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[SCM4 INVENTORY MANAGEMENT AND DEMAND FORECASTING] important feature of direct inventories is that you can assign

MODULE 1 the stock to specific physical units.


INVENTORY - is the raw materials used to produce goods as well a. Production inventory: Production inventory refers to the
as the goods that are available for sale. raw materials used in the manufacturing process. These
➔ It is classified as a current asset on a company's balance materials are combined to create work-in-process
sheet. inventory, before becoming finished goods that are ready
➔ The three types of inventory include raw materials, to be sold to customers.
work-in-progress, and finished goods. b. WORK-IN-PROGRESS (WIP): Refers to a production and
➔ Inventory is valued in one of three ways, including the supply-chain management term describing partially
first-in, first-out method; the last-in, first-out method; and finished goods awaiting completion. WIP refers to the
the weighted average method. raw materials, labor, and overhead costs incurred for
➔ Inventory management allows businesses to minimize products that are at various stages of the production
inventory costs as they create or receive goods on an process. WIP is a component of the inventory asset
as-needed basis. account on the balance sheet. These costs are
subsequently transferred to the finished goods account
INVENTORY MANAGEMENT and eventually to the cost of sales.
➔ Possessing a high amount of inventory for a long time is c. Finished goods inventory: Refers to the total number of
usually not a good idea for a business. That's because of the manufactured products that are available, in stock, and
challenges it presents, including storage costs, spoilage ready for purchase by vendors, retailers, and consumers.
costs, and the threat of obsolescence. With that said, finished products are often a relative
➔ Possessing too little inventory also has its disadvantages. For concept, since a seller's goods may actually become
instance, a company runs the risk of market share erosion another buyer's raw materials inventory.
and losing profit from potential sales. d. MRO Inventory: Refers to supplies, spare parts and other
➔ Inventory management forecasts and strategies, such as a materials needed for routine maintenance, repair and
just-in-time (JIT) inventory system (with backflush costing), operations (or MRO). This inventory is critical for the
can help companies minimize inventory costs because goods smooth running of a business. However, unlike raw
are created or received only when needed. materials, this inventory does not become a part of
Why Inventory Management Matters finished goods offered to customers.
Inventory management is the process of controlling the flow of e. Miscellaneous Inventory: Means all miscellaneous
goods and materials in a supply chain. It includes tracking, storage, inventory of the company located at the Dealership
and distribution of products, ensuring that businesses have the Premises on the Closing Date and consisting of
right amount of stock at the right time and place. non-Manufacturer Parts, batteries, tires, and paint, gas,
BENEFITS OF INVENTORY MANAGEMENT oil and grease, etc., each of which is less than 1 year old,
1. Cost savings: Minimizing excess inventory, reducing storage and all of which (in the case of fluids and paint) shall be
costs, and avoiding stockouts can lead to significant cost in unopened containers and usable.
reductions. 2. INDIRECT INVENTORY: Comprise of stock items that are
2. Improved cash flow: By reducing the amount of capital tied necessary for the manufacturing of goods but are not a
up in inventory, businesses can free up resources for other direct component of such goods. They are ancillary goods,
investments and growth initiatives. which means we cannot assign them to specific units of the
3. Increased customer satisfaction: Properly managing final goods.
inventory ensures that products are available when ➔ Such indirect inventories can be from the
customers need them, leading to better customer manufacturing process or even the selling, distribution
experiences and increased loyalty. or administrative purposes. For example, petrol or
4. Enhanced visibility and control: With a well-managed lubricants used in production are indirect inventories.
inventory system, businesses have better insight into And office supplies used in administration also fall
product availability and can make more informed decisions under the category of indirect inventories.
about production, purchasing, and sales. a. Decoupling Inventory: The term used when product
manufacturers set aside extra raw materials or work in
TYPES OF INVENTORY progress items for all or some stages in a production
1. DIRECT INVENTORY: These are the inventories that are an line, so that a low-stock situation or breakdown at one
integral part of the finished product. So basically, any stage doesn't slow or stop operations. Companies may
physical component which is a part of the final good comes also selectively stock up on maintenance, repair and
under the classification of direct inventory. Another
operating (MRO) goods critical for production, like 3. Holding Costs are those associated with storing inventory
paint or PPE. that remains unsold. These costs are one component of total
➔ Decoupling inventory is also a useful tool to inventory costs, along with ordering and shortage costs.
