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by Lauren

What is Inventory Control?

Friday 13, Dec 2019

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Knowing how to use inventory control can make or break your business. So, no matter your company’s size, it’s important to know what inventory control is and what it means. After all, it’s impossible to have a profitable business without proper inventory control solutions.

What is Inventory Control?

Inventory Control, also known as stock control, is more than just knowing how much inventory you have on-hand. Inventory control means getting the most profit out of your inventory, with the least amount of investment into your inventory. 

A very basic, easy way to think of inventory control is like this: Your inventory control goal is to maximize profit and spend less, while also keeping your customers happy. 

Mastering inventory control all boils down to knowing with complete accuracy and certainty which inventory you have on hand, exactly how much inventory is ready to be shipped to customers, and all the in-between bits relating to warehouse management (like barcode scanner integrations, product locations, and inventory counts). 

Here’s an inventory control example: You’re a local florist, and you get a call from a customer requesting a specific type of flower for a last-minute event. You tell the customer you have this flower available, but because your inventory system is unorganized and outdated, you later realize you actually do not have this requested plant in stock. You end up having to call the customer back to cancel the booking, losing a sale and client. This is poor inventory control.

Why does inventory control matter?

As a business owner, you are at risk of either spending too much money on your inventory or not having enough inventory available for customers. The importance of inventory control matters for any size store or business because of the accuracy it provides. 

Think about it. If you can’t easily track the inventory that is all over the place for your construction company, how do you know which products and services you can provide to your customers for specific time periods? Having complete and up-to-date knowledge of your business and implementing store inventory control matters because it:

  • Helps you to know exactly which products are in stock. 
  • Reduces operational expenses.
  • Reveals which products are selling and which products are not selling. 
  • Helps avoid backorders by always having enough product available. Because who wants to miss out on potential sales just because your inventory control methods were lacking?
  • Provides the best customer service (since you’ll know exactly what and how much is in stock). 
  • Reduces labor costs. With a sound inventory control system in place, product is easily tracked and therefore less likely to be lost, ultimately requiring less staff to handle the stock.
  • Helps avoid profit loss by only paying for warehouse storage space you need, rather than paying to store inventory that doesn’t exist. 

All of the above are advantages of inventory control that enable your business to maximize profit from your inventory while spending less on it. Talk about a win!

What are the different types of inventory control systems?

There are so many different elements when it comes to inventory control and managing inventoryfrom barcode scanner integration to purchasing inventory to shipping, tracking, receiving, warehouse storage, turnover, and reordering. That’s where inventory control systems come into play. The key is using an inventory control system—like inventory management softwarethat keeps all these numbers and relevant warehouse information up-to-date and easy to understand. 

There are two main types of inventory control systems you can choose from to help things run more efficiently: Periodic Inventory Control System and Computerized Inventory Control System

Periodic Inventory

Periodic Inventory requires a physical count of inventory, which can be extremely time-consuming. Records are not up-to-date, but instead are updated periodically (usually at the end of an accounting period). 

Computerized Inventory

Computerized Inventory, also known as Perpetual Inventory, is in sync with all sales, meaning your inventory is constantly being updated in real-time. Even better, with a computerized inventory control system, you can use the counts and data trends collected to forecast inventory needs. This is a great way to predict how much inventory you might need over a particular season. And, since knowledge is power when it comes to inventory control, you’re going to want all the help you can get! 

What is an inventory control problem?

Figuring out the when, what, and how of your inventory is considered the inventory control problem. Your business needs to determine when to order, what to order and how much. To decide on these details, businesses use several different inventory control models. 

Which inventory control models are used to manage inventory? 

The below are the methods used to help you with inventory management so that you can avoid having deadstock, inventory that is never sold, which only loses you money.

Economic Order Quantity (EOQ)

Economic Order Quantity helps you to calculate the ideal inventory amount so that ordering and storage costs can be reduced. It finds the balance between having too much inventory and not enough. Because what good does it do to pay for hundreds of pieces of automotive inventory, just for all that product to sit on the shelves? 

The formula for economic order quantity is displayed.

