What is Inventory Control? Definition, Systems, and Management
Inventory is the primary asset of any retail business. The success of your business depends on how you manage your inventory from the point of purchase to the final delivery to customers.
If you are a retailer, wholesaler, or e-commerce brand, it is essential you are in control of your inventory even if it can be a daunting process. Failing to control your inventory will result in massive losses for your business.
There are inventory management software, systems, and processes that help companies efficiently and accurately track their merchandise. Efficient inventory control helps you maximize profit, avoid overstocks, and make the best use of inventory.
In this guide, you will learn the meaning of inventory control and inventory control systems, how to maintain inventory in your business, how to find the right inventory control solution, inventory control techniques you should know, inventory control management best practices, and types of inventory control systems.
Let’s get started.
What is Inventory Control?
Inventory control is the process of ensuring that the right amount of stock is available within a business. In ensuring that the right amount of stock is available, inventory control also involves the process of maximizing the profit gained from the inventory.
Also known as stock control, inventory control technically involves the practice of maintaining maximum supply and maximum profitability of the inventory in stock without affecting customer satisfaction. It is the process of keeping the right amount and type of inventory in order to prevent shortages, overstocks, and costly problems.
This process includes forecasting and optimizing future demand, supply chain management, production control, purchasing data, loss prevention, and customer satisfaction. Inventory control involves warehouse management.
Proper inventory control allows you to save time and money. You do not waste time, energy, and financial resources on products you do not need. You also increase your cash flow and profit by having inventory items that are always in demand.
The terms “inventory control” and “inventory management” may seem similar but they are differentiated across a thin line.
While inventory control only involves the proper management of goods in a warehouse for maximizing profit, inventory management serves as a broader term.
Inventory management involves the overall management of both finished and unfinished goods alike. Unlike inventory control, it involves the how's as well as the what's; how you obtain products and what you obtain and how you store products as well as what you store, among others.
What Is an Inventory Control System?
One part of inventory control that cannot be missed is the inventory control system. An inventory control system may be a software program used to manage and solve inventory problems or a methodology used to manually control inventory to maximize profit.
An inventory control system serves as a medium through which companies are able to assess and optimize the current state of their inventory assets, account balances, and financial reports. It serves as a method or medium of keeping inventories in a desired state while maintaining adequate supply to customers.
Today, warehouse inventory management software plays a more major and important role in relation to the modern inventory control system. It helps to provide faster and accurate analytics, optimizations, and forecasting solutions for complex inventory control problems.
Some of the most common features of the best inventory control software include inventory tracking and forecasting tools, automated purchase and replenishment tools, lead time variability management, and inventory cost management, among a whole lot of others.
Inventory control systems typically rely upon barcode and radio-frequency identification (RFID) tags for the automatic identification of inventory objects.
Whether software is used or not, the success of an inventory control system depends on maintaining clear records on a regular, periodic, or perpetual basis.
The working capital available to your business can affect your inventory or inventory control system.
How to Maintain Inventory in Your Business
Proper inventory maintenance is one of the most important goals of inventory control. However, one aspect related to the maintenance of inventory that businesses may not pay attention to enough is inventory tracking.
Inventory tracking is most especially ignored by small-scale businesses dealing with custom orders or a small number of items.
Keeping track of inventory is the best way to determine which products sell best and which sell worse. But what are the methods of tracking Inventory? Inventory is tracked with the use of pen and paper, electronic spreadsheets, premium or free inventory management software, and advanced ERP systems.
1. Pen and Paper
Ordinarily, a pen and paper would suffice when keeping track of inventory. You make a list of the inventory items in stock and constantly update the list as you make changes and sales.
Using pen and paper is, however, too basic and time-consuming. It may seem easier but records are easy to lose and there is an absence of any form of automated tracking option. Generating advanced data and efficiently forecasting for the future is also more difficult while using pen and paper.
2. Electric Spreadsheets
Electric Spreadsheets are a step up from pen and paper and one that proves to be effective for this is Microsoft Excel. Excel Spreadsheets are great for storing inventory information as they serve as more organized solutions and help you store data for longer periods.
Nonetheless, an absence of automated inventory control exists and limits your inventory activities. Just like pen and paper, you also need to manually input information about your inventory.
3. Simple Inventory Software
Simple inventory software helps you with some automation features but still lacks advanced analytics, extended features, and scalability. It does not provide you with the most advanced inventory control features available and may need to be replaced as your business grows.
4. Advanced ERP Software
An advanced ERP software offers you the most efficient options for tracking and maintaining inventory. It typically comes as an affordable solution for every business size that combines automated inventory control features with advanced data generation, scalability, and complex inventory problem-solving options.
