In eCommerce, a click of a button could mean a sale or a loss, agree?
You would also agree that inventory control is the invisible gear that keeps this trade clock ticking from behind the scenes, balancing the twin desires to meet customers’ expectations without letting valuable assets collect dust on warehouse shelves.
Our online selling markets are as unpredictable as the weather. Therefore, a solid inventory control system can be the umbrella that protects your profit margins from unexpected storms.
It’s the very backbone of successful business management. So, in this blog, we’ll discuss inventory control and dig deep into its meaning, types, methods, and functions.
What is Inventory Control?
Inventory control is the systematic regulation of goods and materials within a company’s stock. It guides a business through the complexity of supply chains, demand forecasts, warehousing, and avoiding and managing inventory obsolescence. Its prime directive is balancing customer demand while minimising costs.
You see, having too much stock means capital is tied up, gathering dust, while having too little leads to missed opportunities and disgruntled customers. Inventory control fine-tunes this balance, ensuring that the right products are in the right place, at the right time, and in the exact quantities needed.
What are the Types of Inventory Control?
Periodic Inventory Control
Periodic Inventory Control is a traditional method of tracking inventory where physical counts are conducted at regular intervals, such as weekly, monthly, or annually. It involves the scheduled examination of stock on hand.
Typically, this requires shutting down operations temporarily to perform manual counts, meticulously checking items, and reconciling any discrepancies with recorded figures. The data gathered then becomes the foundation for decisions regarding reordering, clearance of excess stock, and identification of possible shrinkage.
Periodic Inventory Control is often found in environments where real-time monitoring is not crucial or where the cost of implementing continuous systems is prohibitive. A small local bookstore might opt for this method, conducting weekly or monthly counts to keep tabs on their inventory. Similarly, a boutique shop selling handcrafted goods may integrate this method with other basic warehouse inventory management techniques to maintain a balance between costs and efficiency.
Perpetual Inventory Control
Perpetual Inventory Control is a dynamic approach that focuses on continuously monitoring and recording inventory transactions. The ongoing tracking of inventory levels characterizes it. Each time a product is sold, received, moved, or otherwise altered, the inventory record is instantly updated. This is typically facilitated through integration with modern technology, such as barcoding and sophisticated software systems, which allow immediate capture and reflection of all inventory-related activities.
Perpetual inventory control is particularly beneficial in large, tech-savvy businesses where real-time information is crucial for optimal performance. For example, a large eCommerce platform might employ perpetual inventory control to manage its vast and diverse product range, ensuring that stock levels are always accurate and aligned with customer demands.
Methods of Inventory Control
ABC Analysis is a pivotal inventory control method that categorizes inventory into three different classes based on their importance. Often referred to as the Pareto Principle, this method identifies that 80% of a company’s profits typically come from 20% of its products.
The ABC Analysis method recognizes this disproportion and applies it to inventory management to optimise resource allocation.
The ABC classification system is a strategic approach to inventory management.
The “A” category contains high-priority items that often account for 15-20% of the inventory but generate 70-80% of revenue.
The “B” category represents a balance, typically accounting for 30% of the inventory and 15-20% of the revenue.
The “C” category, although making up 50-60% of the inventory, only contributes around 5-10% to revenue.
Last In, First Out (LIFO) & First In, First Out (FIFO)
LIFO (Last In, First Out) and FIFO (First In, First Out) are two essential inventory valuation methods businesses use to manage and evaluate inventory. These methods dictate the order in which inventory is sold and consequently affect the cost of goods sold and the value of remaining inventory.
LIFO (Last In, First Out): Under LIFO, the most recently acquired items are sold first. The inventory cost is based on the cost of items that were acquired last, while the older inventory remains on hand.
FIFO (First In, First Out): In contrast, FIFO considers that the oldest items in inventory are sold first. It assumes that the items acquired first are the first to be sold, mirroring a more natural flow of inventory.
Batch Tracking, also known as lot tracking, is a vital inventory control method that allows businesses to track products through different stages of the production and distribution process. This method involves grouping items with shared characteristics or features into batches or lots and tracking them together as a single unit.
In industries where quality control, compliance, and traceability are paramount, batch tracking becomes essential. It ensures that if an issue arises with a specific batch, the entire set can be easily identified and isolated, preventing potential problems from escalating. This practice also facilitates recalling products if necessary and helps in adherence to regulations and standards.
Safety Stock, often referred to as “buffer stock,” is a term that finds its roots in inventory management. It refers to the extra inventory held by a business to mitigate the risk of stockouts due to unpredictable fluctuations in demand, supply delays, or other unforeseen disruptions in the supply chain management.
