Inventory control is the management of raw materials, work in process, and final goods. Inventory control attempts to minimize costs while avoiding production stoppages, the cost of idle workers, and the potential for lost sales due to not having sufficient product available to meet market demand. In many business environments, inventory control is a complex, dynamic process that requires continual oversight and decision making.
Logistics management specialist Jeroen P. Van den Berg divides inventory control into two parts: planning and control. In his article Van den Berg states “Planning refers to management decisions that affect the intermediate term (one or multiple months), such as inventory management and storage location assignment. Control refers to the operational decisions that affect the short term (hours, day) such as routing, sequencing, scheduling and orderbatching.” Adjusting final goods inventory to meet anticipated changes in demand would be part of inventory planning, while changes in raw materials and work-inprogress levels would be part of inventory control.
One method of assessing inventory control is called materials-requirements planning (MRP) and materialsresource planning (MRPII). MRP is an operational planning system in which, by looking at the end product and working backward, all the labor, materials, and other resources needed to produce the product are determined. Computer models are used to assess the complex relationships among the production processes, including timing, energy requirements, machine and worker-production capacities, and shipping and handling. MRPII takes the resource requirements estimated from MRP, analyzes the production costs at various levels of output, and coordinates resource controls with estimated market demand.
In the 1970s many companies shifted emphasis from production improvement to inventory reduction. MRP and MRPII led to the concept of just-in-time (JIT) inventory minimization. In Japan the Toyota Production System, “kanban,” or time-based management, called for eliminating inventories, with suppliers delivering materials and components, sometimes within 30 minutes of when the inputs were needed for production. The system saved money for Toyota, but as correspondent Roger Schreffler states, “The savings realized through kanban, however, aren’t necessarily passed on to Japanese suppliers. In fact, much of the cost for ensuring on-time delivery of precise quantities of components and materials falls directly on the suppliers’ shoulders.” JIT inventorycontrol systems work better when suppliers and customers are in close proximity, but as Toyota learned in the 1990s, such systems create risks. When Toyota’s only brake-part supplier’s factory burned, its assembly plant had only a few hours’ worth of parts to use, and production stopped. Other suppliers quickly created alternative sources of parts, but Toyota lost millions of dollars’ worth of production.
In the United States, Dell Computer Corporation and Wal-Mart are recognized leaders in inventory control. In the 1980s Wal-Mart developed an often-copied electronic sales, ordering, and warehousing system. Scanning systems constantly transmit sales from each store to Wal-Mart headquarters in Bentonville, Arkansas. Reorders based on sales are automatically transmitted to vendors, who then ship to Wal-Mart’s distribution centers. Distribution centers are expected to maintain no inventory but instead constantly coordinate shipments from vendors to individual stores. As an old saying goes, “Nothing gets sold in the warehouse.” A story in the Wall Street Journal about sales on September 11, 2001, provides insights into both American consumer behavior and Wal-Mart’s inventory-control system. The article reported that during the morning of September 11, sales of all goods plummeted as Americans were transfixed to their television screens. In the afternoon sales of water, batteries, canned goods, and ammunition skyrocketed. By evening, sales of American flags had exhausted stores’ inventories.
Dell Computer Corporation is another example of the importance of inventory control. Relatively few Dell customers realize the company does not produce computers or computer parts. Instead, when customers go on-line and order a Dell computer, their orders automatically send other orders to Dell suppliers to produce and send the needed components. By maintaining no inventory, Dell reduces their costs, allowing them to adjust for market conditions and also to avoid inventory obsolescence.
With such methods, many companies wind up with products or components that are out-of-date. Managing inventory has been critical to minimizing costs of production, especially in the personal computer market during the late 1990s, when the “state of the art” technology was being replaced every 12–18 months.
See also mass customization.