Inventory control is one of the key ways a business can keep its costs low. This in turn can lead to higher profit margins and increased sales.
If you're an inventory control manager or looking to become one, understanding how to control inventory is paramount. We'll walk you through all aspects of inventory control and management.
Let's start with a brief overview of what inventory control is.
Inventory Control Overview
Inventory control is the maintenance of a business's inventory level to fulfill orders and minimize costs. It involves managing inventory storage, movement, and maintenance. It also includes using data to make decisions that can increase the profit you make off this inventory.
The Purpose of Inventory Control
The primary purpose of inventory control is to protect inventory from damage or theft and to track inventory in the financial statements. Inventory control ensures a warehouse operates smoothly while keeping costs low and meeting customer demand. All stock must be recorded and this data can be used to make a variety of decisions.
The Application of Inventory Control Data
Using inventory control in your business requires investing time and money. This is done through either physical inventory counts or investing in a perpetual inventory management software. Both result in the accumulation of data regarding inventory levels and trends to plan for purchasing, controlling, and shipping goods.
The Value of Inventory Control
Inventory control is a vital part of any business' ability to make a profit. The major reasons it is valuable to control inventory are that it increases warehouse efficiency, ensures the accuracy of inventory data, can lower costs and increase revenue, and keeps your customers satisfied.
Without inventory control, a business's warehouse can quickly become a liability. If inventory is allowed to move about with no control, 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.
Invest in Automated Inventory Control Systems
One of the best ways to take control of your business's inventory is to purchase a subscription to an inventory management software. This software tracks inventory levels, sales trends, and inventory cycles. Most of these programs can also be hooked to your POS system to provide a perpetual inventory count. This updates your inventory levels each time a sale is made. This feature is built into some of the best inventory control software and allows you to take a more hands-off role.
The other major component of inventory control is inventory management.
Inventory management is the act of reducing inventory costs and optimizing the ability to meet demand. This is done using a variety of methods like reducing dead stock or calculating optimal reorder points.
This most important part of inventory management is that it requires a dedicated focus on inventory tracking.
Inventory Management Process
Inventory management requires creating and following a simple set of processes to limit the chance of improperly managing your inventory.
There are eight steps in the inventory management process. These are: Receiving product, inspecting and sorting product, monitoring inventory levels, receiving orders, picking and shipping product, updating inventory levels, and placing reorders.
These eight steps can be done more efficiently with a properly managed inventory process flow. Each step can be optimized by tracking and reviewing each step. You can eliminate inventory shrinkage, discover flaws, and reallocate resources to any step that needs it to increase your profit and limit your costs.
How to Improve Inventory Management Process
There are many ways you can improve your inventory management and get the most out of your inventory. A few of the most common including communicating inventory needs to your suppliers, tracking product lead time to plan for reordering, hiring an inventory control manager, and using inventory management software.
The two major tools we recommend are the creation of an inventory management process map and the purchasing of an inventory management system.
Inventory Management Process Map
An inventory process map is a flowchart that shows every step in your inventory program. Though the eight steps are fairly standard, there are many variables that are specific to your businesses. By mapping out all steps and options, you can always be prepared for any changes in supply or demand.
Inventory Management System
An inventory management system is a program that tracks and manages all aspects of a company's inventory. This includes purchasing, shipping, tracking, storage, turnover, and reordering. This type of all-in-one inventory management software can be integrated into your POS system to provide a perpetual inventory count.
Now that you understand inventory control and management, let's dive deeper into the individual methods you'll need to know. We'll start with the most obvious, inventory tracking.
Inventory tracking is one of the most important inventory control methods. Inventory levels influence all decisions you make and can quickly increase or decrease your revenue. They can be tracked manually or perpetually.
How to Track Inventory
The basic way to track inventory is to manually count your inventory every two weeks and compare the numbers versus sales. That's known as periodic inventory.
The other option is a perpetual inventory, where an inventory management app or software is integrated into your business's POS. This gives you access to live data at all times and lets you have more control over inventory tracking.
