If you don't take control over your inventory, your inventory will control you.
The success of your business depends on how you purchase, store, sell, and deliver your inventory. Dedicating time and resources to this process is vital to long-term growth.
It's so important we put together a whole inventory control guide. We'll help you understand what inventory control is, why you need it, and give you the tools to do it yourself. You'll also understand how to calculate ending inventory.
Inventory Control Definition
Inventory control is the process of maintaining a business's stock level to meet customer demand and minimize costs. This involves inventory tracking and maintenance of goods. It also includes making decisions to profit from your stock and planning purchases.
Inventory control generally involves the following:
- Integrating barcode scanners with inventory tracking software
- Establishing reorder point and demand forecasting
- Keeping track of all SKUs and associated product data
- Creating product bundles and kitting for maximum profits
- Performing inventory audits
- Setting warehouse labels and optimizing the warehouse layout design
Inventory Control vs. Inventory Management
Inventory management and inventory control are terms often used interchangeably, but they refer to different things.
Inventory control refers to the process of ensuring that a company has the right level of inventory on hand at all times. This includes providing enough staff to meet customer demand, but not so much that it ties up too much capital in inventory.
On the other hand, inventory management refers to managing all aspects of a company's inventory. This includes everything from deciding what items to stock and how much of each item to keep on hand to setting up systems for tracking inventory levels and reordering stock when necessary.
While inventory control and management are essential to running a successful business, they are not the same. Understanding the difference between the two is vital to ensure you use the proper term when referring to either concept.
Example of Inventory Control
Inventory control can feel like an overwhelming task, but it doesn't have to be. Here's an example of how it can work.
Let's say you're an inventory control manager and discover that you have a batch of products on hand that isn't selling. This deadstock–see what is dead stock–takes up valuable space in your inventory and is nearing the end of its life cycle. In this case, you'll need to know how to manage a warehouse so that you can get rid of the excess inventory.
As an inventory control manager, you need to find a way to turn over these products and perform inventory reduction. One option would be to bundle them with more in-demand products in a subscription box using a subscription box platform. This is known as kitting and is just one of many options open to you when practicing inventory control.
Synonyms for Inventory Control
There are many different terms for the process of inventory control. Here are just a few you may come across in your career:
- Stock management
- Control of goods
- Material control
- Stock keeping
- Assets management
- Stock control
- Warehouse management
The Primary Objectives of Control Over Inventory Are Twofold
The two primary objectives of inventory control are safeguarding the inventory from damage or theft and reporting inventory in the financial statements. These are accomplished by using various control methods to maintain inventory turnover. Turnover is calculated using the inventory turnover formula.
Purpose of Inventory Control In a Warehouse
Inventory control is the most important aspect of warehouse management. It ensures the warehouse operates smoothly while keeping costs low and meeting customer demand. Every aspect of stock must be tracked, and this data can be used to make various decisions.
The Application of Inventory Control
Applying inventory control in your business requires investing time and money into inventory management. You can do this by purchasing inventory management software or manually taking inventory. Either way, you can apply the information gained by looking at inventory levels and trends to plan buying, controlling, shipping, and dropshipping goods.
Inventory Control Methods
Inventory control methods are processes and programs you use to plan, order, store, and manage inventory. In general, there are two inventory control methods: manual and perpetual. With manual inventory control, you must conduct physical counts of inventory regularly. This is time-consuming and often involves shutting down all operations to get it done.
With perpetual inventory control, all inventory is tracked in real-time using inventory management software. Barcodes are scanned when products arrive, are used, or shipped. This gives you access to the most accurate data at all times but is more costly than manual counting.
The key to effective inventory control methods is finding a balance between controlling costs and meeting customer demand. If your inventory control methods lower cost but lead to issues with dead stock or back-ordered products, it's not effective. To closely monitor costs, try using an ERP accounting system to keep up with expenses.
Important Considerations In Inventory Control
Four significant considerations exist for businesses looking to take control of their inventory. These considerations will help determine the best control methods and inventory management programs to use:
- Inventory analysis and purchasing. Inventory must be tracked and evaluated regularly to ensure your supply can meet demand. It also advises the manager on what and when to replenish stock.
- Product distribution. There are different ways products can be categorized for distribution. This makes recording inventory much easier and also helps you discover discrepancies like dead stock more quickly. Here are a few examples:
- Food distribution: Products can be grouped according to food type, such as dry goods, produce, meat, etc.
- Alcohol distribution: Products can be grouped according to alcohol type, such as beer, wine, spirits, etc.
- Production evaluation. Production costs and efficiency need to be considered regularly for any manufacturer. This will let you make any necessary adjustments and increase sales.
