Inventory Control: Definition, Objectives, Challenges, Types, Methods, and Best Practices

What is inventory control?

Inventory control is the process of managing and overseeing the storage, usage, and ordering of stock to ensure an optimal level of inventory within a business. This practice aims to maintain a balance between having enough inventory to meet customer demands without holding excessive stock that could tie up capital and incur additional costs. Inventory control involves various strategies and tools to monitor inventory levels, manage reordering, and minimise wastage. It plays a crucial role in inventory management and supply chain management, ensuring the smooth flow of goods from suppliers to customers. Effective inventory control helps businesses reduce costs, improve cash flow, and enhance customer satisfaction by preventing stockouts and overstocking.

What is the objective of inventory control?

Inventory control has two key objectives:

• Customer service level
  Why do you produce goods? The simple answer is to sell them at a good price. In an open market, many manufacturers may produce the same goods as you. So, how can you stand out and attract customers? The answer is clear – through proper customer service.
  Customer service means ensuring that the right goods are available in the right quantity, at the right place, and at the right time. This can only be achieved through effective inventory control measures within your organisation.
• Cost of holding inventories
  Another key objective of inventory control is to optimise the cost of ordering and holding inventories. The overall goal is to provide good customer service while keeping inventory costs under control.
  Managing the cost of ordering and holding inventories is crucial to ensure that the overall cost of selling remains as low as possible.

Importance of Inventory Control

Here are some ways inventory control is important for your business, helping you understand the purpose of managing inventory effectively:

• Quality control
  Having an inventory management system helps improve quality control. By tracking and managing all aspects of your stock, you can maintain better control over quality. The longer you hold inventory, the higher the chance it could get damaged, so rotating stock through your warehouse is essential.
  Inventory control techniques also allow you to track the quality of stock from suppliers. You can monitor how often certain products are returned and if they are returned due to defects. Observing product movement through your inventory helps identify problems and reduce write-offs.
• Organisational control
  Inventory control gives you better organisational control within your business. A well-organised stockroom allows you to manage your goods efficiently and maximise your investment in physical inventory.
  This aspect is crucial for knowing where your stock is and how quickly it can be accessed. Proper inventory control ensures you have enough stock to fulfil orders and maintain safety stock. It also helps avoid issues like dead stock (inventory that does not sell) or overstocking. Safety stock acts as a buffer, reducing the risk of running out of stock.
• Accounting accuracy
  Maintaining accurate inventory records is vital for managing your assets and preparing for audits. It helps you track your overall spoilage and determine the value of your business.
  Financial accounting rules and tax regulations may require your company to have a physical inventory count. All stock should have correct quantities and pricing in your inventory systems and accounting software. This ensures your business can pass audits without any issues regarding accounting integrity.

Challenges of inventory control

• Demand forecasting: Accurately predicting customer demand can be difficult due to market fluctuations, seasonality, and changing consumer preferences.
• Inventory accuracy: Maintaining accurate inventory records is challenging, especially with manual tracking systems, leading to discrepancies between actual and recorded stock levels.
• Supplier reliability: Inconsistent lead times, supply chain disruptions, and unreliable suppliers can cause inventory shortages or excesses.
• Cost control: Balancing the costs associated with inventory, such as storage, insurance, and obsolescence, requires careful planning and management.
• Stock turnover: Ensuring that inventory moves efficiently through the supply chain to avoid overstocking or stockouts is a constant challenge.
• Technology integration: Implementing and integrating advanced inventory management systems can be costly and complex.
• Regulatory compliance: Adhering to industry regulations and standards related to inventory management can add another layer of complexity.
• Human error: Manual processes and human intervention can lead to errors in inventory management, impacting overall efficiency.
• Returns management: Effectively handling returns and restocking items while maintaining accurate inventory levels is often challenging.
• Scalability: As businesses grow, scaling inventory control processes to match increased demand and complexity can be difficult.

How do you control inventory costs and improve your business?

At its core, taking stock is the process of determining what you have and where it is stored, so you can evaluate it. Not all warehouse control methods are suitable for every business or for different stages of an organisation’s growth. Some methods may be too complicated, especially for smaller businesses.

Here are some basic systems for tracking inventory:

• Manual tracking: This involves logging inventory using a ledger or stock book. It is the simplest way to track stock movements and works well for small businesses with few items. However, this system can be difficult to manage as it is a physical record that cannot be easily used for planning
• Stock cards: This slightly more complex method uses stock cards, also called bin cards. Each product has an individual card that tracks its unit price, sale price, and inventory count. The system also tracks purchases, sales, returns, and other stock withdrawals, like promotional pulls. Regular updates are important, and you must record unusual stock movements to avoid inaccuracies
• Simple spreadsheets: Many small businesses use spreadsheets like Microsoft Excel to track inventory. Spreadsheets help automate and capture product data electronically. With regular updates and basic coding, you can keep track of stock levels and statistics. However, since each spreadsheet is customised differently, users need to understand how their system works. This method is considered manual unless advanced features, such as macros or coding, are added to link it with other systems
• Basic inventory software: Simple inventory software is affordable and designed for small to medium-sized businesses. It is often cloud-based and integrates with point-of-sale systems to provide real-time stock updates. These systems offer analytics, reporting, cost comparisons, reorder management, and customer patterns. As your business grows, some software can scale to offer more advanced features

