What is Inventory Control?
Definition, Systems & Best Practices
Inventory control involves managing a company’s inventory (also known as stock) from the time it lands in the warehouse to the time it leaves. Effective inventory control frees up cash by keeping stock levels low – while avoiding running out altogether.
Learn all about best practice inventory control, including the inventory management systems used to track and organise the stock that you have on hand.
This article was updated in March 2023 to reflect current trends.
In this guide:
What is inventory control?
Inventory control is the process of managing physical stock in a business. It is an umbrella term for all of the various systems and workflows that help track, organise, and optimise the movement of parts, products, and raw materials within one or more storage facilities.
Is inventory control the same as inventory management?
Inventory control and inventory management are not the same thing. At first glance, inventory control looks very similar to inventory management. While they are closely related, inventory control ignores all the other factors that make up inventory management, including purchasing, production, sales and reporting.
Which businesses need inventory control?
Any business that handles stock will need inventory control of some form. How much you’ll need it depends on how important your products are to your business’s success. Any of these businesses will find it absolutely crucial:
What materials does inventory control cover?
Inventory control doesn’t just mean organising your finished goods. Any materials or ingredients that you need in order to sell your product need to be taken into account. Manufacturers, for example, will include raw materials and components too.
Why is inventory control important?
Inventory control is important for maintaining low costs and high profits. When businesses lose sight of their stock, productivity will suffer.
When running smoothly, inventory control ensures that your business is set up in a way that enables staff to assemble and send products to customers as quickly as possible. With badly managed goods, you’ll lose sight over where your stock is, how much you have, and what you can currently sell.
There are two other key reasons for paying attention to stock control: reducing holding costs and shortage costs.
Holding costs
Storing inventory costs money, which makes maximising efficiency as much as possible important.
A company with a tight grip on its stock can do more with what’s on hand, meaning they have to store less. They’ll also know exactly when to reorder products, so they can keep levels low without risking stockouts.
Shortage costs
Shortage costs are incurred when a business runs out of stock: meaning employees are idle, your machines are under-utilised and more.
And that’s on top of the opportunity cost of any lost sales due to lack of stock. Better inventory control means fewer stockouts, lowering shortage costs.
For a start-up business with simple stock needs, optimal inventory control shouldn’t be too hard to attain.
However, there are challenges that businesses of all sizes face. And the more moving parts you add, the harder it’ll be to keep on top of everything.
Stocktaking and inventory control
Stocktaking — when you count and record the inventory that your business has on hand — is an important part of inventory control.
After a stock count, you should know exactly what you currently have to sell. If the levels from your count differ widely from what the figures you have in your system, it might be a sign that your inventory control could be improved.
Even if they don’t, having accurate information on your stock is a great start at improving efficiency. Learn more about stocktaking.
Inventory control best practices
There’s no single ‘top’ method to control your inventory – and there are several different approaches and models used.
Your best practice will depend on your business’s unique needs. That said, it’s usually easy to spot the difference between a company with optimal control, and one without. Here are three things to aim for:
1. Set procedures and policy
Perhaps the easiest way to achieve an organised warehouse is to pick your procedures and policy, then ensure that everyone in the business follows them.
For example, decide what should happen when new stock needs ordering — and then how to record it when it arrives.
With all your staff working in sync, you’ll be able to reduce wasted stock (say, from breakages or theft), keep one source of inventory information and take stock with ease.
2. Know everything that goes out the door
Sometimes products may leave the warehouse without being allocated as a sale.
For instance, your business may sponsor an event, donate to a charity, or have some damaged goods from time to time.
Companies with sub-optimal inventory control often fail to record these departures properly, meaning they end up getting marked as lost goods and final reports are incorrect.
3. Be proactive
The companies that master inventory control tend to have one thing in common — instead of passively waiting for problems to arise, they constantly watch out for improvements they can make to their system.
New technologies such as RFID or barcode tracking, for instance, can make keeping stock organised much easier by reliably gathering quality data.
4. Set par levels
Setting par levels or the minimum on-hand quantities of inventory stock for your business helps you to reduce the risk of overstocking while helping to avoid stock outs.
Conditions can change over time, so monitor par levels a few times throughout the business year to ensure they still make sense and to adjust up or down accordingly.
5. Prioritise with ABC
An ABC analysis of inventory derives from the Pareto 20/80 rule that suggests 20 percent of inventory accounts for 80 percent of cost. ABC calculates annual demand multiplied by the item cost per unit. The results are categorised into three cost levels, from the most to the least valuable.
6. Manage supplier relationships
Effective supplier relationships require clear, proactive two-way communication.
Let suppliers know when you are expecting an increase in sales to allow them time to adjust production. Have them notify you know if a product is running behind schedule so you can halt promotions or consider a temporary substitute.
7. Audit regularly
Regular reconciliation is vital and doesn’t mean you need to conduct regular physical stock counts. Cloud-based software will provide you with real-time inventory data, it’s important however, to ensure that reports and physical stock numbers match up.