How to Find the Right Inventory Control Solution?
Finding the right inventory control solution for your business is not easy but can be done through two straightforward steps: determining the nature of your inventory and comparing different solutions for key features
1. Determine The Nature of Your Inventory
The nature of your inventory depends on what you sell. Knowing it helps you to easily select a solution that is best for you.
Different inventory control software programs are optimized for different business types and inventories. An inventory management software may, for instance, offer a more extended feature for controlling perishable inventory. This is the same for expensive or fast-moving inventory items.
Knowing how your inventory type helps you easily pick an inventory control solution that is better optimized for you.
2. Compare Different Solutions For Key Features
When it comes to inventory control solutions, there is a wide plethora of features and factors to consider.
Apart from the cost of the solution and in relation to your business needs, some of the most important elements and features to look out for include integrations, scalability, ease of use, mobile friendliness, and the existence of advanced features.
Choosing a solution that offers integrations with your existing software programs keeps all your business workflows properly streamlined and easier to manage.
For every growing business, scalability remains one of the most prioritized features for any software. Lack of easy scalability impedes business growth and could force you to spend extra money on another inventory control software.
Consider if software allows you to add new store locations, sales channels, product lines, or if you can customize the features to fit your business needs.
Ease of Use
A good inventory control solution can be used with the most minimal technical knowledge and support.
The fact that each inventory control software has its unique UI and UX is acknowledged. Nonetheless, looking out for reviews and choosing one that fits your level of technical expertise is ideal.
An inventory control solution with optimized apps for mobile devices gives you extended capabilities. You have access to your inventory at any place and time and act right in time to make informed business decisions.
Existence of Advanced Features
Looking out for advanced features is another very crucial step in choosing the right inventory control software. Advanced features give you extra functionality and efficiency in achieving more with your inventory control operations.
Some of these advanced features include automated inventory tracking, automated inventory alerts, extended analytics and reporting, barcode scanning integrations, and product categorizations. These are only a few of the advanced features offered by inventory control software but they prove to be the most important.
Inventory Control Techniques You Need to Know
Regardless of your business size or the amount of stock you expect to manage, a few techniques serve as great ways of establishing a proper level of control over your stock.
Some of these include minimum order quantity, economic order quantity, ABC analysis, just-in-time inventory management, reorder point formula, and batch tracking.
1. Minimum Order Quantity (MOQ)
Minimum order quantity is an inventory control technique or measure exercised by the supplier of the inventory items. It means the minimum amount of stock a supplier is willing to sell at a time.
MOQ is the minimum number of inventory units a business can purchase from a supplier. Without an order for the MOQ set by a supplier, the inventory items are not sold. Where a supplier decides to disregard his or her MOQ, the prices for each unit of inventory are usually set higher.
The idea of an MOQ is desirable to the seller and may be detested when you are at the purchasing end of the transaction.
For sellers, the MOQ remains a great technique for ensuring that buyers pay a minimum amount on each transaction they complete. Discounted prices are a popular characteristic with MOQ and it helps to build long-lasting partnerships with buyers that are willing to pay.
Minimum order quantity also helps to minimize the stock-keeping units (SKUs) being managed by a business at the same time. With a minimal amount of stock-keeping unit (SKU), inventory forecasting and overall inventory management are easier.
2. Economic Order Quantity
Economic Order Quantity (EOQ) is an inventory control technique used to minimize or control the cost of purchasing inventory. It is a formula used to determine the ideal quantity of inventory items a business needs to purchase at a time to avoid loss and maximize profit.
When calculating the EOQ, the cost of production or purchase of the inventory as well as the demand rate for inventory items is taken into account. The cost of delivery and storage of inventory are also variables used to determine the EOQ.
However, certain factors need to be present before this technique works perfectly. The demand for inventory as well as the cost of ordering, storing, and delivering inventory items needs to remain constant at all times.
This need for consistency and assumption involved in determining EOQ is one of the major limitations to its use.
The formula for calculating EOQ is:
EOQ = √(2DK / H), or the square root of (2 x D x K / H)
D represents your annual fixed costs, K represents the demand in units and H represents the carry costs per unit.
Overall, the main goal of EOQ is to identify the highest amount of inventory to be purchased, helping to optimize costs for purchasing, storing, and delivering inventory.
3. ABC Analysis
ABC Analysis is an inventory categorization technique. It helps you properly categorize your inventory according to different variables such as the cost of each inventory, age, size, durability, and availability, among others.
