In a perfect world, you would have precisely the number of products in your warehouse that you would need for any given time.
You would have just enough units to cover your orders and get them out to customers on time.
Your warehouses would carry the right amount of stock, and your customers would always be happy.
But it is not a perfect world, and keeping inventory up to date is not simple. Retail and ecommerce businesses must implement an inventory control system.
What Is Inventory Control?
Inventory control is the practice of coordinating and supervising the supply, storage, management and distribution of inventory. Inventory control includes techniques for preventing overselling, stockouts, and delays in the inventory replenishment process.
Inventory control systems keep track of stocked goods, which includes keeping track of their weights, dimensions, amounts, and locations.
The goal of inventory management is to make sure these stocked goods keep up with demand and keep the total cost of replenishing and storing products down. Businesses can do this by only storing products that generate sales online or in your store.
Let’s look at this crucial component of your supply chain in-depth, starting with why inventory control is essential.
The Goals of Inventory Control Policies and Processes
Inventory control doesn’t start with software to manage your inventory. It begins with identifying your company’s inventory control policies and procedures.
But just what are the goals of setting these policies?
It's more a question of what problems the correct inventory management techniques will prevent.
Problems that Inventory Control can Solve
- Dead stock: Products that don’t move are a liability to your company. The definition of dead stock depends on the business. High-dollar products will naturally stay in stock longer than lower-priced items. Efficient inventory management will prevent dead stock, which will improve turnover and reduce holding costs.
- Space issues: You need a place to put your inventory, and if it’s not flying off the shelves, you need a place to store it. Having the right inventory management policies and a good flow of inventory will make better use of your warehouse space and reduce overhead costs.
- Storage costs: Excess inventory could mean purchasing more warehouse space. You’ll have to ensure this new space and possibly pay for security and maintenance. The right inventory processes will improve your overall profitability so you can make smarter investments.
- Taxes: You will have to pay taxes on the inventory that sits on your shelves, and excess inventory will result in higher taxes. By making sure you are carrying only the inventory you need, the right policies will keep your taxes lower.
- Spoilage: If you deal in products that have a shelf life, you want to sell them before their value goes to zero. Effective inventory management will reduce spoilage and help you make the most of your investments.
- Dissatisfied customers: Having too much inventory can cost you in many ways, but not having enough stock can have even more dire consequences. It can cost you customers and sales.
Inventory control is central to supply chain management. The right inventory control system will solve the problems above as well as balance your inventory turnover ratio and free up capital. Proper inventory control will also help you closely track inventory KPIs and meet your goals.
Inventory control policies are the framework that allows your company to meet these goals. They determine how your company handles the movement of inventory under its control. They start with rules about how raw materials are procured and end with how you manage returns and defects.
Choosing an Inventory Control Strategy and System
In today’s fast-paced landscape, you need an inventory system that will record every movement a product makes.
- You sell a product > remove a unit from inventory.
- Inventory items are received > add them to the stock.
- Transfer items from one location to another > log the event in your system.
Tracking every movement of stock allows for real-time accuracy in your stock levels and minimizes the need for physical inventory counts.
This type of inventory control is called a perpetual inventory system, and it has been made possible by advancements in inventory management software.
Perpetual inventory systems depend on automation and are now the standard.
The other primary type of inventory system is a periodic inventory system. This type of method depends on physical inventory counts.
In this approach, actual inventory numbers and inventory counts can get out of sync. And while you still complete physical inventory counts, a standard business may have to be suspended or at least hobbled to ensure that the inventory counts are accurate.
Due to these disadvantages, a periodic inventory system is only suitable for smaller businesses. Most modern businesses can benefit from a perpetual inventory system.
Just about any industry that deals with assets that become final products can benefit from an inventory control system. That is a pretty vague statement, but the tracked inventory can vary widely depending on the industry.
What type of inventory would you need to track?
- Raw materials: If your business manufactures the products you sell, then you need to track raw materials. And one company’s finished product can be another company’s raw materials. A fabric manufacturer’s products become raw materials to a furniture company.
- Finished goods: These are self-explanatory: these are what pops into most people’s minds when they think of "inventory.” Sometimes the customers of these goods will be the general public and sometimes another business.
- Work-in-progress (WIP): WIP inventory started as raw material and is on the way to becoming finished goods. For one company, WIP inventory will be finished products ready for packaging. For another, they are items still on the assembly line.
