
What is an Inventory Control System? Types, Methods & Best Practices
Efficient inventory control is non-negotiable but daunting for multichannel retailers, ecommerce brands, and wholesalers. In fact, 46% of SMBs either manually track inventory or skip it altogether. Shifting to a robust inventory control system is a wise choice to gain a competitive edge over such businesses.
But what is an inventory control system? We’ll discuss that today with its importance, types, techniques, and best practices. We’ll also cover the difference between inventory control and inventory management system, plus 7 tips to get started with an inventory control management system.
What Is Inventory Control?
Inventory control is a set of systems and processes used to maintain appropriate stock amounts in a business. This is done to always be at the top of meeting customer demand without any delay and minimizing the expenses of holding stock.
Efficient inventory control is non-negotiable but daunting for multichannel retailers, ecommerce brands, and wholesalers. In fact, 46% of SMBs either manually track inventory or skip it altogether. Shifting to a robust inventory control system is a wise choice to gain a competitive edge over such businesses.
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But what is an inventory control system? We’ll discuss that today with its importance, types, techniques, and best practices. We’ll also cover the difference between inventory control and inventory management system, plus 7 tips to get started with an inventory control management system.
What Is Inventory Control?
Inventory control is a set of systems and processes used to maintain appropriate stock amounts in a business. This is done to always be at the top of meeting customer demand without any delay and minimizing the expenses of holding stock.
Pro-tip
Fill your warehouse with the right stock to enhance customer satisfaction, improve profitability, and eliminate the need to place backorders. Having better control over your inventory and the right stock identification is possible with an efficient stock control system. It automates laborious inventory control procedures, furnishes real-time inventory levels, and streamlines your logistic workflow.
Right from movement to storage of goods in a warehouse, inventory control tracks it all to maintain a pipeline of goods. Proper inventory control process not only ensures fulfilled customer demand, but also maximizes profits.
How Does An Inventory Control System Work?
An inventory control system is an important part of supply chain management. It helps companies in controlling order quantities, keep an eye on stock levels, and optimize product flow. This strategy reduces expenses related to overstocking or understocking while increasing efficiency by guaranteeing a suitable quantity of stock is accessible at the right moment.
Businesses can guarantee that client requests are satisfied promptly and minimize carrying costs by employing inventory control systems. These systems usually allow for a smooth information flow across departments by integrating with other business processes like finance, sales, and procurement.
Why Are Inventory Control Systems Important?
By automating stock management, inventory control systems make maintaining optimal stock levels possible without much manual effort. Let’s delve deeper into the importance of inventory control systems –
1. Access to Inventory Levels in Real-time
The inventory system updates the inventory levels when a product manufacture, purchase, sale, or return happens, allowing you to gauge the inventory flow and set up reorder points. When you have clear visibility into the inventory level, excess or out-of-stock inventory situations wipe out. This enhances customer relationships as you always fulfill customer demand on time.
2. Logistic Workflow Optimization
Organizations usually have a multi-step supply chain, which is quite challenging to monitor individually. An inventory management software lets you track your goods at each step while giving you access to tools to spot inefficiencies in the logistics. You then have a clearer picture and time to improve.
3. Cost Saving
An inappropriate stock level can cost you a fortune. How? If you’re low on stock, you won’t be able to fulfill customer demands, leading to losing customers to competitors. In contrast, excess stock adds to storage costs, insurance costs, and taxes. So, you see how having full knowledge of inventory level can help you save tons of money.
4. Reduced Manual Labor Errors
Manually tracking inventories is bound to cause errors and fraud. With an inventory control system, tracking goods is automated, eliminating human error and theft.
5. Enhanced Customer Satisfaction
60% of customers expect 2 days, next, or same-day delivery, a major factor in purchase decisions. In such a scenario, listing stocks inaccurately will cause more unfulfilled orders, resulting in order cancellations and dejected customers.
Here’s when inventory management software comes into play. It keeps your inventory level up-to-date, eliminating such situations and enhancing customer satisfaction.