Inventory Tracking Best Practices
There's no single way to track inventory, but there are a few best practices that all businesses should adopt. The six main practices are to establish specific goals for your inventory, use ABC inventory analysis to bucket your products by value, keep safety stock, optimize inventory turnover ratio, increase packing efficiency, and adopt the FIFO method.
These practices can all be applied by manually tracking inventory or by using inventory tracking software.
How to Track Inventory Manually
To track inventory manually you need to physically take inventory at least twice. The first to establish baseline stock levels and again to determine usage. These two inventories are usually taken on the first and last days of the month.
Manual inventory tracking is much more labor-intensive than using tracking software, but can still make use of technology. This is by making use of a spreadsheet to track the data you collect. Still, inventory software offers a much less labor-intensive inventory tracking program.
Inventory Tracking Software
Inventory tracking software is a digital program or application that provides a perpetual inventory count. It is generally integrated into your POS and updates instantly every time an item is scanned as it's sold or shipped. It offers many long-term benefits to a business and eliminates the need for full, physical inventory counts every month.
Whether you use physical or perpetual inventory counts, the next important step is to perform inventory audits to ensure all information is correct.
Conducting an Inventory Audit
An inventory audit is when a business cross-checks its financial records against its inventory records. It is a vital part of inventory management and is done to ensure all records are accurate. These audits also uncover any discrepancies in inventory count or financial records.
How to Conduct Inventory Audit
Conducting an inventory audit requires pulling current data from a variety of sources. This may include inventory counts, sales records, shipping manifests, or other records.
Though there are many forms of inventory auditing, the workflow is mostly the same. You acquire at least two records that should reflect the same inventory numbers. Then check them against each other to discover if they do match. If not, flag the areas with issues and look into any problems that arise like missing inventory, damaged product, or inaccurate sales figures.
Inventory Auditing Procedures
Inventory audits can be completed by using a variety of auditing procedures. Some of the most common include performing a physical inventory count, performing a series of smaller cycle counts, or matching shipping invoices to financial records. In addition, a number of analyses may be conducted including an ABC inventory analysis, cutoff analysis, overhead analysis, finished goods inventory analysis, or freight cost analysis.
All of these procedures are intended to help you verify the information in your records is correct and to uncover any areas where you may be losing money. They are conducted according to strict inventory auditing standards.
Inventory Auditing Standards
Inventory auditing standards must be established by the business if they expect to achieve results. There are two rules that make inventory audits easier and more accurate.
First, audits need to be performed regularly and in the same method each time. If not, the data uncovered will not be particularly helpful as it could be incorrect. Second, inventory control needs to be practiced at all times, otherwise audits will become overwhelming and difficult for the team.
Now that you have a better grasp of the different ways you can audit your inventory, you can start working on limiting waste. One of the biggest issues uncovered during audits is dead stock.
Dead stock is a form of surplus inventory that a business is unlikely to sell in the near future. It is a drain on warehouse resources and actively prevents a business's ability to increase its profits.
These products are not to be confused with buffer stock as they were not ordered with the intention of storing them for a long time. Dead stock continues to depreciate in value and may eventually expire or become obsolete and have to be written off as a loss.
Dead Stock Management
Dead stock inventory control consists of selling what you can and finding ways to minimize the expenses associated with dead stock. The key is that the inventory control manager needs to determine the causes of their dead stock.
Two major causes of dead stock are poorly managed lead times and reorder points. They can cause customers to cancel their orders and result in stock that was expected to be sold left sitting in the warehouse.
Inventory tracking is also a vital part of managing and eliminating issues with dead stock. It helps create inventory forecasts so you only order the correct amount of goods in the future and recognize sales trends and inventory cycles.
How to Get Rid of Dead Stock
Getting rid of dead stock can be very difficult, but it is important to limit losses. Some of the most common ways to offload dead stock is through kitting, limited-time sales, internal store transfers, selling to wholesalers, or returning the goods to the manufacturer.
