What is inventory control, and how is it done? Keeping tight control over inventory is the core discipline within inventory management, and key to success for any firm that sells physical stock. Here we’ll look closely at inventory control, the different ways to track and manage stock levels, and the stock control software and inventory management systems used.
In this guide:
What is inventory control?
Inventory control is ensuring a business has sufficient inventory to meet its needs, while avoiding overstocking, which wastes money, time and storage space.
Also known as stock control, inventory control is an essential part of maintaining profitability in any firm that sells physical goods; while poor inventory control can easily lead to financial losses and business failure.
Inventory control is part of the broader disciplines of inventory management and supply chain management, which are both explored in detail in this guide.
An inventory control definition
Inventory control can be defined as maintaining inventory levels in a way that avoids stockouts, while minimising the costs and inefficiencies of excess inventory. Inventory control is concerned with inventory optimisation, ensuring the right inventory levels are maintained, and maximising inventory turnover.
Where do you control inventory in a business?
Inventory control touches in multiple parts of a business operation. Key parts of any inventory control system include:
Purchasing & inventory replenishment
As stock is sold new material must be ordered – whether this is finished goods, or the components, ingredients and raw materials used in manufacturing.
Inventory owned by a company must be stored securely, and in such a way that retrieving it is as efficient and cost-effective as possible.
Warehousing can be done either inhouse, or via a third party such as a 3PL – or even avoided altogether through drop-shipping.
Good inventory control is especially important when a business uses multiple warehouses and/or holds inventory at its own retail stores, or with its vendors.
Inventory control is particularly important for manufacturers because the lack of a single part or ingredient can disrupt an entire production run, leading to serious losses and delays.
Inventory control for manufacturers can relate to either internal production processes, or external production through, for example, a contract manufacturer.
Coordinating with external manufacturers can add to the challenges of inventory control, as delays can mean losing a scheduled production slot or higher fees. Manufacturers will often use batch tracking, lot tracking or serial number tracking to help manage the complexity of inventory control for production.
Sales and dispatch
As the complexity of sales operations grow, so too does the need for good inventory control.
If a company can maintain a single central view of all its different sales channels – whether online, in store or direct, and B2B or B2C – it will avoid traps such as product expiry, accidentally selling the same stock twice, and overstocking.
Good inventory control improves customer satisfaction as goods turn up promptly – and when costs are minimised through efficient inventory control, goods can be priced competitively, leading to more sales and / or better profit margins.
Planning and forecasting
One of the more challenging parts of inventory control involves purchasing the right quantities of goods for anticipated sales.
Which kinds of businesses need inventory control?
Any business that handles physical goods will need inventory control in some form – and the way in which businesses control inventory depends on their different circumstances.
- Wholesalers and distributors. These firms often buy goods in bulk and need to manage long lead times from suppliers. Warehouse space and holding costs will be important to their inventory control strategy.
- Manufacturers. Inventory control for manufacturers differs between those that make goods to order, versus those that “make to stock”.
- Firms dealing in perishable goods. Food and beverage makers, pharmaceutical manufacturers and any business selling goods with a limited lifespan such as consumer electronics, all have an elevated need for inventory control, as they balance the risk of losing money through wastage and product expiry against the risks of understocking.
- Retailers and multichannel enterprises. Customer satisfaction is often front of mind for retailers – and having sufficient goods in store plays an important part. However, this kind of business model is capital intensive and misjudging demand or overstocking the wrong channel can lead to costly write downs and write offs, as has been the case with several high-profile retailers.
- Businesses struggling with variable lead times. Lead time disruption – where once-predictable delivery times from suppliers become volatile – makes cost-effective inventory control much more difficult as it forces firms to stockpile in order to continue trading. Research by Unleashed shows that small to medium firms worldwide spent on average USD$142,000 more than they needed on stock in 2022, imposing a significant drag on profitability.
Why is inventory control important?
Inventory control is important for maintaining low costs and high profits.
If a business has a large number of product lines or components – known as stock-keeping units (SKUs) – holding even a small amount of excess inventory for each line can see costs balloon.
