The Factors Affecting Inventory Management & Inventory Policy

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In this guide to the factors that affect inventory management, and inventory control policies in business, we’ll explain: 


6 Factors Affecting Inventory Management

Both external and internal factors can affect inventory management in different ways, and it is important to be aware of these variables. Let’s look at the main factors that can affect inventory processes, and how they’re handled via warehouse inventory management software.

inventory management factors

Warehouse costs will affect inventory control policies and how stock is managed each day.

1. Financial Factors That Affect Inventory Management

Factors such as the cost of borrowing money to stock enough inventory can greatly influence inventory management.

In this case, your finances may fluctuate according to the economy, and it is wise to keep an eye on changing interest rates to help plan your spending.

The tax costs associated with stocking inventory is another factor that can influence inventory management. This is especially salient when preparing for the end of year tax returns.


Other financial factors include the expenses associated with warehouse operations and transportation costs changes in these factors may require you to alter your inventory management processes accordingly.

Fluctuations in the cost of fuel, for example, may require you to rethink your transportation methods to reduce costs. You may choose to purchase your own trucks or use outside contractors for transportation, which again will change the way you manage inventory.

2. Suppliers

Suppliers can have a huge influence on inventory control. Successful businesses require reliable suppliers in order to plan spending and arrange production. An unreliable or unpredictable supplier can have huge knock-on effects for stock control.

It’s a good idea to ensure you have a reliable back up supplier to prevent product shortages or delays in the manufacturing process.

3. Lead Time

Lead time is the time it takes from the moment an item is ordered to the moment it arrives.

Lead time will vary widely depending on the product type and the various manufacturing processes involved, and therefore changes in these factors can require changes to inventory management.

Outsourcing manufacturing processes to other countries due to lower production costs may result in longer waiting times. Producing the same goods locally may cost more but take less time, and therefore you may need to adjust your stock levels accordingly.

4. Product Type

Inventory management must take into consideration the different types of products in stock. For example, some products may be perishable and therefore have a shorter shelf life than others. In this case inventory must be managed to ensure that these items are rotated in line with expiration dates.

5. Management

Ultimately, responsibility for managing your business’ inventory sits with you and any co-owners. While you may have multiple employees acting as managers to oversee inventory processes, they typically will not have the same stake in the business as you do.

6. External Factors Affecting Inventory Management

There are multiple external factors that may affect inventory control. For example, economic downturns may occur and this is something that you will generally have very little control over.

Assessing the economy is a must in order to guard against stock outs or a buildup of excess inventory.

Other factors may include the real estate markets or the extent of local competition. These factors are also largely out of your control, so it is a good idea to assess the external climate regularly in order to stay prepared.

factors affecting inventory control

A major factor affecting inventory management policies in a firm is the perishability of the goods sold.

Inventory Control vs Inventory Management

Inventory control and inventory management are often used interchangeably. Though they have similar scopes, there are some important distinctions to make. Inventory control is a method of regulating the inventory you have on hand in your warehouse. On the other hand, inventory management is the activity of forecasting and replenishing inventory, focused on when to order stock, in what quantities and from which supplier.

Regardless of how you define them, it is important to regard them as two different concepts in order to make the appropriate strategic plans.

What is inventory control?

Inventory control regulates the inventory that is already in your warehouse.

This involves knowing what is in stock inside and out – how much is available, where is it located in the warehouse and in what condition it’s in. It is also about ensuring your warehouse is set up in a way that allows warehouse staff to quickly pick and pack to speed up customer order fulfilment.

In controlling the inventory you have on hand, you’ll also be aiming to keep inventory costs down. This can involve identifying the least popular items and reducing the stock, accurately forecasting changes in demand to avoid overstocking. For food and beverage manufacturers, this involves minimising waste by using inventory before they expire.

What is inventory management?

On the other hand, inventory management involves forecasting and product replenishment. Inventory management determines when to order products, in what quantities and from which supplier. This ensures that your business will always have the right quantity of the right item in the right location at the right time.

