Counselors to America’s Small Business
Why Inventory Control?
Control of inventory, which typically represents 45% to 90% of all expenses for business,
is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent
shrinkage (spoilage/theft), and to provide proper accounting. Many businesses have too much of
their limited resource,
tied up in their major asset,
Worse, they may have their
capital tied up in the wrong kind of inventory. Inventory may be old, worn out, shopworn,
obsolete, or the wrong sizes or colors, or there may be an imbalance among different product
lines that reduces the customer appeal of the total operation.
Inventory control systems range from eyeball systems to reserve stock systems to
perpetual computer-run systems. Valuation of inventory is normally stated at original cost,
market value, or current replacement costs, whichever is lowest. This practice is used because it
minimizes the possibility of overstating assets. Inventory valuation and appropriate accounting
practices are worth a book alone and so are not dealt with here in depth.
The ideal inventory and proper merchandise turnover will vary from one market to
another. Average industry figures serve as a guide for comparison. Too large an inventory may
not be justified because the turnover does not warrant investment. On the other hand, because
products are not available to meet demand, too small an inventory may minimize sales and
profits as customers go somewhere else to buy what they want where it is immediately available.
Minimum inventories based on reordering time need to become important aspects of buying
activity. Carrying costs, material purchases, and storage costs are all expensive. However, stock-
outs are expensive also. All of those costs can be minimized by efficient inventory policies.
Inventory control involves the procurement, care and disposition of materials. There are
three kinds of inventory that are of concern to managers:
In-process or semi-finished goods,
If a manager effectively controls these three types of inventory, capital can be released
that may be tied up in unnecessary inventory, production control can be improved and can
protect against obsolescence, deterioration and/or theft,
Handout 06/02 – Inventory Control
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