Essential Guide to Inventory Control (2024)

Inventory control is the process of tracking stock levels while monitoring customer demand. This allows businesses to ensure they have the products people want at the time in the correct quantities. The quantities part is the most important because it helps businesses avoid over or understocking a certain product. Knowing the quantities of products also helped prevent theft and damage. Having the right stock at the right time means businesses adequately manage their supply chains and customer service operations. All this improves efficiency and profitability.

What Is Inventory Control?

Inventory control, also called stock control, is the process of ensuring the right amount ofsupply is available in an organization. With the appropriate internal and productioncontrols, the practice ensures the company can meet customer demand and delivers financialelasticity.

Successful inventory control requires data from purchases, reorders, shipping, warehousing,storage, receiving, customer satisfaction, loss prevention andturnover.

Inventory control enables the maximum amount of profit from the least amount of investment instock without affecting customer satisfaction. Done right, it allows companies to assesstheir current state concerning assets, account balances and financial reports. Inventorycontrol can help avoid problems, such as out-of-stock (stockout) events. For example,Walmart estimated it missed out on $3 billion worth of sales in 2014 because its inadequateinventory control procedures led to stockouts.

An integral part of inventory control is supply chain management (SCM), whichmanages the flow of raw materials, goods and services to the point where the company orcustomers consume the goods. Warehouse management also squarely falls into the arena ofstock control. This process includes integrating product coding, reorder points and reports,all product details, inventory lists andcounts and methods for selling or storing.Warehouse management then synchronizes sales and purchases to the stock on hand.

Inventory management is a higher-level term that encompasses the complete process ofprocuring, storing, and making a profit from your merchandise or services. While inventorycontrol and inventory management may seem interchangeable, they are not. Inventory controlregulates what is already in the warehouse. Inventory management is broader and regulateseverything from what is in the warehouse to how a business gets the product there and theitem’s final destination.

Inventory control practices and policies should apply to more than just finished and rawgoods. The following graphic shows all the things a business might manage using thesepractices.

Why Is Inventory Control Important?

Inventory is one of the biggest costs of capital of any product-based business. If you lookat the balance sheet of this type of company, you’re likely to find that inventorymakes up a large portion of current assets and uses up a lot of working capital.

Inventory control helps avoid the many costs related with buying too much inventory and thestrains of going without the needed inventory. While some companies using just-in-timeordering may carry extremely small inventories, nearly any business requires some form ofinventory, which is best managed through inventory control systems.

If a company can lower inventory, it may find new funds available for expansion or profits.If a company needs to carry more inventory and tight inventory control processes bringinventory levels up, the business could find higher sales, and again higher profits. Usinginventory control to optimize your warehouse, stock room, supply room, or storefront is asure way to cut costs and better manage any kind of product.

How Inventory Control Can Improve Your Business

Implementing proper inventory control procedures can help ensure a business is running atoptimal financial levels and that products meet customers’ needs and expectations.According to the 2015 “Global State of Multichannel Customer Service Report”,62% of customers have stopped doing business with a brand whose customer service was poor.Of those customer service complaints, frustration over out-of-stock or backordered items ishigh on the list.

In fact, research about convenience stores shows that out-of-stocks couldcause a store to lose one in every 100 customers completely. Additionally, 55% of shoppersin any store would not purchase an alternate item when their regular product isout-of-stock. Other areas where businesses incur expenses or lose sales that inventorycontrol practices and methods could address include:

• Spoilage
• Dead stock
• Excess storage costs
• Cost-efficiency
• Decreased sales
• Losing loyal customers
• Excess stock
• Losing track of inventory
• Losing goods in the warehouse

According to professor and author David Pyke, “Owners of small and emerging businesses would be stunned to see how much help they can get and money they can save by wisely managing their inventory. Many small businesses are not rolling in cash, and much of their funding is tied up in their inventory. Good practices balance customer demand and management of inventory in the smartest possible ways.”

4 Ways to Control Inventory

At its core, taking stock is just the process of determining what you have and where you store it so that you can evaluate it. Not all warehouse control procedures are ideal for every business or for the varying stages of an organization’s growth and development. Some methods are too complicated, especially for smaller companies.

You should be able to use your system to track inventory levels, create orders and send outstock. Some basic systems for tracking inventory include:

1. Manual: Whether via a ledger or a stock book, manually logginginventory with a pen and paper is the simplest way to track what comes in and goesout. Small businesses with few items can get away with using this type of system.This system can be challenging because it is an actual record that you cannot mineand use for planning purposes.

2. Stock Cards: A slightly more complex method uses stock cards, alsocalled bin cards. A stock card is a table that records the running unit price, saleprice and inventory count of each product. Use individual cards for each product inlarge warehouses or stock rooms. The system also tracks purchases, sales, returnsand other reasons to withdraw stock, such as promotional withdrawals. You caninclude additional notes on the stock card, such as any problems associated withthat item. For a stock card system to be effective, consistent updates are critical.You must also record unusual stock pulls; otherwise, you run the risk of inaccuratedata.

3. Simple Spreadsheets: Many companies, especially small businesses,use spreadsheets to track inventory. Whether they use Microsoft Excel or somethingsimilar, spreadsheets are a way to start automating and electronically capturingproduct data. With consistent updating and basic coding, you can ensure that youhave available current stock levels and statistics. Businesses quickly customizethese systems to meet their needs. Since everyone who builds a spreadsheet does soslightly differently, users will need intimate knowledge of how the sheet works.This method is also thought of as manual because the only way to automaticallyupdate the spreadsheet system is by adding high-level macros or coding that connectsthem with other systems.