The scope of inventory management is arguably wider than inventory control.

While inventory control only requires understanding of your warehouse, inventory management requires you to understand the supply chain and maintain good relationships with your suppliers.

In managing your inventory, you’re aiming to get inventory at the right place at the right time. This involves quickly reordering stock, having resources in the right place and having an efficient process in place to receive and store inventory stock.

Which comes first: inventory control or inventory management?

Luckily, with inventory control and inventory management, there is no chicken and egg dilemma. The answer is an easy one – begin with inventory control. Knowing what stock you have on hand and the quality of it will allow you to accurately determine when to reorder products.

Inventory management has a two-pronged approach. Firstly, assess the strategic placement of your facilities and ensure you have picked the correct geographic location and site. Done correctly, the strategic placement will be driven by your customers – consider things like where they are located and what they need. You will also need to ensure the building layout allows for efficient inventory handling.

Next, focus on the small details. This stage is where your business deals with order quantities, replenishment cycle times, safety stock, forecasts, seasonality and more. Based on the day to day business operation, tweak the layout and to reflect shifts in demand, changes in customers, technological advances and more. Changes in suppliers can also affect inventory stock and their reordering.

Subsequent planning is then based on operating experience and typically tweaks the initial set as a result of product and order profile changes, customer gains and losses, demand shifts, and technology changes. Changes in sources and suppliers, as well as in their capabilities, can affect both necessary inventory holdings and the parameters of replenishment order cycles and quantities.

This is where we deal with the nitty-gritty of reorder points, economic order quantities, replenishment cycle times, risk periods, safety stock, forecasts and seasonality.

Two sides of the same coin

To summarise, inventory control is associated with maintaining the goods in your warehouse, while inventory management is focused on forecasting and reordering stock. Starting with good inventory control, effective inventory management is the result of both inventory control and inventory management.

While inventory control is associated with ensuring that the inventory in the warehouse is in good condition, inventory management is focused on reordering goods. Companies who wish to achieve better inventory management should first improve their inventory control. With a strong inventory control and management system, companies can get the products to customers without delays and stock out situations.

A Short History of Inventory Management

The current state of inventory management is nothing short of remarkable. Elegant Software-as-a-Service solutions offer real-time inventory control and reporting.

For complex businesses, inventory control allows centralisation by allowing management to keep track of stock across multiple warehouses, in multiple locations, anywhere in the world. Companies such as Toyota have designed the fundamentals of their business models around leveraging inventory management to reduce waste and add unprecedented value.

Although the current state and the future of inventory management are both exciting, the industry’s past has a lot to offer. Let’s take a quick look back at the development of inventory management – from the broadest conception of counting ‘things’ to modern, real-time stock management software.

Ancient Origins of Control

We do not know precisely when inventory management arose.

At its simplest, inventory management is about counting and keeping track of ‘things’.

The earliest evidence archaeologists have found of humans counting ‘things’ are ancient tally sticks dating back approximately 50,000 years. Clay tokens found in Iran dating back over 4,000 years offer an interesting take on agricultural inventory; for example, to create a record representing two sheep, ancient ‘inventory managers’ would select two round clay tokens with + signs baked into them.

Of course, using large numbers of tokens for very large flocks would be impractical, so different clay tokens were used to represent various numbers of different commodities.

Although we can draw a line between ancient counting systems and modern inventory management, that line is very long indeed. Ultimately, ancient inventory management was very basic and entirely manual. In many cases, the difficulty in counting items manually would mean that people would have to make inventory decisions based on a guess or a gut feeling.

A Slow Development

Inventory management would develop steadily but slowly over many thousands of years. The development of accounting systems in ancient Greece and Rome had wide-ranging implications for commerce as well as for civil society.

Robust record keeping enabled ancient societies such as those in present-day Greece and Egypt to achieve feats of engineering that stand even today. Successful inventory management contributed to military victory as well as civic advancement; Roman strategy in the Second Punic War involved an epic logistics effort to ensure security of supply for Rome no matter how many battles the Carthaginians won.

