Home » Articles & News » “The benefits of inventory control”
Any reduction in inventories can have a dramatic effect on your bottom line.

The benefits of inventory control
Computerization is the key to maintaining proper inventory levels
Corporate Detroit (reprinted with permission)
By Donald Reimer, CMC & Ravi Nayar, CMC

Today, maintaining the right inventory levels is a tough challenge. If not properly managed, your inventory can result in a significant expense. Looking over your shoulder is the lender who is concerned about the cost of carrying too much inventory - which can affect profitability.

Fortunately, there are management information systems that exist which use microcomputers and a variety of industry specific software. The cost of carrying inventory today has become a major expenditure and requires immediate attention. The benefits of inventory control far outweigh the costs. Any reduction in inventories, whether it is raw material, work-in-process, finished goods or supplies, can have a dramatic impact on your bottom line.

Industry averages suggest that a 20 percent reduction in inventory is achievable with a computerized inventory control system. For a company with a yearly sales volume of $1 million, such a reduction would result in savings of $14,400 per year and would free up $48,000 of new dollars for reinvestment. For a company with a yearly sales volume of $10 million, the figures are proportionately higher: $144,000 per year in savings and $480,000 in new dollars for reinvestment.

"The benefits of inventory control far outweigh the costs."

A computerized inventory control system can also help a company with new inventory management techniques such as Just-in-time (‘JIT’). Such techniques cut the use of company resources such as warehousing, equipment and personnel. However, these techniques require error-free environments and better control over inventory since the buffer zone to compensate for the errors is less.

How do you go about selecting a computerized inventory control system.

First, such a system should be bought rather than developed in-house. With the purchase of an already available software package, you can focus on getting the benefits of the system immediately rather than waiting until the development and debugging is completed. Also, the documentation and training materials will generally be available immediately when a software package is purchased.

Buying a software package is not easy, considering that there are many choices available in the marketplace today. When choosing a package, consider: ease of installation and operation, ease of use, vendor reputation, local troubleshooting and consulting support, quality and availability of end-user documentation and education programs.

What can you expect a computerized inventory control system to do once it is in use? The package should be capable of certain key functions. The system should allow for reporting and tracking all items of inventory within a company. In the case of a manufacturing company, this includes the raw material, sub-assemblies and other work-in-progress, finished goods, tools and supplies.

In particular, the system should:

  • Maintain an item master file for the company. This file keeps all pertinent information on each item to be controlled: part number and description, detailed information such as preferred and actual locations and shipping weight, reorder point and recommended reorder quantity and cost information such as standard cost, actual cost and sales price.
  • Process the inventory within the company. Such activity includes the material issues, receipts, shipments, transfers, returns, rejections, inspections and scrap. The system should enable the transactions to be processed online, with immediate updates. The system should also provide the capability to track inventory levels and activity for multiple locations within the company.
  • Facilitate purchasing. The system should provide reports of items at reorder points in case of companies not using material requirement planning ("MRP") systems. The order point calculation should be based on the prior use of items. Automatic computation of these numbers greatly helps in inventory control personnel.
  • Provide adequate online inquiry and management reporting capabilities. The system should provide online inquiry into the stock status by different locations, inventory value by different location and descriptive information for each item. The information should be obtainable on the screen from different computer terminal locations.

The system should be capable of generating numerous operational and management reports. These might include:

  • Stock status report
  • Inventory movement report
  • Recommended purchases report
  • Parts history report

A computerized inventory control system can be a big asset to a company, whether large, medium or small. These systems can help the management in controlling the inventories of the company to cut significant costs and have a dramatic impact on the financial bottom line of the company.

Such a system should be purchased from software package vendors and customized to the company’s needs, if necessary. There are many packages available in the software market today. However, care should be exercised in choosing the package since the customizing and implementation costs for the company could be very high if the wrong package is chosen.

The cost of implementing the system goes far beyond the cost of the software package itself. The effort and time could be as high as five to 10 times the cost of the package. But the benefits of the system would still far outweigh the costs for a typical company.

 
All content copyright 2002, 2003, 2004, 2008
 Small Business Strategy Group. All rights reserved.