- MRO goods: These are maintenance, repair, and operating supplies, which help maintain the production process. Some MRO goods are raw materials, but in this case, it is kept on-hand for repairing finished products. MRO goods also include office supplies and cleaning supplies.
If you are asking what type of management software you need to control your company’s inventory, you’re asking the wrong question.
You need to ask what components you need in your inventory system and what type of inventory control methods fit your business. Then, you can customize your inventory control system to your needs.
What are the common features of an inventory control system?
The software you choose should support your inventory control strategies and allow you to use modern inventory control techniques that fit your business.
Here are some features you could look for in inventory control software:
- Safety stock: Safety stock is an additional quantity of a unit kept in inventory to reduce the risk that it will go out of stock (for more on going out of stock, see our article on out of stock vs. back to stock). It will help you absorb changes in customer demand.
- Locked inventory: Inventory that is stored at a warehouse but isn’t for sale. For example, your company may need to set aside stock for subscriptions or promotions. Platforms like Extensiv Warehouse Manager allow you to use locked inventory fields to prevent these units from accidentally selling.
- Reorder points: Your inventory system should help you calculate reorder points for each separate SKU. Sales trends can change, and your software should quickly adjust to those changes and update reorder points accordingly.
- Dropshipping: You might need this option for fulfilling orders just in case you run out of stock. Backorders tend to lower customer satisfaction, and having a dropship backup plan can minimize your backorder rate.
- Channel allocation: Channel allocation allows you to limit what inventory will show on which sales channels. You can use this to restrict sales on fast-selling channels to avoid overselling on them or to create demand to drive sales.
Key Performance Indicators (KPIs) in Inventory Control
It is hard to know just how your inventory control strategies have affected your business without measuring the results.
Your goals may be lowered costs and improving customer satisfaction, but just because your business made improvements in these areas doesn’t mean that you can track those changes back to your inventory control procedures. You need to know the KPIs, or key performance indicators, in inventory control to have a clear picture of inventory processes.
Inventory Metrics to Pay Attention To
- Stock to sales ratio: The ratio of available stock to the amount of stock sold. If you have too much inventory, you are tying up capital needlessly. If you don’t have enough, you lose sales.
- Sell-through rate: The percentage of units sold over a period. When the sell-through rate is low, you may be keeping too much product on hand. When the sell-through is high, you may not be holding enough.
- Inventory age: This is the average amount of time a product sits on your shelf. When this number is high, it means that storage costs may be eating into your profits. When it is low, you may not have enough product on hand to cover orders.
- Inventory turnover rate: A low inventory turnover rate can mean weak sales and too much stock. A high ratio can mean strong sales or pricing that is too low. This ratio is usually compared to an industry average to see how a company sits contextually.
- Backorder rate: This is the percentage of orders that have to be back-ordered. This KPI tells you whether or not you are meeting customer demands. Of course, this is a number you want to keep low.
- Days to sell inventory: This number determines how long it will take your company to turn inventory into sales. This metric should match the industry average because the optimal days to sell a product can vary widely between industries.
- Time to receive: This number tells you how long it takes to receive units to be ready for sale. This metric includes check-in time and adding the products to inventory.
- Put away time: This is how long it takes to put products on the shelf where it is ready to sell.
- On-time orders: This is the percentage of orders that a customer receives on time. You want this number to be as close to 100% as possible to make sure your customers remain satisfied.
- Shrinkage: The percentage of inventory that shows in stock but is not actually on the shelf. Shrinkage should remain low. High shrinkage can result from theft, damage, inventory miscounts, or supplier fraud.
- Average inventory: The average amount of stock you have during a given time. Any anomalies in this number can indicate that there is a problem in your inventory management procedures.
- Rate of returns: This metric will tell you the percentage of products that get returned. A high number can indicate product defects.
- Cost of carrying inventory: This KPI is the percentage of capital spent on inventory. You can lower this number by removing dead stock and slow-moving units.
These metrics can help you determine if your inventory management strategy is doing its job. The inventory management software you choose should provide these metrics and offer detailed reports to help you determine how to address any issues.
Inventory control is essential to your business. Inefficient inventory control can result in increased business costs and unhappy customers. Inventory control starts with taking a good look at your business and setting policies and procedures to help you implement it effectively.
Once your policies are in place, you will know what you need in an inventory control system. The inventory control software will also allow you to track important KPIs to determine how to further improve your business.