Items are split into three categories: Category A, Category B, and Category C.
Category A serves as the appropriate category for the most valuable inventory items. This inventory could be made up of items that bring in the most profit or make up a higher percentage of the overall inventory cost.
Alongside the tight control of these items, the number of items is kept according to the exact demand requirements, and safety stocks for them are kept low. Items are also typically sold individually and their sale is always accelerated.
Inventory in category C includes items that require the least amount of attention. These items may contribute to the overall profit accrued by a business but are usually given lesser attention because of the smaller investments on them.
Category B contains items that fall in between category A and category C. Items in category C may be higher in quantity but are usually less valuable than items in categories A and B.
4. Just-in-Time Inventory Management
Just-in-Time Inventory Management is another inventory control technique aimed at reducing costs. The technique involves arranging the schedule for orders of raw materials in relation to their time of production.
With JIT, companies order the amount and type of inventory and labor they need at that exact time and avoid purchasing excess. Excess inventory may turn to dead stock if not used at the right time and this equates to a waste of money.
The main focus of JIT is to increase the inventory turnover and reduce waste and other connected costs by reducing the amount of inventory being held.
Companies that make use of the JIT technique typically invest in preventive maintenance. In this case, where a problem occurs in the manufacturing of goods, the whole process is stopped.
For this technique to be effective, however, complete streamlining and synchronization must exist between the supply of materials and the manufacturing cycle. Due to the restricted amount of inventory, any mistake could halt the whole process.
5. Reorder Point Formula
The reorder point formula (ROP) serves as a complementary technique in controlling inventory. It is used to determine the right time to place new orders to avoid a stock-out situation.
Reorder point is wholly based on a business's order and sales cycle and varies per product. The time lag between placing an order and receiving it is the most important metric put into consideration. This time lag is called the lead time.
The formula to calculate Reorder Point (ROP) is:
Reorder Point = (Lead Time × Daily Usage) + Safety Stock
For example, let us assume the amount of time it takes for a supplier to deliver inventory is 45 days, 100 units are consumed in a day and the safety stock is calculated at 2,700. What is the reorder point?
Reorder Point = (Lead Time × Daily Usage) + Safety Stock
Reorder Point = (45 days x 100 days) + 2,700
Reorder Point = 7,200
The reorder point would be when the units of inventory in stock reach 7,200.
6. Batch Tracking
Batch Tracking is an inventory control technique used to regulate the quality of inventory. With this method, inventory items with similar traits are grouped and tracked together.
Making use of backtracking helps you to easily trace back defective goods to their original batch. This way, more defective goods can be discovered.
Inventory Control Management Best Practices
1. Organizational Control
Organizational control is a general term that involves the process by which a company sets up its subunits and activities in a way that business goals are more easily attainable.
The organizational control of inventory involves all techniques that make the administration of inventory control easier. It involves putting the different tools and measures in place to keep inventory control activities as seamless as possible.
Organizational control is a combination of a lot of techniques. It includes integrating good inventory control software when needed and making critical calculations such as Economic Order Quantity (EOQ), Minimum Order Quantity (MOQ), Reorder Point, and Safety stock calculations, among others.
The inventory control management best practices also involve making use of techniques like ABC analysis and batch tracking to categorize inventory for easier management and control.
Taking care of the organizational control of inventory before anything else makes the goal of increasing the profitability of inventory more feasible. It provides you with benefits such as improved cost and productivity control and a better ability to manage complexity.
2. Quality Control
Quality control is the implementation of a predetermined set of processes, principles, and procedures concerning the quality of inventory. Inventory items are pitted against these quality metric standards and must be up to standard before being placed in stock for sale.
The process of quality control is executed and overseen throughout the whole production run. Its implementation covers the whole business cycle, from the raw materials to the process of production to the means of storage, and so on.
The goal of quality control is to ensure that the quality metrics are met by all inventory items. If a product fails a quality control test, it could be reworked or repaired, returned to the supplier, or written off as wastage.
Where quality is consistently not met by multiple inventory, an optimized inventory control software could help businesses to identify problem areas.
Internal quality standards are not the only ways through which the quality of inventory items is controlled. Quality control also comes from standards set by external bodies like government regulatory institutions. The compliance to international, safety and environmental standards and certifications are usually relative to a specific industry.
When properly implemented, quality control plays an important role in improving a business's profitability. It contributes to your company’s positive reputation and ensures that your customers remain satisfied with your products.
3. Inventory Forecasting
Inventory forecasting refers to the process of calculating the inventory needed to fulfill future customer orders. It is based on how much product you expect to sell over a specific period and it takes into account certain variables such as your historic sales data, planned promotions, and external forces.
