What Is Inventory Control?

Inventory control, also called stock control, is the process of ensuring the right amount of supply is available in an organization. With the appropriate internal and production controls, the practice ensures the company can meet customer demand and delivers financial elasticity.

Successful inventory control requires data from purchases, reorders, shipping, warehousing, storage, receiving, customer satisfaction, loss prevention and turnover.

Inventory control enables the maximum amount of profit from the least amount of investment in inventory without affecting customer satisfaction. Done right, it allows companies to assess their current state concerning assets, account balances and financial reports. Inventory control can help avoid problems, such as out-of-stock (stockout) events. For example, Walmart estimated it missed out on $3 billion worth of sales in 2014 because its inadequate inventory control procedures led to stockouts.

An integral part of inventory control is supply chain management (SCM), which manages the flow of raw materials, goods and services to the point where the company or customers consume the goods. Warehouse management also squarely falls into the arena of inventory control. This process includes integrating product coding, reorder points and reports, all product details, inventory lists and counts and methods for selling or storing. Warehouse management then synchronizes sales and purchases to the stock on hand.

Inventory management is a higher-level term that encompasses the complete process of procuring, storing, and making a profit from your merchandise or services. While inventory control and inventory management may seem interchangeable, they are not. Inventory control regulates what is already in the warehouse. Inventory management is broader and regulates everything from what is in the warehouse to how a business gets the inventory there and the item’s final destination.

How Inventory Control Can Improve Your Business

Implementing proper inventory control procedures can help ensure a business is running at optimal financial levels and that products meet customers’ needs and expectations. 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. Of those customer service complaints, frustration over out-of-stock or backordered items is high on the list. In fact, research about convenience stores shows that out-of-stocks could cause a store to lose one in every 100 customers completely. Additionally, 55% of shoppers in any store would not purchase an alternate item when their regular product is out-of-stock.

Other areas where businesses incur expenses or lose sales that inventory control practices and methods could address include:

l Spoilage

l Dead stock

l Excess storage costs

l Cost-efficiency

l Decreased sales

l Losing loyal customers

l Excess stock

l Losing track of inventory

l Losing goods in the warehouse

According to David Pyke, co-author of Inventory and Production Management in Supply Chains, now out in its fourth edition, and professor of operations and supply chain management at the University of San Diego, “owners of small and emerging businesses would be stunned to see how much help they can get and money they can save by wisely managing their inventory. Many small businesses are not rolling in cash, and much of their funding is tied up in their inventory. Good practices balance customer demand and management of inventory in the smartest possible ways.”

How to Control Your Inventory

At its core, taking stock is just the process of determining what you have and where you store it so that you can evaluate it. Not all inventory control procedures are ideal for every business or for the varying stages of an organization's growth and development. Some methods are too complicated, especially for smaller companies. You should be able to use your system to track inventory levels, create orders and send out stock. Some basic systems for tracking inventory include:

Manual: Whether via a ledger or a stock book, manually logging inventory with a pen and paper is the simplest way to track what comes in and goes out. Small businesses with few items can get away with using this type of system. This system can be challenging because it is an actual record that you cannot mine and use for planning purposes.

Stock Cards: A slightly more complex method uses stock cards, also called bin cards. A stock card is a table that records the running unit price, sale price and inventory count of each product. Use individual cards for each product in large warehouses or stock rooms. The system also tracks purchases, sales, returns and other reasons to withdraw stock, such as promotional withdrawals. You can include additional notes on the stock card, such as any problems associated with that item. For a stock card system to be effective, consistent updates are critical. You must also record unusual stock pulls; otherwise, you run the risk of inaccurate data.

Simple Spreadsheets: Many companies, especially small businesses, use spreadsheets to track inventory. Whether they use Microsoft Excel or something similar, spreadsheets are a way to start automating and electronically capturing product data. With consistent updating and basic coding, you can ensure that you have available current inventory levels and statistics. Businesses quickly customize these systems to meet their needs. Since everyone who builds a spreadsheet does so slightly differently, users will need intimate knowledge of how the sheet works. This method is also thought of as manual because the only way to automatically update the spreadsheet system is by adding high-level macros or coding that connects them with other systems.