4. Basic Inventory Software: Simple inventory software is usually lowcost and targeted to small and medium-sized businesses. This simple automation isoften cloud-based and ties into your point of sale software, so it can generatereal-time, automatic stock updates. You can also incorporate analytics and reportingand run cost comparisons, create reorders, identify best and worst-selling productsand drill down to order details or customer patterns. Some simple inventorymanagement software systems can scale to more complex functionality as your businessgrows.

Some businesses prefer to stick to the simple systems of keeping track of inventory. Othercompanies plan for growth and scaling. You could also track inventory with:

• Advanced Software: Designed for tracking inventory, most of thesetargeted software solutions can integrate with existing software, are scalable andprovide analytics and templates. Advanced software is now in reach for many small andmidsize businesses because it is no longer cost prohibitive.

Types of Inventory Control Systems

Inventory control and monitoring systems are accounting approaches to track the number ofgoods on hand. Big companies often monitor inventory across stores, warehouses and evenwebsites. The two main systems are periodic and perpetual tracking systems.

The Periodic Inventory System

Most small businesses still use periodic inventory management because it does not requiresophisticated software or inventory scanning. A periodic inventorysystem relies upon occasional or regular physical counts of the inventory. Youdecide accounting periods based on the business needs, but you don’t track inventorydaily or continuously. Instead, you record all purchases to a purchase account. Once youconduct the physical inventory, you shift the balance in the purchase account into theinventory account. Finally, you adjust the inventory account to match the cost of the endingstock. You can calculate the cost of ending inventory using either FIFO (first in, firstout) or LIFO (last in, first out).

The challenges of the periodic system are especially apparent when performing a physicalinventory count. Most normal business activities must be suspended during this time becauseit requires significant manual labor. Many companies hire additional staff and try toperform this outside of regular business hours, such as during a night shift. This type ofsystem incurs more fraud because there is nothing tracking inventory between physicalcounts, reducing accountability between inventories, and because it is more challenging todetermine where any inventory discrepancies occurred.

The Perpetual Inventory System

The perpetual system may bemore expensive to implement than the periodic system due to equipment and software needs.However, the system continuously and immediately updates inventory numbers. This systemcalculates inventory based on sales and purchases via the point of sale and asset managementsoftware. This way, you have accurate stock on-hand accounting at all times. Perpetualtracking is the best way to avoid stockouts when your customers deplete inventory on aparticular product. With a perpetual system, you can achieve minimal employee contact withthe goods.

The challenges of this type of system occur when you use it without also performing physicalinventories. In other words, the recorded inventory may not accurately reflect what isphysically in-stock as time goes by, never mind accounting for drop shipments or inventoryon order. You must account for breakage, stolen goods and loss to ensure the system isaccurate. Further, errors and improperly scanned items affect the inventory records. You canhandle this mathematically by applying corrections that mostly account for these things.Experts agree, though, that even though physical inventories are not common, you shouldimplement some manual stock taking process to complement a perpetual system. You canintegrate these types of systems with supply-chain automation to make quicker decisionsinformed by data.

Barcodes

Barcodes can be part of either a perpetual or periodic inventory system. Some may considerthe barcodes part of an inventory management system, but in truth, this is equipment thatfalls under your existing stock management system. A barcode is essentially a little picturewith text or numbers that gets put on each stock item. The text or numbers store a largeamount of information. A scanner reads that information and transfers it to a database,which tracks the parts and their locations. The system performs scans when the new productarrives and when it is issued out. Barcodes have a rapid return on investment (ROI) bylowering operating expenses once implemented, even for small businesses(opens in a new tab).

Other benefits of barcoding include:

• The elimination of manual data errors
• Faster collection of inventory information
• Automatic inventory updates
• Streamlining of documentation and reporting
• Enabling inventory movement between multiple warehouses and departments
• Easy and quick identification of minimum levels and reordering of necessary levels

Implementing barcodes on inventory is a smart idea because they offer scalability andaccuracy, even to small and growing businesses.

Radio Frequency Identification (RFID)

RFID tags are also a type of equipment that falls under an existing inventory managementsystem. RFID tags are a type of smart tracking. RFID tags contain electronically storedinformation, more information than is possible with conventional barcodes. Tags can bepassive or active: Active RFID tags include batteries, whereas passive tags do not havebatteries. The RFID reader supplies the power for passive tags through radio waves, whereasactive tags send out their radio waves. Both types of tags automatically update to identifythe stock and capture any associated data.

RFID tags are an effective way to protect high-value items and products that requireadditional security compliance, such as pharmaceuticals. Active tags are the best course inbusinesses where inventory security has been an issue.

Although security is the primary benefit of RFID, other features include:

• Remote Tag Reading: The reading range for passive tags is approximately40 feet, and the range for active tags is 300 feet.
• Simultaneous Tag Reading: The system can read several tagssimultaneously so that it can check in an entire pallet of products at once.
• Unique Tag Codes: To track unique products, not just one type ofproduct, you can give tags unique identification codes.
• Constant Updates: Without having to update the physical tag on theitem, you can send it updates such as warehouse location via your active tag or bykeeping the passive tag system activated.

