Inventory Management and Control ANNALINE L.

PALMAIRA
BSBA 4th Year COURSE/SUBJECT PROFESSOR
1st Semester SY 2025-2026
Module 2 : Types of Inventory, Internal Control System, Inventory Forecasting,
Intended Learning Outcomes
At the end of this module, the student is expected to know:

a. The different types of inventory, internal control and inventory forecasting

b. How inventory forecasting benefits the different stakeholders

LEARNING CONTENTS
Types of Inventory
There are five fundamental types of inventory when it comes to the products a business might
sell.
1)Raw materials --- are any items used to manufacture finished products, or the individual
components that go into them. These can be produced or sourced by a business itself or
purchased from a supplier.
For example: A business that makes its own bespoke furniture may purchase materials from a
supplier. While a small business supplying specialty herbs may actually grow these itself. Either
way, raw materials are still considered a type of inventory. And so must be managed, stored
and accounted for accordingly.
2) Work-in-progress (WIP) inventory --- refers to retailers that manufacture their own
products. These are unfinished items or components currently in-production, but not yet ready
for sale. For our furniture business, this may be products that have been put together without
yet being painted or packaged.
3) Finished goods --- products that are complete and ready for sale. These may have been
manufactured by the business itself, or purchased as a whole, finished product from a supplier.
Most retailers will either purchase whole, finished products from a supplier, or have custom
products manufactured for them by a third-party. Finished goods are therefore often (but not
always) one of the only types of inventory needing to be handled within retail inventory
management.
Within a retail context, it’s also useful to further subdivide finished goods into a few other types
of inventory. This gives a business much greater inventory visibility, allowing for improved
allocation and management.
1. Ready for sale. Also known as ‘available inventory,’ this is stock that has been
manufactured/purchased and put away in the warehouse ready for sale. It could be
picked, packed and shipped without complication at any desired moment.
 2. Allocated. This is inventory that has been bought by a customer and allocated to a
sales order. It is therefore not eligible for sale again, and must be removed from the
available inventory figure.
3. In-transit. This is unsold inventory that is currently on the move - e.g. a purchase order
delivery in transit, or stock being moved to another warehouse.
4. Seasonal. Also known as ‘anticipation stock,’ this is inventory that has been
manufactured or purchased to specifically cover a forecasted upturn in [Link]
example, to cover Black Friday sales, or your peak season.
5. Safety. This acts as a buffer cushion of stock to cover you in the event of any
unforeseen upturns in demand, or problems with supply. Knowing (and using) these
different types of inventory is critical to good inventory management. In the next chapter,
we’ll go into the art and science of inventory forecasting
4) Maintenance, repair & operations (MRO) goods --- are items used within the manufacture
of products, but without directly making up any part of a finished product.
This can include items such as:
● Production & repair tools.
● Uniforms & safety equipment.
● Cleaning supplies.
● Machinery.
● Batteries.
● Computer systems.
And all items that are consumed or discarded during the production process.
Small types of inventory like this may seem menial. But MRO is inventory that still needs to be
purchased from a supplier, stored somewhere and accounted for in financial records.
5) Packing materials --- are anything you use for packing and protecting goods - either while in
storage, or during shipping to customers.
This is therefore particularly important for online retailers. And may include things like:
● Bubble wrap
● Padding.
● Packing chips
● A variety of boxes
Many retailers don't think about packing materials when managing their inventory. But stocks of
these items need to be used and maintained regularly - and it's therefore important to include
them in overall inventory reporting and accounting.
Types of Internal Control Systems
Inventory control and monitoring systems are accounting approaches to trace the number of
products available. The 2 main systems are periodic and perpetual tracking systems.

The Periodic Inventory System

Most small businesses still use periodic inventory management because it doesn't require
sophisticated software or inventory scanning. A periodic inventory system relies upon
occasional or regular physical counts of the inventory. You opt accounting periods supported
the business needs, but you don’t track inventory daily or continuously. The challenges of the
periodic system are especially apparent when performing a physical inventory count. Most
conventional business activities must be suspended during this point because it requires
significant manual labor. Many companies hire additional staff and check out to perform this
outside of normal business hours, like during an evening shift.

