Inventory control is not just knowing how much product you have on hand, but also knowing the value of that inventory through each stage of its lifecycle. As a business owner, you must keep tabs on how much is coming into the business from vendors, what the cost of each product is and what the costs associated with shipping and labor are. Inventory control processes and systems should ultimately help you maximize profits and maintain customer satisfaction ratings from the least possible investment into inventory.
Reaching this goal requires a deep understanding of the the types of inventory, possible inventory losses your business could be subject to, and effective ways to count your inventory.
Types of Inventory
Inventory, or stock, comes in different shapes and sizes and also in different states of readiness — raw materials, finished good, stock of unfinished goods and lastly, consumables. Consumables are similar in many ways to raw materials; these are items that are used up or are incorporated into other goods.
Inventory planning hinges greatly on the type of stock you carry. For raw materials and consumables, consider that price can vary over time. Is the supply reliable or are there alternatives? What about discounts for buying in bulk?
Unfinished goods, or works in progress, can be useful to stock if you anticipate possible problems with supplies at some point. Finished goods, on the other hand, are best to stock when demand is certain or batches and orders tend to be large.
The Four Types of Inventory Loss
Regardless of the type of inventory, there is more to inventory control than ensuring quantity is correct at all times. Are you aware of where losses are occurring in your stock?
Plan for and track these four types of inventory loss:
While we expect our product to be handled gently, the truth is every time an item is touched or moved, the risk of damage increases. Loading and unloading it during the shipping process, stocking the shelves — all it takes is one wrong move by a forklift operator or a clumsy employee and you have coffee beans everywhere or spilt milk to cry over… and all those costs to absorb.
Spoilage is a great metric to hold merchandisers and sales staff to. Product will only spoil if too much is ordered, or there were not enough sales made to move the product from the shelves. Make sure your inventory management system allows receivers to input expiration dates so the sales and merchandising teams can be aware where they should focus their efforts.
Shrink is when inventory goes missing with no identifiable cause. Most often this means theft from either employees or customers.
Few companies track the product they use as samples or in marketing, but this should be realized on the books, separate from damage. You might find that your largest siphon of samples is your least profitable customer, in which case you will want to adjust.
Counting Inventory for Accuracy
Inventory quantity can fluctuate. And it’s your job to bring your digital systems into alignment with the physical truth. There are two practices that come into play, and each business has to chose its path based on the resources available and the business’s stringency around accuracy.
The most common starting point is conducting company-wide counts yearly, monthly or even weekly. A periodic count means you can’t receive, sell or ship product because everything has to stay stationary to be sure the count is accurate. Often this will be done after hours using overtime. Combined with the fact there are no sales during this time, this can become very expensive.
The higher the velocity of inventory from the vendor to the customer, the more often counting will need to happen. Sales and customer service teams will be key in identifying out-of-stock items signaling for counts to meet customer needs.
This usually involves one large entry into the inventory management system for any lost or found merchandise to bring the totals back into alignment.
Cycle counting is a tool of perpetual inventory, a goal of any physical goods business. A cycle count is the act of counting a small number of items each day so that at the end of the month or year, the entire stock is current. With fewer transactions on a daily basis, it is possible to research each variance and properly account for them. Making small counts every day will result in a more accurate inventory
As each inventory use is recorded properly, any issues will be highlighted and easily remedied.
For example, if damage occurs, retraining might be in order to ensure proper care and handling of products. If spoilage happens, you may want to adjust order quantity so you can move inventory before expiration. In the event of shrink, install security cameras or systems; and finally, if samples prove to be a problem, limit these to profitable, high-use customers.
Once you have a firm grasp on the current inventory levels and costs, calculate a safety stock. A safety stock is a quantity of product that will cover the regular daily sales for the time it would take the vendor to deliver more product. To do this, take a look at previous receipts to see how long deliveries usually take. If, for example, you sell 20 gallons of milk each day and it takes five days to get a shipment, your safety stock, or the minimum you should have on hand before a reorder, will be 100 gallons of milk.
Inventory is expensive and it is critical to the health of your business to only use capital for the inventory demanded. With so many transactions beyond just purchase and sale, an inventory management system is a valuable tool in the process. Having software that can track everything in one place means you’ll have both quantity and cost figures right in front of you, so measuring improvement becomes easier. Remember, overstock can be as costly as out-of-stock.