Primarily this is because stock must be purchased, which soaks up cash flow, but also because warehousing costs and other variables such as insurance increase as the volume of goods stored goes up.
The importance of inventory control in maintaining cash flow can be seen in the “Cash flow and overstock report” cited above. The report shows that in the 12 months to March 2022 the cash flow tied up in unnecessary excess inventory held by SMEs was:
- £102,000 for UK manufacturers
- USD$157,000 for North American manufacturers
- AUD$231,000 for Australian manufacturers
- NZD$215,000 for manufacturers in New Zealand
And in some sectors where the costs of goods are naturally higher, such as building and construction or the electronics industry, this impact on cash flow went as high as USD$240,000.
Findings like this serve to illustrate the importance of efficiency in inventory control, and the impact it has on broader business operations.
Shortage costs and inventory control
The flip side of holding excess stock are the costs to a business of stock outs – the situation in which a firm doesn’t hold the inventory it needs for either a sale or production process. These are sometimes referred to as shortage costs.
Poor inventory control that leads to stock outs costs a business through loss of sales revenue. These losses affect profitability disproportionately more than the costs of excess inventory.
Other negative impacts of stock outs include:
- Poor customer experience. Failure to deliver goods on time because you don’t hold sufficient stock to meet sales will affect your relationship with both B2B and B2C customers, and erode your brand reputation.
- Reduced efficiency of capital. Stock outs that prevent manufacturing from going ahead will see machinery sitting idle. That means it will take longer to recoup the costs of buying and maintaining plant and machinery, eroding your overall business efficiency.
- Lower staff productivity. When staff are unable to work due to lack of materials or parts for a sale or assembly, you still have to pay them. This reduces your overall labour productivity – and can erode staff satisfaction in your firm.
Inventory control charts
Inventory control charts, also known as inventory control diagrams, are visual representations of the inventory replenishment cycle.
Most modern inventory control software systems let users represent their inventory cycle in a visual format – these charts are also a useful way for students to learn the inventory control cycle.
In an inventory control diagram the volume of stock held for each SKU is graphed, with:
- Peaks representing maximum stock levels.
- Troughs representing the minimum stock level.
- A line showing the ‘reorder point’ where a purchase order for new stock is raised.
The horizontal gap between the reorder point and the maximum level representing the lead time: the time taken for the delivery to reach the warehouse, after a new purchase order is raised.
Using inventory control charts to understand the inventory control cycle
An inventory control chart is an excellent way of visualising some of the core elements of the inventory control cycle, all of which influence the purchasing and inventory replenishment decisions that supply chain managers make. These elements include:
In an inventory control chart, the min stock level usually shows the lowest level of stock for a SKU, before it’s topped up by the arrival of a new delivery to the warehouse.
However, it’s important to note that, in practice, the term ‘min stock’ is often used interchangeably with ‘reorder point’ – the level of stock at which a new Purchase Order is raised. Many inventory control software tools use ‘min stock’ in this way.
Max stock in an inventory control chart shows the greatest amount of stock held for a SKU.
When a purchase order is placed it should take the total volume of goods up to the max stock level. Holding more than your max stock level for any SKU means you are over stocked, and therefore running inefficiently, with too much capital tied up in parts or products.
Your max stock level might also be dictated by physical restraints such as limited warehouse space.
Delays and unexpected problems are part of doing business in the real world, so businesses typically hold what’s known as safety stock, or buffer stock.
Safety stock helps the supply chain run smoothly by preventing normal delays disrupting the overall operation.
The ideal quantity of safety stock held for each SKU can be worked out with the safety stock formula, which factors in the rate of sale or use of each item, as well minimum and maximum lead times.
- For a full explanation of safety stock, the safety stock formula, and a handy safety stock calculator see How to Calculate Safety Stock [+ Video, Formulas & Calculator].
Lead time is the time it takes for goods to arrive in the warehouse after being ordered.
Lead times play a major part in setting ideal min-max levels. A business with long lead times need to hold more stock in order to cover the consumption of stock – through either sales, or use within production – during the period between reordering stock and it arriving.