Not all options are available to all businesses, so an inventory control manager needs to be flexible with dead stock.
Going forward you should also try to avoid running into issues with dead stock entirely. The first thing that needs to be controlled is product lead time.
Lead time is the amount of time that goes by from the start to finish of any given process. Lead time is one of the most important measures in inventory control.
Calculating, understanding, and acting on changes in lead time allows a business to prevent losses and fulfill orders quickly and efficiently. This is true for both retailers and manufacturers. It affects all businesses within a supply chain and can cause major issues if it gets out of control.
Lead Time in the Supply Chain
Total lead time is affected by every step within a supply chain. Production takes time, shipment takes time, and all other intermediary steps take time. As such, lead time in inventory management needs to be monitored and planned for regardless of business type.
Lead Time Is Bad
Long lead times can cause many problems that interfere with a business being able to fulfill orders.
For retailers, long lead time means a loss of sales and angry customers. For manufacturers, long lead time can cause production to halt entirely. It also leads to increased lead time for the retailers and strains relationships. Every additional day that goods are delayed, money is lost so you should always try to reduce it.
Lead Time Reduction
Lead time reduction can take a lot of time, but will help your business improve its sales and fulfillment capability. The most important factor when trying to reduce lead time is to look at your historical data.
There are a few ways you can use this information to reduce your lead times. These include switching suppliers, sharing data with your suppliers, and increasing reorder frequency.
Before you can try any of these methods, you need to know how to calculate your lead time.
Lead Time Formula
Calculating lead time requires a simple formula. There are two versions of the formula depending on if you're a manufacturer or a retailer.
For manufacturers, the lead time formula is:
Total Lead Time = Manufacturing Time + Procurement Time + Shipping Time
For retailers, the lead time formula is:
Total Lead Time = Procurement Time + Shipping Time
Using the inventory tracking tools and formulas above, you can keep your business operating smoothly and focus on increasing sales and revenue by calculating optimal reorder points.
The reorder point is the level of standing inventory on-hand that alerts you to reorder. Essentially, when you hit this particular number, you should place an order to ensure you can continue to meet demand without any gaps.
Reorder point is not a stable number, but is flexible based on sales trends and the demand cycle of a given product. This means you need to have an understanding of each product's inventory levels and sales to optimize its reorder point. This is easily done using inventory management software that tracks everything you need to know about your inventory.
Reorder Point Formula
Uncovering the reorder point for a product can be done using a very simple formula.
Here's that formula:
Reorder Point = (Average Daily Usage x Average Lead Time) + Safety Stock
How to Calculate Reorder Point
To calculate the reorder point for a given product first requires that you determine a product's average daily sales, lead time, and amount of safety stock. Daily sales information can be pulled from your POS system if you have one. If not, you can look at inventory numbers and divide by the number of days between taking inventory. Safety stock can also be found in inventory counts.
Lead time can also be calculated for the product using the formula listed in the previous section. With these three numbers in hand, it's as simple as plugging them into the formula above to determine that product's reorder point.
Reorder Point Problems and Solutions
There are a number of issues that can hamper your ability to make the most informed reordering decisions. Here are just a few of the issues you may encounter.
Safety Stock and Reorder Point
Safety stock is additional stock you keep on hand in the event that demand suddenly increases. The issue here is that you may go through it more quickly than anticipated. This means you need to reorder earlier as well. Luckily, that is exactly why you keep safety stock on hand.
To combat any sudden shifts in demand and safety stock usage, track daily sales and recalculate your reorder points regularly.
Lead Time and Reorder Point
Lead time is the other major issue that may interfere with calculating your optimal reorder point. Unfortunately, you don't have much control over lead time as it is dependent on the supplier and shipper. However, this can be mitigated by keeping an adequate safety stock on hand. You should also calculate your reorder point daily to notice any changes in lead time as they occur.
Reorder point calculations are also a very important part of determining the correct amount of product to order. This is known as economic order quantity.
