Resources / What is inventory control?

Chapter 10

What is inventory control?

If you’re a multichannel retailer, wholesaler, or ecommerce brand, keeping track of inventory can be a daunting prospect. Systems, processes, and technology are now available, though, to help companies streamline their supply chain. With the use of inventory control systems, you can efficiently and accurately track your merchandise.

This guide will help you understand what inventory control is, its importance, and its challenges. It will also provide tips for inventory control, and discuss some inventory control systems and techniques.

What is inventory control?

Inventory control, also called stock control, is the process of managing a company’s inventory levels, whether that be in their own warehouse or spread over other locations. It comprises management of items from the time you have them in stock to their final destination (ideally to customers) or disposal (not ideal). An inventory control system also monitors their movement, usage, and storage.
Inventory control means managing your inventory levels to ensure that you are keeping the optimal amount of each product. 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 forecasting and allow you to set reorder points, too.
Inventory control can include:

  • Barcode scanner integration
  • Complete inventory counts 
  • Keeping track of physical inventory with sales and purchase orders
  • Product details, locations, and histories 
  • Reports and adjustments 

The general goal is to maximize your profits while the least amount of inventory possible is sitting in your warehouse. Your business must do this without compromising customer satisfaction. While you can handle inventory control manually, there are automated systems that take the responsibility of managing your stock levels, and help eliminate costly human error.

According to the US Census Bureau, in July 2020, U.S. manufacturers and retailers were holding $1.33 of inventory for every $1 in sales. Effective Inventory control allows you to change that inventory/sales ratio for the better. Stationary stock does not do anything for your business or its bottom line. Make the most out of the precious space you have, while ensuring you always meet customer demand.

Inventory control vs. inventory management

While they both deal with aspects of inventory, inventory control is different from inventory management. Inventory control works with the inventory already in a distributor’s warehouse. It requires knowing what products are in your inventory and where it is located within your warehouse. It ensures the inventory remains in good condition and is organized in a way that minimizes cost.

Inventory management includes the business processes of product replenishment and forecasting. Management encompasses when to reorder products and how much product to order, to avoid either stockouts or holding too much inventory. It ensures that the right inventory is in the right place, at the right time, and in the correct quantity. You can achieve better inventory management when you improve your inventory control.

The importance of inventory control

The value of inventory control extends from cost reduction to customer satisfaction. Good inventory control saves your business time, resources, and money. Your company can have a significant gain in sales, but without control over your inventory, your business’s profitability will suffer.

Here are some ways inventory control is important for your business.

Quality control

Having an inventory management system allows you to implement greater quality control. If you can track and manage all aspects of your stock, you better control quality. The longer you hold inventory, the more likely it is to get damaged. You can avoid that by ensuring that stock gets rotated through your warehouse.

Inventory control also allows you to track the quality of stock you receive from suppliers. How often do you have certain products returned? How often are those that are returned sent back because they break or have other defects? Seeing how products move through your inventory can point to any problems, and help you eliminate write-offs.

Organizational control

Inventory control means that you have organizational control in your business. A well-organized stockroom lets you manage your merchandise and make the most of your investment in physical inventory. This aspect of inventory control is vital for knowing where your stock is and the expediency with which you can access it.
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.

Accounting accuracy

Keeping an accurate record of your inventory is vital for managing your assets. It will also help you in the event of an audit. Knowing what you have in assets allows you to know your overall spoilage and understand the value of your company.

Financial accounting rules and tax regulations may mandate your company to have a physical inventory account. All stock should have correct numbers and pricing in your inventory systems and your accounting software. This will ensure your company can go through audits without any question to your business’s accounting integrity.

accounting for inventory

Challenges of inventory control

Inventory control is vital for effective business operations. It can also come with challenges. It may seem difficult to find the time and resources, and developing a complete picture of your inventory can be difficult, especially if you have a larger company or multiple inventory locations.

However, these challenges can be overcome to ensure effective control over your inventory. The best way to manage all these challenges is to automate your inventory control process. Look into the best inventory management software for your business.

Below are a few of the challenges you may face.

Finding the time and resources

Doing inventory management manually requires substantial resources. Money and staff hours are required for manual inventory control. However, if you do not prioritize inventory control, you will lose more time and money later on. Take the time to implement a regular schedule to dedicate to inventory control. Also, make sure to include inventory control in your budget.

Visibility

Companies with large stock, complex warehousing, or that are selling on multiple channels can have many moving parts to their inventories. This can create challenges with visibility. Businesses must have a complete picture of their business’s inventory for replenishment, accounting, cash flow, and sales purposes. Losing sight of your inventory can lead to the degradation of inventory quality and can lead to dead stock.

The reports you can obtain through inventory control software systems can help you improve visibility. For instance, you can get alerts when inventory level is low Having high visibility on how your inventory moves  limits obsolete stock and helps determine how much inventory of each product you keep to meet customer demand.

Human error

Human errors are unavoidable when businesses have a constant flow of inventory in and out of their warehouses.  For example, vendors need to send accurate invoices and they need to be matched with purchase orders and physical inventory. Any inaccuracies that occur at this stage can impact your inventory control.

