Inventory control is the practice of maintaining optimal stock levels at all times. This ensures companies can satisfy customer demand without overspending on excess inventory.
Keeping tabs on inventory levels may seem complicated, but it can differentiate between profitability and costly stockouts—especially when you have systems to automate the process.
This guide will get you up to speed on inventory control systems, tactics, and best practices to boost your bottom line.
What is inventory control?
Inventory control (also called stock control) tracks and manages stock levels, ensuring the company carries the right amount of every item. This process encompasses inventory from when it arrives at a storage facility to when it arrives at its final destination.
Inventory control aims to maximize profits while minimizing the amount of inventory sitting around in storage facilities. But the trick is striking that balance without compromising customer satisfaction.
Inventory control is essential for any company that sells physical products, including retailers, wholesalers, manufacturers, and distributors. Accurately tracking merchandise is the foundation of a functional supply chain.
The difference between inventory control and inventory replenishment
Inventory replenishment is a facet of inventory control, but these two terms aren’t interchangeable.
Inventory replenishment is how items move along the supply chain, from a manufacturer to storage to a shipment location. This is one process that helps businesses avoid overstocking (or understocking).
On the other hand, inventory control refers to a company’s entire system of optimizing inventory levels, from warehouse management strategies to inventory count techniques.
Why is inventory control important?
Inventory control is about understanding the flow of goods in and out of your business. This knowledge is essential for maintaining a healthy bottom line.
- Cash flow. Poor inventory management can tie up your cash in excess stock or leave you scrambling to fulfill orders when you run out. Effective inventory control ensures you have the right amount of stock at the right time, keeping your cash flowing smoothly.
- Customer satisfaction. Nothing frustrates customers more than being unable to get what they want when they want it. Inventory control helps you avoid stockouts and fulfill orders promptly, keeping your customers happy and loyal.
- Reduced costs. Holding excess inventory incurs storage costs, and stock that sits too long can become obsolete or damaged. Inventory control helps you minimize these costs by optimizing stock levels.
- Data-driven decisions. By tracking your inventory levels and sales data, you can identify trends, forecast demand, and make informed purchasing, production, and pricing decisions.
How inventory control can improve your business
Effective inventory control not only helps you avoid issues, it actively improves your business operations. Here's how it can take your business to the next level:
- Increased efficiency. By streamlining your inventory processes, you can reduce waste, optimize stock levels, and improve overall operational efficiency.
- Enhanced profitability. With better inventory management, you can reduce costs, maximize sales, and ultimately boost your bottom line.
- Improved customer experience. Accurate inventory tracking ensures you have the products customers want in stock, leading to increased customer satisfaction and repeat business.
- Data-driven growth. By leveraging inventory data and insights, you can identify growth opportunities, make strategic decisions, and stay ahead of the competition.
Inventory control vs. inventory management: What’s the difference?
Inventory control and inventory management might seem interchangeable, but there are key differences between these two terms.
Inventory control is about keeping track of stock already in a company’s storage facility or en route. On the other hand, inventory management is a broader term that involves every stage of the supply chain, including sourcing raw materials, transportation, and order fulfillment.
Put simply, improving your inventory control improves your inventory management.
9 ways to control inventory
Inventory control is essential for the success of any new business, impacting both profitability and customer satisfaction. Here are nine effective ways to manage your stock:
- Manual tracking. Start with a simple spreadsheet or notebook to record incoming and outgoing stock. This basic method can provide a clear picture of inventory levels and help identify trends.
- Stock cards. Assign a card to each product and track details like quantity received, sold, and remaining. This visual aid helps monitor stock levels at a glance.
- First-in, first-out (FIFO). Implement the FIFO method to prioritize selling older inventory first, reducing the risk of spoilage or obsolescence, especially for perishable or time-sensitive items.
- Last-in, first out (LIFO). This method prioritizes selling newer inventory first, which can be beneficial for tax purposes in certain situations, but may not be suitable for perishable goods.
- Regular stocktakes. Conduct regular physical inventory counts to ensure accuracy and identify discrepancies between recorded and actual stock levels. This helps prevent overstocking or understocking.
