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Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term often used is stock control. The three main factors in inventory control decision making process are:

The cost of holding the stock (e.g., based on the interest rate).
The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay

Inventory Control

Inventory Control Basics

The goal of inventory control is to maintain a level of inputs and finished products at the lowest cost possible. Inventory refers to both the raw inputs used to produce goods and the finished products. While most inventory control methods relate to physical goods, many of the concepts are applicable to service-oriented businesses as well. Companies need strong management of all inventories for efficiency, profit and control.

Inventory Levels

The level of inventory needed on hand at a is dependant upon the speed of production, shelf life of goods, acquisition difficulty levels, costs and space considerations. Keeping inventory at a minimal level decreases overhead, management concerns and ultimately correlates to increased profits. Inventory levels that are too low can result in production delays and lost sales. High inventory levels can produce waste, spoilage, increased insurance costs and decreased profit.

First In First Out

First In First Out (FIFO) is an inventory control method where all inventory is used based on the time or date it was acquired. This method simply decreases waste and spoilage and requires stringent control of inventory based on date.

Just In Time

Just In Time (JIT) is an inventory control method where parts or supplies are delivered at the moment they are needed. JIT refers to all types of inventory. This method requires a high level of coordination and trust with suppliers and a highly efficient production process. The just-in-time inventory method creates very low inventory overhead and cost. There is little room for error or delays with this method. Any problems with transportation, production or supply could cause widespread inventory outages.

Other Inventory Control Methods

Fixed order is the most basic type of inventory control, in which inputs are ordered at a set level on a set time frame such as weekly or monthly. Economic order quantity is a formula-driven mathematical approach to inventory control, in which multiple inputs such as annual usage, order cost and carrying costs are used to determine inventory levels.