mitigate the effect of some manufacturing or ➔ A firm’s holding costs include the price of goods
supply chain processes moving faster than damaged or spoiled, as well as that of storage space,
others. labor, and insurance.
b. Inventory Buffer: Additional inventory kept on-hand in 4. Ordering Costs are the expenses incurred to create and
case of emergencies, transportation delays or surges in process an order to a supplier. These costs are included in
demand. Buffer inventory takes up additional space the determination of the economic order quantity for an
and can be costly, especially with inventory that has a inventory item.
shelf-life. 5. Penalty Cost is the cost that is associated with factors such
c. Seasonal Inventory: Stock which is in high demand as late or early deliveries and bid adjustment factors.
during particular times of the year, such as during ➔ Although the penalty cost is not an actual cost, it takes
Christmas or Halloween. This influx in sales is called in account any excess cost of working with a particular
seasonal demand or seasonality – fluctuations in supplier. This cost is added to the purchasing cost of
demand for products or services that are dependent on the supplier and helps you make awarding decisions.
the time of the year.
d. Anticipation Inventory: The stock a company keeps [SCM4 INVENTORY MANAGEMENT AND DEMAND FORECASTING]
expecting a change in customer demand in the near MODULE 2
future. This stock would provide benefits to companies ECONOMIC ORDER QUANTITY (EOQ) - the ideal quantity of units
by satisfying their customers if there is a surge in a company should purchase to meet demand while minimizing
demand. inventory costs such as holding costs, shortage costs, and order
costs. This production-scheduling model was developed in 1913
HOLDING INVENTORY is the practice of stocking inventory your by Ford W. Harris and has been refined over time. The economic
business does not need immediately. order quantity formula assumes that demand, ordering, and
Why Business Hold Inventory holding costs all remain constant.
Businesses that “hold inventory” often hang onto that inventory What the Economic Order Quantity Can Tell You
to prevent potential stockouts. Perhaps the company has concerns ● The goal of the EOQ formula is to identify the optimal
about an unreliable supply chain, foresees a potential surge in number of product units to order. If achieved, a company
demand approaching, or simply over-orders certain products can minimize its costs for buying, delivering, and storing
because it does not fully understand what inventory they have in units. The EOQ formula can be modified to determine
stock and how much of it they truly need. different production levels or order intervals, and
Whatever the reason, one thing’s certain: holding too much corporations with large supply chains and high variable costs
inventory eats into your business’s profits. That’s why carefully use an algorithm in their computer software to determine
evaluating your inventory holding strategy—and the costs EOQ.
associated with that practice—is essential. ● It goes back to 1913, when Ford W. Harris wrote an article
called “How Many Parts to Make at Once.”
COST AFFECTING INVENTORY ● EOQ is an important cash flow tool. The formula can help a
1. Inventory Carrying Cost, or holding costs, is an accounting company control the amount of cash tied up in the inventory
term that identifies all business expenses related to holding balance. For many companies, inventory is its largest asset
and storing unsold goods. The total carrying costs include other than its human resources, and these businesses must
the related costs of warehousing, salaries, transportation carry sufficient inventory to meet the needs of customers. If
and handling, taxes, and insurance as well as depreciation, EOQ can help minimize the level of inventory, the cash
shrinkage, and opportunity costs. savings can be used for some other business purpose or
2. Relevant Cost is a managerial accounting term that investment.
describes avoidable costs that are incurred only when ● The EOQ formula determines the inventory reorder point of
making specific business decisions. The concept of relevant a company. When inventory falls to a certain level, the EOQ
cost is used to eliminate unnecessary data that could formula, if applied to business processes, triggers the need
complicate the decision-making process. As an example, to place an order for more units. By determining a reorder
relevant cost is used to determine whether to sell or keep a point, the business avoids running out of inventory and can
business unit. continue to fill customer orders. If the company runs out of
inventory, there is a shortage cost, which is the revenue lost
because the company has insufficient inventory to fill an
order. An inventory shortage may also mean the company FORMULA FOR CALCULATING ECONOMIC ORDER QUANTITY
loses the customer or the client will order less in the future. (EOQ)
Limitations of EOQ
The EOQ formula assumes that consumer demand is constant.