- Tracking and inventory forecasting. Inventory tracking and forecasting ensure you can meet demand and avoid issues like the infamous backorder. This is done through your order processing team’s creation of algorithms and constant vigilance. Learn what does order processing mean so you have some context.
These skills are also relevant when settling on an inventory manager salary and job description.
Inventory Control Function
Inventory control is closely associated with the function of purchasing. Ordering products, storing, and maintaining them are the main goals of any inventory control manager.
Why Do We Need Inventory Control?
Inventory control is a vital part of any business's operations and significantly impacts its ability to make a profit.
Here are four major reasons you need inventory control:
- Boost inventory efficiency. Your products may be all over the warehouse, making picking and packing take much longer. Inventory control lets you discover and optimize this and many other issues like an incorrect SKU number to increase efficiency and streamline your processes.
- Ensure accurate inventory counts. Inaccurate inventory causes headaches and increases costs. Inventory control gives you insight into inventory numbers and helps determine the reorder point and sales trends.
- Increase sales and mitigate losses. Fill rate is essential for businesses to keep up with customer demand and avoid stockouts. Having a higher fill rate will help increase sales and mitigate losses. Safety stock can ensure that you always have the product available to meet customer demand.
- Ensure customer satisfaction. Customers hate when products are out of stock or on backorder. Controlling your inventory lets you avoid these issues and keep your customers happy.
Why Is Inventory Control Important to Managers?
Storing inventory has many associated costs that a manager needs to control. Without inventory control, a business's warehouse can quickly become a problem.
By allowing inventory to move about with no interference, a manager risks running into skyrocketing costs and plummeting profits. This, in turn, will lead to the loss of their job and possibly the closure of the business. That's why it's necessary to monitor cycle inventory to ensure standing inventory is at a sufficient level.
When attempting to track and manage inventory, there are a few ways to track your data. First, you can take the old-school approach and manually track inventory using a pen and paper. While this is quick and easy to do, it’s also easy to make mistakes. We don’t recommend this approach, regardless of the size of your inventory.
Second, you can use an Excel spreadsheet. We offer a free inventory tracking spreadsheet on our blog, and this is a viable option for a business with a limited inventory or just starting. You’ll still need to perform a regular inventory audit or cycle inventory count to ensure accuracy, but it’s a step above using a pen and paper.
Finally, the best option is to use an inventory control system and other related inventory tracking software. Let’s take a deeper look at the options available here.
Types of Inventory Control Systems
Businesses use inventory control systems to measure the number of goods on hand. Large organizations frequently track inventory at several locations, including shops, warehouses, and websites. There are two main types of inventory control systems: periodic and perpetual inventory systems.
Now let’s take a closer look at these two:
The Periodic Inventory System
The periodic inventory system is one of small businesses’ most commonly used inventory systems. Under this system, businesses keep track of their inventory levels at set intervals, typically once a month. This system is simple to use and understand, making it a popular choice for business owners.
At the end of each interval, businesses will count their inventory levels and update their records accordingly. This system can be used with either physical inventories or virtual inventories.
There are four benefits to using the periodic inventory system:
- It is easy to set up and maintain.
- It provides accurate information on inventory levels.
- It allows businesses to manage their inventories more efficiently.
- It helps businesses avoid stock-outs and overstocking.
The Perpetual Inventory System
The perpetual inventory system is crucial to most businesses' inventory management systems. This system provides near-real-time data on inventory levels, allowing businesses to manage their stock more effectively.
There are two benefits to using a perpetual inventory system:
- It allows businesses to avoid the costly and time-consuming process of physically counting their inventory. This saves businesses significant time and money on the labor cost.
- This information can be used to decide production and stocking levels. and stocking levels. It helps businesses to predict future demand more accurately. With accurate data, businesses can avoid overstocking or understocking their products, leading to lost sales or missed opportunities.
Inventory Control System and Software
One of the best ways to take control of your business's inventory is to invest in inventory management software. This software tracks inventory levels, sales trends, and inventory cycles. There are many options on the market with a variety of capabilities and additional tools.
These programs can be tied to your POS system to provide a perpetual inventory count. This updates your inventory levels each time a sale is made. This lets you make the most informed decisions, calculate optimal reorder points, plan for product lead time, and stock more A-level products.
Automated Inventory Control
Automated inventory control takes a perpetual inventory count to the next level and makes decisions using predetermined rules. This feature is built into some of the best inventory control software platforms and allows you to take a more hands-off role.
Here's an example of how this automatic inventory control can work. You may set a minimum supply threshold for reorder if you have a particular product that you always want to keep in stock. Once you hit this number, the system automatically sends a new purchase order to your manufacturer. You can optimize this process with the optimal economic order quantity, or EOQ.
