Advantages of inventory control system
Any company that maintains inventory for sale or as part of a raw material supply must have defined inventory control policies. For most small businesses, inventory functions as the largest investment the company makes. Numerous financial and service related advantages exist for the company that manages to effectively control its inventory; these include leaner operations and reduced operational expenses.
An increase in customer service levels results from having a highly defined and working inventory control policy. Imagine two competing companies: company “A” has very defined inventory control policies and company “B” has very few policies in place. A customer calls company “B” to place an order. Company “B’s” inventory system says it does not have the product available and the wait time would be three weeks. The customer then calls company “A”, and company “A” has the product available and can ship the same day. Nothing abnormal happened here except that company “B” did have the product available. But because no one received the product in the system, the customer service person could not see the available inventory. Company “B” lost the sale and possibly any future sales from this customer. Company “A” gets the sale and probably all future sales from this customer. It also maintains a higher fill rate (the number of orders filled divided by the total number of orders received).
Well-defined inventory control policies can reduce the labor costs associated with managing the inventory. Each time inventory gets handled, whether to move it from one location to another, to retrieve it for order picking or to put it away for storage, it involves labor. This handling makes up part of the cost associated with managing inventory. Companies prefer to handle the inventory as little as possible. When a company constantly searches for lost inventory, moves inventory from one location to another because of poor space utilization or handles the inventory multiple times, it results in increased labor costs. Properly managed inventory reduces these incidents and reduces the labor cost associated with the inventory.
Lower inventory cost is a definite advantage for the company that effectively controls its inventory. Business owners need to fully understand the costs of carrying inventory, not just how much the inventory costs to purchase. Inventory carrying costs consist of all the expenses a company incurs for owning inventory. These expenses include the cost of capital, storage and risks costs (including obsolescence, damage, theft and deterioration) plus the appropriate taxable amounts. Effective inventory control reduces these costs because it reduces the total amount of inventory required to manage the business. Inventory control monitors the level of inventory and proactively manages obsolescence and deterioration by ordering in the appropriate quantities. Effective inventory control also reduces storage costs, because it orders enough inventory to fill consumer demand and not much more.
The company that effectively and proactively controls and manages its inventory has a competitive advantage over the company that has lax inventory control policies and procedures.