What is Inventory Control? A Guide to Getting Started
Inventory control is a method of optimizing products in order to avoid costly shortages and overstocks while continuing to adequately supply customer demand.
Keeping up with inventory levels is a never-ending task. Customer demand will fluctuate, supplier rates will increase, and warehouse teams must be able to prepare for these changes.
Also known as stock control, inventory control focuses on ensuring a business has ideal inventory levels at all times without overspending on products upfront. While the terms inventory control and inventory management are often used interchangeably, they deal with different aspects of inventory.
Inventory Management vs. Inventory Control
Inventory management is a broader term that covers how a business orders, stores, and profits from raw materials and stocked goods alike. This high-level process tracks a product's entire lifespan, from sourcing to order fulfillment. Inventory management also includes the strategic positioning of warehouse locations, order quantity, inventory forecasting, and more. Inventory management software automates item tracking, generates reports, and identifies any discrepancies in stock levels.
On the other hand, inventory control focuses on processing items at an operations-level and involves processing stock once it arrives at a storage facility. It involves warehouse management with the goal of maximizing profits with minimum inventory investment to prevent write-offs while still maintaining customer satisfaction. Luckily, modern technology has made it easier than ever to measure these metrics.
Why Inventory Control is Important
When a business is able to achieve inventory optimization by basing decisions on real-time data, this can reduce inventory costs, improve warehouse management, and provide items on a timely basis to meet customer's needs.
Here are a few ways optimizing stock levels can help businesses-
Provides Accurate Inventory Counts
Whether this is done manually with a spreadsheet or with software that digitally scans barcodes on each unit, inventory control gives an accurate picture of all units within a warehouse.
Helps Businesses Make Inventory Management Decisions
Since sales have a tendency to fluctuate throughout the year, businesses must regularly measure inventory changes over time in order to fit demand. Inventory control measures turnover rates, or how often a product is sold and replaced in a given time period. This helps managers identify which items have the highest demand or are slow-moving, preventing excess ordering of unnecessary stock and helping to speed up warehouse management processes.
Prevents Write-Offs and Dead Stock
Inventory control provides the data needed for inventory accounting, which deals with the value of raw goods and goods sold. By making it easy to calculate existing inventory value, this helps eliminate write-offs and dead stock.
Keeping track of stock levels also helps businesses strike the balance between holding the minimum level of inventory that still satisfies customer demand. This limits wastage from excessive stocking, while also preventing the possibility of stockouts.
How Businesses Can Get Started with Inventory Control
Optimizing inventory storage can seem like an intimidating task at first, however, there are a few straightforward steps businesses can take to make the process easier. Below are some best practices to help companies set up a seamless inventory control system.
1. Include the Essentials
A sound inventory plan needs to include the essentials and have processes in place to account for- addressing storage space issues, identifying and categorizing inventory, setting maximum and minimum limits for each product, and generating regular inventory reports. Having a solid foundation to start with will help all of the smaller aspects of the process fall into place.
2. Constantly Adapt and Adjust Accordingly
Companies need to constantly track inventory levels and update their inventory counts and demand projections accordingly. Ideally, this should be done weekly, as industry trends, seasons, and world events can directly affect customer demand.
3. Always Have Critical Stock
When implementing a process to optimize inventory storage, businesses can determine which stock items are critical to their sales. This can either be a company's most popular finished goods or a raw good needed to manufacture that product. Once determined, a process should be set in place to ensure that an item never goes out of stock.
4. Implement Shipment Reviews
Inventory control begins when a product is received at the warehouse, so ensuring the item arrives undamaged is crucial. Warehouse managers should require thorough inspections of all incoming units to prevent inventory loss.
5. Hire Key Inventory Management Team Members
Having inventory management members that are dependable, organized, and are able to properly coordinate the day-to-day is crucial to minimizing errors. The inventory management team oversees every stage of the inventory control process, so choosing people who are detail-oriented will help prevent issues like lost, damaged, or spoiled stock.
6. Store Like Inventory Together
When possible, store like inventory in close proximity to each other. This will save on labor costs as warehouse team members will be able to locate inventory more quickly and efficiently. This can also prevent the issue of lost or disorganized stock.
7. Review Other High-Level Processes
If a business currently has a disorganized inventory, it may be helpful to review any related processes before taking on inventory control. Stock control is one part of inventory management, so if there is an issue with inventory management, such as improper sourcing, this will affect all related processes. Those areas may need to be handled first to avoid causing other issues in the supply chain.
8. Create a Scalable System
Finding a cloud-based inventory control system that is flexible and provides key analytics will help companies scale their operations by cutting back on the time and effort that would otherwise be spent completing tasks manually.
9. Automate Simple Tasks
Getting bogged down by small inventory tasks is one of the biggest errors a company can make. When done manually, low-level tasks like inventory counting can take hours and are often performed inefficiently. Automating these tasks not only reduces the risk of human error and provides more accurate data, but also frees up valuable time that can be spent on higher-level processes.
10. Prepare a Backup Plan
In the case of theft or power outages, having a backup plan prepared can save a business from having to halt operations. For this reason, cloud-based inventory software is a safer choice compared to a local server.
Inventory Control Systems
Stock control systems are accounting methods that track the amount of inventory in storage. The two main types of systems are periodic and perpetual.