Some challenges with using RFIDs include:

• Passive RFID tags require scanners or handheld readers.
• The cost can be prohibitive for some businesses.
• The supply chain also needs the equipment necessary for RFID tags.

If you are considering using RFID tags, they have become cheaper in recent years. Experts saythe best use of RFID tags is to place them at high-risk points close to your stock, such asat exits. Finally, for products with a limited shelf life, an RFID system can provideinformation to ensure quality control, such as when they were brought in and theirexpiration dates (if relevant).

A recent trend among small businesses is the use of QR codes, which are like barcodes, butyou don’t need to buy expensive equipment to read them. You can install an app on asmartphone that reads QR codes. They also carry more information than a barcode because oftheir matrix-like patterns. QR codes are not active systems like active RFID tags and notnearly as expensive.

Inventory Control Methods

Inventory control methods are the ways you use your business’s strengths andrelationships, your expertise, formulas and forecasts to determine how much supply you keep,sell, store and order. Effective inventory control balances controlling costs and meetingcustomer demands.

A company’s days of inventory outstanding (DIO) measures how many days a company holdsstock before selling it. The DIO is an efficiency measure because product stock ties upfunds. The lower the DIO the better, especially for a small business. DIO scores haveincreased in the past five years by 8.3%(opens in a new tab), meaning that companies have poorerinventory control practices. Additionally, there is a need to increase warehouse space,which means additional costs for businesses. This trend underscores the importance of optimizing inventory control to reduce the duration goods remain in stock, thereby minimizing capital tied up in inventory and the associated storage costs.

8 Inventory Control Techniques

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

1. FIFO and LIFO: These are methods of placing value on the products.LIFO assumes that the goods last added to the inventory are the first goods to besold, while FIFO assumes that the goods first added to the inventory will be thefirst sold.

2. Min-Max Inventory Control: This theory sets minimum and maximumlevels of stock to maintain specific items in your inventory. So, when you get tothe minimum level of stock, order only enough to reach the maximum level set.Critics of this approach say that you may end up with either too many or too fewproducts.

3. JIT Inventory: The just-in-time (JIT) inventory management strategylines up the raw material order from suppliers with the production schedule. Youdecrease waste in the form of inventory cost because the goods are onsite only asneeded. JIT can be a step in Lean manufacturing by slightly requiring JIT toincorporate what the customer wants in each product manufactured. The risk with thismethod is running out of stock due to inefficient suppliers, but supplierrelationship management can somewhat mitigate this risk.

4. Two- or Three-Bin System: A two- or three-bin system involves twocontainers of the same stock item. When one container becomes empty, you use thesecond container (the backup), which then identifies the reorder point (ROP). TheROP is when inventory gets down to a level that initiates stock replacementactivities. The problem with a method this basic is evident in situations wherethere are big or fast orders. You may never be exactly sure how much product is instock at a given time, so you may not be able to predict whether you can fulfill alarge order or quick, successive orders.

5. Fixed Order Quantity: In a fixed order quantity rule, you may onlyorder a specific amount of an item at one time. With this rule in place, reordermistakes, storage space issues and unnecessary expenses are kept to a minimum. Youmay link fixed order quantities to automatic ROPs.

6. Fixed Period Ordering: In a fixed period ordering rule, you link thereplenishment of specific items to a particular interval. In this case, the orderquantity is always different to compensate for customer demand.

7. Vendor-Managed Inventory (VMI): In this method, it’s often thesales representative that manages the stock on specific products, noticing andordering what needs replenishment. For example, a beverage company representativewho performs deliveries reviews the stock and space available for their products inthe store and replenishes it themselves.

8. Set Par Levels: When inventory drops below the par levels, yoursoftware should signal you to order more. Par levels vary by product, relative salesrates and the time to restock and require research and sound decision-making. Parlevels change over time and must be reset at regular intervals. On the positiveside, having minimum levels makes your business more efficient and flexible. Whennew products hit the market, you can purchase them because your funds are notcompletely tied up in existing inventory.

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   Further, storage costs are lower, and if your business moves fast, having only theminimum levels of stock may be more suitable. Some challenges you may face includepossibly running out of stock, when ordering the minimum could be more expensive andthe variability of how well your suppliers can deliver products quickly andefficiently. You should also have a safety stock alongside your minimum inventory.Safety stock is the stock you keep in excess in case there are delays in delivery.You use this stock only in case of emergency.

7 Top Inventory Control Best Practices

The most effective inventory control methodology can vary between companies. Whichevermethodology you choose, it should be clear to employees and have well-defined policies andprocedures. If you use software with your methodology, look at systems that boast the keyfeatures your company needs, not just a one-size-fits-all package. Organizational controlstarts with labeling items, whether via SKUs or a more complex system. Quality controlrequires having quality standards and policy for staff to follow.

1. Choose a Management Improvement Methodology: Management improvementmethodologies involve more than just inventory control. You can improve yourbusiness, from top to bottom, with a management methodology that you commit to.Examples include Kaizen, Lean and Six Sigma.

2. Optimize Purchasing Procedures: One of the hallmarks of properinventory management is ensuring that you use data and forecasting to control yourpurchasing procedures. This also includes identifying items by monitoring customerdemand, removing obsolete stock and adjusting safety stock and reorder points.

3. Manage Supplier Relationships: It is critical to manage supply chainrelationships well because you can often head off and solve problems by workingclosely with suppliers. For example, suppliers can offer your business a negotiableminimum order quantity, take back products that are not selling and help you quicklyrestock when sales accelerate for a specific product.

