Inventory Control – What is it and Why it is Important

Inventory control allows companies to maintain the proper balance of stock in their warehouses and help with providing superior customer service.

inventory-control-what-is-it-and-why-it-is-important
Inventory control systems are critical tools that help large and small businesses measure and balance their operations.

If you are involved in almost any type of manufacturing business, you have probably wrestled with inventory issues at some point. Controlling your inventory is a process that leads to generating maximum profits with a minimum amount of stock, all without diminishing your customers’ levels of satisfaction.

Not surprisingly, considering the potential impact inventory control can have on both your company’s well-being and your customers’ approval, it can be one of the primary concerns of any organization. Since they integrate so many aspects of a company’s administration—purchasing, shipping, receiving, turnover, storage, tracking, and reordering—inventory control systems are critical tools that help large and small businesses measure and balance their operations.

What are the two main types of inventory control systems?

While there are a variety of inventory control systems that can help you track your inventory, there are the two principal types to consider, the difference between them is the frequency at which the system updates the data.

Perpetual inventory system

The perpetual inventory system is the more common of the two. With this system, companies enter inventory data continuously. When your company purchases a product, it is immediately recorded as inventory, and when it is sold, the inventory balance is reduced and recorded in cost of goods sold.

Click here to learn more about Calculating the Cost of Goods Sold in Manufacturing.

The only deviations in this system come from theft or transactions that were not recorded. Because of this, it’s crucial to have periodic counts of physical inventory and make adjustments to match your records

Periodic inventory system

In contrast, the periodic inventory system is not kept perpetually up to date. Instead, a business will revise inventory information only at particular intervals, which is often annually. The periodic system is often the choice of companies that do not want to set up the technology or purchase the software required to track data.

Read more about Periodic vs. Perpetual Inventory System in Modern Manufacturing.

Why is inventory control so important?

Inventory control allows companies to maintain the proper balance of stock in their warehouses. It can prevent them from losing a sale because they didn’t have enough inventory to complete an order. Inventory issues—such as too many backorders—will send customers in search of other suppliers.

When you control your company’s inventory, you can provide superior customer service. You will also have real-time knowledge of what’s selling and what isn’t. Knowing what you have, where it is, and when stock is going in and out will help you lower costs, speed up deliveries, and keep fraud at bay.

Also, there are usually no good reasons to have excess inventory, taking up space in your warehouse. It often leads to loss of profits when the stock goes out of style, gets damaged, or you lose a customer who required it.

Difference between inventory control and inventory management

Inventory control and inventory management seem similar, and sometimes the terms are used interchangeably. However, they each focus on a different aspect of inventory optimization. Here is how they contrast:

Inventory control revolves around warehouse management, including:

  • Comprehensive inventory lists
  • Product details, histories, and locations
  • Barcode scanner integration
  • Reorder reports and adjustments
  • Variants, bundles, and kitting
  • Syncing stock on hand with sales orders and purchase orders

The goal of inventory control is to maximize profits with minimum inventory while keeping customer satisfaction levels high.

Inventory management is a more general term. It can cover how your business obtains, stores, and profits from both raw materials and finished goods. It’s all about having the right stock, in the right quantities, where you need them when you need them, and all at the correct cost.

How can inventory control improve your business?

A 2015 Global State of Multichannel Customer Service Report, found that 62% of customers stopped doing business with a brand that had poor customer service. High on the list of those customer service complaints was annoyance over backorders and out-of-stock items. The research showed that convenience stores, in particular, could lose many customers entirely from too many out-of-stocks.

Proper inventory control systems can ensure that your company’s products are meeting your customers’ needs and expectations. They will also help you keep your business running at optimal financial levels. Areas where your company could be incurring expenses or losing sales because inventory control practices are not in place include:

  • Excess stock
  • Excess storage costs
  • Deadstock
  • Losing track of inventory
  • Losing goods in the warehouse
  • Decreased sales
  • Losing loyal customers

Many small businesses are short of cash because much of it is tied up in their inventory. Proper inventory control practices can provide the balance needed between customer demand and the management of inventory. Most managers would be surprised or shocked to discover how much money they could save by controlling their inventory wisely.

Getting started with inventory control

The details of the inventory control procedures might be a lot for some businesses to take on. So, here are some tips to help you identify your needs before you get started.

  • An inventory control plan goes beyond merely tracking your inventory: Your plan should focus on your orders from purchasing to production and selling the products and then removing them from your books. The program should also address reducing wasted warehouse space, ordering supplies utilizing a forecasting formula, and setting up relationships with your vendors.
  • Make sure you always have critical stock on hand: There will always be certain items that should never go out-of-stock. Whether it’s repair parts for machinery or components that are the mainstay of sales, you need to have an inventory control process in place that guarantees these items will always be available.
  • Create a plan and implement it: Inventory control is continuous and not confined to the warehouse. You need to be tracking metrics, updating your forecasts, and changing your inventory control plan when necessary.
  • Choose a scalable system: It may be tempting to purchase software systems that are either one-size-fits-all or very low-cost. A cloud-based system will grow with your business and provide the analytics you need to continue that growth.

Use the right manufacturing software to help you control your inventory

Inventory-Software
Companies can improve demand forecasts with inventory software solutions that utilize historical data

Companies can improve demand forecasts with inventory software solutions that utilize historical data and considers factors such as the lifecycle of the product, seasonal fluctuations, and projected trends. These inventory solutions, available at reasonable costs through manufacturing software such as Enterprise Resource Planning (ERP) systems, can track and calculate inventory levels and minimize the need for carrying extra stock. When companies consider the benefits of controlling their inventory, they find this software is well worth the investment.