- Set reorder points. Establish minimum stock levels for each product and set automatic reorder points with suppliers to avoid running out of stock and missing sales opportunities.
- Categorize inventory. Classify items based on their value and turnover rate (e.g., high-value, low-turnover; low-value, high-turnover). You’ll focus efforts on managing the most critical items.
- Analyze sales data. Track sales data to identify trends and forecast demand. You’ll gain insights to make informed purchasing decisions.
- Prioritize accuracy. Train staff on proper inventory management procedures and emphasize the importance of accuracy in recording transactions. This helps prevent costly errors and ensures reliable data.
- Inventory management software. Consider using software to automate tracking, streamline reordering, and provide valuable insights into stock levels, sales trends, and overall inventory performance.
3 ways inventory control benefits your business
Inventory control might not seem glamorous, but it pays serious dividends in profitability and customer satisfaction.
1. Reduced carrying costs
According to the US Census Bureau, manufacturers and retailers are sitting on approximately $1.33 of inventory for every $1 in sales. Inventory control allows companies to improve that ratio and cut carrying costs by ensuring they hang onto the right amount of inventory at the right time.
2. Fewer stockouts
Poor inventory visibility can lead to unexpected stockouts that tarnish relationships with current and prospective customers. 34% of businesses have shipped an order late after accidentally selling a product that was out of stock, according to Peoplevox.
Inventory control prevents stockouts by providing accurate, timely insights into what’s selling so you can get a game plan together.
4. Better quality control
The worldwide cost of inventory distortion exceeds $1 trillion, according to a research study conducted by IHL Group. That includes dead stock, overstock, and spoilage, which interfere with cash flow and disrupt your supply chain.
Implementing an inventory control strategy helps you spot discrepancies early before affecting your bottom line or customers.
Inventory control systems
There are two general approaches to monitoring and controlling inventory: periodic and perpetual systems. Let’s take a look at both.
1. Periodic inventory system
In this system, inventory counts are done manually and data is updated periodically, hence the name. As you might expect, this approach is time-intensive. But it’s serviceable for small businesses that don’t ship a lot of inventory or have a small product catalog.
Periodic systems require minimal information and no sophisticated inventory management software, but the tradeoffs are more manual labor and inaccuracies.
2. Perpetual inventory system
The defining characteristic of perpetual inventory systems is tracking stock levels in real-time. Implementing this system comes at a higher cost than the periodic system, but it’s a far more efficient way to prevent stockouts, minimize human error, and save money in the long run.
Since this approach involves high levels of automation, it makes it easier to use the following inventory control techniques.
Inventory control methods
Inventory control isn’t an exact science; there are several tactics you can mix and match to suit your goals and needs. Let’s overview the most tried and true methods.
FIFO and LIFO
First in, first out (FIFO) method is an inventory valuation method that assumes that the oldest inventory is sold first. Conversely, the last in, first out (LIFO) method assumes that the most recent inventory purchased is sold.
Just in time inventory
The JIT strategy syncs purchase orders with production schedules to deliver inventory “just in time” to meet production needs. This allows companies to run lean and reduce the amount of inventory on hand.
Vendor managed inventory (VMI)
In a vendor managed inventory system, the supplier or manufacturer (the vendor) takes responsibility for all aspects of their customer’s inventory, including ordering, delivery, and replenishment. Outsourcing these tasks frees up time for the customer to focus on other aspects of their business.
Always better control (ABC) inventory
ABC is a common inventory categorization method that companies use to prioritize high-value items. It works by sorting inventory into three buckets:
- A items: inventory with the highest consumption value
- B items: inventory that sells frequently, but not as much as A items
- C items: inventory that doesn’t sell much and comprises the bulk of holding costs
Conducting an ABC analysis enables accurate demand forecasting and helps companies make better decisions.
Reorder point formula
The ROP formula determines the minimum number of SKUs a company needs to carry to meet demand or production targets. Once inventory reaches that specified point, it triggers a purchase order to replenish the stock. Here’s the formula:
Reorder Point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock
Barcoding and radio frequency identification (RFID)
A barcoding system lets companies quickly track inventory by scanning barcode labels on inventory items. Then, the data is transferred to a computer or inventory management system in real-time.
