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How to control inventory
5. Про схвалення Концепци реформування системи соцгальних послуг. Розпорядження Ka6iHeTy MiHicTpiB Украши вiд 13 квгг. 2007 р. № 178-р (втратило чиннiсть на пгдставг Розпорядження КМ № 556-р вгд 8 серп. 2012 р.)//Офщ. вiсн. Украши. - 2007. - 27 квгг (№ 28). - C. 69. - Ст. 1122.
6. Про сощальш послуги. Закон Украши вгд 19 черв. 2003 р. № 966-IV (гз змгнами, внесен. зггдно гз 8 Законами у 2004-2012 рр.)//Офщ. вгсн. Украши. - 2003. - 1 серп. (№ 29). - C. 52. - Ст. 1435.
7. Про схвалення Стратеги реформування системи надання сощальних послуг. Розпорядження Кабгнету Мгнгстргв Украши вгд 8 серп. 2012 р. № 556-р.//Офщ. вгсн. Украши. - 2012. - 20 серп. (№ 61). - C. 71. - Ст. 2482.
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Kats Mariia Valerievna, Taras Shevchenko National University of Kyiv, Ph. D. Student, the Faculty of Economics E-mail: maphonja@bigmir.net
How to control inventory
Abstract: different inventory control systems are examined in the article. Each of them is analyzed and recommendations of its better use depending on area of business activity are given.
Keywords: inventory, the eyeball system, reserve stock system, perpetual inventory systems, stock control, inventory control records.
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, capital, tied up in their major asset, inventory. 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:
• raw materials;
• in-process or semi-finished goods;
• 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.
The reasons for inventory control are:
- yelps balance the stock as to value, size, color, style, and price line in proportion to demand or sales trends;
- help plan the winners as well as move slow sellers;
- helps secure the best rate of stock turnover for each item;
- helps reduce expenses and markdowns;
- helps maintain a business reputation for always having new, fresh merchandise in wanted sizes and colors.
Three major approaches can be used for inventory control in any type and size of operation. The actual
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system selected will depend upon the type of operation, the amount of goods.
The Eyeball System. This is the standard inventory control system for the vast majority of small retail and many small manufacturing operations and is very simple in application. The key manager stands in the middle of the store or manufacturing area and looks around. If he or she happens to notice that some items are out of stock, they are reordered. In retailing, the difficulty with the eyeball system is that a particularly good item may be out of stock for sometime before anyone notices. Throughout the time it is out of stock, sales are being lost on it. Similarly, in a small manufacturing operation, low stocks of some particularly critical item may not be noticed until there are none left. Then production suffers until the supply of that part can be replenished. Such unsystematic but simple retailers and manufacturers to their inherent disadvantage.
Reserve Stock (or Brown Bag) System. This approach is much more systematic than the eyeball system. It involves keeping a reserve stock of items aside, often literally in a brown bag placed at the rear of the stock bin or storage area. When the last unit of open inventory is used, the brown bag of reserve stock is opened and the new supplies it contains are placed in the bin as open stock. At this time, a reorder is immediately placed. If the reserve stock quantity has been calculated properly, the new shipment should arrive just as the last of the reserve stock is being used.
In order to calculate the proper reserve stock quantity, it is necessary to know the rate of product usage and the order cycle delivery time. Thus, if the rate of product units sold is 100 units per week and the order cycle delivery time is two weeks, the appropriate reserve stock would consist of 200 units (I00u x 2w). This is fine as long as the two-week cycle holds. If the order cycle is extended, the reserve stock quantities must be increased. When the new order arrives, the reserve stock amount is packaged again and placed at the rear of the storage area.
This is a very simple system to operate and one that is highly effective for virtually any type of organization. The variations on the reserve stock system merely involve the management of the reserve stock itself. Larger items may remain in inventory but be cordoned off in some way to indicate that it is the reserve stock and should trigger a reorder.
Perpetual Inventory Systems. Various types of perpetual inventory systems include manual, card-oriented, and computer-operated systems. In computeroperated systems, a programmed instruction referred
to commonly as a trigger, automatically transmits an order to the appropriate vendor once supplies fall below a prescribed level. The purpose of each of the three types of perpetual inventory approaches is to tally either the unit use or the dollar use (or both) of different items and product lines. This information will serve to help avoid stock-outs and to maintain a constant evaluation of the sales of different product lines to see where the emphasis should be placed for both selling and buying.