Types of Inventory Control Systems
Inventory control systems are of two types–periodic and perpetual. However, you must choose the one that aligns with your business size, type, and inventory kind. Let’s gain a better understanding of both –
1. Periodic Inventory System
As the name suggests, a periodic inventory system involves manual counting of goods by warehouse managers at pre-decided intervals–monthly, quarterly, or annually. The interval is decided as per your business’s activities and needs.This system is recommended for small businesses with limited inventories and companies with niched products, as only they can manually count their stock. It is not feasible for larger organizations dealing in large amounts of stock.
2. Perpetual Inventory System
The perpetual inventory system aims to give you a real-time picture of your inventory level. How? By tracking stock via advanced technology like barcodes and Radio Frequency Identification tags. After tracking, this system logs and centralizes the stock data in the database for warehouse managers to analyze and access. This system is highly recommended for all sizes of businesses operating at multiple locations or dealing in large-scale inventories.
Different Inventory Control Techniques
Businesses can use a variety of inventory control methods according to their requirements and style of operation. The following are a few of the most common methods of inventory control:
1. Just-in-Time (JIT)
Just-in-time (JIT) is one of the most common techniques of inventory control. By only ordering supplies as needed, the Just-in-Time strategy seeks to minimize excess inventory. Although this method lowers holding costs, it requires careful planning and coordination with suppliers to prevent stockouts.
2. Economic Order Quantity (EOQ)
The Economic Order Quantity (EOQ) model determines the optimal order quantity that minimizes the total costs of placing orders and maintaining inventories. It is designed to minimize inventory expenses by optimizing order size and frequency.
3. ABC Analysis
Inventory can be categorized using the ABC Analysis technique according to its significance:
A-items: These things, which make up a small portion of the overall inventory volume, are extremely valuable and important. They demand strict management and frequent monitoring.
B-items: Items with a moderate level of value that require routine management effort.
C-items: Items with a high volume and low value that don’t need a lot of managerial attention.
By focusing more on high-value products, this inventory control strategy enables organizations to deploy resources more effectively.
4. Safety Stock
Safety stock refers to a safety cushion of excess inventory on hand to guard against unforeseen events like demand spikes or supply chain interruptions. The variety of lead times, demand trends, and the product’s criticality all influence the quantity of safety stock needed. This approach raises the cost of inventory, but it avoids expensive stockouts that can result in missed sales or manufacturing hold-ups.
5. Reorder Point (ROP)
The Reorder Point (ROP) system determines the exact stock level at which fresh inventory should be ordered in order to refill the supply before it runs out. Typically, lead time—the amount of time it takes to receive fresh stock and demand during that wait time are taken into account in the ROP calculation. When a stock hits this predetermined level, the system immediately initiates a purchase order.
6. Batch Tracking
Businesses can track inventory through their lifecycle with batch tracking. This method guarantees proper stock rotation, which is especially helpful for businesses that deal with perishable commodities or products that have expiration dates.
7. Cycle Counting
Instead of performing complete stock counts all at once, cycle counting is a way to carry out routine inventory audits in which parts of the inventory are counted on a cyclical basis. By using this inventory control method, inconsistencies are detected early, and accuracy is increased.
8. Vendor-Managed Inventory (VMI)
Vendor-Managed Inventory (VMI) assigns the supplier the task of overseeing the buyer’s inventory. The vendor simplifies operations for the customer by keeping an eye on stock levels and automatically restocking goods as needed.
9. LIFO and FIFO
Last In, First Out, or LIFO, states that the most recent additions are used or sold first. It is often employed in industries where firms wish to match the cost of items sold with the present market rates and product costs change.
First In, First Out (FIFO) dictates that the oldest inventory is sold or used first. The method, which ensures the oldest stock is consumed before it goes bad, is more popular in businesses that deal with perishable goods or items with expiration dates.
Best Practices of Inventory Control Systems
Following a few key best practices will help companies properly improve an inventory control system:
1. Regular Inventory Audits
Making sure that your real stock matches what is reported in your system can be guaranteed by conducting routine audits using techniques like cycle counting. This process helps in the early detection of inconsistencies, theft, and operational inefficiencies. Accurate inventory monitoring tools and routine audits are necessary to preserve data integrity and avoid costly errors.