You can mitigate human error by the optimization of your inventory control system and integrating your solutions. This will allow your software to alert you if there are any discrepancies between what was entered in the accounts payable and the physical inventory counts.

Inventory control systems

There are a number of inventory control systems and related techniques that businesses can utilize. Each has benefits and disadvantages based on your inventory size and company operations. Retailers may find that they have different needs to a wholesaler, for instance. Start by defining your business goals and metrics to get an idea of your current and future needs.

Then, determine if your business should use a:

Spreadsheet to control inventory

The use of a spreadsheet as a manual way to control inventory works best for smaller businesses that don’t keep much stock or have a lot of different kinds of inventory. Keeping a spreadsheet is less expensive than the other two, but inventory control can be harder to maintain. Your team members will not, though, have to spend time learning to use an automated system.

While you may feel it gives you a better sense of control, manual inventory control through the use of a spreadsheet is far more prone to human error and is labor-intensive. Supply chain management may also be harder to maintain because it will require an employee to keep track of multiple moving parts. The replenishment of stock will also be harder to track in a manual system.

Periodic inventory system

A periodic inventory system usually relies on physical inventory counts. Inventory information is updated periodically when a physical count is conducted. This is super time-consuming for businesses that deal with large amounts of inventory or frequent inventory moves. However, it can work for companies that don’t handle many orders.

Periodic inventory generally uses the formula:

Cost of Goods Sold (COGS) = (Beginning Inventory + Purchases) – Closing Inventory. 

This system is easy to implement and requires minimal information. However, your stock levels will rarely be up to date, leading to delays and increased write-offs. It also relies on inventory audits rather than an automated system that updates in real-time.

Perpetual inventory system

Perpetual inventory systems update your stock in real-time when a transaction happens or new stock is received through technology solutions.  Around 72% of all retailers plan to adopt real-time visibility in their supply chain using automation, sensors, and analytics. It allows you to easily implement inventory management techniques like Economic Order Quantity (EOQ). EOQ makes sure inventory meets demands while minimizing holding and storage costs.

Perpetual systems give you better visibility on your inventory than periodic systems. And it lowers the cost and time spent on physical inventory counts.

 

advanced_inventory_software

4 tips when it comes to inventory control

Now that we have a foundation of what inventory control is and the inventory control systems you can utilize. Here are some tips when it comes to inventory control.

Use real-time inventory tracking

The value of automation cannot be understated. Real-time tracking gives you the most accurate, up-to-date information which guides your financial and business decisions. It can help increase your ROI and reduce your carrying costs. Automatic inventory tracking is extremely helpful when selling on multiple channels. Overselling can be damaging to the customer experience can be avoided when all the orders and inventory information is synced in real-time across all channels.

Be consistent with your labeling system

Modern warehouse management gives companies a wide range of options when it comes to labeling and identifying inventory. Find a system that works for your business and then be consistent with label strategies.

For example, SKUs make your inventory easy for your team to manage. Barcoding your inventory allows you easier multi-location inventory control, and multichannel inventory management.

Your company might also use Radio Frequency Identification (RFID) to identify individual products and components. RFID isn’t just for raw materials, it can be used just as effectively with finished stock and can track items throughout the supply chain.

ABC Analysis

One strategy you can use in a perpetual system is ABC analysis. This classifies inventory items based on the item’s consumption value. That value is the total value of a piece of inventory consumed over a specific time frame. The letters stand for the different categories items can be placed into.

  • A items refer to goods with the highest consumption values. This will be a low number of items with a high consumption value. 
  • B items are the category with less consumption value than A but higher than C items. 
  • C items have the lowest consumption value. The risk on this stock is low, but so are the returns. They often make up a good portion of your stock. 

The table below is an example of how this system would be implemented in practice: 

Set reorder points

This may seem obvious, but reordering can be a tricky part of inventory control. You want your customers to have quick access to stock without having to deal with the carrying costs of dead stock. With inventory control software, you can set these levels to alert you when a product gets below a certain level. You can set individual products to reorder points using EOQ or ABC analysis.

It can also help you have better control over your lead time. Lead time is the time that passes between when an order is placed to replenish inventory and when it is received. This factor affects the amount of stock you need. Dead stock takes up valuable warehouse space. On average, space in warehouses and distribution centers in the US costs $5.08 per square foot. To enable a more accurate replenishment, you can also adopt a data-driven inventory planning system.

integrated_inventory_planning

Perform regular audits

Even if you use inventory control software, you should still perform regular checks for theft, spoilage and possible human errors. You also want to ensure that each department is in communication regarding your inventory. Make sure your systems are accurately communicating with your accounting department the cost and count of your inventory.

Conclusion

Effective inventory Control is vital for any business, from a newly established brand all the way up to Amazon. It allows you to optimize your cash flow and reduce resources spent in inventory control. By using automated inventory control software systems, you can implement a strategy for inventory control that tracks your assets in real-time. Giving you visibility and control over your stock.

Even if your business has a relatively small operation, you can choose between a periodic or perpetual inventory system. However, if you have a large volume of stock or more complex processes, a perpetual inventory system is definitely a more suitable option. And if you look to complete your retail tech stack, research the best inventory system that can be seamlessly integrated with the rest of your business operations.

⬆ Back to Top