Stock Control. A stock control system should keep you aware of the quantity of each kind of merchandise on hand. An effective system will provide you with a guide for what, when, and how much to buy of each style, color, size, price and brand. It will reduce the number of lost sales resulting from being out of stock of merchandise in popular demand. The system will also locate slow selling articles and help indicate changes in customer preferences. The size of your establishment and the number of people employed are determining factors in devising an effective stock control plan.
With the observation method (the eyeball system), unless the people using it have an unusually sharp sense of quantity and sales patterns, it is difficult to keep a satisfactory check on merchandise depletion. It means that you record shortages of goods or reorders as the need for them occurs to you. Without a better checking system, orders may only be placed at the time of the salesman’s regular visit, regardless ofwhen they are actually needed. Although it may be the simplest system, it also can often result in lost sales or production delays.
Most smaller operations today, except for the very smallest, are using some form of a perpetual online system to record the movement of inventories into and out of their facilities. In a retail operation, the clerk at the register merely scans the ticket with a reader, and the system shows the current price and removes the item from the inventory control system. A similar process occurs in a manufacturing operation, except that the “sale" is actually a transfer of the inventory from control to production. This is a particularly critical system in a large operation such as a grocery store where they regularly maintain 12,000 plus items.
Inventory Control Records. Inventory control records are essential to making buy-and-sell decisions. Some companies control their stock by taking physical inventories at regular intervals, monthly or quarterly. Others use a dollar inventory record that gives a rough idea of what the inventory may be from day to day in terms of dollars. If your stock is made up of thousands of items, as it is for a convenience type store,
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dollar control may be more practical than physical control. However, even with this method, an inventory count must be taken periodically to verify the levels of inventory by item.
Perpetual inventory control records are most practical for big-ticket items. With such items it is quite suitable to hand count the starting inventory, maintain a card for each item or group of items, and reduce the item count each time a unit is sold or transferred out of inventory. Periodic physical counts are taken to verify the accuracy of the inventory card.
Out-of-stock sheets, sometimes called want sheets, notify the buyer that it is time to reorder an item. Experience with the rate of turnover of an item will help indicate the level of inventory at which the unit should be reordered to make sure that the new merchandise arrives before the stock is totally exhausted.
Open-to-buy records help to prevent ordering more than is needed to meet demand or to stay within a budget. These records adjust your order rate to the sales rate. They provide a running account of the dollar amount that may be bought without departing significantly from the pre- established inventory levels. An open-to-buy record is related to the inventory budget. It is the difference between what has been budgeted and what has been spent. Each time a sale is made, open-to-buy is increased (inventory is reduced). Each time merchandise is purchased; open-to-buy is reduced (inventory is increased). The net effect is to help maintain a balance among product lies within the business, and to keep the business from getting overloaded in one particular area.
Purchase order files keep track of what has been ordered and the status or expected receipt date of materials. It is convenient to maintain these files by using a
copy of each purchase order that is written. Notations can be added or merchandise needs updated directly on the copy of the purchase order with respect to changes in price or delivery dates.
Supplier files are valuable references on suppliers and can be very helpful in negotiating price, delivery and terms. Extra copies of purchase orders can be used to create these files, organized alphabetically by supplier, and can provide a fast way to determine how much business is done with each vendor. Purchase order copies also serve to document ordering habits and procedures and so may be used to help reveal and/or resolve future potential problems.
Returned goods files provide a continuous record of merchandise that has been returned to suppliers. They should indicate amounts, dates and reasons for the returns. This information is useful in controlling debits, credits and quality Issues.
Price books, maintained in alphabetical order according to supplier, provide a record of purchase prices, selling prices, markdowns, and markups. It is important to keep this record completely up to date in order to be able to access the latest price and profit information on materials purchased for resale.
Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify fast sellers are essential for proper inventory management. Taking regular and periodic inventories must be more than just totaling the costs. Any clerk can do the work of recording an inventory. However, it is the responsibility of key management to study the figures and review the items themselves in order to make correct decisions about the disposal, replacement, or discontinuance of different segments of the inventory base.
References:
1. Inventory control//Enterpreneur. - [Electronic resource]. - Access mode: http://www.entrepreneur.com/ar-ticle/21842.
2. Inventory control//Professor Hossein Arsham. - [Electronic resource]. - Access mode: http://home.ubalt. edu/ntsbarsh/business-stat/otherapplets/ABClass.htm
3. Stock control and inventory//Info Enterpreneurs. - [Electronic resource]. - Access mode: http://www.infoen-trepreneurs.org/en/guides/stock-control-and-inventory.
4. What is inventory control//Accounting tools. - [Electronic resource]. - Access mode: http://www.accounting-tools.com/questions-and-answers/what-is-inventory-control.html
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