Inventory Control Tips: Best Way to Control Inventory
Inventory control is complicated and takes a lot of time and energy. Luckily, a few best practices help make the process easier and more reliable.
Here are the four best ways to control inventory:
- Conduct inventory audits often. If you don't have an accurate sense of your inventory levels, you'll never be able to control them. You need to conduct regular audits to ensure your actual and reported levels are the same. One way to limit the amount of time this takes is to conduct an inventory cycle count every few days. Here, your employees audit just a selection of products to ensure the report is accurate. It lets you avoid halting operations and is best used for your most valuable products.
- Pick the correct inventory costing methods. Do you use the FIFO method or LIFO method of inventory costing? Is that the one you should use? Look into the differences between the first-in-first-out and last-in-first-out methods to see if switching is beneficial. You may be sitting on old products longer than necessary.
- Establish par levels. Establish a par level for every product you sell to avoid running out of inventory and missing sales. A product's par level is the minimum amount you need on hand to meet customer demand. If you use an inventory management system, there's likely a feature built-in for this.
- Follow the data. You have everything you need to get the most out of your inventory. Suppose you're properly tracking inventory levels, sales, and demand trends. Regularly review the data and establish patterns that show what you should stock and when. Investing in an order management system can also help uncover patterns that affect your shipping and delivery. You should also keep an eye out for inventory shrinkage or waste issues.
Inventory Control Sheet
An inventory control sheet is a spreadsheet containing information about the goods in your inventory. This includes inventory levels, storage capacity, order and reorder dates, and unit prices. There are many other variables that may also be tracked depending on a business's inventory model. Many inventory management programs come with built-in control sheets.
Inventory Control Template With Count Sheet for Excel
Inventory control can be made much simpler by using an Excel spreadsheet. You can track your inventory levels, value, and length in storage. This will let you determine the best ways to optimize your inventory usage.
To help make things easier for you, we've put together a simple inventory control template spreadsheet. Just download the inventory control template, add in your own data, and begin taking control of your inventory!
Taking control of your inventory can pay dividends with just a little effort. By following the steps above and using our inventory control spreadsheet, you can make your inventory work for you.
For more inventory control tips, check out our comprehensive inventory control management guide or learn how to perform an inventory audit. Then, you'll be able to sell your products on a direct to consumer (DTC) or online marketplace confidently.
Frequently Asked Questions About What Is Inventory Control?
Inventory control is a skill any warehousing employee must-have. In addition to replenishing and organizing stock, there is deadstock reduction, SKU rationalization, and more. To understand inventory control better, here are some frequently asked questions and our answers:
What are the Hidden Costs of Inventory?
There are many hidden inventory costs, including holding costs, deadstock, poor warehouse organization, and obsolete products. Holding costs is the price being paid whenever inventory is sitting on a shelf but hasn’t been sold. It’s impossible to eliminate 100% of holding costs, but every business should aim to sell products as quickly as possible.
Deadstock is any inventory that has been sitting for too long and is unlikely to be sold in the near future. It has to be eliminated quickly; otherwise it costs you money instead of making it.
Obsolete products are anything that customers no longer have a strong interest in and are close to becoming deadstock. Poor warehouse organization includes inadequate signage and labels, unsafe storage conditions, and too little walking space. The more you can eliminate these obstacles, the better.
You can calculate how often your inventory is replaced over a set period of time with an inventory turnover ratio (ITR) formula.
The formula is as follows: Cost of goods sold / average inventory for current cycle = inventory turnover ratio. For example:
$9,451 cost of goods sold / $1,432 average inventory for cycle = 6.60 ITR
A higher ITR is more desirable than a lower one, because this indicates that your company is selling most of your inventory each cycle.
What Are the Four Functions of Inventory?
There are four primary functions of inventory. Here are details on each one in no particular order:
- Preparedness for customer demand. Inventory is packaged and shipped as soon as customer orders come in. This prevents the need to manufacture or order parts for every individual order.
- Efficient decoupling. Decoupling (see decoupling definition) is a key inventory function for both original manufacturers and in-house producers. This is when a portion of the goods from a production run is set aside in the event machines break, or production delays occur.
- Mitigating the effects of customer discounts. When a company has more products to give away, they have a greater incentive to run promotions and discounts. Promotions are shown to increase average order size, which is a win for both customers and businesses.
- Providing a hedge against inflation. Products that hold their value over a long period of time are a great hedge against inflation. Getting products manufactured in bulk is a good way to keep costs low and still sell them for market prices.