The Perpetual Inventory System

The perpetual system could also be costlier to implement than the periodic system. This
technique calculates inventory supported sales and purchases via the purpose of sale and asset
management software. This way, you've got accurate stock on-hand accounting in the least
time and minimal employee contact with the products is achieved.
The challenges of this sort of system occur once you use it without also performing physical
inventories. In other words, the recorded inventory might not accurately reflect what in-stock is
physically as time goes by. Further, errors and improperly scanned items affect the inventory
records. Experts agree, though, that albeit physical inventories aren't common, you ought to
implement some manual stock taking process to enrich a perpetual system. You’ll integrate
these sorts of systems with supply-chain automation to form quicker decisions informed by data.

Inventory Forecasting
Inventory forecasting is crucial to the financial success of any retail business. It helps strike a
balance between sinking too much cash into inventory at once, while ensuring demand can
always be satisfied without going out of stock. However, this is also one of the most difficult
aspects of inventory management to get right.
What is inventory forecasting? I
Inventory forecasting is essentially making an informed projection on how much stock will be
needed to satisfy demand over a given time period. It starts with a simple demand forecast, then
uses what’s already in stock to plan how much inventory is required going forward. It’s important
to note that forecasting will always be educated guesswork. No forecast is set in stone, and
there are several factors that can affect accuracy - such as seasonality and sales history. Good
demand and inventory forecasting will therefore take these factors into account, and be agile
enough to allow for adjustments when circumstances change.
Inventory forecasting, also known as demand planning, is the practice of using past
data, trends and known upcoming events to predict needed inventory levels for a
future period. Accurate forecasting ensures businesses have enough product to fulfill
customer orders and do not spend too little or too much on inventory.

Setting forecast boundaries

The first step in predicting your inventory requirements is to create a simple forecast of your
expected sales. For this, you’ll need to set some forecast boundaries.
1) Forecast period A forecast period is the specific amount of time into the future that a
forecast will be attempting to predict.
It is recommended at least to have the following three periods:
1. Annual.
2. 90 day.
3. 30 day.
These should then be reviewed each month. If market trends or actual sales performance is
different than expected, then upcoming sales forecasts can be adjusted accordingly.
2) Base demand Base demand is simply the exact current demand for a product at the
specific point a forecast is due to begin from.

For example, a company may be doing a 30 day forecast for white Nike sneakers. If they
sold 37 units over the previous 30 days, then base demand would be 37.

This just gives a starting point to work from in our forecast. To increase accuracy, we’ll
need to consider any trends and variables that may impact demand.

Incorporating trends and variables

It’s not enough to forecast inventory based purely on current demand. There’s a whole
host of factors that could impact the data going forward.

Most businesses will therefore need to take a variety of trends and variables into
account in order to achieve the most accurate inventory forecasting possible.

1) Sales velocity

Stock-outs shouldn’t happen, but in reality they sometimes still do. And sales velocity
takes this into account when it comes to looking over your past sales performance
for inventory forecasting.
 For example: Maybe you only sold 20 units of a product in the past 90 days. But it
doesn’t tell the whole story if you actually had it listed as ‘out of stock’ for 89 of those
days.
Forecast better for the upcoming period and you could sell much more. We can
therefore use the following calculation to omit out of stock days:

All things being equal, sales velocity gives an indication of how much a product should sell if
continuously in stock over a 30 day period. Something that can be very useful for forecasting
inventory requirements into the future.
2) Marketing activity
It’s also essential that you consider marketing and advertising activity when it comes
to inventory forecasting. This should be taken into account in two ways:

1. Past marketing activity when looking at sales history.

2. Planned marketing activity when planning for future sales.

The main thing to watch out for is whether planned marketing activity is conceivably
different or scaled up/down compared to past marketing activity.

For example:

It could be realistic to expect a 25% sales uplift if Facebook Ads worked well last Q3,
and you decide to increase budget by 25% in this Q3. So you’ll need to account for
this when inventory forecasting.

3) Seasonality
Seasonality is absolutely critical for forecasting your stock requirements.

Winter coats tend to not sell well in summer months. Good gifts will tend to pique
around the Holidays. Items you discount will possibly go through the roof during
Black Friday.

But there may also be more subtle, not so obvious variations in demand for certain
products.

This is where 12 month sales data is powerful.

You’ll need to look back over the previous year (several years if possible) to see
which specific months and periods in time certain items:

● Start to trend up.

● Plateau.
● Start to trend down.

