Controller's Guide to Planning and Controlling Operations

10

PLANNING AND CONTROL OF INVENTORIES

INTRODUCTION

A controller who is not familiar with the intricacies of inventory management may have a difficult time determining whether a company has an inventory problem at all, the nature of the problem, and how to fix it. This chapter solves these problems by describing all key aspects of inventory that a controller should be concerned with, including the costs and benefits of having inventory on hand; the various materials management systems and how they impact inventory; types of reordering methodologies; the impact of obsolete inventory on overall valuations, accuracy, and turnover; and how to budget for projected inventories in future periods. Only a thorough grounding in all of these areas will allow a controller to master the art of keeping inventory levels to a minimum without upsetting a company's customer service levels or its ability to produce to a predetermined production schedule.

COSTS AND BENEFITS OF CARRYING INVENTORY

This chapter deals with a wide range of issues dealing with inventory, to an extent that is greater than in other chapters dealing with other parts of the balance sheet. Why the hoopla? This section notes the many critical factors surrounding inventory, all of which a controller should keep in mind before making a decision that will change the mix or amount of inventory kept on hand.

First, what are the benefits of keeping inventory on hand? One is that it covers up mistakes in the production area. For example, ...