A company that can shorten its lead times will tie up much less capital in stock. For similar reasons stable lead times free up cash flow for businesses, as less safety stock is needed to cover for disruptions and delays.
Rate of sale or use (aka rate of consumption)
The rate at which goods are consumed by a business – whether through sales or within production – is another very important element of the inventory control cycle.
The amount of any SKU ordered within the inventory replenishment cycle is a function of its individual rate of consumption and its lead time.
So for example a company that sells 10 chairs per day, with a lead time of 10 days for that item would need to order 100 chairs to cover sales during that period. However if the rate sale was only 5 chairs per day, 50 chairs per order would suffice.
The reorder point is the level of stock, unique for each SKU, at which a new purchase order should be placed to prevent that item running out.
Supply chain managers can use the reorder point formula to work out an appropriate reorder point for each part product.
The reorder point formula uses rate of consumption, lead times and safety stock figures for each SKU to work out the ideal level of stock at which new material should be ordered.
- For a full explanation of the reorder point formula, see The Reorder Point Formula: All You Need to Know [+ Video].
Inventory control systems
An inventory control system is any solution that helps a business control their inventory, ensuring sufficient material is available to meet the company’s needs, while keeping investment in stock within bounds.
Inventory control systems vary, but come in two main types:
Periodic inventory control systems
Periodic inventory systems, which rely entirely on stocktakes for up-to-date stock levels, are the simplest form of inventory control.
In a periodic system, stock levels are check at set intervals, and replenishment decisions made accordingly.
Many small businesses begin by managing their stock this way, often recording stock levels on spreadsheets, or even in a stock book that’s updated every week or month – or when an order arrives, or is sent out.
However as businesses grow the cash flow impacts of overstocking – as well as the time involved in updating and checking records – often necessitates moving to am always-on –or perpetual – inventory control system.
Perpetual inventory control systems
A perpetual inventory control system tracks stock movements in real time, allowing for much finer inventory control.
Stock adjustments that can be automatically updated within a perpetual inventory control system include:
- Stock arrivals to a warehouse recorded via barcode scanners (or manually added to the system).
- Transfers between warehouses or stores.
- Sales via multiple different channels. For example retail sales can adjust records via Point of Sale (POS) software integrations; e-Commerce sales update stock records electronically via their own integrations, and bulk sales can be managed via a B2B sales portal, or updated directly.
- Consumption of goods or raw materials through a manufacturing process.
- Bulk shipments that are subsequently broken down into discreet SKUs.
- Kitsets or assemblies that combine multiple items into a singly saleable bundle.
- Loss through wastage.
Inventory control software
Inventory control software systems are the tools that make perpetual inventory control possible. With inventory control software a business can record and manage details for every item it owns, including:
- Its unique product code / SKU number.
- Current location.
- Selling price/RRP.
- Batch/lot or serial number.
- Manufacturing cost.
- Quantity or volume.
- Any associated tax costs.
Inventory control software also helps supply chain managers automate the difficult task of maintaining ideal inventory levels.
Purchase management with inventory control software
Being able to quickly raise and send purchase orders for the right amount, at the right time, is a huge aid to business efficiency.
However knowing the right quantity to buy for each part or product depends on its current (and sometimes future) rate of consumption and lead time.
Lead times and rate of consumption can both be very dynamic – which makes calculating – and resetting – appropriate min-max levels very time consuming, especially when any number of SKUs is involved.
For this reason, one of the most important features of inventory control software is the ability to check and set min-max levels, based on up-to-date lead time and rate of consumption data for every different SKU within the business.
This kind of functionality is a huge aid to supply chain managers, especially given the important cash flow impacts of good inventory control.
Inventory control software & min-max levels
Setting an appropriate min-max level for every product in a portfolio requires:
- The ability to measure historic lead times for every SKU.
- The ability to measure historic rate of consumption for every SKU.
- The ability to set appropriate safety stock buffers.
- A way to easily apply new min-max levels to each product.