The calculation also assumes that both ordering and holding costs
remain constant. This fact makes it difficult or impossible for the
formula to account for business events such as changing
consumer demand, seasonal changes in inventory costs, lost sales
revenue due to inventory shortages, or purchase discounts a
company might realize for buying inventory in larger quantities.
How Does Economic Order Quantity Work?
Economic order quantity will be higher if the company’s setup
Example of How to Use EOQ
costs or product demand increases. On the other hand, it will be
1. EOQ takes into account the timing of reordering, the cost
lower if the company’s holding costs increase.
incurred to place an order, and the cost to store
Why Is Economic Order Quantity Important?
merchandise. If a company is constantly placing small orders
Economic order quantity is important because it helps companies
to maintain a specific inventory level, the ordering costs are
manage their inventory efficiently. Without inventory
higher, and there is a need for additional storage space.
management techniques such as these, companies will tend to
Assume, for example, a retail clothing shop carries a line
hold too much inventory during periods of low demand while also
of men’s jeans, and the shop sells 1,000 pairs of jeans
holding too little inventory during periods of high demand. Either
each year. It costs the company $5 per year to hold a pair
problem creates missed opportunities.
of jeans in inventory, and the fixed cost to place an order
is $2.
EOQ BASED ASSUMPTIONS
The EOQ formula is the square root of (2 x 1,000 pairs x
1. Reorder point: The reorder point is the time when the next
$2 order cost) / ($5 holding cost) or 28.3 with rounding.
order should be placed. EOQ assumes that you order the
The ideal order size to minimize costs and meet customer
same quantity at each reorder point.
demand is slightly more than 28 pairs of jeans. A more
2. Demand, relevant ordering cost, and relevant carrying cost:
complex portion of the EOQ formula provides the reorder
Customer demand for the product is known. Also, the
point.
ordering and carrying costs are certain. A relevant cost refers
2. Say your clothing shop also sells men’s hiking shoes. The
to a cost you need to consider when you make a decision.
model you sell costs $45 per pair. You sell 100 pairs of hiking
3. Purchase order lead time: The lead time is the time period
boots a month, or 1,200 per year.
from placing the order to order delivery. EOQ assumes that
Your ordering cost is $50 per order. You added up the
the lead time is known.
total time spent by everyone who’s involved in the
4. Purchasing cost per unit: The cost per unit doesn’t change
ordering process, and you figure that the combined time
with the amount ordered. This removes any consideration of
to process each order is 2 hour. Based on average salary
quantity discounts. Assume you’ll pay the same amount per
and benefit costs, you assign a $50 cost per order.
unit, regardless of the order size.
The carrying cost per unit is $3. That rate covers the
5. Stockouts: No stockouts occur. You maintain enough
occupancy costs and insurance where the inventory is
inventory to avoid a stockout cost. That means you monitor
stored. The amount also accounts for the opportunity
your customer demand and inventory levels carefully.
cost of carrying the inventory.
6. Quality costs: EOQ generally ignores quality costs.
EOQ= square root of [(2 x demand x ordering costs) ÷
carrying costs]
Economic order quantity uses three variables:
EOQ= square root of [(2 x 1,200 x ($50x2)) ÷ $3]
● Demand: The demand, in units, for the product for a specific
EOQ= square root of [$240,000 ÷ $3]
time period.
EOQ= square root of 80,000
● Relevant ordering cost: Ordering cost per purchase order.
Economic order quantity = 283
● Relevant carrying cost: Carrying costs for one unit. Assume
the unit is in stock for the time period used for demand.