Economic order quantity is the ideal amount of product a company should purchase to minimize inventory costs. Essentially, it is the amount of product you need to order to meet demand without having to store any excess inventory.
Finding your optimal order quantity for a product is the goal of calculating its EOQ. However, it is very difficult to achieve as any slight variance in demand, cost, or price will throw the numbers off.
Economic Order Quantity Value
Managing economic order quantity can help avoid issues like excess stock or dead stock and keep avoidable losses to a minimum. It also helps establish goals for inventory KPIs, informs inventory forecasting decisions, and helps increase the company's sales and revenue. It is also a vital part of the just in time inventory model.
Advantages and Disadvantages of EOQ
Utilizing EOQ for your business has both advantages and disadvantages. On the plus side, economic order quantity allows you to minimize all costs associated with inventory and can easily be adapted to your business model. This will lead to higher profit margins and a streamlined workflow in the warehouse.
However, there are also a few drawbacks that you need to be aware of. Calculating EOQ can be difficult. You'll see the formula used for EOQ calculations below, and it's safe to say it isn't the easiest to use. The calculation is also based on assumptions, so your number will not be completely accurate if any of the numbers you use are not perfectly steady.
Economic Order Quantity Formula
Calculating the economic order quantity for a product can be done using a slightly complicated formula.
Here's that formula:
EOQ = √ (2 x Demand x Order Cost / Holding Cost)
Calculating the economic order quantity for your products can help you make the most out of your warehouse space, minimize costs, and increase revenue. It also allows you to make the most out of your inventory forecasting.
Inventory forecasting is used to predict future inventory levels needed to meet demand. This is done by combining historical data with future assumptions on demand cycles and sales trends.
Collecting data is the most important part of inventory forecasting. This requires a strong inventory management program. Sales trends, stock issues, and dead stock are just a few of the issues that can be uncovered by taking regular inventory.
How to Forecast Inventory
To forecast inventory levels, you must first take inventory at least twice. This can be done through physical inventories, cycle counts, or the use of a perpetual inventory program. Next, determine what products are selling well and if they are nearing their reorder point. This lets you predict future sales trends based on historical sales.
Each new inventory taken will provide further insight into inventory trends. You can use any shifts in sales or stock levels to make more informed forecasts.
Keys to Inventory Forecasting
There are many ways any business looking to forecast for inventory management and control can achieve their goals. There are three best practices you should use to get the most of your forecasting.
First, consistently track and record your inventory levels. If you don't, all of your forecasts will be based on faulty data and can lead to wasted money. Second, include all key players in decision-making. People not involved in inventory management are still affected by the decisions and have points of view that can be very helpful. Third, investing in inventory management software can pay dividends. Forecasting can be updated in real-time and you can minimize the chance of flawed forecasting.
Now that you know all of the major tools of inventory control, you're set to become a star inventory control manager.
Inventory control managers are in charge of all aspects of a business' inventory management and inventory control programs. They are a vital part of a company's management team and are responsible for warehouse operations and inventory tracking.
Inventory control managers are responsible for everything from inventory tracking to inventory auditing to inventory maintenance and more. They must also manage and direct warehouse personnel.
Inventory Control Manager Skills and Responsibilities
Due to the importance and varied nature of this role, inventory control managers must have a wide variety of skills. These skills include the ability to lead and direct others, solve complicated problems, use data in their decision-making, and have a sense of organization and attention to detail.
These skills are all used when meeting their responsibilities. These include managing and monitoring all inventory counts, performing inventory audits, forecasting inventory needs, tracking shipments, and training and leading warehouse staff.
Luckily, using the tools listed above, you can be prepared to become a talented inventory control manager.
Now, you're ready to take control of your inventory.
Get It Under Control
Whether you are an old hand at inventory control or you're new to the field, we can help. Just request a BlueCart demo, and we’ll get you on top of your inventory control. Warehouse inventory control is a vital part of all businesses and can help you spend less on inventory and increase profits.