Did you know Amazon ships 1.6 million packages a day—totaling a little over 18.5 orders a second? If you’re wondering how that’s possible, you’re not alone. Companies try and fail to nail a systematic approach to getting mass quantities of orders to customers on time, and it doesn’t help when supply chain issues are mainly out of the company’s control.
When companies learn a method and type of inventory control that works for their business, it can be a game-changer. Inventory control is an operational process that includes daily activities such as receiving raw materials and products, checking for discrepancies, and storing and transporting inventory to and from customers and within the warehouse.
When done well, inventory control ensures you have enough stock to meet your business needs while keeping inventory costs low and forecasting changing market demand.
In this post, we’ll explore what inventory control is, how it differs from inventory management, and the methods your company can use to optimize inventory control.
Inventory control ensures that a company has enough stock to meet inventory demand. While inventory management looks at inventory more holistically, inventory control focuses specifically on studying market demand and using insights to make informed decisions about the stock.
When creating an inventory control system, you should have one goal: Maximize profit while incurring as little inventory costs as possible and prioritizing customer satisfaction. It’s a tricky balance, and businesses too often save costs but at the expense of retaining customers or vice versa.
However, getting inventory control right is one of the most critical elements of scaling a business. Stick with us as we explain why good inventory control is pivotal for growing companies.
Inventory control reduces costs and improves service while managing working capital to maintain adequate and consistent cash flow. Effective inventory control means having the right product in the right place at the right time — and a solid strategy is essential to meeting customer demands.
The primary objective of inventory control is to keep only the necessary units on hand without overspending or compromising customer satisfaction. However, whether you’re an online retailer or wholesaler or manage inventory throughout the supply chain, you’re bound to run into some unique circumstances that require you to create a tailored inventory control system. Later, we’ll break down how different product sellers deploy different inventory control techniques depending on their industry and market share.
Inventory control falls within the larger concept of inventory management. While inventory management involves more high-level inventory oversight, inventory control involves more targeted activities, like sending orders, receiving stocks, and handling other day-to-day order management processes.
Inventory management and inventory control aim to improve a company’s bottom line. Still, they approach it in different ways:
Implementing a structured inventory control system can support companies in a few ways. Here are some of the benefits of inventory control:
The primary purpose of an inventory control system is to ensure that all raw materials and finished goods are available for production or sale. This includes all the inventory types necessary for your business to operate without a glitch.
Internal stock handling is a nightmare for many inventory managers because it is challenging to keep pace when all internal handling, recording, and tracking happen manually. An inventory control system can quickly show spikes in sales, promotions, and other factors to alert management to the necessary inventory response, thus, improving efficiency.
The different costs associated with inventory include:
All costs incurred by a business are either passed onto the consumer or can be responsible for the company’s failure. Businesses can use an inventory control system to prevent unnecessary costs and determine where to save money along the supply chain from acquisition to consumer.
Inventory directly or indirectly impacts almost everything that happens in your company. Employing an inventory control system will save money at multiple touchpoints.
Exceeding customer expectations is one way to stand out from the competition. A detailed inventory system can be key –– knowing what you have, where you have it, or how long it will take to get it.
An essential advantage of having real-time inventory control reports is that they provide businesses with instantly actionable data. Additionally, real-time inventory management allows you to analyze trends and pinpoint where you need improvements. Real-time reporting gives your business a competitive edge and improves sales by minimizing or eliminating stockouts.
Inventory control is vital in estimating future sales volume or evaluating what items to put on sale racks. Forecasting is essential for retail businesses and a huge part of optimizing product sales. Business managers can review historical purchasing data to make assumptions based on product performance when using an inventory control system.
Creating a successful inventory control system requires structure and communication across different teams. Follow the three steps below to lay the foundation for your inventory control system.
Strong communication is the key to smooth processes, and when it comes to inventory control, effective communication between the production, sales, and marketing teams is critical to success. Marketing departments have a pulse on demand, whether through customer interaction or data. Similarly, production teams have access to critical timelines and material supply. Collaboration between these departments ensures minimum and maximum inventory limits get met without overproducing or undersupplying.
The reorder point (ROP) is a specific level at which you need to order stock so you do not run out of inventory. A big part of determining the ROP is keeping a pulse on raw materials, work-in-progress goods, and finished goods. A robust inventory control system forecasts the ROP for all the components you’ll use in production and finished goods.
There are various tried and true inventory control techniques that companies find success with, and you can select the one that best meets your needs. Whatever approach you choose, the strategies must help determine your minimum inventory needs and ROP.
Inventory control methods evaluate the accuracy of your inventory records against the actual physical inventory on hand. Here are some different ways to assess your inventory.
The periodic inventory control method reconciles inventory periodically with merchandise recorded in the purchase account. In this method, the inventory account and cost of goods sold (COGS) update at the end of the accounting period — which is determined based on business needs.
The inventory account is adjusted to match closing stock, calculated using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method.
Best for: Small businesses that hold smaller amounts of inventory
The perpetual inventory control method uses sophisticated equipment and software that tracks inventory in real time. Updates happen automatically whenever a product is received or sold. Unlike periodic inventory control, perpetual inventory has a built-in checks and balances system.