RFID is a more advanced inventory tracking system that uses tags containing more data than barcodes, such as when the item arrived and its expiration date. An RFID reader is then used to identify and update the inventory levels.
Inventory forecasting
Inventory forecasting is predicting how much inventory a company needs to keep up with production demands. It factors in market research, historical data, and trends to gauge how much of any given item they need to order.
Whether a company forecasts for a product launch, a seasonal trend, or just to improve their operations, it’s a valuable way to stay competitive in uncertain times.
Best practices for inventory control
Keep these tips in mind to maximize the effectiveness of your inventory control strategy.
Develop standard operating procedures (SOPs)
SOPs are detailed instructions that ensure the entire organization is aligned with its responsibilities. Here are a few items to address in SOPs:
- How often will you conduct cycle counts?
- What kind of equipment, software, or apps will the team have access to?
- What is your annual inventory budget?
- What are your security and fraud prevention policies?
- How often will you audit your inventory control process?
Automate reporting
Inventory control yields lots of data that is nearly impossible to track and analyze with spreadsheets. Many growing businesses utilize inventory management software to run automated reports.
For instance, QuickBooks Enterprise puts industry-specific data right at your fingertips, like inventory valuation summaries, stock by item, open purchase orders, and more. No number-crunching is required.
Optimize your warehouse management
A warehouse management system (WMS) is software that puts tedious inventory tasks on autopilot. The main purpose of a WMS is to make warehousing operations more efficient. Key features include:
- Labeling and tracking inventory by bin location or serial number
- Streamline warehouse layout
- Automating invoices and notifications
- Tracking inventory analysis metrics
Conduct regular audits
Conducting regular inventory audits can identify discrepancies, prevent shrinkage, and ensure the accuracy of your inventory data. This entails physically counting your stock and comparing it to your recorded inventory levels.
Assess risk
Determine potential risks to your inventory, such as theft, damage, or obsolescence. Develop strategies to mitigate these risks, such as implementing security measures, improving storage conditions, or adjusting your purchasing practices.
Establish supplier relationships
Building strong relationships with your suppliers is essential for maintaining a consistent flow of goods and avoiding disruptions in your supply chain. Communicate regularly with your suppliers, establish clear expectations, and negotiate favorable terms.
Forecast and plan
Use historical sales data and market trends to forecast future demand and adjust your inventory levels accordingly. This proactive approach can help you avoid overstocking or understocking, ensuring you have the right amount of product on hand to meet customer demand.
Common inventory control challenges
Inventory control can be a juggling act, especially for small businesses with limited resources. Here are some common challenges you might encounter and how to stay one step ahead:
- Inaccurate data. Manual tracking can lead to errors, causing overstocks or stockouts. Invest in inventory management software to automate tracking and ensure accuracy.
- Demand fluctuations. Predicting customer demand can be tricky, leading to excess inventory or missed sales opportunities. Analyze sales data and trends to anticipate demand and adjust inventory levels accordingly.
- Lost or damaged stock. Theft, damage, and spoilage can eat into your profits. Implement regular inventory checks, security measures, and proper storage practices to minimize losses.
- Limited visibility. Not knowing what's in stock or where it's located can lead to delays and missed sales. Use technology like barcodes or RFID tags to track inventory in real-time and improve visibility.
- Supplier issues. Delays in deliveries or unexpected price increases can disrupt your inventory flow. Establish strong relationships with reliable suppliers and have backup plans in place.
- Overstocking or understocking. Both scenarios can be costly. Overstocking ties up cash and leads to storage costs, while understocking results in missed sales and dissatisfied customers. Use inventory forecasting tools to find the right balance.
Final thoughts
US retailers have an average level of inventory accuracy of about 65%. That means that the company can’t locate an item more than one out of three times and might not even know if they have it in stock.
That statistic is troubling, but it’s also an opportunity.
Investing in inventory control is a path to peace of mind. When you’re not scrambling to figure out where inventory is located, you can focus on higher-level tasks. A marginal improvement to your inventory control can be a significant advantage—especially in today’s competitive climate.
