Inventory control is critical for both retailers and manufacturers. They should adhere to it to improve their organisation's inventory management. This page explains how to pick between several inventory control techniques and types and how they work. It will provide a detailed explanation about what is inventory control, inventory control techniques, the function of inventory control, types of inventory, inventory control methods, and much more. So, keep reading.
Introduction
Inventory management refers to tracking commodities, component components, and raw materials that a corporation consumes or sells. As a business leader, you perform inventory management to ensure that you have enough merchandise on hand and recognise a shortfall.
The process of counting or cataloguing objects is referred to as "inventory." Inventory is a current asset in accounting and refers to all merchandise in various manufacturing stages. Both shops and manufacturers can continue selling or developing things if they retain stock. Inventory is a substantial asset on the balance sheet; nevertheless, too much inventory may become a practical problem.
Keeping inventory as a multichannel retailer, wholesaler, or e-commerce firm may be difficult. However, organisations may now use systems, procedures, and technology to help them simplify their supply chains. Inventory control methods allow you to track your inventory effectively and correctly.
This guide will explain what inventory control is, how important it is, and how difficult it may be. It will also include inventory control recommendations and a discussion of inventory control methods and practices.
Table Of Contents
- Types of inventory
- What is inventory control?
- Importance of inventory control
- Challenges of inventory control
- Functions and Steps of inventory control
- Inventory control systems
- Popular inventory control methods
- Tips for inventory control
- Frequently asked questions
- The bottom line
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Types Of Inventory
Experts consider ten distinct types of inventories relevant and take them into account while conducting an inventory control procedure.
Raw Materials:
The raw materials to develop and finish items are known as raw materials. When the product is finished, the raw elements, such as the oil needed to make shampoo, are usually indistinguishable from their previous state.
Work In Progress (WIP):
Items in production, such as raw materials or components, labour, overhead, and even packing materials, are WIP inventory.
Finished Goods:
Items that are ready to sell are known as finished products.
Maintenance, Repair, and Operations (MRO) Goods:
MRO is inventory — usually in the form of supplies — that aids in producing a product or the operation of a business.
Packing and Packaging Materials:
The primary packaging protects the product, makes it useable and refers to the final packaging containing labels or SKU information. Bulk packaging for transportation is referred to as tertiary packaging.
Safety Stock and Anticipation Stock:
The additional inventory that a corporation buys and keeps to handle unexpected situations is safety stock. Safety stock has a cost of ownership, but it helps to maintain customer happiness. Similarly, anticipation stock is made up of raw materials or completed goods that a company buys in response to sales and production trends. A company may acquire safety stock if the price of raw material is rising or if peak sales season is coming.
Cycle Inventory:
Companies order cycle inventory in lots to ensure that the proper amount of stock is available at the lowest possible storage cost.
Service Inventory:
Service inventory is a notion in management accounting related to how much service a company can deliver in a certain time frame. In a given week, a hotel with ten rooms, for example, has a service inventory of 70 one-night stays.
Transit Inventory:
Transit inventory, also known as pipeline inventory, moves between manufacturers, warehouses, and distribution hubs. It might take weeks for transit inventory to travel between sites.
Excess Inventory:
Excess inventory, also known as obsolete inventory, is unsold or unused items or raw materials that a business does not anticipate to use or sell but must pay to store.
What Is Inventory Control?
Inventory control, also known as stock control, is the process of managing a company's inventory levels, whether in its own warehouse or across many locations. It entails overseeing products from when they enter your inventory through their eventual destination (preferably, clients) or disposal (not ideal). An inventory management system also keeps track of their movement, use, and storage.
Inventory control refers to maintaining track of your inventory levels to ensure that you have the right amount of each product on hand. Inventory management may help you keep track of your purchase orders and maintain a successful supply chain. Forecasting systems may be put in place, and the ability to define reorder points.
Inventory control includes:
- Integration of a barcode scanner.
- Count every item in your inventory.
- Using sales and purchase orders to keep track of physical inventories.
- Details about the products, as well as their locations and histories.
- Adjustments and reports.
The overall idea is to maximise earnings while keeping as little inventory in your warehouse as feasible. This must be done without jeopardising consumer happiness. While manual inventory control is possible, automated methods can manage your stock levels for you and help you avoid costly human errors.
Effective inventory management helps you to improve the inventory/sales ratio. The stationary stock offers little to help your company's financial line. Make the most of your limited area while guaranteeing that you can always fulfill client demand.
Importance Of Inventory Control
Inventory control has several benefits, including cost savings and increased customer satisfaction. Inventory control saves your company time, money, and resources. Your firm may see a substantial increase in sales, but your profitability may suffer without inventory control. Here are some reasons why inventory control is crucial for your company:
Quality control
With an inventory management system in place, you can improve quality control. You can better control quality by tracking and managing all aspects of your supply. The longer you have merchandise on hand, the more likely it will be harmed. You may avoid this by ensuring that your warehouse's inventory is rotated.
Inventory management also allows you to keep track of the stock quality you receive from suppliers. How frequently do you have things returned? How many of those returned are sent back because they are broken or have other flaws? Observing how items travel through your inventory might reveal any issues and help you avoid write-offs.