Calculating the correct level of safety stock is vital. Too little may lead to stockouts, while too much can tie up capital and lead to obsolescence. Here’s a general formula used to calculate safety stock:
Safety Stock = (Maximum Lead Time – Average Lead Time) * (Maximum Usage – Average Usage)
Functions of Inventory Control
Maintaining Inventory Specifications and IDs
The clear identification and categorisation of inventory items form the foundational bedrock of inventory control. This ensures that every item can be swiftly located, tracked, and managed. By implementing specific identification numbers and labels, businesses can eliminate confusion, reduce errors, and promote efficiency in all inventory-related activities.
Barcode Implementation and Control
Barcodes serve as a significant tool in modern inventory management. By representing information visually through various patterns, barcodes facilitate the quick scanning and processing of items. Integration with various systems, including point-of-sale and warehouse management, enables comprehensive tracking and reporting. The benefits of barcode implementation extend to reduced manual errors, faster processing times, and improved inventory visibility.
Managing Inventory Lists
Effective list management is essential, and techniques such as categorizing items, employing automated tracking tools, and implementing systematic inventory organization play a vital role.
With the assistance of inventory management software, businesses can achieve real-time updates, leading to better decision-making. Regular updates and periodic audits ensure that the inventory lists remain accurate and reflect the true state of warehouse storage
Real-life/Real-time Warehouse Reports
The era of real-time information has made real-time warehouse reporting an indispensable part of inventory control. These live data insights enable businesses to react swiftly to changes, helping better align with market demand. Various reporting tools and technologies provide real-time statistics, trends, and actionable insights, thus positively impacting decision-making and overall operational efficiency.
Inventory Storage Oversight
Proper inventory storage is paramount for preserving product quality and ensuring quick accessibility. Tailoring storage strategies to different types of inventory – perishable, fragile, bulk items, etc. – is essential for optimal efficiency. Continuous monitoring of storage conditions, like temperature, humidity, and accessibility, ensures compliance with regulations and standards.
Accounting and Tax Operations Related to Warehouse Management
Inventory control is closely tied to accounting and tax operations. Integrating inventory data with accounting processes allows for more accurate financial statements and effective tax calculations.
In the fast-paced world of eCommerce, where the battle for customer satisfaction rages, inventory control is a crucial background process of a thriving online business. As technology and trends evolve, it’s time to integrate an effective inventory control system and let inventory control be the compass that navigates your eCommerce success.
What is an example of inventory control?
Effective inventory control takes on many forms in different industries. For instance, in eCommerce, sellers employ real-time tracking systems with barcoding to monitor stock levels. These systems automatically adjust inventory counts when sales increase during holiday promotions. Additionally, to avoid stockouts, the system calculates the Economic Order Quantity (EOQ) and triggers reorder points based on demand patterns.
What are the 3 major inventory control techniques?
The Push Strategy is a forecast-driven approach that relies on stocking inventory based on predicted demand. This strategy depends on analyzing past sales data and understanding seasonal trends to anticipate customer needs.
The Pull Strategy takes a different approach by ordering or producing items only when there is actual customer demand. Often used for speciality, expensive, or low-demand items, this strategy requires the item to move up the supply chain, which can take time.
The Just-In-Time Strategy (JIT) combines elements of both the push and pull strategies, ordering inventory “just in time” to fulfil customer orders or meet business needs. By maintaining minimal inventory levels and relying on quick responses from suppliers and logistics providers, JIT offers benefits like lower carrying costs and improved cash flow.
What is the importance of inventory control?
- Ensures the right amount of inventory is maintained to meet customer demand without overstocking or understocking.
- Helps in minimising carrying costs, including storage, insurance, and obsolescence.
- Ensures timely delivery of products, improving customer satisfaction and loyalty.
- By avoiding unnecessary stock, it frees up capital that can be used elsewhere in the business.
What is the inventory formula?
The basic formula for calculating inventory is:
Beginning inventory + net purchases – COGS = inventory.
What are the five types of inventories?
The five types of inventories are:
- Raw Materials Inventory: Includes unprocessed materials waiting to be converted into final products. Essential for continuous production and a buffer against supply interruptions.
- Work-in-Progress (WIP) Inventory: Comprises partially finished goods undergoing the production process. It helps in tracking progress and controlling production efficiency.
- Maintenance, Repair, and Operating (MRO) Inventory: Consists of items like spare parts, maintenance supplies, and operating accessories. Vital for maintaining machinery and minimizing downtime.
- Finished Goods Inventory: These are completed products ready for sale or distribution. It plays a critical role in meeting immediate market demand.
- Packing Materials Inventory: Includes packaging materials such as boxes, wrappers, and labels. Essential for protecting, preserving, and presenting products for sale.