2. Accurate Forecasting
The capacity to forecast future demand is essential for efficient inventory management. By examining past sales data, market trends, and seasonality, companies can improve their ability to predict demand and maintain appropriate inventory levels.
Poor forecasting can lead to financial risks like stockouts or excess inventories. Demand forecasting algorithms are often integrated into inventory control systems to assist companies in optimizing stock levels ahead of expected future demand.
3. Efficient Inventory System
Effective inventory control systems are integrated with accounting, purchasing, sales, and other company systems. Data entry errors are minimized, and consistent reporting is ensured by real-time integration, which guarantees smooth information flow between departments. Through the automation of several inventory management processes, the use of barcode scanning, RFID technology, and cloud-based software can further improve productivity.
4. Optimize Inventory Levels
Achieving optimal inventory levels requires striking a balance between excess and insufficient supply. Inventory management strategies like EOQ, JIT, and safety stock assist companies in adjusting their stock levels to meet their unique operational requirements. It guarantees product availability while reducing holding expenses.
5. Adopt JIT Techniques
Just-in-Time (JIT) strategies allow businesses to cut holding expenses and prevent overstocking. By matching production schedules with demand projections, Just-In-Time (JIT) helps companies optimize their operations. As it provides little margin for delays or unforeseen demand spikes, this method requires close supplier collaboration and precise forecasting.
6. Analyze Inventory Metrics
Metrics related to inventory, like lead time, carrying costs, and turnover rate, reveal how well your inventory is managed. Businesses can determine bottlenecks, maximize reorder points, and evaluate supplier performance by using these indicators. This analysis helps in optimizing inventory control strategies to increase output and profitability.
7. Clear Inventory Policies
To guarantee uniformity across departments, inventory policies must be well-defined and documented. These guidelines include instructions on how to order, receive, store, and audit inventory, ensuring that all employees adhere to the same protocols.
Properly specified policies minimize mistakes and simplify processes, especially in bigger organizations where inventory control is divided among several groups.
Tips for Getting Started with Inventory Control
Controlling inventory is best done with an effective stock control plan and system. Here are some tips to start the inventory control process –
1. Develop a Holistic Inventory Control Plan
A holistic inventory control plan monitors your orders throughout their circulation–from production/purchase to sale and removal from books. On top of this, your control plan should aim to reduce warehouse space wastage, set up a forecasting formula to order supplies and build great vendor relationships.
2. Update Your Plan Regularly
Today’s effective inventory control plan might lose effectiveness in a month, leading to haphazard online inventory management. So, updating your plan and forecasts with changes in business and market needs is essential.
3. Stock Up on Critical Products
No matter how good your inventory control plan is, it’ll not be as useful if you run out of critical products like machine parts. That can hamper your sales, causing you to lose customers and money. In fact, inventory managers intend to increase their critical product inventory by 47%.
4. Double-check Your Shipments
You must never stock up on your products in the warehouse without reviewing it. If any inventory is absent or damaged in your stock, you can identify it beforehand to avoid a loss of sales.
5. Adopt a Scalable Inventory Control System
Getting an inventory system that fits your current business size and needs is great but insufficient. You must invest in a cloud-based system capable of scaling and fulfilling your growing business needs. Such a system can furnish analytics that add to your business growth.
6. Balance Inventory Costs and Benefits of Stock Backup
To create a fool-proof inventory control system, find the perfect balance between the cost of having stock backups and avoiding running out of stocks. This balance can be found only by analyzing your business and selecting the right method or forecast technique.
Conclusion
Businesses can better control inventory levels, cut expenses, and boost productivity by using a variety of inventory control strategies. Adopting best practices guarantees that businesses meet consumer expectations while streamlining inventory management processes. These practices include precise forecasting, frequent audits, and well-defined policies. Maintaining a competitive edge as companies expand and change will depend on improving inventory control systems and implementing the latest technologies and tools.