6 Factors Influencing The Effectiveness Of Inventory

Even with the best management and control, the effectiveness of inventory can, and does, fluctuate. When you know about the variables that affect the various processes involved, you can better anticipate and mitigate their effects.

The following 6 factors influence the effectiveness of inventory and are the most important ones to be aware of:

  • Type of Products
  • Supplier Reliability
  • Lead Time of Orders
  • Differences In Management
  • Finances
  • External Factors

After taking a closer look at them, we’ll explore a few basics of inventory control.

1. Type Of Products

Product type can have a significant effect on inventory effectiveness, which makes it a factor that cannot be ignored. Stock that’s time or temperature-sensitive or perishable must be managed in a way that ensures it’s stored in optimal conditions and rotated appropriately.

We can expand this point to include factors such as a malfunction of the storage facility. For example, a breakdown at a cold storage facility could negatively affect the integrity of stock.

2. Supplier Reliability

Successful inventory management and control, and any successful businesses, depends on reliable suppliers. You won’t find it easy to plan spending, stock rotation, and other elements of management, as well as production and delivery, if your suppliers are unreliable. Even if you deal with suppliers that have shown themselves to be reliable, having a reliable backup supplier is an excellent idea.

Many, if not all six factors discussed in this article can affect the effectiveness of your supplier’s inventory. Without a reliable backup supplier, your business could experience delays or stock shortages.

3. Lead Time Of Orders

The time between ordering an item and its arrival, known as the lead time, is another important factor influencing the effectiveness of inventory.

Lead time varies from item to item, depending on:

  • What those items are
  • How they’re made
  • Their place or country of manufacture
  • The outsourcing of some manufacturing processes
  • How the items are shipped
  • Customs and excise processes

The different lead times of stock require careful planning to ensure desirable stock levels are maintained. Even so, delays in any of the above elements can affect your inventory.

4. Differences In Management

As a business owner, your interest in your enterprise is likely to be greater than that of your staff. For many of them, their job is just that—a job. However, if you’ve poured your savings into your business, it’s much more than paid employment.

When you appoint managers to oversee inventory processes, you obviously hope to appoint the best people for the job. They need to have the skills, enthusiasm, and dedication to complete their appointed tasks as diligently as possible.

One of the best things you can do as the owner, or co-owner of the business, is to familiarize yourself with every aspect of inventory control and management, and the factors that affect it—then oversee those you’ve appointed in management positions.

5. Finances

Several financial factors can affect the effectiveness of inventory. One of them is the price of fuel and the cost of transport, freight, and logistics. The fuel price is anything but static, and its fluctuations may ultimately influence a decision to purchase company vehicles to handle stock movement, or to use a trucking or freight company. Your decision can affect your business’ inventory control and management.

Another financial factor to consider is the borrowing of money to stock sufficient inventory. Doing so can link your inventory management to fluctuations in the economy. If interest rates increase, you will need to divert more of your earnings to paying the interest on your loan, which means you may have less to spend on keeping your inventory stocked with certain items.

These fluctuations should be factored into the financial section of the business plan template you drew up when you launched your operation. You can adjust the figures as you grow, or as your product line and stock changes. By planning for these fluctuations you can ensure your inventory is stocked and managed efficiently, regardless of what the markets are doing, or how interest rates rise and fall. 

You should also keep tax costs in mind when stocking inventory. For example, if your tax deadline is looming, you may want to wait until it has passed before restocking.

6. External Factors

An old proverb says no person is an island, as we’re all affected by external factors, and we need others to make a success of life. We can extend this to include businesses (they need customers), and, yes, even inventories (they’re affected by outside factors). This means you need to stay aware of what’s happening in the external climate.

Some external factors you should pay attention to include your local competition and their market share, and local real estate markets. If your competition has the majority of the market when it comes to product A, you should make sure you keep some of it in stock. However, you may also want to focus on building your share of the market when it comes to products B and C. If more and more people are moving to the area, you may need to adjust your inventory quantities to meet the increased demand for certain items.

Other external factors include fluctuations in local, national, and international economies, strikes or other protest action in transport or other industries, health-related lockdowns, and natural disasters.

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The Basics Of Inventory Control

Now that we’ve looked at factors that influence the effectiveness of inventory, let’s have a glance at the 4 basic principles of inventory control. You can gain better control or regulation of stock by doing the following:

1. Stock Traceability

A track-and-trace system, such as software that traces stock in real-time, is an essential part of inventory control. Beyond this, find out everything you can about the supply chain, such as goods that are being distributed, stock that’s still in transit, and pipeline inventory insights. 

2. Organize The Inventory

Good inventory management doesn’t happen without good organization. A public library is one of the best examples of the importance of an organized inventory. It would be almost impossible to find a particular title if the books were not shelved alphabetically by author or according to the Dewey Decimal system.

When your inventory is well-ordered, your workers can do stock counts and find particular items easily. You can bring order to your warehouse or storage room by storing stock in logically organized areas or units. Those areas or units, as well as the stock, should be easy to identify. It’s a good idea to keep popular or fast-moving stock where it’s easy to access. Ideally, popular stock should be near the distribution area. 

3. Accurate Stocktaking

The starting count of your inventory stock must be as accurate as possible. Do this by implementing a physical stock count, which can be double-checked. Subsequent stocktaking can be checked with the up-to-date electronic inventory records. Remember that measurement units can vary, depending on the items in stock. When counting, choose a measure, such as counting items individually or in multiples, by box, or pound/kilogram.

4. Unique Identification Numbers

Use unique identification numbers, barcodes, or other identifiers for the items in the inventory. Avoid using product serial numbers, as it may cause confusion if items from different suppliers share the same serial number. You should also be able to track and find items by lot and batch number.

There’s no way of guaranteeing that inventory effectiveness will be foolproof. However, with planning, good management, and organization, it’s possible to mitigate or to use the factors that affect it to your business’ advantage. 

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