A Breakthrough

At the end of the 1880s, Herman Hollerith, an American inventor, developed an electromechanical punch card tabulator. The punch card allowed people to record many types of data, including inventory, by creating very small holes in pieces of cardboard.

This invention was leveraged by later inventors to develop the very first ordering system. Customers in a store could fill out a punch card; the system would then read the punch card, send the information to the storeroom and someone from the storeroom would then bring the item to the customer.

The system looked up items from a catalogue and was able to manage the financial and inventory recording aspects of a transaction.

From Punch Cards to Barcodes & RFID

Retailers in the 1960s, inspired by earlier work with UV sensitive markings, developed a new way of managing inventory, the barcode. There were a number of competing barcode technologies until the industry adopted the now ubiquitous Universal Product Code barcode symbology in the mid 1970s. The first UPC barcode ever to be scanned was a 10 pack of Wrigley’s Juicy Fruit chewing gum at a supermarket in small-town Ohio.

The development of more advanced computers allowed the barcode to flourish and with the barcode system becoming more efficient and affordable, it was widely adopted. Tracking inventory by hand was replaced with product scanning. However, data input into computers was still done by hand.

Then came Radio Frequency Identification (RFID) that enabled factories and retail stores to use an RFID microchip to transmit information about a product such as type, manufacturer and serial number, to a data collection device. The introduction of RFID technology meant businesses no longer needed to input data by hand because barcode readers could instantly update their databases.

RFID technology was also a game-changer for vendors because constant access to real-time sales data ensured products were adequately available. RFID technology is now a staple, improving inventory control and streamlining entire business operations.

Goodbye, Paper and Clipboard

Although many businesses are only now implementing inventory management software, technological advancements in the 1980s and 1990s spurred larger businesses to implement computerised systems. Because computing power was still very expensive, most small to medium-sized business were left out in the cold.

Around the turn of the century, the same kinds of advanced inventory tracking software became available to smaller businesses. Many early adopters also embraced spreadsheet applications and built their own bespoke inventory control systems.

During the dotcom boom, ‘Application Service Providers’ (ASPs) made the first attempt at delivering software (including inventory management applications) online.

The ASPs were broadly inefficient and failed to scale, and most did not make good on the promises they made to customers. Perhaps the time simply wasn’t right – ASP applications were very slow due to the technical constraints at the time. Fortunately, the technology and thinking around cloud computing has improved, and businesses can now rely on highly scalable Software-as-a-Service applications which are intuitive and easy to use.

policies in inventory management

Access to cost-effective inventory management software is a major determinant of successful inventory control.

The basics of modern Inventory Management

As we mentioned above, Inventory management is an important aspect of any successful business. It is the process of overseeing and controlling the flow of inventory units a business uses in the production or manufacture of goods for sale or distribution.

Inventories are usually made up of a combination of goods, raw materials and finished products, and effective management of these items is essential to ensure optimal stock levels and to maximise the earning potential of the company. It also allows a business to prevent or mitigate any inventory-associated losses.

Inventory management software is used by businesses for various reasons: it can track the costs of inventory throughout the manufacture and sales process, tell businesses when to replenish stock, and allow them to track profits. It can also be used to forecast inventory levels and prices, as well as expected product demand.

Effective inventory management is important as not only is inventory one of the most valuable assets to a business; there is a direct link between inventory levels and company profits.

Why inventory management modernisation matters

Inventory represents an investment that is tied up until either the item is sold, or it is used in the production of another item that is sold. Businesses are reliant on having items in stock; otherwise customers will simply go to a competitor who can provide what they want.

However, holding inventory in stock is not without costs – storage, insurance and maintenance all must be considered. When it comes to replenishing stock levels, most management plans seek to strike a balance between having enough units when required, and ensuring supplies are not overstocked. This is why having an inventory management system can be advantageous.

