Inventory Management: Strategies and Best Practices

The assignment content discusses the importance of stock control in a company, highlighting various methods and strategies used to manage inventory levels. The content emphasizes the need to balance demand and supply, as well as costs, to avoid excessive investment in inventory or stock shortages. It also introduces concepts such as re-order points, outsourcing, bottleneck enhancement, just-in-time (JIT) inventory control, economic order quantity (EOQ), safety stock levels, and their advantages and disadvantages. Overall, the content aims to provide a comprehensive overview of the principles and methods of stock control for small-scale businesses.

BLOG: STOCK CONTROL
WHAT IS THE PURPOSE OF STOCK
CONTROL?

STOCK CONTROL
10th August 2019
The term inventory or stock is one of the key terms used in business. This term is used for the
products (finished goods) available in a company's hand for sale along with raw materials that
are used for producing such products available for the purpose of sale. Inventory or stock stands
as one of the most vital assets of a company because the turnover of stock represents itself as one
of the key sources of the company's revenue generation as well as subsequent earnings for its
shareholders. In the ordinary course of business, inventory is a type of asset which is meant to be
sold. Inventory is not something that could be sold out immediately if that does not stand as a
finished product in form. The items considered as inventory fall into any one of out the below
stated three categories:
 Underlying in the manufacturing process of being produced for sale
 Held for ordinary sale in the regular course of business
 The supplies or materials that are intended to consume in the process of production.
The above stated classification of asset includes all the items that are purchased as well as held
for sale or resale by manufacturing and retailing companies. On the other side, in service
providing companies, inventory stands as the cost of a particular service, for which the expected
related revenue is not recognized or generated yet. In the accounting system, inventory or stock
is classified into three different categories such as Raw materials that include materials that are
being consumed by a company in the process of producing finished goods. Work-in-process, that
includes all the items that are underlying in the middle of the company’s production process,
which means that are not yet ready to get sold to customers, and Finished goods which include
goods or products ready to get sold to customers.
Inventory is also grouped as a type of short-term asset because it is generally liquidated within a
year. Inventory is one of the most vital elements of a company’s production process as without it
production could not be started. Following this, if production could not get started, then the

finished inventory which is ultimately sold to customers for generating business revenue is also
not available. Due to this reason, inventory or stock must be controlled in a proper manner to
ensure its availability for continuing production and sales related core business activities of a
company. Inventory or stock control refers to the processes that are employed to maximise
inventory utilisation by a company. The main goal of stock control is of generating maximum
profit through the least investment in inventory without encroaching upon the satisfaction levels
of customers. In considering the impact of inventory or stock control on profits and customers,
stock control stands as a chief concern of companies that have huge inventory investments like
large-scale manufacturers, distributors, and retailers.
Definition and Purpose of Stock Control
Stock control is defined as the practice of a company to balance the requirement of maintaining
inventory levels against cost. The ideal result of stock or inventory control is the least investment
in the inventory and still being capable of fulfilling customers' orders on-time. It is the process
that helps a company to ensure that appropriate volume of stock to be maintained throughout the
year by it in order to conduct the regular course of business and to continue its practices of
meeting the demand of customers without delay. Stock control is also known as a process of
keeping total costs related to stock holding at a minimum level. Stock control or inventory
control is broadly defined as the activity of checking stocks of a shop. It is a methodical practice
of verifying inventory of a business as well as focusing on a number of related facets attached to
inventory management such as future demand forecasting. Other facets in relation to stock
control include production control, supply chain management, customer satisfaction, and
financial flexibility.
Basically, stock control stands as an organisational practice of managing and monitoring the
volume of stock in amount either kept in storage or underlying on selling floor at any point of
time. It is highly significant to done efficiently as stock or inventory is the only largest asset
present in the store which liquidates in short-term and at a regular interval. The purpose in
relation to stock or inventory control is to ensure and have required amount of stock in hand to
avoid any kind of interruption in the production process without having excess inventory to sell

