Inventory Control Methods: The Good, the Bad, and the Ugly

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Struggling with managing your inventory level to meet customer demand? What is the best way to manage your inventory? It is a question that must be asked and answered at each business by someone who understands the unique needs of that business. In the end, you are the most-qualified person to answer that question. But you need to know all of the facts of the matter so that you can make the right decision that will lead to lasting success for your business.

There are four main inventory control methods that should be considered as part of your analysis:

  • ABC System
  • Min-Max System
  • Two-Bin System
  • Order-Cycle System

The following is an analysis of these four popular methods of inventory control. We will define what each one is and then address its unique strengths and weaknesses.

ABC System. This system includes three groups of products. The first group (A) includes large, costly finished goods; the second group (B) includes somewhat less-costly products; and the third group (C) includes small, cheap products. The ABC System focuses on product types, not quantity. If you use inventory tracking software, you should be able to use this system just fine. The ABC System will help you know how long it will take to reorder certain products, based on their group. This is a good software for monitoring inventory turnover.

Min-Max System. This is the simplest method of inventory control. You simply draw two lines, which represent a maximum amount of inventory and a minimum amount. When your stock of finished goods reaches the minimum stock level, it’s time to reorder. However, you can’t order more than the maximum line. The simplistic approach of this method can be both a good thing and a bad thing. It’s easy to use, but it could leave you with shortages or excess inventory, if you’re not careful.

Two-Bin System. This system is good for stock control. As its name suggests, this system includes two bins: One bin with products you sell day to day, and another bin with products that are sold only when the first bin is empty and an order has been placed to refill it. This is also a fairly simple approach, though it can still require a lot of work. Be sure to rotate through the backup bin fairly often and try not to stock up too much on products or your carrying inventory cost will rise.

Order-Cycle System. In this system, every 30, 60, or 90 days you go through your inventory and check the inventory level. You order more products that you suspect will sell out before the following scheduled inventory checkup. This is the worst of the four inventory control methods. It is fraught with danger. If you only look at your inventory levels every 30 days or so, you could run into overstock problems or shortages. You should steer clear of this inventory control method.

Even with these inventory control methods, you still need to rely on other methods to keep your inventory level in check, especially an inventory audit. An inventory audit is the process of making sure that financial records and physical inventory count match that of the company's records. Inventory tracking is also necessary because it makes sure each finished product reaches its final destination.

The decision of how best to control your physical inventory is up to you. No matter what method you use, you should also use inventory management software. This will allow you to have all the facts you need to make smart ordering decisions and keep they inventory control method functioning as it should.

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TL;DR SUMMARY

An inventory control method is a way of managing an organization’s parts, products, and assets. The four main inventory control methods are:

  • ABC System – Organize items into three groups.
  • Min-Max System – Set high and low inventory quantities.
  • Two-Bin System – Have a main stockpile of goods and a backup stockpile.
  • Order-Cycle System – Schedule cycle counts on a regular basis.

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