Ever order something online only to learn that it’s out of stock? Or rush to a store for a certain product to find an empty shelf? As a business owner, you want to avoid this: running out of stock can harm your relations with customers and forfeit sales, hurting your profitability. To ensure this doesn’t happen, you need effective inventory control procedures.
Learn more about the types of inventory control procedures, the benefits of an inventory management system, and tips for effective inventory control.
What is inventory control?
Inventory control is how your business records and monitors the supply of goods it has on hand, based in part on insight into what and how much your customers buy. An effective inventory management system ensures that the correct supply is available when needed and accounts for shifts in customer demand. Inventory management systems can reduce the costs associated with warehousing too much supply or the wrong stock.
Think of it like this: It’s a way to help avoid running out of holiday stock in early December, for example, or to stop you from reordering products that customers aren’t buying.
Inventory control vs. inventory management: similarities and differences
Inventory control and inventory management both utilize sales data and follow certain parameters to determine the amount of stock needed for efficiency and profitability.
- Similarities: Essentially, inventory control falls under the umbrella of inventory management. Both monitor various components of your inventory and help you make informed ordering decisions. They also provide insight into what you should market to your customers, or if there’s a product you should ditch.
- Differences: Inventory control monitors goods stored in a warehouse (the physical inventory that’s on hand), while inventory management relies on demand and sales forecasting to monitor raw materials and finished products. It is a key tool for ensuring that goods are in the right place at the right time. Inventory management also helps with anticipating customer demand, restocking and controlling inventory to reduce waste, and maximizing profitability.
What are inventory control procedures?
Inventory control procedures involve consistently monitoring your physical inventory, maintaining a high level of supply chain management, and using sales data and anticipated customer demand to make the right decisions.
Your inventory control system should be robust and ensure you have more inventory when sales historically spike, and fewer items during slow periods. Regularly monitoring your inventory can also contribute to loss prevention and higher customer satisfaction by avoiding running out of stock.
Technology can ease much of the burden of inventory control for ecommerce and brick-and-mortar retailers. One such technology is Shopify POS, available in two subscription tiers: Lite and Pro. The Pro tier offers advanced inventory management to create purchase orders, generate unified analytics (a blend of online and brick-and-mortar data), and more. You won’t have to manually reconcile anything, because it captures warehouse and retail inventories and automatically syncs quantities.
5 types of inventory control procedures
- First in, first out (FIFO)
- Last in, first out (LIFO)
- Just in time (JIT)
- Economic order quantity (EOQ)
- ABC analysis
Despite their different goals and procedures, each of these methods is designed to control and track inventory:
1. First in, first out (FIFO)
In the FIFO system, the oldest inventory is sold before the newer inventory. It also means you won’t be stuck with out-of-date products your customers eventually won’t want. Because older, less costly goods are expensed first, this method tends to maximize net income, but also leads to higher tax bills.
2. Last in, first out (LIFO)
On the flip side, LIFO accounts for inventory with the assumption that newer items are sold before older items. The cost of the most recently purchased items, which usually are higher than older products, is expensed first. This is a method to consider for ecommerce and physical businesses with a large inventory. It is a more conservative method, because recording higher product costs leads to lower net income as well as taxes.
3. Just in time (JIT)
The just-in-time inventory system is aptly named, because it refers to receiving products as close as possible to when they will be sold or used. This keeps stock—and costs—low, and can make inventory easier to manage, because there are fewer goods to track in warehouses. For instance, supermarkets won’t keep lots of fresh produce on hand because of its short shelf life. Rather, they will order just enough to satisfy expected customer demand over the course of just a few days. That said, disruptions in shipping and manufacturing supply chains—such as those during the pandemic—can leave your business vulnerable to shortages.
4. Economic order quantity (EOQ)
Economic order quantity (EOQ) is a calculation that reflects the ideal size of an order based on variables such as the time of year and economic conditions. This helps companies avoid overspending and waste while still meeting customer demand. Keep in mind that this method is more time-consuming because it requires more intensive monitoring.
5. ABC Analysis
The ABC analysis system applies a simple concept to the art of inventory control. Products or materials with the “A” designation are the most important (or often the most expensive). The “B” designation is for a stock of moderate value that requires moderate management. The “C” designation is for low-cost inventory that warrants minimal management. The limitation of the ABC method is that it does not account for seasonal demand or economic changes, potentially resulting in missed sales opportunities.
Benefits of implementing inventory control procedures
For ecommerce and retail businesses, good inventory control procedures offer several benefits, including:
- Minimizing warehouse costs. Finding optimal locations for products in a warehouse, limiting waste (especially for perishable items), and improving internal communications for orders and product availability can all minimize warehouse costs.
- Greater forecasting and planning abilities. Forecasting can create a more efficient product journey from warehouse to store or customer.
- Increased cash flow and profitability. Fostering more positive customer relationships by fulfilling orders on time, increasing quality control and standards, and calculating the cash value of your inventory can all help improve profitability.
On the other hand, poor inventory management may result in:
- Higher holding costs. The longer you hold inventory, the more it will cost you.
- Lack of accurate information. Poor inventory management will deprive you of the information needed to make informed decisions, such as whether a product is selling or not. Carrying the wrong products or running out of popular items could lead to lost revenue as shoppers turn to your competitors.
- Paying for excess warehouse space. If you don’t manage your inventory well, you could pay more than necessary to store it.
Effective inventory control: tips and best practices
To control your inventory and maximize your supply and profits, try these tips:
- Set inventory goals and update them as needed. These goals should reflect your sales targets and be adjusted based on your inventory goals.
- Implement an inventory tracking system. A proper tracking system will not only monitor your inventory levels but also the location of products, their condition, and how long they’ve been in storage.
- Regularly analyze your inventory data. Whether it’s quarterly or annually, periodically go through your inventory numbers to set sales targets, create marketing campaigns, streamline operations, and better understand customer demand.
- Develop a reordering strategy. Do you reorder when you’re down to 10% of an item or once you’ve sold the last unit? A reordering strategy will answer this question and more, ensuring you have the right products available—not the ones customers don’t want.
- Automate your inventory management processes. Automation can make managing inventory easier and free you up to focus on other aspects of your business. Automation also removes the potential for human error.
- Consistently audit your inventory. Audit your inventory at least once a year. This keeps records up to date and gauges if your system is working.
Inventory control procedures FAQ
How do I choose the right inventory control procedure for my business?
You can use sales data, warehousing costs, and customer demand to determine the right procedure for your business.
How often should I conduct inventory audits?
Most retailers should perform an extensive audit at least once a year, usually to coincide with tax season. For large inventories or companies with a lot of SKUs (stock keeping units), you should audit every two to three months.
Can I automate inventory management processes?
Yes. Retailers, including ecommerce businesses, can use some form of inventory control software to organize and monitor their stock. Several providers offer inventory control systems that can automate most, if not all, of your process.
How do I know if my inventory control procedures are effective?
High turnover of products is a good sign of effective inventory control. Consult your quarterly sales data to determine if you’re meeting customer demand and warehousing the right products in the correct quantities to avoid running out of stock.