Proper inventory forecasting allows a business to reduce cost by keeping the right amount of inventory in stock for that period. With data-driven predictions, you can determine how much inventory you will need and you will not have to purchase inventory that you do not need.
Inventory forecasting also allows you to determine your best-selling inventory items and ensure that they are never out of stock by focusing your purchases on them. Less labor is needed to manage inventory and overall, you have a more productive production cycle.
To accurately forecast inventory, some of the most important metrics include:
- The forecast period, which is the length of time within which inventory is expected to be restocked.
- Demand trends, which could change depending on certain external factors. For instance, the demand for beach shorts and bikinis typically increases during summer. Demand for these items also decreases during winter.
- The calculated maximum stock level
- The calculated inventory reorder point
There are, however, different types of inventory forecasting. These include quantitative forecasting and qualitative forecasting.
Quantitative forecasting makes use of the historical data of a business's inventory. Qualitative forecasting, on the other hand, focuses on external factors like market intelligence, environmental factors, and economic demand. These, alongside other dynamic external factors, affect the process of inventory forecasting.
4. Inventory Tracking
Inventory tracking means tracking which inventory you have in your possession, where your inventory is stored, and the quantities available at each location of storage.
Tracking inventory levels in real-time is an important part of inventory control. It is crucial for businesses and organizations that wish to make their inventory control activities more productive.
Making use of an inventory tracking system is the most efficient way of going about this. An inventory tracking system is any software or program that is used to track inventory levels in real-time.
Inventory tracking offers you greater transparency and accuracy in inventory control. It also makes managing inventory turnover easier. You can easily measure the amount of time it takes for inventory to be sold and replaced in a designated period.
However, there are still challenges involved in inventory tracking, with some easily taken care of by an advanced inventory tracking system.
The more inventory you have, the more you have to keep track of, and the harder it is to accurately track them. Having a high stock-keeping unit (SKU) count or a wide variety of items in your inventory makes tracking it a complex and expensive task, with mistakes always around the corner.
An inventory does not stay in one place also and, without an inventory tracking system in place, engaging in inventory tracking can be very time-consuming. This challenge is present no matter the type of inventory control system used.
5. Lead Time Variability Management
Lead time variability is one of the problems involved in inventory control and its management is aimed at proffering solutions to it.
Lead times change and this happens due to different reasons. There could be transportation delays or scheduling issues, issues surrounding labor, security, or even stock out at the supplier level.
The goal of lead time variability management is to limit the effects of these or take control of these factors enough for them not to be a problem. Inventory forecasting depends a lot on lead time and getting its management right makes predicting future inventory needs easier.
Taking control of lead time variability is not easy but there are a few ways to go about it. Tracking inventory in real-time enables you to know when and where a problem may pop up. You are seldom caught unaware and can easily deal with problems.
Studying the supply trends of your supplier as it relates to your business and other businesses is also important. Predicting how your supplier can meet demands makes your expectations more realistic. The time it takes for your inventory to be delivered is easily predictable, allowing you to set your inventory forecasting activities right.
6. Shelf-Live and Slow-Movers
Slow-movers, or slow-moving inventory, are the stock-keeping unit (SKUs) that have stayed on the shelf and have not been shipped in a long period. This period could be relative and varies, not only from item to item but also from supplier to supplier.
Slow-moving inventory is a problem in inventory control. It is one that inventory forecasting aims to eliminate for a better inventory turnover rate and profitability.
With slow-movers, excess storage space is unnecessarily used up and more maintenance cost is spent on them, increasing your capital investments. Coming up with a plan to take care of these types of stock-keeping units (SKU) is important.
One of the best ways a lot of businesses have dealt with these items is to slash their prices. This could lead to a loss but proves to be better in the long run where selling them seems most unlikely. Of course, before doing this, certain factors like product marketing need to be revised of their efficiency.
One preventative inventory control technique used to deal with slow-moving inventory is the Economic Order Quantity (EOQ). EOQ is the maximum amount of inventory to be purchased at a particular time.
Determining your EOQ helps to minimize the amount of inventory in stock and the overall cost of purchasing, delivering, and storing inventory.
7. Safety Stock Calculation
Safety stock is the additional amount of inventory that is held in stock to avoid a stock-out situation. It serves as a safety net in case demand for inventory is greater than usual.
When calculating the amount of safety stock required to be purchased, two factors are crucial; the daily use of a stock-keeping unit (SKU) and the lead time for orders to arrive.