or manage and investing a lot in inventory. Inventory management is the most vital part of stock
control which is exercised in order to gather and evaluate data about market demand, rate of
turnover and levels of inventory. A major purpose of stock control is to collect information
related to the placement of orders when needed and sell out existing stocks when it is possible.
A major purpose attached to stock control is of minimising stocks along with the costs associated
with holding stocks while ensuring the company that it has sufficient stocks by using which it
could meet customer demands. The key reason behind holding stocks in WIP is to ensure more
flexibility in machinery utilisation, while holding the finished products in stock that allows the
company to meet all the variations in consumers’ demands. Stock control is conducted by using
the systems of inventory management to track when a product is ordered, and restocked. Stock
control system even has a feature of automatic ordering that alerts a company when stock gets
reduced at a certain level. Some other purposes of stock control are to:
 minimise the amount of investment in the company’s inventory by reducing or selling out
excessive stocks
 ensure the availability of required inventory to ensure uninterrupted production to meet
consumer demand
 provide a mathematical as well as a scientific basis to assist the company in defining
inventory needs
 minimise the risk of financial loss due to deterioration, obsolescence etc
 tiding over demand fluctuations in the market by maintaining safety-stock in a reasonable
manner
 maintain important records in order to protect against leakages and wastages of
inventories, thefts
 decide replenishment of inventories in timely manner.
Activities involve in Stock Control

 Adopting the system of just-in-time production that builds goods only when specific
customer demand is there for such goods. This action minimises the amount of
investment in inventory, and often speed up the delivery times.
 Reducing the quality of products produced and offered which ultimately reduces
inventory investment whereas gains the negative reactions from the staffs engaged in
marketing as they tend to offer a largest possible variety of products or services to
customers.
 Building warehouses near the place where customer concentrations are wide so that
products can be shipped more rapidly to the final customers. This particular approach
targets at greater and more improved customer service though it increases the amount of
capital investment in inventory.
 Ordering minimum volume of supplies and raw materials required to run a specific
production process and re-ordering for the same more frequently for reducing the
investment of cash in supplies and raw materials.
 Creating different cells in a company’s production area which could be held responsible
in order to create goods and if required, sub-assemblies from the beginning of the
production to end i.e. to finish the goods that could be sell to customers. This activity
reduces investment in WIP (work-in-process) but ensures still on-time delivery of goods.
 Installing the systems of automated picking to ensure rapid shipment of finished goods
from warehouses to the final destination i.e. market.
 Locating suppliers residing near to the production facility of the company to reduce
delivery lead times. This particular activity reduces the requirement of maintaining
expensive safety-stocks in-house.
 Installing a system to track the movement of inventories. This tracking system should be
computerised. This activity helps a company to eliminate the chances of inventory theft
from the production area and warehouse. It also helps to ensure no inventory lost in
transit and allows a company to invest less in inventory.

 In the area of production, management of bottleneck operation which assist the company
to maximise the volume of production of major goods which are required in increasing
the overall profitability of the company.
Areas where Stock Control System is Exercised
There are a number of common areas where inventory control needs to be exercised. Some of
these areas are:
Raw materials and supplies availability: There should be enough office supplies and raw
materials in the total inventory in a company’s which is required for ensuring that new lot of jobs
are to be launched in production process on-time, but not excess than the required which could
lead the company to invest more in inventory. Stock control is designed to address ordering in
small-size lot frequently from the suppliers. Some suppliers accept this and a company engages
itself in the process of sourcing of product in sole entice the suppliers to engage in JIT (just-in-
time) deliveries.
Finished goods (products) availability: An organisation often found capable of charging higher
prices for its sellable products, if it becomes able to ship those products to customers in a reliable
manner and without delay. Thus, the company could apply the premium pricing strategy which is
associated with the company for having a high level of finished products on hand. This also led
the company to use the just-in-time system of manufacturing, which only manufactures products
on the basis of specific orders from customers.
Work-in-process (WIP): It is not impossible to reduce inventory which is being involved in the
production process and it reduces the investment in inventory once again. Reduction in
inventories, that are already engaged in production process, can be done by involving a broad
array of actions like using the production cells or units to work on sub-assemblies, shifting the
working area from large space to a small space for reducing the time required in move
inventories i.e. travel time of inventories, reducing set-up times for machine to minimise job
sizes and switch on new jobs.
Re-order point: A major part of stock control is to decide the best level of inventory at which to
re-order additional inventory. Here, if the re-order level set at a very low level then it keeps the