4. Create Automated Reports: Since inventory control and managementsystems produce massive quantities of data, businesses need to find ways to analyze,report and use this data. Many systems automatically generate reports for inventorystatus, stock logs, reconciliation, historical stock, aging inventory and inventoryfinancials. Further, companies should decide at what point along their supply chainthey should share these reports, so suppliers can adequately prepare.

5. Conduct a Risk Assessment: Problems regularly crop up in businesses,whether you have an unexpected sales spike, a cash shortfall, not enough warehousespace, an inventory miscalculation, slow-moving products or discontinued products.Prepare a risk assessment matrix to determine what your worst risks are and how youcan address them when they occur.

6. Regularly Audit: Conduct regular audits to ensure that your actualstock and reports line up. There are three ways to perform an audit: physical goods,spot checking and cycle counting. A physical inventory requires counting all yourinventory and should be performed at least annually and often at the end of the yearto line up with income tax reports. Spot checking is when you choose a product ortwo at a different time from the full inventory, physically check it and compare itto what is in your documentation or software system. Problem or fast-sellingproducts are ideal for spot checking. Cycle counting spreads out the reconciliation throughout the year. Each product has its audit period, but you should check high-value items more often.

7. Selective Inventory Control (Forecasting): Many techniques fallunder selective inventory control and management or forecasting, such as ABCanalysis. In this form of analysis, you classify the inventory with one of thefollowing: usage value, procurement source, procurement difficulty, seasonality,unit price and rate of consumption. Choose a formula based on the relativeimportance of each classification and how much it affects the stock.

Tips and Expert Advice for Getting Started With Inventory Control

Fully exploring the intricacies of inventory control procedures and theory may be a lot forsome businesses. The tips below can help you identify what you need to do beforeimplementing a new inventory control process:

• A Good Inventory Control Plan Has Several Key Essentials: Purchasinga software system that addresses your warehouse stock is not enough. A goodinventory control plan addresses your orders from production or purchasing toselling the items and ultimately removing them from your books. An inventory controlprogram should account for things like reducing wasted warehouse space, orderingsupplies using a forecasting formula and setting up vendor relationships.

• Plan First, Then Execute: Any manager worth their salt will tell youthat inventory management and control are continuous and do not live just at thewarehouse level. You should continually update your plan, then put it into practice.You should be tracking metrics and updating your forecasts for future months weeklyand making changes to your stock management planned as needed. You may also berequired to change your inventory management plan based on world events.

• Ensure You Always Have Critical Stock: Whether it’s machineparts or an item that is the backbone of sales, determine which stock is critical,and ensure those items never go out of stock. For this, you should have an inventorycontrol process in place.

• Carefully Review All Shipments: A key point of inventory loss occurswhen your business initially receives an item. Closely review packing slips andproducts for any damage.

• Appoint the Right Inventory Management Team Members: Staff buy-in iscrucial, but make sure those assigned to own the inventory control processes are theright people for the job. Math should be among their strengths, and they should havetime to perform the task correctly. Ideally, your inventory management team includespeople that touch each stage of the process, from warehouse managers to procurementspecialists to pickers on the floor. Smaller businesses should consider includingall managers and some front-line staff representation.

• Group Like Items: As much as possible, group like inventory in thesame areas. Further, unique products should have a single storage location.

• Find the Balance Between Inventory Costs and the Benefits of Having Stock onHand: Developing a truly effective inventory control system relies onfinding that right balance between the cost of making and storing product andavoiding stockouts. Your business’s money is tied up in that stock.Fortunately, getting to know your business enough will enable you to choose theright methods and forecasting techniques. You are looking to determine the totalcost of your stock, including factors like warehousing costs and perishables, andweighing that against the demand and the cost of stockouts to give you the rightbalance

• Look at Other High-Level Plans: If you do not have positive controlover your inventory, you probably need to address other areas of your business. Doyou have an adequate quality management plan? Have you looked at your facilitymanagement plan lately?

• Choose a Scalable System: It is tempting for small businesses toorder software systems that are one-size-fits-all or, conversely, free or low-cost.Cloud-based systems can grow with a business and provide the analytics you need tocontinue your business’s growth.

• Your Software Is Only as Good as Your Processes: Software cannotsolve bad processes, just automate them.

• Have a Backup Plan: No matter how high tech the software or wellthought out the process, ensure that your business has a backup plan for poweroutages and theft. Cloud computing is always a better option than a local server.

Control Stock With How You Sell It

You can also control stock with how you sell it. In some cases, the stock is not even a partof your onsite inventory, but you can still control it. Here’s how based on when orhow you sell your products:

• Bundling: Combining goods or services to offer the customer extravalue for one cost is called bundling. In inventory control and management practice,bundling is a way to move aging inventory. For example, you include a surprise freegift or offer a reduced price on another item based on a purchase. These techniquesalso improve your customers’ experience.

• Rolling Inventory: When inventory is rolling, instead of storinggoods inside a warehouse, managers leave it in the truck trailer and store thattrailer in the warehouse parking lot. A driver can hook up the trailer when thestock is needed and drive it to the retail store. Warehouse employees never touchthe inventory.

• Drop Shipping: Also known as cross-docking, drop shipping is when amanufacturer or supplier directly ships its products to customers on behalf of theretailer. The retailer never has the product in stock and never handles or sees theproduct. These businesses mostly work via internet sales.