QUANTITY DISCOUNT is an incentive offered to a buyer that
***This are used to set up an EOQ formula***
results in a decreased cost per unit of goods or materials when
purchased in greater numbers. A quantity discount is often offered
by sellers to entice customers to purchase in larger quantities.
➔ The seller is able to move more goods or materials, and the
buyer receives a more favorable price for them. At the
consumer level, a quantity discount can appear as a BOGO When companies price their goods and services, they generally
(buy one, get one discount) or other incentives, such as buy have two options: quantity discounting or linear pricing.
two, get one free. ● A linear pricing strategy is simpler to manage for business
How a Quantity Discount Works owners than quantity discount pricing and makes it easier
● Retailers often get better deals if they order more of the for them to maintain the marginal profit on each item.
same item. For example, the cost per unit for t-shirts might ➔ For instance, a T-shirt company that employs linear
be $7.50 per unit if fewer than 48 pieces are ordered; $7.25 pricing would sell a single shirt for $20, five shirts for
per unit if 49-72 pieces are ordered; or $7 per unit if 73 or $100, and 10 for $200. If each shirt costs $10 to make,
more pieces are ordered. each shirt will bring in $10 in marginal profit, regardless
● Depending on the quantity discount, all pieces ordered must of how many are sold in an order.
be delivered and paid for by a certain date. Alternatively, the ➔ The primary drawback of linear pricing is that it does
purchases and payments can be spread out over a specified not provide an incentive to buy in larger quantities.
period of time. When customers order only single items, the price per
● By selling in larger quantities, the seller can increase their transaction stays the same. Linear pricing also denies
revenues per transaction (RPT). The vendor can also scale the business owner the opportunity to take advantage
quantity discounts in "steps," with lower per-unit prices at of economies of scale.
higher quantities to encourage bulk buyers. For instance, a
coat maker that employs "steps" in its pricing strategy could Example of a Quantity Discount
offer coats at $20 each, five for $90, and 10 for $160. ● If a company sells a product that costs $5, buying 100 of
those units would cost $500. To entice buyers to purchase its
ADVANTAGES AND DISADVANTAGES OF QUANTITY DISCOUNTS product, a company may offer a quantity discount, selling
ADVANTAGES 100 units for $450, which would make the per unit cost
● Quantity discounting can be fruitful. The principal benefit is $4.50 instead of $5; a 10% discount.
to increase total sales volume in order to realize economies What Is the Purpose of Quantity Discounts?
of scale. Quantity discounts boost units per transaction ● The purpose of quantity discounts is purely to sell more
(UPT). The resulting increased sales volume can lead to products. By offering lower per-unit costs through quantity
economies of scale in the form of purchasing goods and discounts, a seller entices a buyer to purchase its products
materials in bulk at a quantity discount from suppliers, and since it's a better deal for the buyer.
the ability to combine incidental per-order costs, such as
shipping and packaging, into one sale. These economies of How Is Quantity Discount Calculated?
scale have the potential to reduce per-unit costs to the seller. To calculate the quantity discount, divide the total cost by the
● Quantity discounting can also come in handy when a seller is number of items at each quantity level to determine the per-unit
keen to lower its inventory. Taking such action can be cost.
particularly useful when the product in question risks going Example: If you are getting 100 items for $300, the per-unit cost is
out of fashion or becoming obsolete, due to a technological $3 (300/100). If you are getting 200 items for $400, the per-unit
breakthrough. cost is $2 (400/200).