A perpetual inventory system makes sense for businesses with multiple product lines and high sales volumes.
Best for: Large companies that typically see high sales numbers
The just in time inventory control method helps companies limit costs by only holding inventory when needed.
This method works well for companies that experience seasonal demand or small businesses looking to limit inventory costs as they’re just starting to grow. It can be costly to store inventory for extended periods; the just in time method ensures companies don’t see costs from holding inventory in-house.
Best for: Retailers that experience seasonal demand and small businesses trying to minimize inventory costs as much as possible
Companies use the EOQ formula to determine the optimal quantity of inventory that satisfies market demand and minimizes inventory costs as much as possible.
The EOQ formula assumes that demand will remain relatively constant over time, so companies in industries that see lots of demand fluctuation and seasonal changes can’t use it.
Best for: Companies in industries that don’t see demand fluctuation
ABC analysis is a process companies use to prioritize products and materials based on their worth. Using ABC analysis, companies make informed decisions about the inventory that’s most valuable to have on hand.
In ABC analysis, the “A” represents the goods with the most value, the “B” represents goods with slightly less importance, and the “C” is goods with the least value. Companies consider goods with these categories in mind when making inventory control decisions.
Best for: Product sellers and manufacturers looking to segment products by revenue to increase profit margins
Developing a sound inventory control strategy involves overcoming organizational challenges. Here are a few challenges you may face when implementing an inventory control strategy:
If you move large amounts of stock, work with multiple suppliers, or have a more complex warehousing system, it can be difficult to see the entire inventory process.
Without proper visibility into stock movement, you can easily find yourself with too much, insufficient, or the wrong type of stock. As a result, it’s important –– first and foremost –– to ensure you have visibility into all moving parts of your inventory process.
Inventory control only works if you understand how supply and demand works in your industry. As mentioned above, companies that experience seasonal supply and demand shifts will want to deploy a different inventory control method than those with a more regular supply schedule.
Understanding the nature of supply and demand will allow you to make an informed decision about the correct inventory control method, so you can build an internal system that makes the most sense for your business and industry.
Inventory control helps reduce human error primarily through automation. By creating an inventory control system rooted in an automated inventory management system, you can mitigate mistakes by automating invoicing, purchasing, and stock count.
Additionally, the best inventory management software will alert you if there are any inaccuracies or discrepancies in your physical inventory count and financial records.
Overstocking increases holding costs or when an opportunity is missed for the sake of something else. In terms of inventory, overstocking one product reduces the capital available to purchase new products, meaning there’s a loss of opportunity to profit from new products. On top of missed opportunities, there’s a risk of being stuck with obsolete inventory, plus an increase in holding costs, including storage, possible theft, or damage.
Stockouts occur when you need more inventory to cater to the market demand. Like having too much inventory, not having enough also affects cash flow. But more importantly, insufficient stock directly affects the customer experience. Today’s shoppers expect same-day and next-day delivery. When they don’t, they’re quick to try other vendors or to write poor customer reviews.
Inventory control methods will vary between companies in different industries, but there are a few universal best practices that companies should adhere to when implementing an inventory control system. When working to build an inventory control system, you should always:
You should check that your physical stock aligns with your inventory reports to ensure no discrepancies. If you’re using inventory management software, perform a year-end inventory count to ensure your physical stock count aligns with the information in your software.
Audit high-value items more regularly than others. You can also audit fast-selling items through the process of spot-checking, which involves checking items on a more regular basis than the rest of your inventory.
If you have a good relationship with your supplier, you can improve your inventory control system, as your supplier can help you solve problems that may occur during inventory management processes.
For instance, let’s say you have a product that doesn’t sell nearly as well as others, but you still need to stay stocked with it. If you have a good relationship with your supplier, you can negotiate a beneficial minimum order quantity so you can appease customers without taking a loss on obsolete inventory.
Automating your inventory control process is an excellent way to stay on top of market trends, mitigate human error, set automatic reordering, and more.
Once you determine the inventory control method that makes the most sense for your business, automated inventory management software can allow you to take a hands-off approach to inventory management and focus more on adding value to your business.
The main objective of inventory control is to maximize profits while incurring as little inventory costs as possible — all while ensuring customers receive the correct products promptly.
While determining the right inventory control method will depend on your business and industry, you can enhance your inventory control method by integrating it with an inventory management software designed to work to the needs of your business. Cin7’s versatile software solutions help companies to sell more products to new customers — at the lowest cost possible.
Get a demo to see what our products can do for you.
Lost, obsolete or overstocked inventory drives up costs and destroys margins. Without inventory visibility, you won’t know your business is suffering until it’s too late.
The year 2020 marked the highest-level Working Capital Index in 10 years resulting from the Covid-19 pandemic, reported J.P. Morgan. The findings highlight how real-world events impact inventory levels and the availability of working capital. Working capital is defined as inventory, debts, cash, and cash equivalents. A business needs working capital to be able to […]