Organisational control
Inventory control entails having organisational control over your company. A well-organized stockroom allows you to manage your products and get the most out of your physical inventory investment. This part of inventory management is critical for knowing where your goods are and how quickly you can get to them.
Inventory control, or the organising of your goods, is critical to the smooth operation of any business. It will guarantee that you have enough units on hand to fulfil orders and maintain a reserve. You'll also be able to prevent having any dead stock or excess if you keep your inventory under control. Safety stock serves as a buffer, reducing the chances of an item running out of supply. Inventory that does not sell is known as dead stock.
Accounting accuracy
Keeping an accurate inventory record is critical for asset management. It will also assist you if you are subjected to an audit. Knowing what assets you have let you determine your overall spoilage and the worth of your organisation. Financial accounting requirements and tax regulations may require your business to keep track of physical inventory. All stock should have the right numbers and pricing in your inventory systems and accounting software. This will ensure that your company's accounting integrity is not questioned during audits.
Challenges Of Inventory Control
Inventory management is essential for running a successful business. It can also provide difficulties. Find the time and resources to construct a thorough image of your inventory, especially if you have a larger firm or many inventory sites.
However, these obstacles may be addressed to maintain good inventory control. Automating your inventory control process is the best method to deal with these issues. For your business, look into the finest inventory management software.
Here are a few of the difficulties you could experience.
Finding the time and resources
Manual inventory management takes a significant amount of time and effort. Manual inventory control necessitates both money and manpower. However, if inventory control is not prioritised, you will waste more time and money in the future. Take the time to set up a regular period to focus on inventory management. Make sure you budget for inventory management as well.
Visibility
Inventory might have many moving components for companies with a lot of stock, complicated warehouses, or selling across several channels. Visibility issues may arise as a result. Businesses must fully view their inventory for replenishment, accounting, cash flow, and sales purposes. Losing sight of your inventory might cause it to degrade in quality and result in dead stock.
Inventory control software solutions may provide you with reports that might help you enhance visibility. For example, you may receive notifications when inventory levels are low. Having a clear picture of how your inventory moves help you reduce outdated stock and estimate how much of each product you should maintain on hand to match client demand.
Human error
When organisations have a steady movement of merchandise in and out of their warehouses, human mistakes are inescapable. Vendors, for example, must deliver detailed invoices linked to purchase orders and actual inventories. Any mistakes at this point might have a negative influence on your inventory control.
By optimising your inventory control methods and integrating your solutions, you may reduce human error. If there are any differences between what was recorded in accounts payable and the physical inventory counts, your program will notify you.
Functions And Steps Of Inventory Control
Inventory management is linked to a company's buying department. Product ordering, storage, and cost-effectively managing stock or inventory are all functions of inventory control managers. The following are the steps involved in inventory control:
Step 1: Determine the minimum inventory level.
Because the sales and marketing teams work directly with customers, the manufacturing team must maintain a positive relationship. It will assist them in determining inventory levels, such as maximum and minimum limitations. Before manufacturing begins, a business owner can determine whether or not raw materials will become outdated. This knowledge also aids them in stocking up on rare raw materials so that completed items may be produced quickly.
Step 2: Set re-order levels.
As client tastes and preferences change, there may be an increasing demand for a product that a company can supply. Producing the optimum quantity to fulfil demand necessitates prior planning and determination. This process necessitates restocking raw supplies within a specified time frame to generate completed items for the consumer.
Step 3: Select a reliable inventory management system.
A company's chosen strategy must assist it in determining the re-order quantity at any given moment. Businesses can use any of the major inventory control methods, including ABC analysis, Just In Time (JIT), the FSN method (Fast, slow, and non-moving categorisation), and the Economic order quantity approach (EOQ).
Inventory Control Systems
Businesses can use a variety of inventory control systems and associated strategies. Each offers advantages and downsides depending on your inventory quantity and how your business operates. Retailers, for example, may discover that their requirements differ from those of a wholesaler. To understand your present and future demands, start by outlining your company goals and metrics.
Spreadsheet to control inventory
Smaller firms that don't retain much stock or have various sorts of inventory will benefit from using a spreadsheet as a manual inventory control system. Maintaining inventory management with a spreadsheet is less expensive than the other two methods, but it might be difficult to maintain. On the other hand, your team members will not have to spend time learning how to operate an automated system.
While manual inventory control using a spreadsheet may offer you a greater impression of control, it is significantly more prone to human mistakes and is labor-intensive. Supply chain management may also be more difficult to maintain since it requires an individual to keep track of many moving pieces. Stock replenishment will also be more difficult to track in a manual approach.
Periodic inventory system
Physical inventory counts are typically used in a periodic inventory system. When a physical count is performed, inventory information is updated regularly. This is extremely time-consuming for organisations that deal with huge volumes of goods or regular inventory changes. It may, however, be appropriate for businesses that do not handle a large number of orders.
