Inventory happens to be the one of the most critical components for any business. Keeping a close tab on the inventory can be the strategic advantage you need for the success of your business. This is why inventory management and inventory control should be a priority for all businesses.
While on paper most business owners do comprehend the importance and urgency of following the inventory consistently, in practice, a lack of information and knowledge means that less than half actually have any practices in place.
When we talk about taking care of inventory or inventory management, a popular concept that surfaces is Inventory Control.
In this article, we tell you what inventory control is and why it is a must.
We will also give you a step-by-step process on how to go about inventory control.
First things first, let us understand what inventory control is.
What is Inventory Control?
Inventory control is monitoring & managing a company's inventory and warehouse by keeping up the stock at desired levels. It controls all the aspects of inventories from purchasing, receiving, warehousing, shipping, tracking, turnover, and reordering.
A key role of inventory control is supply chain management, which deals with the progression of different types of inventory, like raw materials, work in progress inventory, finished goods etc in addition to labor, and machinery costs to where the organization or clients consume the goods.
Talking about inventory control and inventory management, you must know that they are not the same. Inventory management is a more of an umbrella term that incorporates the total cycle of procuring goods, storing away, and making a profit from your product.
Inventory control directs what is left in the warehouse. On the other hand, inventory management is more extensive. It directs everything from how company gets its stock , and products reach their customers.
Importance of Inventory Control
Reducing Customer Churn
In an open market, countless companies create similar commodities. So, how can you be unique and pull in clients to your product and improve customer retention?
According to the 2015 “Global State of Multichannel Customer Service Report”, 62% of customers have stopped doing business with a brand whose customer service was poor. Customer service implies that the products your customer needs should be easily accessible to them. If you don’t control your inventory, there are high chances of going understock as a result failing at good customer service.
Research shows that businesses that go out-of-stock could make the companies lose one in every 100 clients. And if you think you can provide your customers with an alternative, then that's not gonna work- Because 55% of customers would not buy another commodity when their standard product is unavailable.
Better inventory control helps you maintain stocks ready for delivery, making sure that your customers don't go anywhere else and you don't lose them.
Minimizing Cost of Goods Sold and Holding Inventory
In the words of Joseph Brandt, control your inventory, control your profits.
Inventory control is an essential part of any company that is aiming for success today. Hence, the cost of inventory and carrying them through the production process is equally essential. It helps to keep the general costs of selling as low as they can be.
Inventory control enables a timely review of inventories, helps plan the ideal amount of inventory to be stored, allows proper physical verification of Inventories. Not to mention, a well-maintained and latest record of the movement of materials.
We hope you have made a note of these compelling benefits of inventory control. If these benefits of inventory control have convinced you that it is a must for your company, we have a few steps for you to get started.
4 Steps Involved in Inventory Control
Step 1: Forecast Inventory Levels
Inventory forecasting is a technique to anticipate the stock levels for future sales. It requires you to keep a track of your sales and demand so that you can manage your inventory and purchase orders accordingly.
It helps you to increase the company's revenue by fulfilling customer demand. At the same time, saves you from any unnecessary inventory costs, caused by overstocking of goods.
To plan your inventory levels, look at historical data and trends.
But what if you don't have them?
In this case, a good starting point is to consult your sales and marketing department.
Your sales team and marketing team are the closest to your customers. Hence, they understand your customers better, and they are familiar with their demands. They can help you decide the maximum & minimum limits of inventory. Tell you accurately which product will please the customers more in comparison with other products.
Being aware of your inventory levels minimizes stock wastage, reduces inventory holding costs, and improves predictability.
Step 2: Set Reorder Levels
"The world is changing very fast. The big will not beat small anymore. It will be the fast beating the slow," said Rupert Murdoch. Earlier we thought that the industry was changing rapidly, but today the demands of your customers, their preferences, are also changing just as quickly.
To fulfill the needs of your customers, as and when it is at the peak, you should be able to keep up with the pace of the changing demands. Step 1 of forecasting inventory demands will help you with Step 2 of setting reorder levels accurately.
Imagine, a product you manufacture or sell as a retail trader, is in very high demand. You must study how quickly you are running out of that product in demand and set a reorder level. As soon as you realize that your inventory is going lower than the set mark you can immediately order a new stock. In this way, you continue to sell the product in demand until the new stock for the same product arrives.
Step 3: Use an Inventory Management System
An Inventory Management System is the process by which you track your goods, be it raw materials, or finished goods. You track their complete movement from buying the raw materials to manufacturing, to the end deals.
Here are 8 reasons why you need an inventory management system:
- Improved inventory accuracy
- Improved forecasting
- Lower cost of goods sold
- Real time inventory reports
- Reduced stock wastages, under stocking and over stocking
- Higher productivity
- Organized Warehouse Operations
- Scale inventory as your business grows
Note: A software cannot solve bad inventory processes, just automate them.
Step 4: Pick the Right Inventory Control Method
There are various methods of inventory control available. What you need to do is, pick a technique that suits your business the best. Whichever approach you choose, it must answer the following:
- The quantity of the stock in the warehouse?
- When is the time to restock?
- How much inventory should you stock up?
Confused about what these inventory control methods are and which one to pick?
Worry not! We have enlisted the inventory control methods for you to pick. So, take a quick sneak peek at these methods.
Methods of Inventory Control
Analysis A, B, & C:
In this method, you classify the stocks into three parts- specifically A, B, and C.
Segment A comprises inventories high in demand, but it is unlikely for that demand to reoccur. So stocks of segment A need to be controlled strictly.
Segment B comprises stocks that are of reasonable worth and with decent chances of recurrence.
In Segment C, you have inventories with low worth. However, high chances of recurrence. So it will require the least amount of control.
In the JIT method, the organization preserves a stock level required for production. You will not have any leftover inventory past the production requirements in this technique. JIT is considered the best method to avoid an excess of stock. The requests for new goods are when the old stock is nearly finished.
However, the drawback of this method is, supply delays, if not managed, will affect the production/fulfillment process.
Economic Order Quantity (EOQ)
In this technique, the organization will be familiar with the amount of inventory you should stock up and at what time you keep the minimum inventory level in mind. EOQ is helpful when the ordering, demand and holding costs are reliable over the long run.
The Fast, Slow, and Non- Moving (FSN) Method
In this method, the inventories are classified depending on the speed of their movement. as fast, slow, and non-moving. On the premises of the development across these categories, you can request new inventory.
The Bottom Line
In the words of Rhonda Adams, "Inventory is just money, sitting around in another form".
The main goal of inventory control is to boost the usage of stock to make a profit. Maintaining adequate inventory levels makes sure that you do not have money unnecessarily tied up in the inventory. Most importantly, inventory control clears you of any production-related hindrances and improves the supply chain.
Inventory control plays a crucial role in any company, so you cannot leave any room for human error that is easy to occur. Hence, a lot of companies are using inventory control systems. It allows them to manage all the steps of inventory control under one integrated system.
We hope this article helped you gain insights into inventory control, its benefits & methods.