Types of inventory control systems

• Periodic inventory system: This system involves physically counting inventory at specific intervals, such as monthly or annually. It provides a snapshot of inventory levels but may not reflect real-time changes.
• Perpetual inventory system: Utilises technology to continuously track inventory levels, updating records in real-time with each transaction. This system provides more accurate and timely inventory data.
• Just-in-time (JIT) inventory system: Focuses on reducing inventory levels by ordering goods only when they are needed for production or sales, minimising holding costs.
• Economic order quantity (EOQ) system: A mathematical model that determines the optimal order quantity to minimise the total costs of ordering and holding inventory.
• ABC analysis: A method that categorises inventory into three classes (A, B, and C) based on their value and usage, allowing businesses to prioritise management efforts on the most critical items.
• Vendor-managed inventory (VMI): In this system, suppliers are responsible for managing and replenishing inventory levels based on agreed-upon parameters, improving efficiency and reducing the risk of stockouts.

Methods of Inventory Control

Inventory control methods are ways to use your business’s strengths, relationships, expertise, formulas, and forecasts to decide how much stock to keep, sell, store, and order. Effective inventory control involves balancing cost control and meeting customer demands.

• Days of inventory outstanding (DIO): This measures how many days a company holds stock before selling it. DIO is an efficiency measure because holding stock ties up funds. The lower the DIO, the better, especially for small businesses
• DIO scores have increased by 8.3% in the past 5 years, indicating that companies are using poorer inventory control practices
• This trend also suggests a need for more warehouse space, which adds to business costs
• Optimising inventory control is crucial to reduce the time goods remain in stock, thus lowering capital tied up in inventory and the associated storage costs

Inventory control techniques

Ways to control stock based on when or how you order goods or materials include:

• FIFO and LIFO: These are methods for valuing inventory. LIFO (Last In, First Out) assumes that the most recently added goods are the first to be sold. FIFO (First In, First Out) assumes that the first goods added to the inventory are the first to be sold
• Min-Max inventory control: This method sets minimum and maximum stock levels. When stock reaches the minimum level, you order just enough to reach the maximum level. Critics argue that this method can result in having too much or too little stock
• JIT inventory: The Just-In-Time (JIT) inventory management technique aligns raw material orders with the production schedule. This reduces waste and inventory costs because goods are only on-site when needed. While JIT can be part of Lean manufacturing, it carries the risk of running out of stock due to unreliable suppliers. Effective supplier relationship management can help reduce this risk
• Two- or three-bin system: In this system, you have two or three containers of the same item. When one container is empty, you use the second container as a backup, triggering a reorder point (ROP) to replenish stock. This method can be difficult to manage for large or fast orders, as you may not always know the exact stock level at any time
• Fixed order quantity: With this method, you order a specific amount of an item each time. This helps minimise reorder mistakes, storage issues, and unnecessary expenses. Fixed order quantities can be linked to automatic reorder points (ROP)
• Fixed period ordering: This rule involves ordering stock at regular intervals, with the order quantity varying based on customer demand. This method ensures that stock is replenished at consistent intervals
• Vendor-managed inventory (VMI): In this system, a sales representative manages stock for specific products, ordering replacements as needed. For example, a representative from a beverage company may monitor stock in a store and replenish it during their deliveries
• Set par levels: Par levels are minimum stock levels that trigger automatic ordering when stock falls below them. Par levels depend on factors like sales rates and restocking time. They need to be adjusted regularly. Having par levels helps make the business more efficient and flexible, allowing for quicker adoption of new products. However, challenges include the risk of running out of stock and increased costs when ordering in small amounts. It is important to have safety stock, which is extra inventory kept to cover delivery delays. Safety stock should only be used in emergencies

What are some inventory control examples?

Effective inventory control can be illustrated through various practical examples. One such example is the implementation of a just-in-time (JIT) inventory system by automotive manufacturers. In this system, parts and components are delivered to the production line only as they are needed, reducing the need for large storage areas and minimising holding costs. 

Another example is the use of barcoding and RFID technology in retail stores. By tagging products with barcodes or RFID tags, retailers can quickly scan items during checkout or stocktaking, ensuring accurate inventory records and reducing human errors. Pharmaceutical companies often employ the first-in, first-out (FIFO) method to manage inventory, ensuring that older stock is used before newer stock to prevent expiration and wastage. 

E-commerce businesses frequently use demand forecasting tools to predict future sales and adjust inventory levels accordingly, avoiding overstocking or stockouts. In the food industry, restaurants might use a perpetual inventory system to continuously monitor ingredient levels, ensuring they have the right number of supplies to meet customer demand while minimising waste. These examples highlight the importance of tailored inventory control strategies across different industries to improve efficiency and reduce costs.

