CHAPTER 7 INVENTORY CONTROL SYSTEMS

Objectives:
Differentiate kinds of inventory control system.
Learn what the function of this system is.

Inventory control systems are technology solutions that integrate all aspects of an organization’s
inventory tasks, including shipping, purchasing, receiving, warehouse storage, and turnover,
tracking, and reordering. While there is some debate about the differences between inventory
management and inventory control, the truth is that a good inventory control system does it all
by taking a holistic approach to inventory and empowering organizations to utilize lean practices
to optimize productivity and efficiency along the supply chain while having the right inventory at
the right locations to meet customer expectations.
That being said, there are two different types of inventory control systems available today:
perpetual inventory systems and periodic inventory systems. Within those systems, two main
types of inventory management systems – barcode systems and radio frequency identification
(RFID) systems – used to support the overall inventory control process:

▪ Main Inventory Control System Types:

▪ Perpetual Inventory System

▪ Periodic Inventory System

▪ Types of Inventory Management Systems within Inventory Control Systems:

▪ Barcode System

▪ Radio Frequency Identification (RFID) System

Inventory control systems help you track inventory and provide you with the data you need to
control and manage it. No matter which type of inventory control system you choose, make sure
that it includes a system for identifying inventory items and their information including barcode
labels or asset tags; hardware tools for scanning barcode labels or RFID tags; a central
database for all inventory in addition to the ability to analyze data, generate reports, and
forecast demand; and processes for labeling, documenting, and reporting inventory along with a
proven inventory methodology like just-in-time, ABC analysis, first-in, or first out (FIFO), or last
in-first-out (LIFO).
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What Are the 4 Types of Inventory?

Before getting into details about the types of inventory control systems, it’s important to
understand the different types of inventory.

Generally, inventory can be grouped into four primary classifications:

▪ Raw materials – Raw materials are inventory items used in the manufacturing process to

create finished goods. What is considered a raw material to one company may be
considered finished goods to another. For example, a company that creates parts or
components for machinery or equipment would consider those components finished goods.
A manufacturer that purchases those components for use in their manufacturing process
would consider the same components raw materials. Raw materials may consist of things
like paper or steel, nuts and bolts, chemicals, wheels, and other items.

▪ Work-in-progress – Work-in-progress (WIP) inventory includes items that are currently being

processed. WIP inventory can include raw materials and components that are going through
the manufacturing process to produce finished goods as well as finished items that are
waiting for final inspection or quality control. After those final steps are complete, these
finished items would be considered finished goods.

▪ Finished goods – Finished goods are comprised of all completed items that are ready for

sale to the final customer.

▪ MRO goods – MRO stands for maintenance, repair, and operating supplies. MRO inventory

consists of items necessary to operate, such as equipment and machinery, and the items
needed for maintaining equipment and infrastructure. That means MRO inventory can also
include items that are sometimes considered raw materials but in this case are essentially
spare parts. Nuts and bolts are a good example. When nuts and bolts are on hand to
assemble finished products, they’d be classified as raw materials. Extra nuts and bolts a
company keeps in storage to repair equipment, on the other hand, are classified as MRO.
Other examples of MRO inventory include janitorial supplies such as cleaning solutions,
mops, and brooms, tools, packaging materials, uniforms and gloves, and office supplies
such as paper, pens, calculators, printer ink, and other items.
Inventory can be further classified in several ways depending on the industry, the company’s
operations, and the types of inventory the company manages. Companies that purchase
finished goods and sell them to customers at a markup have just one type of inventory called
merchandising inventory.

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Some companies, such as manufacturers, need to manage a variety of inventory in different
classifications, making efficient inventory tracking a must. To effectively manage inventory, an
inventory tracking solution is paired with an inventory control app or inventory management app.

How Do Inventory Control Systems Work?

Inventory control systems, such as inventory control apps, offer a variety of functions that help
companies manage various types of inventory. Inventory control systems typically consist of
inventory management apps paired with barcode tagging to identify inventory assets, and
information about each item is stored in a central database. Barcode labels serve as inventory
trackers, allowing users to bring up information about the item on a computer system, such as
the item’s price, the number of items in stock, the location of an item within a warehouse, and
more.
The best inventory control apps are mobile-compatible, with companion apps that allow users to
track and manage inventory while they move throughout a facility or from site to site. There are
many inventory tracking apps for smart phones, some of which are mobile-exclusive, while
others have desktop applications to allow users to track inventory from any device. There are
also many inventory tracking apps designed specifically to meet the needs of warehouse
managers. When looking for an inventory management app, look for features that accommodate
your company’s needs, such as trigger alerts when inventory levels reach pre-defined
thresholds, re-ordering capabilities, and analysis and reporting to support functions such as
forecasting.