The Periodic Inventory System
This method does not utilize inventory software or scanning tools. Instead, it requires manual counts of inventory. There is no continuous record taken to determine the inventory amount. Instead, the inventory value is determined at the end of each accounting period, which is usually at the end of the year.
Once a business completes the physical inventory, the balance in the purchase account is shifted to the inventory account, which is then adjusted to match the cost of the ending inventory.
Since the periodic inventory system is immensely time-consuming, most companies shut down normal operations to perform the task. In some cases, additional staff is hired to help with the manual process of counting inventory.
Unfortunately, this type of accounting method makes businesses vulnerable to human error, fraud, and theft. This is because it's extremely difficult to identify discrepancies, as there is no system in place to track inventory during physical counts.
The Perpetual Inventory System
This is a method of accounting that uses management software to record the sale or purchase of inventory. It continuously and immediately updates inventory value, giving businesses a highly detailed report of stock on-hand and any changes that may occur. With a perpetual system, stockouts can be avoided and accounting errors minimized as there is minimal employee contact with the units.
However, experts advise that companies should implement a combination of manual stock inventory practices with a perpetual system to accurately reflect what is physically in-stock.
The following are some tools businesses can combine with a perpetual inventory system.
A barcode is a graphic with text or numbers that are placed on each unit and stores information regarding the unit and location of an item. The system then transfers this code to a digital database.
Barcodes can be integrated with either a periodic or perpetual inventory system.
When implemented into a business, barcodes have a rapid return on investment (ROI) as they lower operating expenses and improve inventory count accuracy by removing manual data errors. Barcodes also offer scalability as they collect inventory data faster, offer automatic updates, and streamline data reporting.
Radio Frequency Identification (RFID)
RFID tags are a smart tracking tool that contains electronically stored information. Compared to barcodes, RFID tags can store more data and are often used to protect high-value inventory that requires additional security.
These tags can be either passive or active. Active tags are battery-operated and have their own power supply, whereas passive tags require electromagnetic energy from an RFID reader to work. If security is an issue, active tags are the best option as they can set off alarms when removed from the premises.
Additional benefits of active tags include-
- Unique tag codes for several types of products
- Immediate data updates can be made to the tag without needing to remove the physical tag
- Remote tag reading allows tags to be read remotely
- Passive tags have a reading range of 40 feet and active tags have a range of 300 feet
- Simultaneous tag reading enables systems to read groups of tags simultaneously, saving on time and effort
- RFID systems can be time-consuming to set up
- The high cost makes it difficult for some businesses to implement
- When signals from two or more RFID readers overlap or there is interference by magnetic fields like metal, this can cause signal issues with the inventory system
Controlling Stock with Sales
Stock can be controlled with key sales methods. The type of method used will depend on a business's individual objectives.
This combines goods or services to provide customers with added value and is an inventory control technique used to move expiring inventory. For example, a makeup store may offer customers a free mascara with the purchase of eyeliner as a form of bundling.
This strategy minimizes the labor and time invested in processing inventory wherein a product is brought to a warehousing area but never actually unloaded into the warehouse.
This occurs when a supplier directly ships its products to customers on behalf of the retailer. Since the retailer never handles the actual product, this saves on time and physical effort.
Consignment is a business arrangement where the supplier agrees to give their goods to a retailer without payment upfront. Instead, the retailer pays for the item when it is sold based on a percentage of the sale price. For example, TheRealReal, an online consignment store, works on this model by selling luxury goods on behalf of individual consignors, or vendors. When these goods are sold on their online store, TheRealReal pays consigners an agreed-upon percentage of the sale in return.
This is the process of selling inventory not currently in stock and is a useful tactic that allows businesses to capitalize on sales. However, problems can arise when backorders start to pile up and fulfillment intervals lag, so businesses should approach this method cautiously.
The Importance of Stock Protection
To secure goods from theft, businesses should first identify which items have the highest value and take the proper precautionary measures to protect them. For example, liquor bottles are often stored behind glass cabinets at grocery stores and require store attendants to access them. This is because they are often one of the most expensive items in the shop and among the most commonly stolen goods.
High-end items should be given RFID tags that set off alarms if removed from the premises. Installing video surveillance in warehouse areas and within the store can also help prevent theft.
Be aware that theft can occur internally, as well. A 2014 study of U.S. Retail Fraud found that employee theft accounted for the biggest area of store loss, making up 38% of the overall shrinkage. When businesses implemented inventory management software, the National Retail Federation found that internal theft decreased by a minimum of 11%.
How Software Can Help Businesses Control Inventory
Inventory control can help businesses avoid the costly dilemma of too much inventory and ending up with dead stock, or too little inventory and out-of-stock issues leading to lost sales and unhappy customers.
Investing in inventory software can help a company get invaluable real-time inventory data and make the proper inventory investments. Here are some tips on what to look for when choosing the right software-
- The software can be easily integrated with existing business processes and is easy for employees to learn and teach.
- The program fully integrates with a POS system, or point of sale, where transactional processes take place. Inventory software should be able to pull this data from the system to allow companies to view inventory sold in real-time.
- It should be able to analyze inventory data to provide accurate sales projections to help teams know how much inventory to order and when.
Implementing modern software to provide real-time inventory levels not only frees up invaluable time that can be spent on higher-level tasks but also allows businesses to scale operations to meet growing consumer demands.
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