The formula for calculating the safety stock is:
Safety Stock = (Maximum daily use of inventory × Maximum lead time) – (Average daily use of inventory × Average lead time)
So, for instance, let us assume that the highest recorded daily use of a stock-keeping unit (SKU) is 120 units and the average daily use is usually 100 units. Where the highest recorded lead time is 45 days and the average lead time is 30 days, the following would be the safety stock:
Safety Stock = (Maximum daily use of inventory × Maximum lead time) – (Average daily use of inventory × Average lead time)
Safety Stock = (120 × 45) – (100 × 30)
Safety Stock = 5400 – 3000
Safety Stock = 2,400.
Therefore, an additional 2,400 stock-keeping units (SKUs) would be kept at all times to avoid a stock-out situation. The safety stock calculation also works closely with the estimated reorder point.
Types of Inventory Control Systems
There are three different types of inventory control systems. They are the periodic inventory system, perpetual inventory system, and inventory counting And management technology.
1. Periodic Inventory System
A periodic inventory system allows organizations to track inventory according to a predetermined time span. Unlike a perpetual inventory control system, inventory is not tracked on a daily basis. The beginning and ending inventory levels during a certain period of time are what are taken into account.
Inventory control systems that track inventory periodically typically conduct physical inventory counts. When physical inventory counting finishes, the purchases account is compared with the inventory account to determine the cost of the ending inventory.
With this method, companies may choose to calculate the cost of ending inventory using either the Last-In-First-Out (LIFO), FIFO (First In/First Out), or any other inventory accounting method.
Unfortunately, a few disadvantages of using a periodic inventory system exist. First, normal business activities are greatly hindered during the period of physical counting of inventory. Rushing the counting to curb the effects of this may lead to mistakes.
Another disadvantage is that periodic inventory systems also typically don’t use inventory trackers. Due to this, there is space for errors and fraud as there is no continuous monitoring and control over inventory. The long time that passes in between counts also makes this more difficult to deal with.
This inventory control system is better suited for small businesses as counting is less labor and time-intensive.
2. Perpetual Inventory System
A perpetual inventory system continually updates inventory records and accounts for additions and subtractions to inventory. Inventory accounts are immediately updated when inventory items are received, sold, moved from one location to another, or removed from inventory.
Companies may prefer the perpetual inventory system due to the delivery of up-to-date inventory information and the usual absence of physical inventory counts. These systems also typically present accurate accounts of inventory on a continual basis and when managed properly. Inventory control software programs generally make use of this perpetual system.
Nonetheless, challenges associated with perpetual inventory systems exist. First, this system has a higher cost of implementation than the periodic system, especially for businesses with multiple locations or warehouses. Periodic maintenance and upgrades are also required.
Another challenge is that periodic physical counts are still required. The recorded inventory may not accurately reflect the actual inventory in stock. Mistakes, stolen items, and improperly scanned items may impact the recorded inventory records without physical counts.
3. Inventory Counting and Management Technology
There are two popular technological systems used in inventory control: the Barcode Inventory System and the Radio-frequency Inventory Identification System. These two systems serve as complementary inventory control measures for the periodic and perpetual systems.
The barcode inventory system involves the scanning of barcodes on inventory items with a barcode scanner or mobile device. It eliminates manual data entry and helps to give a history of transactions for inventory items.
The radio-frequency inventory identification system makes use of both tags and tag scanners to properly control inventory. Tags are placed on inventory items and the tag scanners, usually placed all around the warehouse, actively scan tags as they pass through them.
Radio-frequency inventory identification systems are great for organizations that really need to continually track inventory or which have experienced serious inventory security issues.
Sadly, this system is more expensive than the barcode system and there could be interference issues in environments with a lot of liquids or metals.
Inventory Control FAQ
The task of overseeing inventory control falls to the inventory manager, often supported by an inventory control software that implements an inventory control system.
However, it should be noted that while inventory control and inventory management may intertwine in some areas, inventory control is narrower in scope and deals only with what is in the warehouse. The inventory manager is often responsible for inventory management.
The main purpose of inventory control is to ensure that you have enough inventory to meet the demands of your company and its customers while optimizing time and cost management.
For a manufacturing company, Inventory control is used to ensure that you have the right amount of raw materials and finished items to meet sales demands and reduce production downtime.
For a store, an effective inventory control system will ensure to hold the least amount of inventory in your warehouses and ultimately improve cash flow and lower holding costs.
Achieving this involves performing several tasks such as barcode scanner integration, comprehensive inventory counts and order reports, monitoring stock shelf life, and synchronizing stock on hand with sales orders and purchase orders.