• Consignment Inventory: This business arrangement occurs when acompany gives its goods to another company or storefront before they pay for them.The storefront or company pays for the products once it sells them, for an agreedupon percentage of the sale price. Thisarrangement can be an excellent situation for small businesses that areselling the products because their cost of ownership is minimal.

• Backordering: When a company decides to take orders and payments forproducts that are not in stock, they are taking backorders. For a small number ofitems (one or two), it is easy to process the order and inform your customer with aforecast of when you will fulfill it. Further, the higher the value of the item, themore patient your customers will be with backorders. Problems mount, however, whenthe backordered products start to multiply. It is not recommended that smallbusinesses whose products are generally stocked on-site mix with many backorders.Positive reasons to offer backorders include increasing cash flow, adding someflexibility for small businesses not capable of handling the logistics and lowerholding and overstock costs. Challenges of backordering include possiblydisappointing customers, longer fulfillment intervals and other logisticalrequirements.

Forecasting for Inventory Control

Instead of using a manual method to reorder, look at ways to mathematically forecast what isin stock or when to order. These methods can include categorizing your stock, such as in theABC method, but mainly show what you currently have in store:

• ABC Analysis:

  This method of supply chain forecasting divides allon-hand inventory into three distinct groups. “A” items are those ofhigh value and low sales frequency. The budgetary impact of these items issignificant, but their sales are not predictable. “B” items are those ofmoderate value and moderate sales frequency. “C” items are those of lowvalue and high sales frequency. These items require less oversight due to theirlessened monetary impact and constant turnover. Using these delineations forinventory helps you prioritize by separating out products that need more attentionthan others. Forecasting done with ABC analyses calculates the number of stockavailable based on this delineation. Additionally, storage and packing locations canbe set up to reflect these delineations.

• Reorder Point (ROP) Formula:

  The ROP formula mathematically tellsyou the right time to order or produce more stock. Using existing information,calculate the sum of your lead time demand and safety stock. You may need to knowthe reorder lead time alongside this formula, which is the time between placing anorder and when you receive it. You must account for the lead time when calculatingorder timing. The formula for reorder point is:

Let’s say that Ava has to calculate the ROP for the liquid bandages her companymanufactures in its facility. She calculates the safety stock (SS) for this product at 50units.

She then calculates the Lead Time Demand (LTD) for that product.

LTD= (Average Daily Usage x Average LeadTime Days)

Her manufacturing department uses 20 units of raw materials per day, and it takes about fivedays for a reorder of those materials to arrive.

Using this information, she can calculate the ROP:

If stock for liquid bandages falls below 150 units, then Ava must place a reorder.

Follow this handy chart to calculate your ROP:

“Inventory management gets complicated very quickly, explains Dr. Pyke. “Forexample, a reorder point model has a trigger. So, the order fixed quantity is hopefully setup in a way that optimizes the trade-offs involved (i.e. too much versus not enough). When Iam helping a business, this is where I usually start their training. Moreover, problemsoften come in manufacturing when there are lags between the startups and processchangeovers—for instance, an ice cream manufacturer changing over from chocolate tovanillaversus vanilla to chocolate. In the latter example, going from vanilla to chocolate, thereare fewer complications and problems. Also, chocolate covers over a multitude of sins!However, when you go from the more complex (chocolate in this scenario) to the less complex(vanilla) process, it can take longer and add unnecessary layers of complexity.”

• Economic Order Quantity (EOQ):

  The EOQ determines the optimal amount ofinventory you should buy or produce to make the costs of ordering and storing minimal.This formula is useful for when the demand, ordering and holding costs are consistentover time. You can modify the EOQ formula to compensate for different production levelsor order intervals.

What EOQ Means

Let’s say that Ava wants to know the optimal number of size 12 glass bottles she wantsto have in-stock for production. They are quite costly to purchase and store, so she mustcalculate the EOQ. Ava’s production team uses 1,000 size 12 glass bottles annually. Itcosts her firm about $3 per year to hold that bottle in inventory, and the fixed cost toplace an order is $5. Therefore,

The ideal order size to minimize costs and meet customer demand is a little more than 33 size12 glass bottles. Now that you have the ideal quantity, you can also use the ROP formula todetermine the perfect timing to order these size 12 glass bottles.

Follow this handy chart to calculate your EOQ:

Supply Chain Inventory Control

There are some options for controlling your inventory along the supply chain. Whether you areon the production side or within the warehouse, these techniques can help.

Supply Chain Inventory Control Techniques

• Batch Control: To control inventory you are producing, you canexecute batch control. This method produces goods in batches sized to ensure thatthe right amounts of components are available to produce the required number of thefinished product. Batch control is especially useful in concert with methodologiessuch as Lean manufacturing and just-in-time. Batch control procedures save money andresources.

• Third Party Logistics (3PL): Some companies outsource portions oftheir supply chain, such as in their warehouse, distribution or fulfillmentservices. Outsourcing may occur at certain times of the year, such as during theholidays. 3PLs turn over employees constantly, especially when they only hire themseasonally. These inexperienced employees can account for a significant amount oflost or missing inventory.

• Bulk Ordering and Shipping: One way to manage costs is to orderitems that you consider evergreen in bulk. You can also ship evergreen items in bulkat a discount. Companies lay out more money in advance, but since the items sellquickly and steadily, the risk is low. Bulk stock is easier to manage because of theproduct consistency, making the management costs lower. Manufacturers offer adiscount when ordering multiples of the same product, making the products cheaper.This option may be suitable where the demand is difficult to predict. However, bulkordering means higher storage costs, is challenging for perishable goods, can leadto obsolete stock and ties up capital.