DISADVANTAGES You can then compare these per-unit costs to the cost of buying
● There are several caveats to this strategy, though. The main the unit individually without a quantity discount.
drawback of quantity discounts is that the discount squeezes
profit per unit, also known as the marginal profit, unless TYPES OF QUANTITY DISCOUNT
sufficient economies of scale are realized to at least offset 1. All-Unit Quantity Discount refers to a discount that lowers a
the discount offer. retailer's wholesale price on every unit purchased when the
● So, if the per-unit cost for the coat company is $10, the retailer's purchases equal or exceed some quantity threshold
company makes a $10 profit on every single $20 sale. or target. The discount is usually specified in terms of some
However, if the company offers quantity discounts of $2 per percentage off list price, and is sometimes also referred to as
coat for orders of five coats and $4 per coat for orders of 10 a 'target rebate,' because when the target is reached, the
coats, then it makes only $8 in marginal profit on an order of retailer receives a rebate on all units previously purchased.
five and $6 in marginal profit on an order of 10. That would Illustration: The Heavyweight Trash Bag Company has the
of course change if the coat company is able to save money following price schedule for its large trash can liners. For orders of
by, for example, buying in bulk from its suppliers. less than 500 bags, the company charges 30 cents per bag; for
orders of 500 or but less than 1,000 bags, it charges 29 cents per
Quantity Discount vs. Linear Pricing bag; and for orders of 1,000 or more it charges 28 cents per bag.
In this case, the breakpoints occur at 500 and 1,000. The discount a physical count of the inventory is performed at specific
schedule is all-units because the discount is applied to all of the intervals.
units in an order. - As an accounting method, periodic inventory takes inventory
at the beginning of a period, adds new inventory purchases
during the period, and deducts ending inventory to derive
the cost of goods sold (COGS).
- It is both easier to implement and cost-effective by
companies that use it, which are usually small businesses.
How Periodic Inventory Works?
- The term inventory refers to the raw materials or finished
goods that companies have on hand and available for sale.
Inventory is commonly held by a business during the normal
course of business. It is among the most valuable assets that
Example: Assume that you are a business owner of a coffee shop. a company has because it is one of the primary sources of
The company uses plastic cups at a fairly constant rate of 10,000 revenue.
per year. The accounting department estimates that the fixed cost - There are several ways that companies can account for their
of placing an order is P9, and holding costs of fixed at P3 inventory. One of these is the periodic inventory system. This
First compute the EOQ values corresponding to each unit cost accounting method requires a physical count of inventory at
Once EOQ has been identified, locate and identify on which specific times, such as at the end of the quarter or fiscal
cluster the cost per unit will fall. year. This means that a company using this system tracks the
2. Incremental Quantity Discount is a discount where the inventory on hand at the beginning and end of that specific
reduced purchasing cost only applies to items bought above accounting period. The inventory isn't tracked on a regular
the break point. basis or when sales are executed. The periodic inventory
Illustration: Heavyweight Trash Bag Company. Assuming the trash system also allows companies to determine the cost of
bags cost 30 cents each for quantities of 500 or less; for quantities goods sold.
between 500 and 1,000, the first 500 cost 30 cents each and the - Periodic inventory is normally used by small companies that
remaining, cost 29 cents each. For quantities of 1,000 and over, don't necessarily have the manpower to conduct regular
the first 500 costs 30 cents each, the next 500 cost 29 cents each, inventory counts. These companies often don't need
and the remaining costs 28 cents each. accounting software to do the counts, which means
inventory is counted by hand. As such, the system is
commonly used by companies that sell small quantities of
inventory, including art and auto dealers.
Pros and Cons
One of the main benefits of using periodic inventory as a method
of accounting is that it is easy and cheap to implement. That's
because it doesn't have to occur on a regular basis. It doesn't
require fancy software or even extra hands, especially for
businesses that sell a very low volume of goods. But there are
Example: Assume the Universal Robina Corp. drawbacks as well, which include:
The company uses plastic sachets at a fairly constant rate of 1. The possibility of human error
200,000 per year. The company ordering cost is php. 50.00 per 2. Problems detecting defects and/or theft
order. Considering total time spent by everyone who’s involved in 3. The potential need to shut down operations to do a count
the ordering process, per assessment on the combined time to
process each order is 3 hours. Based on average salary and benefit Periodic Inventory vs. Perpetual Inventory
costs, you assign a php. 25 cost per order. - Under the periodic inventory system, a company doesn't
Considering the rate for the occupancy costs and insurance where know its unit inventory levels nor its COGS until the physical
the inventory is stored. The carrying cost per unit is php. 5.00 count process is complete. This system may, in fact, be
Compute for the company total cost per unit under Incremental acceptable for a business with a low number of
Quantity Discount. stock-keeping units (SKUs) in a slow-moving market.
