market as well as seasonal changes.
Businesses can reduce uncertainties in demand by coordinating the supply. There are different models that control the inventory costs, depending on the product. For example, the Economic Order Quantity model is often best for products that are in continuous supply. It minimizes inventory costs by replenishing inventory only when the current inventory runs out, so there is rarely a large surplus. The Newsvendor model is best suited for products that are available for a limited period of time. This model determines optimal inventory levels based on customer pricing, demand and cost.
There are three kinds of inventory costs: safety stock, ordering and shortfall. Safety stock refers to products that need to be kept in stock in order to satisfy the customers' demands. These demands are constantly in flux for many products, creating a challenge to optimize the levels of stock. Statistical calculations can aid businesses in determining the probabilities of demand. Ordering costs consist of placing orders for products; invoice processing, transportation, receiving and storage are all ordering costs as well. Lost sales due to short supply make up shortfall costs. Shortfall costs can be avoided by keeping an ample safety stock on hand. This will also increase customer satisfaction. The inventory control system used should balance the carrying costs against the shortfall costs.
In order to manage inventory, retail businesses rely on counting. This is done by comparing the counts (actual inventory) with records (expected inventory) in order to identify any errors, shortages or shrinkage. Typically, counts are retaken in order to track down the problem. If the problem is low stock, the ordering levels can be increased to meet demand. Errors made in paperwork are much more difficult to track and require checking the counts multiple times. Often, shrinkage problems are due to employee theft, which must be investigated by the business.