Stock Quantities: How Much to Keep

The type of stock (raw, unfinished, finished or consumable) you have can also determine howmuch you should keep on hand.

For raw stock, look at the following factors:

• The reliability of the supplier and alternate sources of supply
• Whether you produce and deliver the components in batches
• The predictability of demand
• Bulk discounts

Unfinished stock, also called work-in-progress (WIP), costs you in storage space but is oftenbeneficial. You can add an extra level of protection to your production with unfinishedstock. For example, if you have a machine in the middle of a process that is at risk ofbreaking down, you can pull the unfinished stock to bypass that part of the process.

Keep extra finished stock around when you identify a product’s demand or when you areconfident that your batch productions are adequate. You would also naturally have extrafinished stock around when you are completing a large order.

How much consumable product stock you should keep around also depends on the reliability ofyour suppliers. If the demand for those products is well-known and steady, you may want tokeep extra. Further, if you expect price rises or get a significant discount for bulkbuying, having additional consumable stock is acceptable.

Inventory Control Policies and Processes

Inventory control starts the moment goods enter your organization, whether through the frontdoor or via a receiving dock. Developing standard operating procedures (SOPs) can helpeveryone understand their responsibilities related to stock. SOPs are step-by-stepinstructions that define routine activities.

What to Include in an SOP

In the case of inventory control, the SOP should, at a minimum, address:

• Receiving goods and supplies
• Storage and tracking
• Inspection dates and rotation
• Security
• Shipping

If you are developing new SOPs, clearly define policies and processes, and ask staff members(especially new ones) to review them for understandability. Additional tips for inventorycontrol policies include:

• Separate Administrative Inventory Control From Accounting and Finance:For security purposes, the staff who handle the administration of inventorycontrol should not be the same personnel who perform stock controlling duties infinance or accounting.

• Prioritize Accurate Inventory Counts: Problems occur when trying tofulfill an order with an unknown or inaccurate amount of inventory in stock.Inventory accuracy is a higher priority than order fulfillment.

• Choose the Right Tools: Before drafting your processes, determinewhat risks are inherent and acceptable in the type of tools you choose. Whether youuse dedicated software, RFID tags or spreadsheets and bins, define your systemsfirst.

• Perform Continuous Improvement: To ensure continuous improvement,you must include it as part of your SOPs. Even a short section on the expectedintervals for review provides a place for staff to start.

• Consider How Often You Need to Conduct Stock Counts: There are threedistinct ways to conduct stock counts: periodically, perpetually and a combinationof perpetually and periodically. Decide on the intervals, and write them into yourSOPs.

• Factor in All Equipment: As you write your policies, consider thetools available to set realistic expectations. For example, if you want yourphysical inventories completed over a weekend, determine if your employees shouldhave scanners that expedite their work.

• Determine, at a Minimum, Annual Stocking Policies: At the bareminimum, annual stocking policies should include the maximum and minimum levels,safety stock levels and optimum reorder levels. You should also calculate youraverage inventory levels to help set these policies.

• Prepare an Annual Inventory Budget: Before buying any inventory, andat least once a year, determine your annual inventory budget. This estimate is thetotal cost of ownership of the goods for the year, including the costs of materials,holding, fixed operation, logistics, redistribution and any miscellaneous items.

Basic Invoice Control Policies

Effective invoice control policies should inform staff about how your business invoicescustomers, including the schedule, forms and procedures. Developing reliable basic invoicecontrol policies and procedures ensures you collect the hard-earned income from yourproducts or services. Invoices are typically sent after order fulfillment. Your invoicepolicies can be templates and should be clear and simple so that staff can follow themwithout many issues.

The invoice types you need to control are:

• Purchase Orders: Before processing an order, clients or sales staffsubmit purchase orders. These documents should be completed and signed by thecustomer, ensuring that all details are accurate.

• Order Receipts: Policies around an order receipt should reflect theset of checks you perform upon delivery of a product. These checks should kick offinvoicing and include the shipment tracking numbers and receipt paperwork.

• Invoicing Processes: Templates are ideal to use for invoicing,especially if your software automatically creates them. Policies around invoicingshould ensure the purchase order number, invoice date and include all the requiredpayment details.

• Software: If your customer base is large or growing, considerinvesting in invoicing software. Create policies that help support the developmentof a template, and ensure the software tracks and archives all transactions.Software can also make generating unpaid invoice reports more efficient andstraightforward.

• Past Due Payments: Inform all customers of your late payment ornonpayment policy. Be flexible, but ensure that these documents reflect theconsequences. For example, explain grace periods and procedures about who follows upon tardy invoicing and what leeway they have so customers can make their owndecisions about paying an invoice late.