To calculate your Economic Order Quantity:

Take the square root of (2SD) / Production Cost (carrying costs)

S is your setup (order) costs

D is your demand rate (units)

Confused? Here’s an example: Your company has used 6,000 units of automotive inventory each year. Your cost is $5 per order. You’ve figured out your carrying cost per unit is $6. So your calculation would look like this: The square root of (2)(6,000)(5) / (6) equals 10,000. And the square root of 10,000 is 100. 

Your EOQ equals 100 units. What does this mean? It means that if you order 100 units of inventory each time your orders are placed, your inventory costs (ordering and carrying) are cut back.

Confused, still? It’s not the easiest inventory formula, we know. You can calculate your EOQ here, too.

Reorder Point Formula

Another formula commonly used is the Reorder Point. It helps you to know when the right time is to order more inventory. The whole “point” with reordering is to order your inventory just before your inventory runs out.

The reorder point calculation also includes something called a safety stock. Think of your safety stock as an extra measure of protection. It is additional inventory you have in stock to help reduce the risk that the item will fully run out before more inventory arrives. It serves as a buffer in the case that something unexpected happens, such as a significant increase in orders over a very short period of time. 

The formula for reorder point formula is visualized.

To calculate your Reorder Point:

(Average Daily Usage Rate x Lead Time Demand) + Safety Stock

So, if your business was using on average 5 units of product each day and it takes one week for your inventory reorder to arrive, and your safety stock amount is 50 units: (5 x 7) + 50 = 55. Your inventory reorder point is 55 units. Meaning, if your inventory level falls below 55 units, you should place a new order.

Just-In-Time Inventory (JIT)

Another common inventory control method used is the Just-In-Time Inventory (JIT). This means ordering inventory only as needed, without safety stock (back-up inventory). But with JIT, inventory is always intentionally running low, and you are regularly at risk of running out.

An inventory control specialist can be helpful with implementing these models, as well as ordering and monitoring products.

How can I improve my inventory control?

When it comes to inventory control, knowing which areas of your inventory to focus on can make all the difference. Think of the below list as a “best practices” for inventory control.

Finished Goods Availability

Customers see value in being able to receive a product quickly. So if your products are immediately ready to ship, you might be able to charge a higher price.

Raw Materials Availability

As part of your supply chain management, you always want to make sure your raw materials are available. These are materials that are part of your product, such as clasps and hooks for your jewelry business.

Work in Process

This is your inventory that is not yet sold or is currently being manufactured. You can actually reduce your work in process as an option for strengthening your inventory control functions.

Outsourcing

By outsourcing specific steps to suppliers, you achieve two things: You put the responsibility on the supplier and you reduce operating costs and expenses. For example, using another company for your landscaping business to help with installing lattices gives you a piece of that profit, without having to deal with paying for the lattice inventory. 

Bottleneck and Production Control

You will inevitably have a bottleneck within your inventory at some point. A bottleneck means there is a hiccup in your supply chain process that ends up slowing down receiving and therefore sales. It can be caused by disorganized stocking methods of your inventory once it arrives, as well as other issues regarding the receiving and tracking methods you use. 

A bottleneck is less than ideal because it limits the amount of inventory you can sell. But having a buffer in place such as safety stock (having extra materials on hand) is a quick fix to keep things running smoothly and efficiently. 

Quality Control

 By making sure your inventory suppliers produce high-quality products, you are practically guaranteeing you can trust your products to not break or cause issues resulting in returns, recalls or lost customers. 

Organizational Control

 This might go without saying, but…it never hurts to keep your inventory organized. When inventory is labeled clearly, it reduces the chances of human error (and remember, inventory mistakes cost money).  

How can inventory control software help with inventory control?

Sortly inventory management software works on tablets, desktops and smartphones

A good inventory management software system is the bread and butter for keeping your inventory control wheels turning smoothly. With an easy-to-understand system, the tedious work is done for you (like calculating your EOQ and reorder points). With Sortly, establishing inventory control practices has never been easier. Track your inventory location, price, and quantity and even get alerts for a simple way to stay on top of your inventory management. 

Get Started with Sortly for Free! 

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