Methods for Inventory Control

by Kenneth Hamlett, Demand Media
Companies use many different methods to manage and control their inventory.

Companies use many different methods to manage and control their inventory.

Depository image by Czintos Ã–dÃ¶n from <a href=''></a>

Most companies have a never-ending goal to find the best method to control one of their largest assets&amp;mdash;their inventory. Many different methods of inventory control exist, from the very basic to the very complex. All methods aim toward one target&amp;mdash;to have the lowest total cost of ownership while having the highest possible service levels. Some methods find a balance between the cost and service components, while others favor one component over the other.

Holy Grail

Inventory control methods vary from company to company, commodity to commodity and SKU to SKU. The inventory control method that works best for slow-moving items might not work as well for fast-moving items. A company might have 1 million different SKUs and use only five different inventory control methods. One thing to remember&amp;mdash;there is no perfect method to manage inventory. A holy grail or magic formula that results in perfect inventory levels does not exist. A company can only seek to find the best method that results in reduced cost and increased service levels.


Many small businesses use a basic method of inventory control called minimum stock levels. With this form of control, additional stock gets ordered when the existing stock has reached a certain level. For example, a small business sets a minimum stock level of 40 units on an item that sells at an average rate of 100 units every five days. When the inventory reaches 40 units at the end of day three, the company orders additional stock.


One of the most popular methods for controlling inventory in the manufacturing environment remains just in time, or JIT, inventory control. JIT seeks to deliver inventory to the production floor just in time for use. The JIT method delivers only the exact quantities required to complete current production&amp;mdash;no more, no less. JIT inventory control is highly dependent on the ability of the company&amp;rsquo;s suppliers to deliver on demand. In most manufacturing environments utilizing JIT delivery, the supplier has a warehouse very close to the manufacturing facility.

Economic Considerations

The economic order quantity, commonly referred to as EOQ, seeks to find a balance between holding too much or too little inventory. The EOQ formula gets quite complex, and to make use of it, a company must know the following information&amp;mdash;annual usage in units, ordering cost in dollars per order, annual carrying cost rate as a decimal of a percentage, unit cost in dollars and the order quantity in units. The EOQ method seeks to find the order quantity that has the lowest total cost of carrying the inventory.

Safety Stock

Safety stock refers to an additional amount of stock carried over the normal stocking level requirements as a buffer against uncertainty. Some reasons for using safety stock as an inventory control method include supplier performance problems, long lead times and material uncertainty. Calculating safety stock quantities involves another complex formula, but most large companies have software that automatically calculates safety stock values. For the small business that works on a very tight budget, carrying additional inventory in the form of safety stock may do more harm financially than the benefits gained from carrying the inventory.

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