Inventory control, also known as stock control, is the process of managing your inventory stock. It helps companies account for the goods in their control and lets them put in place procedures to manage all items effectively.
Inventory control is closely related to inventory management, which is the entire process of looking after inventory, from purchasing the stock to turning it over and ordering more. Inventory control in terms of the organization of your stock is vital for the proper running of your company. It will ensure that you have enough units to fulfill orders and have safety stock. Effective inventory control will also help you avoid having any dead stock or overstock. Safety stock acts as a buffer to reduce the risk of an item being out of stock. Dead stock is inventory that doesn’t sell.
The goal of inventory control procedures is to maximize profits with minimum inventory investment, while improving customer satisfaction levels. Proper inventory control can keep track of your purchase orders and keep a functional supply chain. Systems can be put in place to help with demand forecasting and allow you to set reorder points, too.
Inventory control involves several components including:
- Deciding the optimal amount of inventory your business should hold – Too much inventory will cost your business money to store and could lead to waste. Conversely, too little and you run the risk of being unable to fulfill orders, therefore losing out on sales.
- Deciding when your business will order more of an item as it begins to run out – this helps ensure you can fulfill sales, maximizing revenue.
- How inventory is managed while in stock – For example, storing it in a way that allows employees to find it easily, or that encourages older items to be used first.
- Good inventory control systems ultimately ensure businesses always have the correct level of stock, enabling them to meet sales demand while reducing waste and storage costs.
Inventory Control vs. Inventory Management
Though they might sound like the same thing, inventory control and inventory management do have their differences.
Inventory control is all about regulating and handling the inventory you already have on hand. For example, what you do with leftover product that doesn’t sell, or whether you track products with barcodes or RFID tags.
Inventory management deals with inventory demand forecasting and replenishment usually with an inventory management system, like backordering processes and bulk shipping systems. It is a broader term that covers how you obtain, store, and profit from raw materials and finished goods alike. To improve both starts with getting a handle on your inventory control process.
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4 Typical Inventory Control Methods
You should be able to use your system to track inventory levels, create orders and send out stock. Some basic systems for tracking inventory include:
Manual
Whether via a ledger or a stock book, manually logging inventory with a pen and paper is the simplest way to track what comes in and goes out. Small businesses with few items can get away with using this type of system. This system can be challenging because it is an actual record that you cannot mine and use for planning purposes.
Stock Cards
A slightly more complex method uses stock cards, also called bin cards. A stock card is a table that records the running unit price, sale price and inventory count of each product. Use individual cards for each product in large warehouses or stock rooms. The system also tracks purchases, sales, returns and other reasons to withdraw stock, such as promotional withdrawals. You can include additional notes on the stock card, such as any problems associated with that item. For a stock card system to be effective, consistent updates are critical. You must also record unusual stock pulls; otherwise, you run the risk of inaccurate data.
Spreadsheets
Many companies, especially small businesses, use spreadsheets to track inventory. Whether they use Microsoft Excel, Google Sheets or something similar, spreadsheets are a way to start automating and electronically capturing product data. With consistent updating and basic coding, you can ensure that you have available current stock levels and statistics. Businesses quickly customize these systems to meet their needs. Since everyone who builds a spreadsheet does so slightly differently, users will need intimate knowledge of how the sheet works. This method is also thought of as manual because the only way to automatically update the spreadsheet system is by adding high-level macros or coding that connects them with other systems.
Inventory Management Software
Simple inventory management software is usually low cost and targeted to small and medium-sized businesses. This simple automation is often cloud-based and ties into your point of sale software, so it can generate real-time, automatic stock updates. You can also incorporate analytics and reporting and run cost comparisons, create reorders, identify best and worst-selling products and drill down to order details or customer patterns. Some inventory management software systems can scale to more complex functionality as your business grows.
Periodic vs Perpetual Inventory Systems
Now that we’ve covered the basics of inventory and how inventory control systems work in general, let’s discuss the two main types of inventory control systems.
Periodic Inventory
A periodic inventory system is catered more towards smaller businesses yet can be used by a business of any size. It employs regular physical counts of the stock to calculate the level of inventory and the costs of goods sold (COGS). At the end of a set period, the inventory and cost of goods sold are updated manually.