An inventory management system monitors all aspects of a company’s inventory as items move through the production and sales process. The process involves tracking customer orders, shipping, costs, stock and sales.

Whether or not a business has some form of inventory software in place, there are some critical elements every system needs in order to function efficiently. This includes well-organised location names, easy to read and unambiguous location labels, unique item numbers, units of measure, a good starting count, good policies and – most importantly – people who know and can follow those policies.

On top of all these things, a software system that tracks all inventory activity can be used, as keeping track of inventory data by hand or in a spreadsheet often doesn’t cut it. Good inventory management software can make it easier to track stock and provide different people with access to the data, as well as offer a detailed insight into the inventory activity of a business. It also provides an accurate historical record of inventory movements and sales.

The ultimate goal: Low-cost, sustainable inventory

All of the factors mentioned above will help businesses to keep costs in check, allowing them to maintain a suitable amount of stock, set targets and monitor profits efficiently. As inventory is one of the most important assets a business has in its arsenal, an adequate inventory management system will help a business to track those assets and control them accordingly.

Inventory is a vital part of any retail or manufacturing business, yet inventory management often doesn’t get the attention it deserves.

4 fundamentals of Inventory Control

If you think about it, even in our homes there is some semblance of order to how we store our groceries. Instinctively undertaking basic inventory management, we generally place tea, coffee and sugar together for easy access and use, toiletries in the bathroom and cleaning products under the sink.

So, if it’s natural to do this at home, why not at least manage the inventory essentials in our business?

The principles below sum up the fundamentals of modern inventory control.

1. A place for everything

Organisation is a fundamental requirement of good inventory management. A place for everything and everything in its place meaning everything requires clear and easy-to-understand storage locations with identification tags for each of these.

Think of how retail stores present products in clearly signed categories with complementary products together such as; Manchester, Appliances, Menswear and Gardening, making it easier for consumers to find what they are shopping for.

Storage locations should be similarly named, using straightforward inventory labels that are simple and easy to read, such as ‘Bay 1’ with ‘Rows 1, 2, 3 and 4’. Keep aisles and walkways free of obstructions and don’t forget to name empty and unused spaces for future use.

A common-sense approach to creating an efficient flow is to store frequently purchased, fast moving products in easily accessible areas. Having these close to dispatch allows for easy picking and improved shipping processes.

inventory control policy factors

External factors such as shipping lead times will also affect inventory management policies.

2. Unique identifiers

Employ unique identification numbers for inventory items. Avoid using product serial numbers as there is no guarantee these serial numbers are discrete, which can cause problems if another product has the same number.

Use logical names for each product. Item descriptions should be well-defined and clear with labels precisely stating what the product is. Having the ability to track lot and batch numbers is important for several reasons including quality control, service and warranty management and to help isolate production faults.

3. Accurate measures

Always begin with an accurate starting count of your inventory stock. Undertake a physical count of inventory to ensure that paper or electronic records accurately reflect the actual on-hand inventory in your organisation.

Be consistent with how you quantify inventory items. Units of measure can vary by weight or volume. Depending on the types of inventory held, these can be counted as individual pieces, multiples of 100, per gram, kilo or per box. It is important to pick a measure and stick with it.

4. Traceability

Businesses need to know exactly what is in their supply chain. This includes knowledge of pipeline inventory, goods still in transit or in the process of being distributed. Have a system to track and trace inventory activity on demand, from receipt to sales and dispatch. Product recalls occur regularly and are particularly delicate in industries were the public’s health may be put at risk.

Inventory management software is an ideal tool for real-time traceability and can be used by multiple people across multiple locations.

Mastering the fundamentals of modern Inventory Management

Today, solid inventory management is key to the success of a business. Accurate inventory creates a system of checks and balances between your accounting and your warehouse teams; it helps pinpoint operational issues and identify ways to streamline processes.

A firm understanding of the fundamentals discussed above – alongside sound policies and procedures, and trained well-informed staff – will see your business unlocking the power of effective inventory management.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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