The 2 Types of Inventory Control Systems

Now that we’ve covered the basics of inventory and how inventory control systems work in
general, let’s discuss the two main types of inventory control systems.

Perpetual Inventory System

When you use a perpetual inventory system, it continually updates inventory records and
accounts for additions and subtractions when inventory items are received, sold from stock,
moved from one location to another, picked from inventory, and scrapped. Some organizations
prefer perpetual inventory systems because they deliver up-to-date inventory information and

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better handle minimal physical inventory counts. Perpetual inventory systems also are preferred
for inventory tracking because they deliver accurate results on a continual basis when managed
properly. This type of inventory control system works best when used in conjunction with a
database of inventory quantities and bin locations updated in real time by warehouse workers
using barcode scanners. Inventory management apps are perpetual inventory systems.

There are some challenges associated with perpetual inventory systems. First, these systems
cannot be maintained manually and require specialized equipment and software that results in a
higher cost of implementation, especially for businesses with multiple locations or warehouses.
Periodic maintenance and upgrades are necessary for perpetual inventory systems, which also
can become costly. Another challenge of using a perpetual inventory system is that recorded
inventory may not reflect actual inventory as time goes by because they do not conduct periodic
physical inventory counts, a necessary activity even when inventory trackers are used. The
result is that errors, stolen items, and improperly scanned items impact the recorded inventory
records and cause them not to match actual inventory counts.

Periodic Inventory System

Periodic inventory systems do not track inventory on a daily basis; rather, they allow
organizations to know the beginning and ending inventory levels during a certain period of time.
These types of inventory control systems track inventory using physical inventory counts. When
physical inventory is complete, the balance in the purchases account shifts into the inventory
account and is adjusted to match the cost of the ending inventory. Organizations may choose
whether to calculate the cost of ending inventory using LIFO or FIFO inventory accounting
methods or another method; keep in mind that beginning inventory the previous periods is
ending inventory.
There are a few disadvantages of using a periodic inventory system. First, when physical
inventory counts are being completed, normal business activities nearly become suspended. As
a result, workers may hurry through their physical counts because of time constraints. Periodic
inventory systems typically don’t use inventory trackers, so errors and fraud may be more
prevalent because there is no continuous control over inventory. It also becomes more difficult
to identify where discrepancies in inventory counts occur when using a periodic inventory
control system because so much time passes between counts. The amount of labor that is

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required for periodic inventory control systems make them better suited to smaller businesses.

Barcode Inventory Systems

Inventory management systems using barcode technology are more accurate and efficient than
those using manual processes. When used as part of an overall inventory control system,
barcode systems update inventory levels automatically when workers scan them with a barcode
scanner or mobile device. The benefits of using bar-coding in your inventory management
processes are numerous and include:

▪ Accurate records of all inventory transactions

▪ Eliminating time-consuming data errors that occur frequently with manual or paper systems

▪ Eliminating manual data entry mistakes

▪ Ease and speed of scanning

▪ Updates on-hand inventory automatically

▪ Record transaction histories and easily determine minimum levels and reorder quantities

▪ Streamline documentation and reporting

▪ Rapid return on investment (ROI)

▪ Facilitate the movement of inventory within warehouses and between multiple locations and

from receiving to picking, packing, and shipping

Radio Frequency Identification (RFID) Inventory Systems

Radio frequency identification (RFID) inventory systems use active and passive technology to
manage inventory movements. Active RFID technology uses fixed tag readers throughout the
warehouse; RFID tags pass the reader, and the movement is recorded in the inventory
management software. For this reason, active systems work best for organizations that require
real-time inventory tracking or where inventory security has been an issue. Passive RFID
technology, on the other hand, requires the use of handheld readers to monitor inventory
movement. When a tag is read, the data is recorded by the inventory management software.
RFID technology has a reading range of approximately 40 feet with passive technology and 300
feet with active technology.