Periodic inventory generally uses the formula:
Cost of Goods Sold (COGS) = (Beginning Inventory + Purchases) – Closing Inventory
This system is simple to set up and requires little information. On the other hand, your stock levels will seldom be up to date, resulting in delays and greater write-offs. It also depends on manual inventory audits rather than a real-time automated system.
Perpetual inventory system
When a transaction occurs or fresh stock is obtained through technological solutions, perpetual inventory systems update your stock in real-time. Around 72% of all retailers expect to use automation, sensors, and analytics to get real-time visibility in their supply chain. It makes inventory management strategies like Economic Order Quantity simple to apply (EOQ). EOQ ensures that inventory matches demand while reducing storage and holding expenses. Perpetual systems provide better inventory visibility than periodic systems. Physical inventory counts are also less expensive and time-consuming.
Popular Inventory Control Methods
The following are some of the most prominent inventory control methods:
Economic order quantity:
The term "economic order quantity" or "EOQ," refers to a formula. It is the best inventory amount that a corporation should acquire, taking into account a variety of factors such as total production costs, demand rate, etc. It assists most entities in releasing any locked cash in inventories and lowering direct costs.
ABC analysis:
It entails categorising inventory into three buckets, A, B, and C, based on the value of the inventory to the company's profits. Because a category contains pricey things, only a modest inventory is kept. Average-priced merchandise with a medium sales frequency falls into the B category. Category C inventory has a low value but a rapid turnover rate. In comparison to A or B, it requires less inventory control.
Just-in-time (JIT) inventory management:
It is a method of reducing inventory costs by aligning raw material orders from suppliers with production schedules. There will be no surplus inventory held beyond what is required for production; hence there will be no deadstock in the organisation.
Safety stock inventory:
If demand exceeds expectations, businesses might order excess inventory to use as a buffer stock if demand exceeds expectations. It's a way to make up for underestimating demand.
Fast, slow, and non-moving (FSN):
It entails categorising inventory into fast-moving, slow-moving, and non-moving material to determine how quickly a company can place orders.
Tips For Inventory Control
Now that we've established a basic understanding of inventory management and the various inventory control systems available let's move on to the next step. Here are a few pointers on inventory management.
Use real-time inventory tracking
Automation's importance cannot be overstated. Real-time tracking provides you with the most accurate and up-to-date data to help you make informed financial and business decisions. It can help you enhance your return on investment while lowering your operating costs. When selling across numerous channels, automatic inventory tracking is highly useful. When all orders and inventory information are synchronised in real-time across all channels, overselling may be avoided, detrimental to the customer experience.
Be consistent with your labelling system
When it comes to marking and identifying goods, modern warehouse management affords businesses a lot of possibilities. Find a method that works for your company and stick to it with your labelling efforts. SKUs, for example, make inventory management simple for your team. Your inventory may be barcoded to simplify multi-location inventory control and multichannel inventory management.
Set reorder points
This may seem self-evident, yet reordering may be a difficult aspect of inventory management. You want your consumers to get products quickly without incurring the expenses of dead stock. You may set these thresholds in inventory management software to warn you when a product falls below a specified threshold. Using EOQ or ABC analysis, you may set specific goods to reorder points.
Perform regular audits
Even if you utilise inventory control software, you should check for frequent theft, spoilage, and human mistakes. You'll also want to make sure that all of your departments are on the same page regarding your inventory. Make sure your systems correctly communicate with your accounting department the cost and count of your inventory.
Frequently Asked Questions
1. What is inventory management?
Inventory management is a method of keeping track of, regulating, and storing your inventory goods. Inventory management is an important part of supply chain management since it oversees all activities from when an item enters your shop to when it is sent.
2. What is inventory count?
An inventory count, also known as inventory counting, is a method used in inventory management that involves physically verifying the amount and quality of items in stock. This is frequently done to conduct an audit to see if the technical bookkeeping stock corresponds to the physical warehouse stock.
3. What is inventory turnover?
The pace at which inventory is sold, utilised, and replaced is known as inventory turnover. Divide the cost of products by the average inventory for the same time to get the inventory turnover ratio. A larger ratio indicates good sales, whereas a lower ratio indicates dismal sales.
4. What is inventory analysis?
Inventory analysis is the process of looking at your inventory to see how much you should have on hand. This has traditionally been accomplished by balancing the expenses of ordering and maintaining inventories (known as the economic order quantity). However, to account for other elements, a lot more inventory research is required to account for other elements.
5. What does average inventory cost mean?
The average cost technique divides the overall cost of goods purchased or produced in a period by the total number of things purchased or produced to assign a price to inventory items. The weighted-average approach is another name for the average cost method.
The Bottom Line
Effective inventory control is critical for every organisation, from a freshly founded company to Amazon. It helps you improve your cash flow and save money on inventory management. You may build an inventory management strategy that tracks your assets in real-time by employing automated inventory control software solutions—giving you access to and control your inventory.
Even if your company is tiny, you have the option of using either a periodic or perpetual inventory system. On the other hand, a perpetual inventory system is better if you have a huge volume of goods or more sophisticated operations. Research the best inventory system that can be smoothly linked with the rest of your business activities if you want to complete your retail tech stack.