Perpetual Inventory
A perpetual inventory system keeps track of inventory balances on a continual basis, with updates automatically generated as soon as products are received or sold. Perpetual systems are necessary for any ecommerce retailer looking to take advantage of multichannel ecommerce or one that has more complex fulfillment needs.
Updates are automatic as soon as goods are received or sold and the COGS are also updated straight away. As for sales, they are immediately recorded in an inventory live count. Meaning that the live count should always be correct if there is no theft in-store or damage.
Inventory Control Technology
RFID
You’ve likely noticed RFID, or radio frequency identification tags, on items you’ve bought. With the help of radio frequency, RFID tags make it easy to search for and identify your inventory. They can either work passively or actively and work in tandem with software, tag readers, and antennae.
While active RFID tags can inform you of their status within a certain radius, passive RFID tags have to be scanned to collect key information like product type or location. Both functions are great for businesses that need to know the state of their inventory levels at any given moment. RFID tags are particularly helpful for preventing phantom inventory.
Barcodes
Using barcode software is also a more efficient way to control inventory. Using barcode scanners for inventory tracking, you’re able to:
- Keep more precise records of your inventory at any time
- Speed up the process of inventory control
- Make moving inventory easier to track
- Significantly reduce costly inventory errors
You might have seen barcodes in big-box stores like Walmart or Target. But it’s also a viable way for smaller businesses to control inventory that isn’t as expensive as RFID tracking.
While both barcodes and RFID tags can carry product information, they do have their fundamental differences. So you want to take the time to vet both options and weigh what features can help you maximize inventory control.
Inventory Control Metrics
If you are managing inventory yourself, it may be useful to understand these key formulas to help control your stock. They are simple enough to use and put into whatever spreadsheets you are using.
Economic Order Quantity (EOQ)
The formula for economic order quantity is the square root of [2 (setup costs) (demand rate)] divided by holding costs.
This formula is ideal for businesses that wish to minimize their inventory costs (for example, order costs, shortage costs, and holding costs). With the assumption that demand, ordering and holding costs remain constant, this formula is very cost-effective.
Reorder Point Formula
For the reorder point formula, multiply the average daily usage rate for an inventory item by the lead time in days to replenish it. The reorder point prevents your business from falling behind in the next supply of inventory as an accurate reorder point ensures there is enough inventory on hand to satisfy customer demand.
Inventory Turnover Ratio
The formula for inventory turnover ratio is the cost of goods sold (COGS) divided by the average inventory for the same period.
This formula helps your company understand the rate at which a business sells and replaces its inventory of goods during a certain period.
Inventory Control Tips
Inventory control is complicated and takes a lot of time and energy to get right. Fortunately, there are a few best practices that help make the process easier and more reliable.
Conduct Inventory Audits
If you don’t have an accurate sense of your inventory levels, you’ll never be able to control them. You need to conduct regular audits to ensure your actual and reported levels are the same. One way to limit the amount of time this takes is to conduct an inventory cycle count every few days. Here, your employees audit just a selection of products to ensure the report is accurate. It lets you avoid halting operations and is best used for your most valuable products.
Pick the Correct Inventory Cost Method
Do you use the FIFO or LIFO method of inventory costing? Is that the one you should use? Look into the differences between the first-in-first-out and last-in-first-out methods to see if there’s a benefit to switching. You may be sitting on old product longer than necessary.
Establish PAR Levels
A product’s PAR (short for Periodic Automatic Replenishment) level is the minimum amount you need on hand to meet customer demand. You should establish a par level for every product you sell so you can avoid running out of inventory and missing sales. If you use an inventory management system, there’s likely a feature built in for this.
Utilize Best Available Data
If you are properly tracking inventory levels, sales, and demand trends, then you have everything you need to get the most out of your inventory. Regularly review the data and establish patterns that show what you should stock and when. Investing in an order management system can also help uncover patterns that affect your shipping and delivery. You should also keep an eye out for issues with inventory shrinkage or waste.
Bottom Line
If you establish the best practices for inventory management it can be an incredible help in efficiently running your business. It is important to make the right choices that can scale and grow with your business. Great inventory control will save money, time, and improve customer service. Remember that with an effective inventory management system in place you can keep your business profitable, analyze sales patterns and predict future sales, and prepare for the unexpected. With proper inventory control, a business has a better chance to survive and thrive.
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