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RFID inventory management systems have some associated challenges. First, RFID tags are
far more expensive than barcode labels; thus, they typically are used for higher value goods.
RFID tags also have been known to have interference issues, especially when tags are used in
environments with a lot of metal or liquids. It also costs a great deal to transition to RFID
equipment, and your suppliers, customers, and transportation companies need to have the
required equipment as well. Additionally, RFID tags carry more data than barcode labels, which
means your system and servers can become bogged down with too much information.
When choosing an inventory control system for your organization, you first should decide
whether a perpetual inventory system or periodic inventory system is best suited to your needs.
Then, choose a barcode system or RFID system to use in conjunction with your inventory
control system for a complete solution that will enable you to have visibility into your inventory
for improved accuracy in scanning, tracking, recording, and reporting inventory movement.

Managing procurement is crucial for any successful business. If your business does not have
consistent processes for managing procurement, you risk failing to account for your purchases
and risk making costly purchasing mistakes. Purchase orders are perhaps the most important
part of an effective procurement management process. Let’s take a look at purchase orders and
the four main types used by businesses every day.

What are purchase orders?

A purchase order is where a purchaser creates and sends an order to a vendor for goods or
services. In a standard purchase order, the purchaser will, at a minimum, specify what products
are being ordered, the quantity, the agreed price and delivery and payment terms.

A purchase order may arise out of a past order, an advertisement or offer by the vendor, or the
parties’ negotiation as to the price and quantity. In this respect, a purchase order is a great way
to concretely record what the purchaser and the vendor have agreed on. Purchase orders are
essentially contractual offers. When a vendor chooses to accept a purchase order, that
purchase order becomes the basis for a contract between the purchaser and the vendor.

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The four main types of purchase orders

Standard purchase orders

A standard purchase order is typically used for irregular, infrequent or one-off procurement. As
mentioned above, it contains a complete specification of the purchase, setting out the price,
quantity and timeframes for payment and delivery.

A restaurant might raise a standard purchase order when it purchases new tables and chairs. If
all goes well, this should be a one-off purchase for the restaurant, and the contract will be
fulfilled once the chairs are delivered in good order.

Planned purchase orders

Like a standard purchase order, a planned purchase order is relatively comprehensive. A

planned purchase order requires full details of the goods and services to be purchased and their
costs. Dates for payment and delivery are also included in a planned purchase order, but these
are treated as tentative dates. Issuing a release against the planned purchase order places
individual orders.

For example, a restaurant might require 50,000 disposable placemats in one year – the
manager could create a planned purchase order with a commercial printer detailing the price
and quantity with a tentative delivery schedule. After using the first 5,000 placemats, the
restaurant would create a release against the purchase order to order more.

Blanket purchase orders

A blanket purchase order involves a purchaser agreeing to purchase particular goods or

services from a specific vendor, but not at any specific quantity. Pricing may or may not be

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confirmed in a blanket purchase order. This type of order is typically used for repetitive
procurement of a specific set of items from a supplier such as basic materials and supplies.
In the restaurant example above, they could equally choose to use a blanket purchase order to
procure the disposable placemats — not having to confirm a specific quantity may make this a
preferable option if the quantity required is not clear.

Contract purchase orders

A contract purchase order sets out the vendor’s details and potentially also payment and
delivery terms. The products to be purchased are not specified. A contract purchase order is
used to create an agreement and terms of supply between a purchaser and vendor as the basis
for an ongoing commercial relationship. To order a product, the purchaser may refer to the
contract purchase order when raising a standard purchase order.

🖰 For more information refer to the link provided:

https://www.onupkeep.com/answers/inventory-management/types-of
inventory-systems/#periodic-inventory-system

https://www.unleashedsoftware.com/blog/managing-procurement
purchase-orders

❖ To know more information about - CHAPTER 7-Inventory Management System

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=nAcNgmYPA-4

❖ To know more information about - CHAPTER 7-Inventory Systems: Perpetual vs

Periodic
PLEASE CLICK THE LINK: https://youtu.be/tAJ8mRfffJ8

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References

https://www.camcode.com/asset-tags/inventory-control-systems-
types/ https://businessjargons.com/inventory-control-system.html

https://www.referenceforbusiness.com/encyclopedia/Int-Jun/Inventory-ControlSystems.html