- The perpetual inventory system is considered superior for
MODULE 3 the following main reasons:
Periodic Inventory 1. The perpetual system continuously updates the
- The term periodic inventory system refers to a method of inventory asset ledger in a company's database system.
inventory valuation for financial reporting purposes in which
This gives management an instant view of inventory. The When Would You Use a Periodic Inventory System?
periodic system is, therefore, time-consuming and can - Companies would normally use a periodic inventory system
produce stale numbers that are less useful to if they sell a small quantity of goods and/or if they don't
management. have enough employees to conduct a perpetual inventory
2. The perpetual system keeps updated COGS as count. Small businesses, art dealers, and car dealers are
movements of inventory occur compared to the periodic several examples of the types of companies that would use
system, which cannot give accurate COGS figures this accounting method.
between counting periods.
3. The perpetual system tracks individual inventory items. MULTIPRODUCT SYSTEMS
This means that if there are any defective items, the 1. ABC Classification System
source of the problem can quickly be identified. Contrast - The ABC Classification system is one means of ranking items.
this with the periodic system, which most likely would These are sequenced in decreasing order of annual peso or
not allow for prompt resolution. dollar volume of sales or usage.
4. The perpetual system is tech-based and data can be - Ordering the items in this method and graphing the
backed up, organized, and manipulated to generate cumulative peso or dollar volume gives an exponentially
informative reports. On the other hand, the periodic increasing curve know as the Pareto curve. Normally, twenty
system is manual and more prone to human error, and percent of items account for eighty percent of the annual
data can be misplaced or lost. peso or dollar volume, that is for (A items,) the next thirty
Illustration of Periodic Inventory percent of the items typically account for fifteen percent of
The cost of goods sold is a fundamental income statement the peso or dollar volume (B items), and the final fifty
account. But a company using a periodic inventory system will not percent of the items account for the final five percent of the
know the amount for its accounting records until the physical peso or dollar volume (C items).
count is completed. - A item should receive the most attention. The inventory
Let's suppose the value of a company's inventory is $500,000 on levels should be reviewed often, and should carry a high
January 1. The company purchases $250,000 worth of inventory service level. B item do not need close analysis, and C items
during a three-month period. After a physical inventory count, the are normally ordered infrequently in large quantities.
company determines the value of its inventory is $400,000 on - In multiproduct inventory systems, not all products are
March 31. This becomes the beginning inventory amount for the profitable, such as control costs must justify in some cases
next quarter. COGS for the first quarter of the year is $350,000 Illustration
($500,000 beginning + $250,000 purchases - $400,000 ending). An item is to spend 10,000 pesos annually, for its inventory
Due to the time discrepancies, it becomes the onus of the activity, which contributes only P2,000 a year to profits is
manager or business owner responsible for monitoring the period apparently not economical.
inventory if it makes sense to the bottom line to allocate hours to In this case, it is important to differentiate profitable item from
count inventory daily, weekly, monthly, or yearly. not profitable item.
PARETO EFFECT
Advantages of a Periodic Inventory System - Created by Wifredo Pareto
- The periodic inventory system is commonly used by - This economist, studied the distribution of wealth in the
businesses that sell a small quantity of goods during an 19th century, noted that a large portion of the wealth was
accounting period. These companies often find it beneficial owned by the small segment of the population.
to use this system because it is easy to implement and - This Pareto effect also applies to inventory systems: a large
because it is cost-effective, as it doesn't require any fancy portion of the total peso or dollar volume of sales is often
software. accounted for a small number of inventory items. Consider
Can You Determine Shrinkage in the Periodic Inventory System? that items are ranked in decreasing order of the peso or
- Inventory shrinkage happens when there is a discrepancy dollar value of annual sales. The cumulative value of sales
between the actual stock and the inventory list. As such, the normally results in a curve much.
actual stock is lower than what's recorded on the list.
