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What are the key components of an effective inventory control system?

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Inventory control is the process of managing the quantity, location, and quality of the products or materials that a business holds. It is essential for optimizing the efficiency, profitability, and customer satisfaction of any operation. However, inventory control is not a one-size-fits-all solution. It requires careful planning, implementation, and evaluation of several key components. In this article, we will discuss what these components are and how they can help you achieve an effective inventory control system.

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Sandeep Naik

Head of Supply Chain Management at Mahindra and Mahindra Limited [Automotive Division ]

1 Demand forecasting

One of the first steps in inventory control is to estimate the future demand for your products or services. This will help you determine how much inventory you need to keep, order, and distribute. Demand forecasting can be based on historical data, market trends, customer feedback, or other factors. However, it is not an exact science. You should always account for uncertainty, variability, and seasonality in your demand patterns. You should also update your forecasts regularly and adjust your inventory levels accordingly.

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Sandeep Naik

Head of Supply Chain Management at Mahindra and Mahindra Limited [Automotive Division ]
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One need to always keep in mind that demand is for resources planning but materials planning can be done with fixed orders in hand. In case of certain stranger items stks can be maintained or managed with defined demand pattern to cater to customers.

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2 Inventory classification

Another important component of inventory control is to classify your inventory items according to their value, demand, and usage. This will help you prioritize your inventory management activities and allocate your resources efficiently. A common method of inventory classification is the ABC analysis, which divides the inventory items into three categories: A, B, and C. A items are the most valuable and require the most attention. B items are moderately valuable and require less attention. C items are the least valuable and require the least attention. By applying the ABC analysis, you can focus on the items that have the most impact on your bottom line.

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Sandeep Naik

Head of Supply Chain Management at Mahindra and Mahindra Limited [Automotive Division ]
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While we classify items in ABC manner another supplementary way is XYZ items i.e. Runners, Repeaters & Strangers. U can make multiple combinations e.g. AX, AY, AZ & so on.. This will help to exercise proper control on items. AX & AY we can exercise tight controls & AZ can be managed with defined stk levels to cater to typical or MTO items.

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3 Inventory tracking

Inventory tracking is the process of monitoring the movement and location of your inventory items throughout your supply chain. It is essential for maintaining accurate inventory records, avoiding stockouts or overstocks, and ensuring product quality and safety. Inventory tracking can be done manually or automatically, depending on the size and complexity of your inventory system. Manual tracking involves using paper documents, spreadsheets, or barcode scanners to record inventory transactions. Automatic tracking involves using radio-frequency identification (RFID) tags, sensors, or software to capture inventory data in real time.

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4 Inventory optimization

Inventory optimization is the process of finding the optimal balance between inventory costs and service levels. It is the ultimate goal of inventory control, as it can improve your cash flow, profitability, and customer satisfaction. Inventory optimization can be achieved by applying various techniques, such as economic order quantity (EOQ), safety stock, reorder point, and inventory turnover. These techniques can help you determine how much inventory to order, when to order, and how often to order. They can also help you reduce inventory waste, obsolescence, and shrinkage.

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5 Inventory audit

Inventory audit is the process of verifying the accuracy and validity of your inventory records. It is a crucial component of inventory control, as it can identify and correct any discrepancies, errors, or frauds in your inventory system. Inventory audit can be done internally or externally, depending on the purpose and scope of the audit. Internal audit is performed by your own staff, usually on a regular basis, to ensure compliance with your inventory policies and procedures. External audit is performed by a third-party, usually on an annual basis, to ensure compliance with accounting standards and regulations.

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Sandeep Naik

Head of Supply Chain Management at Mahindra and Mahindra Limited [Automotive Division ]
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Businesses either small or larger Perpetual Inventory cycles to be deployed based on class of items or valuation. This help to get snap shots of stk accuracy in system. Any leakages in the system can be identified on timely basis & major damage can be averted. Once in a year complete physical stk checks to done arrive @ gaps in physical v/s actual to avoid any carryover losses.

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6 Inventory reporting

Inventory reporting is the process of analyzing and communicating your inventory performance and results. It is a valuable component of inventory control, as it can provide you with insights, feedback, and recommendations for improving your inventory system. Inventory reporting can be done using various tools, such as dashboards, charts, graphs, or tables. Inventory reporting can help you measure and evaluate your inventory metrics, such as inventory accuracy, availability, turnover, and cost. It can also help you identify and address any inventory issues, challenges, or opportunities.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Sandeep Naik

Head of Supply Chain Management at Mahindra and Mahindra Limited [Automotive Division ]
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Managing inventories with VMI principles is also a proven way to optimise overall performance. Here sound understanding with suppliers & with win-win philosophy this concept can be deployed. Also good level of Relationship Management with all stake holders helps to implement VMI effectively.

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What are the key components of an effective inventory control system?

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3

4

5

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1 Demand forecasting

2 Inventory classification

3 Inventory tracking

4 Inventory optimization

5 Inventory audit

6 Inventory reporting

7 Here’s what else to consider

Business Administration

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What are the key components of an effective inventory control system?

1

2

3

4

5

6

7

1 Demand forecasting

2 Inventory classification

3 Inventory tracking

4 Inventory optimization

5 Inventory audit

6 Inventory reporting

7 Here’s what else to consider

Business Administration

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