inventory investment low whereas increases the stock-out risks which may interrupt or interfere
in the process of production or sales. A reverse problem arises if the re-order level set at a much
higher level. In order to eliminate such problems, the alternative method to be used is the
material requirements planning system which helps the company to order enough inventory (raw
materials and other supplies) for expected levels of production.
Outsourcing: Stock control also involves in the process of decision making in relation to
outsourcing a few activities to the suppliers which help the company in shifting the burden of
inventory control to the suppliers.
Bottleneck enhancement: In somewhere of a company’s production process, there is a
bottleneck always found which interferes with the capability of the company’s entire operation in
relation to increase the volume of the final output. Stock control involves in placing an inventory
buffer immediately in front of the bottleneck operation to ensure the running of bottleneck even
if production failures arise from it which would interfere with other required inputs.
Method of Stock Control
Managing inventories for a small-size business is an act of balancing between demand and
supply as well as an act of balancing the costs. Carrying an excessive amount of inventory lead a
company to make a huge investment in dollar and increases the risk of loss if a product fails to
get favor from the market. On the other side, having little stock can create problems too for a
company in relation to the shortage of stock and make the business miss out the opportunity to
meet consumers demand and to make revenue. There are a number of different stock control
methods available, including JIT (just-in-time), EOQ (economic order quantity), and Safety
stock level (minimum stock levels. All these stock control methods are capable to assist
companies to gauge customer needs as well as the needs of the company itself. It is mentionable
here, that inventory or stock control methods use to vary across commodities, and companies.
The stock control method that works best for the fast-moving inventory items might fail to work
as well for the slow-moving inventory items.

Effective methods of stock control
Just-In-Time (JIT) Stock Control: This method helps a company to deliver the required
inventory to the floor of production just at the time of its use. This method delivers the exact
quantity of inventory only as required for the current production i.e. no less, no more. It helps to
reduce production costs by eliminating the costs related to the over-consumption of stock. This
method includes the risk of stock running out. This method is applied by a company if its
suppliers have warehouses near the company’s manufacturing unit.
Economic Order Quantity (EOQ): This particular stock control method helps a company in
balancing between holding too little or too much inventory. The formula of EOQ is quite
complex, and to use it, one must know the annual usage of inventory in units, rate of annual
carrying cost on percentage, ordering cost per order in dollars, unit cost (in dollars) as well as the
order quantity (in units). This method identifies the order quantity at the lowest total carrying the
cost of inventory.
Safety Stock Levels: The term safety stock stands as an additional volume of stock that is
carried over as buffer against some uncertainties that might interrupt the production process.
There are some reasons behind the use of safety stock such as problems in supplier performance,
material uncertainty, and long lead-times. Calculating the amount of safety stock is complex, but
most of the large businesses have software which uses to calculate the values of such safety stock
automatically. For small-scale businesses, it is expensive and can harm financially compared to
the benefits generated from carrying inventory.
Advantages and Disadvantages of Stock Control
Advantages of Stock (inventory) Control are –
 Improves a company’s liquidity position by reducing the unnecessary blockage of capital
inventories those are purchases and stored excess than actually required
 Facilitates in production scheduling, duplicate ordering, and avoiding the shortage of raw
materials

 Ensures smooth and uninterrupted production operations as it helps companies to
maintain stocks of raw materials at a reasonable volume
 Protects companies against the variations in materials at the delivery time
 Facilitates timely and regular supply of finished goods to consumers through an adequate
amount of finished products in stock
 Helps to eliminate or minimise financial loss occurs due to obsolescence, damage
deterioration, etc.
Disadvantages of Stock (inventory) Control are –
 Unable to eliminate business risks
 Cost consuming and complex
 Not always suitable for small-scale businesses