Inventory Control Systems

Managing inventory is extremely important for companies. Most companies have a lot of their resources tied up in inventory and for these companies it is extremely important to have the right amounts of inventory on hand. Some common costs for not managing inventory properly include stock-out costs (lost sales), shrinkage (theft), and carrying costs. Carrying costs refer to the cost of actually having to carry the inventory. If a business is carrying too much inventory, it means that they are not able to use this money tied up in the inventory somewhere else.

What are the Different Types of Inventory Control Systems?

This is a question that is often asked and the answer depends on what you mean by control systems. There is the actual system itself, and then there is the technology behind the system. We will briefly discuss both below.

Control Systems

The following descriptions are meant to be general in nature. Each company might have a slightly different way of managing their inventory. Making matters more complex, the way that businesses manage their inventory is often proprietary knowledge that the company wants to keep secret from its competitors.

There are three general types of systems: an intuitive system, a reserve system, and a computer system. The intuitive system is simply a system where the inventory managers look at the inventory and decide when to reorder. They use their experience and their gut feelings to decide when they don’t have enough inventories or when they have too much. It has been illustrated that this system is generally not the most effective as humans tend to make a lot of errors. This system is not used much anymore except by smaller businesses.

The next type of system, the reserve system, simply sets aside some extra inventory to be used when the current inventory runs out. This inventory is usually set aside and is only opened when the inventory on-shelf runs out. Once this inventory is opened, the company reorders more inventory.

The computer system is probably the most sophisticated of the three types of systems. This system uses perpetual inventory records to automatically trigger inventory orders when inventory falls below a certain level. This level is known as the optimal quantity reorder point. This quantity is calculated using the data collected from the perpetual records.

Control System Technology

The different types of technology used to control inventory includes barcode and radio frequency identification (RFID) technology. Barcodes have been in use for some time. They speed up the data entry process and they also eliminate errors that are often associated with manual entries. RFID technology is much newer and also more expensive. With RFID technology instead of having to directly scan each individual piece of inventory, the inventory only has to be in the general vicinity of the RFID reader. This makes counting and controlling for inventory even faster than with barcode technology.

Managing inventory can make or break the fortune of a company. There are a lot of different systems available to control inventory: intuition, reserves, and computer operated. After you have decided on a system, you’ll also need to determine which technology will best fit your organization.