- Manual oversight and control, so the unique business knowledge of management can be applied to the process.
- Integration with the purchase order raising system used.
Advanced Inventory Manger (AIM) is an example of a system that automates this process. AIM solves one of the biggest challenges for supply chain managers – setting the right minimum and maximum stock level for hundreds, or even thousands of parts, components, ingredients or finished products – without spending hours in unreliable spreadsheets.
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.
Stock takes match your inventory records with your real-world situation, allowing you to understand and adjust for any discrepancies – including any loss through damage or theft.
Annual stock takes are also a legal requirement in most jurisdictions.
- You can learn more about stock takes, including the most efficient ways to conduct a stock take, in the Unleashed Guide to Stocktaking.
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. 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.
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.
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.
The two main inventory control methods
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.
Other inventory control techniques
Many businesses run a hybrid inventory control model, using a just in case approach for some items, and a just in time model for others. Likewise there many nuanced ways to control inventory in a supply chain, some of which have been made possible through improvements in technology.
Vendor managed inventory
In vendor managed inventory (VMI) the supplier is responsible for controlling inventory levels at the retailer level. Under VMI, stock is sometimes held on a consignment basis, meaning the supplier retains ownership until it is sold.
- Learn more about Vendor Managed Inventory in Vendor Managed Inventory: The Complete Guide to VMI.
Drop shipping is where the business making the sale holds no stock. Instead they pass the details of the purchaser directly on to the supplier who fulfils directly.
Drop shipping has the huge advantage of not requiring any capital outlay on stock in order to make sales, but often involves longer lead times for the consumer – as well as reduced brand and quality control for the business making the sale.
Today many firms include drop shipping with a hybrid inventory control model, enabled via sophisticated inventory control software.
Inventory control best practice
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
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.
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.
Inventory control examples: Two case studies in inventory control
Case study one: Hilditch & Key
Hilditch & Key have been selling luxury menswear since 1899, with a flagship store on London’s famous Jermyn Street plus a store on Paris’ Rue De Rivoli. They also sell worldwide through their online store.
Hilditch & Key’s inventory control problem took two main forms: they had a significant over stock issue, which created a drag on cash flow and efficiency. They also simultaneously experienced the opposite issue, with regular stock outs on some lines. Customers were frustrated when attempting to purchase clothing online that wasn’t in stock.
Hilditch & Key did have an inventory system in place in the form of SAP Business ByDesign, but this was unable to meet their inventory control needs. In particular they needed a system that accurately shared stock levels with their eCommerce platform, and integrated well with their accounting tools. They investigated options and subsequently implemented Unleashed.
Inventory control at Hilditch & Key has since dramatically improved. With better visibility of the value and quantity of stock on hand they were able to reduce their overstock by 30%. The number of stock outs has reduced by 50%, and overall they increased their efficiency, saving 35 hours per week, which equates to around a 15% saving on their admin costs.
Case study two: Tielka Organic Tea
Tielka Organic Tea is an Australia-based high-end tea merchant that sells both wholesale and direct to consumer, with a sales mix that includes online tea subscriptions. They also produce their own teas, which they blend out of bulk ingredients. Founded by Managing Director Rebecca Domorev, they’ve been trading since 2008.
Inventory control was conducted ‘by sight’, with replenishment decisions based on a visual assessment of which stock was running low, and records kept in Excel spreadsheets – a situation that founder Domorev describes as “a mess”. As the business grew this system began to fall apart, with regular stock outs disrupting business. This was particularly damaging to the company’s café and restaurant customers, who needed to meet the needs of demanding patrons.
Tielka implemented Unleashed, and integrated it with their accounting system, Xero, and their online eCommerce platform, Shopify – as well as a dedicated fulfilment app called StarShipIT. They now run two different Shopify stores – one for direct-to-consumer sales, and one for wholesale orders.
With Unleashed at the heart of their operation, Tielka now have total oversight and control over their inventory levels. The business is now far simpler to run, with inventory levels accurately matched to business needs, and less time spent on inventory control. The business has since grown to become the country’s most awarded organic tea company.
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