What are the 3 Decision Rules for Inventory Control?

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Effective inventory control is a process. It involves many areas of an organisation and is a delicate balance between the three categories of inventory costs.

As one of a business’ greatest assets, inventory is also the cause one of the hardest decisions manufacturers, retailers and eCommerce businesses have to make. Therefore, it is important to establish a set of guidelines to improve inventory decisions and optimise inventory control.

That’s where decision rules for inventory control are crucial to guide decisions and make inventory control more efficient and effective.

Decision rules for inventory control

It is important that manufacturing, retail and eCommerce businesses have positive inventory control to sustain profitability over the long term. Decision rules for inventory control are created to reduce uncertainty relative to fluctuating demand and the external economic environment.

The three decision rules for inventory control are objectives, restraints and variables. Determining these in the context of inventory control will help organisations to establish protocols that will govern how they can then deliver on customer expectations.

Decision objectives

The main objective of inventory control is to reduce procurement costs as much as possible while managing the holding costs to keep inventory stock on your shelves. In addition to selling inventory at the right price to cover these ordering and carrying costs.

With an online inventory management solution, businesses can view these figures in real-time and assess the numbers across individual products and product categories. By having easy access to this information, inventory teams can quickly determine the profitability of ordering, shipping or moving certain inventory stock.

When a certain stock is deemed to have little or no profitability then a flag can be raised to undertake a more detailed appraisal of the stock in question to determine the best strategy for dealing with it. More timely decisions can be made based on previous experiences with similar products.

Decision variables

Variables are another critical factor when it comes to decision rules for inventory control. The variables of stock control can include product cycle time from the supplier to your warehouse and the level of buffer stock necessary to protect against supply chain complexities.

Factoring in variables becomes easier with an online inventory management solution that monitors stock in real-time and automates processes such as ordering new stock once existing stock falls below a predetermined minimum level. Instead of having to manually order replacement stock, your online inventory management system will do the ordering for you.

An effective strategy for dealing with these variables is to implement just-in-time inventory, which aims to improve return on investment by reducing inventory control costs. Just-in-time supply chains also depend on online inventory management guides that send signals to the ordering system based on previous demand. Once the ordering signal is received, the system can automatically order more stock.

Decision restraints

Inventory restraints include all those areas related to storage and handling costs including damage to and spoilage of inventory stock. Identifying your biggest inventory restraints and dealing with them becomes easier with online inventory management tools that help you tap fast into all your accounting and inventory data.

If you are using an online inventory management system to manage inventory stock levels, the software can be programmed to reorder goods when the stock level falls to a minimum quantity. The software automatically orders new stock on a predetermined cycle. An effective online inventory management system reduces inventory carrying costs minimises the risk of waste or obsolescence and your customer order fulfilment will be achieved on time.

It might at times be necessary to drop certain products that just aren’t selling because it is costing too much to store or move them. Alternatively, you might replace slow-moving stock with a substitute product that although more expensive, has a higher turnover rate.

Decision outcomes

The primary goal of effective inventory control is to achieve ongoing customer satisfaction and company profitability. The decision process that leads to positive inventory outcomes is primarily concerned with reducing the ratio of ordering costs, the ratio of holding costs and the ratio of lead times between ordering and receiving of products.

Ineffective inventory control and warehouse management can lead to waste, lost sales and lost revenue.

Overall, the best decision rules for inventory control are the automated actions that online inventory management software can make in relation to specific stock performance, including automated stock replenishment based on stock level warnings. Having to consider and manually undertake simple inventory tasks such as stock replenishment, can be both time-consuming and counterproductive.

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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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