Inventory control best practices

Implementing inventory control best practices is crucial for optimising stock management and enhancing business efficiency. 

One best practice is to regularly review and analyse inventory levels, identifying slow-moving or obsolete items and making informed decisions about discounts, promotions, or discontinuation.

• Implementing an automated inventory management system can streamline processes, reduce manual errors, and provide real-time visibility into stock levels.
• Maintaining accurate and up-to-date inventory records is essential for effective decision-making and forecasting.
• Establishing strong supplier relationships and negotiating favourable terms can help ensure timely deliveries and reduce costs.
• Conducting regular cycle counts can help maintain inventory accuracy and identify discrepancies early.
• Using ABC analysis to prioritise inventory management efforts on high-value and high-usage items can improve efficiency. 

Additionally, setting reorder points and safety stock levels can prevent stockouts and ensure smooth operations. Training staff on inventory control procedures and best practices can also enhance overall effectiveness. Finally, continuously monitoring and evaluating inventory performance through key performance indicators (KPIs) can help identify areas for improvement and drive continuous optimisation. 

Tips and expert advice for getting started with inventory control

Getting started with inventory control can seem daunting, but following these tips and expert advice can help streamline the process.

• Begin by assessing your current inventory practices and identifying areas for improvement.
• Invest in an inventory management system that suits your business needs, offering features like real-time tracking, automated reordering, and reporting.
• Conduct a thorough inventory audit to establish a baseline and identify discrepancies.
• Implement ABC analysis to prioritise high-value and high-usage items for more focused management.
• Set clear inventory control policies and procedures for staff to follow, ensuring consistency and accuracy.
• Train employees on these procedures and the use of inventory management tools to reduce errors.
• Establish reorder points and safety stock levels to prevent stockouts and overstock situations.
• Regularly review and analyse inventory data to make informed decisions and adjust strategies as needed. Foster strong relationships with suppliers to ensure reliable and timely deliveries.
• Monitor inventory performance continuously through KPIs to identify trends, track progress, and drive continuous improvement. By following these tips and leveraging expert advice, businesses can establish effective inventory control practices that enhance efficiency and profitability.

Difference between Inventory control and inventory management

Aspect	Inventory control	Inventory management
Definition	Focuses on maintaining optimal inventory levels to meet demand.	Encompasses all activities related to managing inventory, from ordering to storage to sales.
Objective	Ensure that the right quantity of stock is available at the right time.	Oversee the entire lifecycle of inventory to maximise efficiency and reduce costs.
Scope	Narrower, primarily concerned with stock levels and reordering.	Broader, including procurement, warehousing, and distribution.
Techniques	Includes JIT, EOQ, safety stock, and cycle counting.	Utilises demand forecasting, supplier management, and inventory control techniques.
Tools	Inventory control systems, barcoding, RFID.	Comprehensive inventory management software with multiple functionalities.
Timeframe	Short-term focus on immediate inventory needs.	Long-term focus on overall inventory strategy and optimisation.
Decision-making	Tactical, dealing with day-to-day stock levels.	Strategic, involving planning and policy formulation.
Integration	Part of the overall inventory management process.	Integrates inventory control as one of its components.

 

Forecasting for Inventory Control

Instead of manually reordering stock, you can use mathematical forecasting methods to determine what is in stock or when to order. These methods include categorising your stock, such as with the ABC method, and mainly show the current stock levels:

ABC analysis:

This method divides inventory into three categories.

• "A" items are high-value items with low sales frequency. These items have a significant budgetary impact, but their sales are not predictable.
• "B" items are of moderate value and have a moderate sales frequency.
• "C" items are low-value items with high sales frequency. These items are less important financially and turn over quickly.

By categorising your stock this way, you can focus on items that need more attention. Forecasting using ABC analysis helps calculate the available stock based on these categories. You can also organise storage and packing areas to reflect these categories.

Reorder point (ROP) formula:

The ROP formula helps you calculate when to reorder stock or produce more items. It uses existing information to add the lead time demand (LTD) and safety stock (SS). Lead time is the period between placing an order and receiving it. The formula for reorder point is:

ROP = LTD + SS = 100 units + 50 units = 150 units

Conclusion

In conclusion, while inventory control and inventory management are closely related, they serve distinct functions within a business. Inventory control focuses on maintaining optimal stock levels to meet demand, while inventory management encompasses the broader scope of overseeing the entire inventory lifecycle. Both are essential for effective supply chain management and can significantly impact a company's profitability and operational efficiency. Implementing best practices, leveraging appropriate techniques, and continuously monitoring performance are crucial for successful inventory management. Inventory financing can help businesses seeking to optimise their inventory processes. Considering a business loan to invest in advanced inventory management systems and training can be beneficial, ultimately driving improved efficiency and growth.