Types of Inventory Control

What is Inventory Control?

Inventory control is the process of managing and overseeing a company’s inventory. It involves monitoring and managing the flow of goods from manufacturers to warehouses and then to retail outlets or directly to customers. The primary goal of inventory control is to ensure that the right amount of inventory is available at the right time, in the right place, and at the right cost. Effective inventory control helps businesses reduce carrying costs, prevent stockouts and overstock situations, improve cash flow, and enhance customer satisfaction by ensuring products are available when needed.

Geeky Takeaways:

• Inventory control involves forecasting demand, determining optimal inventory levels, and setting reorder points to ensure that stock levels are neither too high nor too low.
• Tracking inventory levels in real-time to know exactly how much stock is on hand, in transit, or in production.

Types of Inventory Control

1. Perpetual Inventory System

The Perpetual Inventory System is a highly detailed and efficient approach to managing inventory that operates in real-time. This system continuously tracks every addition to or subtraction from inventory as transactions occur. It relies heavily on technology, using barcodes, RFID tags, and computerized inventory management systems to update stock levels instantly when sales or purchases are made.

Features

• Real-time Inventory Updates: The inventory records are updated instantly whenever a sale or purchase is made, providing a constant, accurate count.
• Technology Integration: It integrates seamlessly with other business systems, like point-of-sale (POS), enterprise resource planning (ERP), and e-commerce platforms, allowing for streamlined operations.
• Detailed Reporting: Offers detailed insights into inventory levels, sales trends, and order histories, which helps in making informed business decisions.

Advantages

• Accurate Inventory Data: Keeps a precise track of inventory at all times, which helps in maintaining optimal stock levels and reducing the chances of stockouts or overstock.
• Enhanced Efficiency: Automates stock tracking, which reduces the need for physical inventory counts and lowers the likelihood of human error, leading to smoother operations.
• Better Financial Reporting: Provides accurate and up-to-date financial information, which is crucial for timely and effective financial planning and analysis.

Disadvantages

• High Initial Setup Cost: Requires significant investment in technology and systems, which may be burdensome for small businesses.
• Complexity in Implementation: Setting up a comprehensive system involves complex integration with existing software and training for staff, which can be time-consuming and disruptive.
• Dependence on Technology: Heavily relies on the functioning of technology; any system failures or glitches can disrupt the inventory tracking and lead to inaccuracies.

Example

A retail store uses a perpetual inventory system to track inventory in real-time. Each sale deducts items instantly, while purchases are added immediately. This ensures accurate stock levels are maintained continuously, enabling efficient management and timely reordering. The system facilitates better decision-making, reducing stockouts and optimizing inventory investment.

2. Periodic Inventory System

The Periodic Inventory System is a traditional method of inventory management where stock levels are updated and assessed at fixed intervals, such as weekly, monthly, or annually. This system does not track inventory transactions as they happen but rather relies on physical inventory counts to determine stock levels at specific times.

Features

• Scheduled Inventory Counts: Inventory is physically counted at predetermined times, which provides updated stock information at regular intervals.
• Manual Updates: After each count, the inventory records are manually updated to reflect the current stock levels.
• Simplicity: Lacks the complexity of continuous monitoring systems, making it easier to implement without advanced technological infrastructure.

Advantages

• Low Initial Cost: Requires minimal investment in technology and systems compared to more advanced inventory methods like the perpetual inventory system.
• Simplicity in Management: Easier to implement and maintain, particularly for small businesses with limited inventory or those just starting out.
• Flexibility in Scheduling: Businesses can plan inventory counts during off-peak hours or seasons, minimizing disruption to daily operations.

Disadvantages

• Potential for Inaccuracy: Since updates are not made in real-time, discrepancies can arise due to theft, loss, or recording errors, leading to potential issues with stock levels between counts.
• Operational Disruption: Physical inventory counts can be time-consuming and may disrupt regular business activities, especially if done during business hours.
• Delayed Data: The delay between counts means that the data is not always current, which can hinder decision-making and responsiveness to market changes.

Example

A small clothing boutique that uses Periodic Inventory Control. Every quarter, the staff closes the store for a day to physically count all merchandise, from dresses to accessories. They record these counts in their inventory system to adjust for any discrepancies, such as unrecorded sales or damages, ensuring they have accurate stock information for the next few months until the next count.

3. Just-In-Time (JIT) Inventory System

Just-In-Time Inventory is a streamlined approach to inventory management that aims to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, and not before. This system is highly coordinated, requiring precise timing and reliable suppliers to ensure that components arrive just in time to enter the manufacturing process without the need for significant storage time.

Features

• Reduced Inventory Levels: JIT helps businesses minimize their inventory levels, which reduces the cost of holding stock.
• Supplier Integration: Close collaboration with suppliers is essential to ensure timely delivery of components, which necessitates a strong and reliable supply chain network.
• Continuous Improvement Focus: Emphasizes process and quality improvements, as errors can cause significant disruptions, and there is little inventory buffer to fall back on.

Advantages

• Lower Holding Costs: By reducing inventory storage, businesses can significantly cut costs associated with warehousing, insurance, and handling.
• Increased Efficiency: Streamlining the production system to receive goods as needed eliminates excess production and minimizes waste.
• Enhanced Quality Control: As production schedules are tightly controlled, businesses can focus more on quality assurance and continuous improvement practices to reduce defects and rework.

Disadvantages

• High Dependency on Suppliers: JIT systems rely heavily on suppliers’ ability to deliver goods on a precise schedule. Any delay can halt production and lead to significant disruptions.
• Vulnerability to Supply Chain Disruptions: Events such as natural disasters, strikes, or transportation failures can cripple production, as there are no excess stock buffers.
• Significant Implementation Costs: Setting up a JIT system can be expensive and complex, requiring changes in procurement practices, production processes, and quality control measures.

Example

Consider a car manufacturer that uses Just-In-Time (JIT) Inventory. They coordinate closely with their suppliers to ensure that components, like seats, electronics, and tires arrive exactly when needed on the production line. This method eliminates the need for large storage areas and reduces holding costs, as parts are used immediately in assembly, ensuring a streamlined and cost-effective production process

Conclusion

In conclusion, mastering the Types of Inventory Control is essential for any business looking to streamline operations and enhance efficiency. Whether you choose a Perpetual Inventory System for real-time data, the simplicity of a Periodic Inventory System, or the precision of Just-In-Time (JIT) delivery, each method offers unique benefits and challenges.

Types of Inventory Control – FAQs

What are types of inventory control?

The 3 types of Inventory control are ,

• Periodic Inventory Control System
• Perpetual Inventory Control System
• Just-in-time (JIT).

What is the difference between perpetual and periodic inventory systems?

Perpetual inventory systems continuously track inventory levels in real-time, while periodic inventory systems involve manually counting and reconciling inventory at specific intervals.

How does Just-In-Time (JIT) inventory control work?

JIT inventory control aims to minimize inventory holding costs by receiving goods from suppliers exactly when they are needed in production or for sale, reducing the need for excess inventory storage.