Inventory control is how an organization can ensure that it has sufficient inventory to meet customer demands in an economical way. It involves taking a closer look at one’s stock and maintaining the perfect balance between stock levels. Constant inventory issues like backorders, poor delivery often drive customers away because you were unable to fulfill an order due to insufficient inventory.
Inventory management is a tough nut to track. Running a seamless retail operation is a challenge but also the only way to get an edge over your competitors. By mastering it, fewer mistakes are made, more orders are processed, lesser money is wasted, and most importantly, you acquire a bunch of loyal customers.
By having complete control over your inventory, you will be able to process orders quickly, achieve good results in terms of delivery and ultimately provide better customer service.
Let’s take a look at some of the best inventory control methods. These will help you to maintain balance in stock levels, organize the warehouse efficiently, thus creating an inventory management setup that is foolproof.
In the A-B-C analysis, the inventory is divided into three categories to determine the degree of control for each.
A items – these are goods whose annual consumption value is the highest.
B items – these are good with moderate consumption value
C items – These are the least valuable ones, with the lowest consumption value.
Avoiding stock-outs in A items will be the foremost concern. These items require tight inventory control, more secure storage areas and better sales forecasts. Their reorders will also have a higher frequency, compared to other items.
B items need monitoring as they might have the potential to progress towards class A or in unfavorable circumstances, towards class C.
With C items, the question that usually arises is that whether they are needed or not. Since their annual consumption is the least, businesses often prefer to keep very low or no stock of such items.
The ABC analysis can also be used to organize the placement of items in the warehouse, where items A can be kept closer to the picking, packing and shipping areas while C items can be kept at the back so they don’t come in the way.
Safety stock is the inventory ordered and kept in excess of demand. Safety stock is a way of being prepared for the unexpected. Should the demand for products suddenly rise at any occasion, safety stocks come to the rescue by preventing a stock-out situation. An increase in safety stock reduces chances of stock-out costs over the long run but it also increases the level of the total inventory held. The best way to gauge the right level of safety stock for a product is to analyze the stock out costs, usage and delivery rate.
Calculating reorder point is a tricky business. You have new products that are selling fast and you need to quickly replenish that stock. But if you reorder too quickly, you will need to store it, and if you are too late then you risk facing disappointed customers, plus being forced to use up safety stocks.
First in first out method assumes that the oldest items put on the shelf will be sold first. This method is especially beneficial if the business deals with perishable items such as food, medicines, cosmetics, etc. FIFO could also be a good idea for non-perishable items. If a product is always sitting on the shelves, it may eventually get worn out, expire or become outdated.
Economic Order Quantity
The economic order quantity is a means to figure out how much stock needs to be reordered for a particular item. But that’s not it. At the same time, you also need to make sure that the inventory order and carrying costs are minimum.
Regular large-scale audits of your entire inventory are important. The number of items you think you have should match the same in the account books. In case of discrepancies, you can do spot-checking of incoming & outgoing orders and available inventory. This will help you catch smaller errors faster before they turn into big mistakes.
Cycle counting is a quicker, small-scale alternative to a full audit. Also known as a partial audit, cycle count is an inventory auditing method wherein the warehouse is divided into smaller sections and the inventory is counted. With smaller areas, cycle counting occurs more frequently and provides a more clear picture about the accuracy of a warehouse.
Inventory Budgetary System
This system is involved in the planning, execution, and control of inventory operations. An annual inventory budget is prepared wherein all the variables like the number of units to be procured, how much inventory to hold and safety stock levels, are all decided well in advance. The inventory budget helps to control consumption levels and minimize wastes.
Inventory Turnover Ratio
Inventory turnover can be defined as the number of times a company has sold their inventory in a given period of time. The inventory turnover provides insight into how efficient an organization is in making sales from their inventory. The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory in the same period. An example could be- if the cost of goods sold is $200,000 and the average inventory is $20,000, then dividing it comes up to 10. The inventory turnover ratio can be used to calculate the inventory turnover period. Assuming that the turnover period is 365 days, by dividing 365 with 10, it equals 36.5. This calculation tells us that the inventory turned over 10 times in the year and was on hand for around 36 days before it was sold. The higher the inventory turnover ratio, the better as it denotes a shorter shelf life of inventory and higher sales volume.
Inventory Management System
There are a number of ways to maintain inventory data and control. You can manually update data on account books or excel sheets or you can invest in an inventory management system.
However, the first two methods are prone to manual errors. An inventory management software reduces manual data entry and ensures that accurate information is entered into the computer system.
In addition to this, an inventory management system will arm you with real-time data so you know exactly how much or how little inventory you need. With the help of an inventory management software, every piece of your inventory will be accounted for. It will also track your goods right from the moment an order is received, its journey through the supply chain until it leaves the warehouse for shipping.
The inventory is the most valuable asset for any business. Naturally then, keeping track of every item that you own is equally important. The inventory control method that you select will depend on the nature, scale, and type of your business and the overall goals you want to achieve. Nevertheless, inventory control is essential for the upkeep of your business and to ensure a streamlined supply chain management process.