Key Performance Indicators in Inventory Control

Key performance indicators (KPIs) are metrics that demonstrate how well portions of yourcompany are functioning and how well you are achieving your key business objectives. KPIsare also useful for comparing your business to others in your industry. In inventorycontrol, KPIs can help identify pain points and why you are losing money. If you are havingstockouts, you will want to fix them so you can keep customers. You will want to look atyour long-term and short-term goals using KPIs. Therefore, certain KPIs make sense to runregularly. For example, a stock-to-sales ratio is one KPI that can track forecasting:

Stock-to-sales ratio = (Beginning of monthstock (BOM) / the month's sales)

Another KPI is sell-through-rate (STR), which helps retain customers. Use the STR as a metricto identify how long a product is in stock, if you need to reprice it and when to reorder.This metric is often compared to the inventory turnover rate, which has a longer period tocalculate (often a full year). The sell-through-rate KPI compares stock received through asupplier to determine how much you sell monthly:

STR = Sales / BOM on hand x 100

Average inventory is a KPI that helps you understand how many products you are storing overspecified periods:

Average Inventory = (Current inventory +previous inventory) / 2

Finally, the fill rate is a KPI that tells you how well you fulfilled your orders for singledeliveries or for deliveries over a given time. This KPI is also called line item fill rate(LIFR), with the term “line” referring to the line on an order or manifest. Theformula for LIFR is:

LIFR = (Number of items purchased / numberof items sold) * 100

Another formula that determines LIFR is:

LIFR = (Number of lines the order fulfills/ Total number of lines on order) * 100

A fulfilled order is complete when it is at 100%. For example, Jack Heinz orders fourproducts:

This company shipped lines one through three (the seamless carbon steel pipes, copper pipesand plastic trench drain with grates) on May 20, 2019. When the company ran the LIFR, it wasnoted as 75%, because there were four line items, of which only three were filled:

LIFR = 3 / 4 * 100 = 75%

The company shipped out the 90-degree threaded fitting on line four on May 24, 2019, bringingthe LIFR to 100%. However, if your metric focuses on customer satisfaction based onfulfilling orders immediately, keep the metric for only the initial rate. The initial LIFRis 75% and undoubtedly provides more information than the final LIFR.

You can also calculate fill rates by case and value. When you expedite items outside thetotal shipment, you cannot count those non-expedited items as having been misses, and youshould factor out the expedited items. In other words, your primary concern should be howyour business fills orders regularly, not during exceptions.

Inventory Control Software

Manually controlling inventory has its challenges: It can be labor-intensive, difficult toshare, prone to human errors, create excess paperwork you do not need and require continuousmonitoring and fact-checking.

According to Dr. Pyke, one software solution doesn’t fit all organizations. He says,“there are systems that integrate with existing ERP (enterprise resource planning)systems. Some organizations have developed their own systems, taking their best thinking,and developing what they need exactly in-house. When I consult, I often help smallbusinesses develop their own spreadsheets to start. One of the companies I advise is a largesoftware company, and their software is excellent and can do major things for their company.These systems do exist for smaller companies, but there are also inexpensive options thatcan do just as good a job.”

4 Questions to Ask About Advanced Inventory Tracking Software

If you are starting to look at advanced software to track inventory, you will need toapproach it carefully and thoughtfully. Choose inventory control software by answering fourmain questions:

1. What products and quantities of products do I need to manage?
   Your software needs will absolutely be different, depending onwhat and how much you sell. For example, the software priorities are vastlydifferent for companies that sell food versus one that sells high-end electronics.Food sales companies need software that can track expiration dates. Companies thatsell high-end electronics require software with security features and analytics thatensure their stock does not become obsolete.

2. What are the critical features I need?
   Some software systemswill integrate with existing systems, but some will not. It’s critical todecide whether you need this integration or if you will build in the additionalcosts to replace the software. Further, letus assume that your business has a trajectory of massive growth within the next fiveyears. In that case, select software that can scale.

3. What can I pay for software?
   Software systems that targetinventory control can differ wildly in cost. Good salespeople can quote a pricebased on your requirements. In that bottom line, include any other software thatneeds to change to accommodate the new purchase and the cost to transition in stafftime. Calculate the return on investment (ROI) for every solution you review and howlong it will take to recoup that investment.

4. What does software mean for staffing?
   Determine if your currentstaff can adapt to vast changes in how you do business. Then decide if you need tohire new staff with different skill sets, reassign or retrain your current team. Forexample, if you employ many low-skilled workers to count inventory, you may not needthem with a perpetual inventory system. Further, they may not be able to help youset up your new software or troubleshoot it after installation. You may need to hirea staff member with technical software skills, depending on the complexity of whatyou buy. If you can reassign loyal staff members to other jobs or train them for thesoftware, excellent. Otherwise, consider what your business needs are first.

Getting Started With Inventory Control Software

To effectively control your inventory, you need item-level visibility—somethingsoftware canprovide if you use it consistently. In this case, consistent use means that every staffmember uses it the same way every time they produce, sell or receive goods. Software canprovide many things at your fingertips. For example, you always know what’s been soldand how fast, any unique offers and discontinued products. You have an electronic version ofeach transaction, which can include the part number, quantity and when and where you soldit.

Other advantages of having dedicated inventory control software include:

• Increase in profits
• Never have stockouts
• Barcodes and label track inventory
• No more inventory write-offs
• Quick and efficient auditing
• Saved time
• More system flexibility
• Quick information retrieval
• Built-in analytics for decision-making

To get started, look for the software with features that support your business’s needsand future.