Shrinkage isn't necessarily evident in the periodic inventory
system. That's because it takes the inventory at the
beginning of the reporting period and at the end unlike the
perpetual system, which takes regular inventory counts. So if
there is any theft, damage, or unknown causes of loss, it isn't
automatically evident.
These figures are only estimates and will differ slightly from one materials needed, resources such as labor and machine, the
system to another. The three items group are labeled A,B,C, targeted quantity, and the place of the production.
respectively. - The main goal of routing is to identify the most efficient and
cost-effective sequence in the process of manufacturing the
PRODUCTION CONTROL SYSTEM goods.
- Production control is the process of overseeing, managing, 2. Scheduling
and controlling the tasks involved in producing goods or - As the name suggests, the scheduling step is the production
services. part where all the time-related conditions are stated. It
- It uses different control techniques with the aim to meet should arrange the manufacturing schedule in order of
production targets on schedule and according to the set priority, and include the start and end date of each task
quality. involved in the operations.
- The main goal of production control is to ensure that all - Scheduling is considered as the time-table of the production
resources and manpower available are utilized in the best process.
way possible to achieve optimum performance in the 3. Dispatching
production system. - The third step, dispatching—is the stage where actual
Importance production is started; it implements the activities indicated
- The success of business operations heavily depend on the in the routing and scheduling stages.
practices and standards being followed. A best practice for - Dispatching can be classified as either centralized—where
quality control and quality assurance, integrating orders are provided by a specific authority; or
production control into the businesses strategy can help decentralized—where instructions are issued by all involved
increase production efficiency. business units.
Reasons Why You Should Implement Production Control As A 4. Follow-Up
Business Process - Follow-up evaluates the effectiveness of the whole
- Ensure equipment and product quality – Optimizing production control system. In this step, bottlenecks, delays,
production processes helps proactively identify bottlenecks and inefficiencies are identified and addressed. Follow-up is
in the procedure including equipment that prevents also the part where production managers compare the final
businesses from operating normally. A good production production result against the predicted schedule and product
control technique ensures that targeted outputs are met, quantity.
right on schedule, and according to standards. - Follow-up allows businesses to determine whether the
- Regulate inventory control – An efficient production control process can still be improved with the goal of achieving
system helps businesses manage inventory better. This greater manufacturing output in the production.
enables inventory managers to purchase materials 5. Inspection
accurately and avoid discrepancy in the number of stocks. - Inspection is not an official step of the production control
- Increase productivity – Utilizing production control process but performing regular or random audits is
techniques lessens unproductive time spent by employees. sometimes necessary to ensure that internal best practices
When equipment is in a good condition and production and industry standards are consistently complied with.
schedules are right on track, manufacturing targets are Production Control Example
fulfilled efficiently. Company ABC, a major electronic gadget producer based in San
- Lower production costs – Appropriately-designed Francisco, has recently seen an influx of consumer demand for
production controls and techniques, along with the their flagship mobile product. According to the inventory records,
assurance of efficient equipment, ability to effectively the demand for the product, paired with international supply
manage inventory, and increased employee productivity—all chain disruptions, forecasts product supply shortage by the end of
these can lead to major cost savings for businesses. the year if the issue is not properly addressed.
- Improve customer experience – All the above-mentioned Because of this, product managers and manufacturing managers
importance and benefits not only help businesses internally, of Company ABC quickly optimized their production control
they also translate to an enhanced customer experience. An techniques. Aside from immediately consulting their backup plans
organization’s reputation strengthens when final products for secondary and tertiary material suppliers, they also recognized
consistently meet customer expectations. the need to hire additional people to avoid manpower shortages
4 Steps in Production Control from further affecting their manufacturing schedule.
1. Routing Random inspections are also conducted throughout the
- Routing is the first step of production planning and control. succeeding months to ensure an accurate product quality and
This part of the process involves defining the path of the product quantity.
operation from start to end. It should specify all the raw MATERIAL REQUIREMENT PLANNING (MRP)

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