This allows you to make data-backed decisions on seasonality, and how much
inventory you might require during these periods.

4) Unexpected publicity
Unexpected media attention or publicity may be unlikely. But it’s still something you’d
need to forecast for if it happens.

For example:

You’ll probably need to forecast an uptrend in sales if a celebrity is pictured wearing

some of your jewelry. Or be prepared for a possible downtrend if you get some bad
press in a national newspaper.

Either way, unexpected publicity is definitely something you should be aware of and
reacting to with your forecasts.

5) Industry-specific effects
Events and goings on within your industry and marketplace in general can also
impact demand for products.

This could be a whole range of things, such as:

● A major competitor going out of business.

● A large company diversifying into your niche.
● Major changes to pillar marketing channels (if Facebook banned your
Ad account, for example).
● Law changes in states/countries you operate/sell in.

Again, these are slightly ad-hoc and unpredictable. But anything that does happen
should be reacted to with inventory requirements adjusted accordingly.

Types of Inventory Forecasting

Trend forecasting: Trends are changes in demand for a product over time. This
method projects possible trends and excludes seasonal effects and irregularities
using past sales and growth data. More-granular sales data helps this forecasting
technique by showing how specific customers as well as types of customers will
 likely purchase in the future. Analysts can find new ways to market and offer sales
from this data.

Graphical forecasting: The same data that a forecaster looks at mathematically in

trend forecasting can be graphed to show sales peaks and valleys. Some forecasters
prefer the graphical method because it is visual. They can discern patterns from a
series of data points and add sloped trend lines to graphs to examine possible
directions that might otherwise be missed.

Qualitative forecasting: When they lack historical data, some companies go straight to the
source: their customers. Qualitative forecasting often involves complex data collection, such as
focus groups and market research. Forecasters then flesh out models from this type of data.

Quantitative forecasting: Considered more accurate than qualitative research alone,

quantitative forecasting uses past numerical data. The more past data a company has, the more
precise the forecast usually is. One example of quantitative forecasting is time-series
forecasting, which uses temporal quantitative data to make a model. This model helps to predict
future trends

Inventory Forecasting Benefits

Cost savings:

 Less money tied up in overall inventory as well as holding inventory

 Keeps safety stock at a realistic threshold

 “Right amount at the right time” ordering

Customer and Supplier satisfaction:

 Minimizes the number of out-of-stock items

 Trend analysis yields happier customers as newly “hot” items are available

 Better supplier relations via fewer “hair on fire” calls for stock or material resupply
 Back-End Improvements

 Improved automation and decreased manual labor

 Better management of supply chain

 Better management of production cycle

Strategic Insights

 Aligns stock levels with business goals and the company mission

 Improved margins and profitability

 More accurate inventory data and reporting

Forecasting for new products

As stated earlier, inventory forecasting is always going to be somewhat of a guess.

And that becomes even more so when it comes to new products with limited sales
data available.

The key is to try to inform your guesswork as much as possible.

So consider things like:

● Trends of similar products you’ve launched.

● Trends of other products within that category you’ve launched.
● Trends of all previous products you’ve launched.
● Using a tool like to see seasonality of when people search for specific
products most.
● Making use of market research, surveys and focus groups.
You can also build up your data set slowly. So launching new products with small
amounts of inventory to judge initial reaction, then re-investing in greater stock
numbers going forward.
Inventory planning and replenishment

Sales and demand forecasting is one thing. But true inventory forecasting needs to
go a step further and actually plan out how you’ll replenish stock for the upcoming
period.

This means considering:

1. Current stock levels. How much is currently on-hand? There’s no

point purchasing 40 units to cover 40 forecasted sales if you already have 27
units on-hand.
2. Pipeline inventory. How many units have already been ordered and
en route as pipeline inventory? You don’t want to double buy stock.
3. Lead time. How long will it take for new stock to be delivered,
received into inventory and made ready for sale?

ASSESSMENT

Name__________________________________ Course________ Yr. & Sec._____

Direction: Based on the discussion in the module discuss the following clearly.

1. Differentiate periodic from perpetual inventory system. Discuss advantages

2. Discuss the importance of inventory forecasting
3. Present a specific type of business and discuss how would you do its inventory forecast

Web Learning References:

1. [Link]
2. [Link]/portal/resource/articles/inventory-management/[Link]