When looking for new inventory control software, consider these features:

• Inventory optimization parameters
• Tracking and forecasting tools to signal stock anomalies
• Tools that automate replenishment, including those that calculate the right stock levels
• Lead time management
• Safety stock calculations
• Cost management
• Logic to call out expired shelf-life and slow-moving products
• Support across multiple locations
• Back office software integration
• Automatic inventory monitoring
• Automatic batch controls
• Supplier data metrics
• Barcoding integration
• RFID system integration
• Multiple pricing for items, based on the customer
• Pricing in different currencies
• The option to update per item or per item group
• Multiple warehouse communication
• Quality control metrics
• Batch tracking
• Support for multiple users

When looking at any system, it’s important to keep in mind future needs and howtechnology can help. Dr. Pyke shares, “There is a big animal called forecastingcoming. Everyone wants to predict everything underlying every purchasing decision thatconsumers make. Machine learning and the vast data amounts will only make the ability toforecast better. Taking advantage of that ability in a way that does not cost too much isthe future of this industry.

“Blockchain in the supply chain is also up-and-coming. You do not need blockchain to bevaluable, but the visibility to what is out there will improve. Over time, it will beinteresting to see what is real and what is hype, but it all will have an impact,regardless. My advice is for businesses to sit on the sidelines for a bit and see whathappens. Eventually, companies will be able to use it for improvements in inventorymanagement.”

The Best Practices of Using Inventory Control Software

Whether you use a dedicated software system or spreadsheets, you still need to follow somebest practices. Use whatever tools are on hand to optimize inventory levels.

Once you have inventory control software set up, follow these tips:

• Use platforms that talk to each other or have everything under the same system.
• Treat each item in your inventory differently; each SKU is different for a reason.
• Ensure your supplies are above board by using the available data.
• Use mobile devices when possible.
• Slot your inventory.
• Perform cycle counts and update the data in your system.
• Link all transactions to your software.

You should also ensure that you do not purchase something too complicated for what yourcompany needs and that the software is worth the cost. If you don’t, it’s notjust a waste of money, but you could end up needlessly frustrated. If your software comeswith analytics capacity, though, make sure you perform the measurement.

If you bought or are looking to purchase inventory control software, use it to perform thefollowing calculations:

• What products are selling and not selling
• Total inventory costs
• Inventory trends and sales data
• The inventory budget

How to Keep Your Stock Secure

Ensuring your stock is secure should also be top of mind when thinking about inventorycontrol. Whether your concern is thieves and shoplifters or your employees, stock securityaffects the bottom line. To protect your goods from people who would steal them out yourfront door, identify which inventory is the costliest or the most desirable. For example,laundry detergent and razor blades are high-target commodities.Everyone needs them; they are sure to resell and are amongst the most stolen items in anygrocery store. These products should be accessible to customers but placed in ahigh-visibility place if you have problems with theft.

You should fit expensive, high-end items such as computers and electronics with RFID tagsthat can add security. An alarm will sound if they are removed. Be sure to secure deliveriesafter their arrival. Before you log items into your system is a prime time for them to getlost or stolen. Dispose of any additional packing materials, so thieves do not get the ideathat a delivery just took place. If possible, install closed-circuit television (CCTV), alsocalled video surveillance, in your parking lots and other vulnerable locations to deflectpotential theft.

An outside threat isn’t the only security concern you should have. Staff can steal,too. Train your team on the security systems in place and policies that address theft andits discipline. Many people are unaware of the toll theft takes on a business, including thecosts of staff turnover and job security. So, train your staff to understand the trueeffects of stealing.

By setting up procedures that prevent theft, you can stave it off before it occurs. Forexample, staff who oversee stock should not also monitor the company’s financialrecords. Restrict access areas to personnel, and distribute responsibility. Consider whetherall staff require access to every portion of your warehouse or every supply cupboard. Assignstaff responsible for auditing to assist other staff with their supply needs. Regularlyreassign staff to stock control to prevent collusion. Finally, consider if you’reusing the functions in existing software to their best ability.

NetSuite Can Help Provide Visibility Into Your Inventory Control Process

Properly managing inventory can make or break a business, and having insight into your stockat any given moment is critical to success. Regardless of the type of inventory controlprocess you choose, decision-makers know they need the right tools in place so they canmanage their inventory effectively. NetSuite offers a suite of native tools for trackinginventory in multiple locations, determining reorder points and managing safety stock andcycle counts. Find the right balance between demand and supply across your entireorganization with the demand planning and distribution requirements planning features.

Learn more about how you can use NetSuite to manage inventory automatically, reducehandling costs and increase cash flow.

Inventory Control FAQs

What is Inventory Control Process?

Inventory control process are the processes and techniques used to manage a business’sinventory. These processes help ensure inventory is stocked to the right levels,doesn’t expire or cost too much to store long-term, and is available at the rightlocation and time.

What is an example of Inventory Control?

An example of inventory control is found at grocery stores and other businesses that sellperishable goods. Grocery stores work hard to ensure fresh food is available when customerswant it, but don’t order so much that it goes bad on the shelf. With a warehousebusiness where perishable goods are not an issue, inventory control processes ensurehigh-demand products are readily available while lower-demand products are kept in lowersupply.

What is the Purpose of Inventory Control?

Inventory is a major cost for businesses. In addition to the cost of the good, companies haveto pay for storage and the related real estate, staffing, and utilities to keep those itemsavailable. Inventory control aims to optimize inventory so you’re not overstocked orunderstocked for any specific item.

What are the Four Types of Inventories?

The found main types of inventory are raw materials/components, WIP (work in progress),finished goods, and MRO (maintenance, repair, and operation supplies). Not all businessescarry all four types of inventories, but most businesses require at least one of theseinventory categories.