Inventories may be held in the material management cycle to supply the production function or in the distribution function to meet customer demand. Inventory control in the latter is crucial to efficient physical distribution. Inventory represents the largest single investment for manufacturers of packaged consumer goods, amounting up to a third of their asset investment. High inventory levels are necessary in competitive conditions where the market segments are diverse in nature and customers are used to obtaining goods quickly.
The objective of inventory control is to minimize total inventory costs subject to demand and service level constraints. The main costs are due to holding inventory, ordering and the risks of stock outs. The system has to figure out how much to re-order, when to re-order and how to control stock outs at the minimum cost.
There are a number of inventory control systems available, depending on the type of business. Distribution requirements planning (DRP) systems deal with connecting the production process with the other inventory levels further down the channel. They operate on the assumption that they are managing inventories intended to resupply other inventories.
An accurate forecast of future demand is obviously essential for any inventory control system, Lack of such a forecast or inaccuracies can wreck havoc throughout the physical distribution channels. Unpredicted increases also cause stock outs and loss of orders in the future, every firm and every channel member has to balance the costs of holding higher inventory levels against the costs of stock outs.