8. Have a contingency plan
Unfortunately, even the best inventory control strategies and techniques won’t always protect against the unexpected or prevent the occasional problem.
By preparing for any of these eventualities before they happen, you can avoid other, much larger problems that could impact your business. Develop a plan detailing how will you react when these issues arise and what you can do to mitigate the problems.
Inventory control systems
Just as inventory control is part of inventory management, your inventory control system is dictated by your inventory management system.
They are two main ways of recording stock movements: doing it manually or automating the process.
Manual inventory control systems
Periodic inventory systems, which rely entirely on stocktakes for up-to-date stock levels, are the simplest form of manual inventory control.
If you want to keep a closer eye on your levels, you’ll need a perpetual system.
For small businesses with simple stock needs, a spreadsheet or a stock book that you update whenever anything arrives, leaves or moves around the warehouse might well be enough. Many businesses, though, will require something more sophisticated.
Automated inventory control systems
Dedicated inventory management software provides a means to track and organise your stock using the cloud.
You can combine it with sophisticated tools such as barcode scanners and warehouse management systems, enabling you to:
This all becomes increasingly important as your business grows more complex.
Ensuring that all your products are in the right place, for example, becomes much more difficult when you have multiple warehouses to manage.
Automated inventory systems make this task much easier, offering accessible information on every item, including its:
- Unique ID number
- Current location
- Selling price/RRP
- Batch/serial number
- Manufacturing cost
- Quantity
- Source
- Any associated tax costs
Find out more about inventory management systems.
Improving inventory control: 3 top tips
There are lots of different ways to improve your inventory control. Here 3 top tips to get you started.
1. Correctly classify products
Categorising your products and components into an easy-to-understand, user-friendly system is a solid first step towards proper inventory control.
The methods for classifying goods can differ from company to company, but there are a few common methods you can employ. The ABC method, for example, categorises items according to their value and documentation requirements.
2. Consider warehouse management
Warehouse management is all about improving the effectiveness of your warehouse and its staff.
Warehouse management software will often come with a flexible location system and customised categorisation for easy storage, movement and picking. Such a system will increase inventory accuracy while reducing cycle times and handling costs.
3. Improve supplier relationships
Supplier issues will often end up impacting your inventory control strategies.
Building solid relationships with all your suppliers is imperative if you want your business to run smoothly — so make sure to review all your suppliers regularly to ensure the partnership is working for both parties. If you don’t think it is, it might be time to find a new supplier.
How inventory control affects profit
If too much cash is invested in purchasing inventory in the hopes of future sales, it comes directly off the bottom line until it is recuperated through sales. If insufficient inventory is supplied for the demand, sales are essentially ‘left on the table’, resulting in less profit and dissatisfied customers.
Cost of Goods Sold
A company’s profit is the remainder once the cost of goods sold (COGS) is subtracted from the net sales. Now, the COGS is comprised of every cost the inventory incurs along the way, not simply the cost of purchasing it in the first place.
Likewise, if inventory is left languishing in excess in the warehouse not being sold, it incurs storage and insurance costs which also add to the COGS and decrease profits.
Storage control
Needless travel throughout the warehouse to pick products for orders can account for a significant amount of wasted labour hours.
To avoid this, analyse what products are used or sold most often and to house these products close the warehouse entry so they can be picked with ease. Consider how to store like items in terms of their expiratory dates. Always use items well before their expiratory dates so that the quality of all manufactured products is optimised.
Data control
Inventory control is reliant upon stellar record keeping and data entry. When this goes awry, incorrect quantities of products could be ordered resulting in unnecessary expenditure and over or under-stocking the warehouse.
Incorrect data entry can also have ripple effects over the entire supply chain which could affect efficiency significantly. The result of this is adding to the cost of the product which, as previously mentioned, decreases the company’s eventual profits.
Inventory control methods & strategies
Inventory control is typically split into two methods: Just in Case and Just in Time. Let’s explore each of these inventory control methods in detail.
Just-in-case inventory control
Just in case (JIC) is an inventory control strategy that concentrates on ensuring there is a sufficient buffer of safety stock available at all times.
While less cost-efficient than other methods, JIC has gained increasing popularity in recent times due to the rise in supply chain disruptions and limited supply.
Just-in-time inventory control
Just in time (JIT) is an inventory technique that seeks to keep levels of stock on hand as low as possible.
After all, any stock that you have in the warehouse is both costing you money and at risk of never being sold (if it gets damaged or becomes obsolete, for instance).
For wholesalers and distributors, JIT means products spend almost no time in the warehouse before it’s bought by your customers.
For manufacturers, it means materials, components or ingredients arrive immediately before they’re used in the production process — and that finished goods aren’t sitting around before they are sold. That way, the costs and risks associated with holding goods are kept to an absolute minimum.
JIT is a powerful technique, but it’s notoriously difficult to achieve. Get it wrong, and you risk stockouts: and the lost sales that accompany them.
To get it right, you need complete oversight over your suppliers, your manufacturing line (if you have one) and your customer demand.
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