Basic Inventory Software: Simple inventory software is usually low cost and targeted to small and medium-sized businesses. This simple automation is often cloud-based and ties into your point of sale software, so it can generate real-time, automatic stock updates. You can also incorporate analytic and reporting and run cost comparisons, create reorders, identify best and worst-selling products and drill down to order details or customer patterns. Some simple inventory management software systems can scale to more complex functionality as your business grows.

Some businesses prefer to stick to the simple systems of keeping track of inventory. Other companies plan for growth and scaling. You could also track inventory with:

Advanced Software: Designed for tracking inventory, most of these targeted software solutions can integrate with existing software, are scalable and provide analytic and templates. Advanced software is now in reach for many small and midsize businesses because it is no longer cost prohibitive.

Methods of Inventory Control

Inventory control methods are the ways you use your business’s strengths and relationships, your expertise, formulas and forecasts to determine how much supply you keep, sell, store and order. Effective inventory control balances controlling costs and meeting customer demands.

A company’s days of inventory outstanding (DIO) measures how many days a company holds stock before selling it. The DIO is an efficiency measure because inventory ties up funds. The lower the DIO the better, especially for a small business. DIO scores have increased in the past five years by 8.3%, meaning that companies have poorer inventory control practices.

The most effective inventory control methodology can vary between companies. Whichever methodology you choose, it should be clear to employees and have well-defined policies and procedures. If you use software with your methodology, look at systems that boast the key features your company needs, not just a one-size-fits-all package. Organizational control starts with labeling items, whether via SKUs or a more complex system. Quality control requires having quality standards and policy for staff to follow.

Inventory control best practices include:

Choose a Management Improvement Methodology: Management improvement methodologies involve more than just inventory control. You can improve your business, from top to bottom, with a management methodology that you commit to. Examples include Kaizen, Lean and Six Sigma.

Optimize Purchasing Procedures: One of the hallmarks of proper inventory management is ensuring that you use data and forecasting to control your purchasing procedures. This also includes identifying items by monitoring customer demand, removing obsolete stock and adjusting safety stock and reorder points.

Manage Supplier Relationships: It is critical to manage supply chain relationships well because you can often head off and solve problems by working closely with suppliers. For example, suppliers can offer your business a negotiable minimum order quantity, take back products that are not selling and help you quickly restock when sales accelerate for a specific product.

Create Automated Reports: Since inventory control and management systems produce massive quantities of data, businesses need to find ways to analyse, report and use this data. Many systems automatically generate reports for inventory status, stock logs, reconciliation, historical stock, aging inventory and inventory financials. Further, companies should decide at what point along their supply chain they should share these reports, so suppliers can adequately prepare.

Conduct a Risk Assessment: Problems regularly crop up in businesses, whether you have an unexpected sales spike, a cash shortfall, not enough warehouse space, an inventory miscalculation, slow-moving products or discontinued products. Prepare a risk assessment matrix to determine what your worst risks are and how you can address them when they occur.

Regularly Audit: Conduct regular audits to ensure that your actual stock and reports line up. There are three ways to perform an audit: physical inventory, spot checking and cycle counting. A physical inventory requires counting all your inventory and should be performed at least annually and often at the end of the year to line up with income tax reports. Spot checking is when you choose a product or two at a different time from the full inventory, physically check it and compare it to what is in your documentation or software system. Problem or fast-selling products are ideal for spot checking. Cycle counting spreads out the reconciliation throughout the year. Each product has its audit period, but you should check high-value items more often.

Selective Inventory Control (Forecasting): Many techniques fall under selective inventory control and management or forecasting, such as ABC analysis. In this form of analysis, you classify the inventory with one of the following: usage value, procurement source, procurement difficulty, seasonality, unit price and rate of consumption. Choose a formula based on the relative importance of each classification and how much it affects the stock.

Original text link: https://www.netsuite.com.au/portal/au/resource/articles/inventory-management/what-are-inventory-management-controls.shtml