Your guide to using inventory control to optimize your supply chain
Understanding your inventory is key to achieving an efficient supply chain. But what are the necessary steps to better manage your inventory levels? Let’s explore inventory control and why it’s an integral aspect of a successful supply chain operation.
What is inventory control?
Inventory control, also known as stock control, is the process of managing your inventory levels to optimize the amount of supply. Simply put, it ensures you can meet customer demands at a given time.
The goal is optimization – to maintain only the necessary amount in order to minimize costs while preventing stockouts. Successful inventory control takes into account data from purchases, reorders, shipping, storage, loss prevention and more. It also involves your organization’s finances – too little stock in your warehouse can lead to lost sales, while too much increases overhead.
Inventory control vs. inventory management
While inventory control encompasses supply chain management and warehouse management, inventory management is the complete process of procuring, storing and profiting from your service or product. Inventory control only involves what is in the warehouse, while management regulates how the item arrives at the warehouse, its status while there and how it reaches its final destination.
Benefits of optimized inventory control processes
It’s crucial to know how much stock you have sitting in your warehouse right now for a number of reasons. But what about the long-term benefits? Inventory control is important because it:
- Maintains accuracy
- Informs demand forecasting
- Reduces costs
- Improves customer satisfaction
Knowing your inventory levels is important, but how should you do this? While there are a number of methods to choose from depending on your business and a number of factors, such as whether you employ vendor-managed or consignment inventory, utilizing one of these methods with regularity provides you with data necessary to maintain accurate stock counts. And while the overall goal is optimization, accurate inventory data is a critical part of the equation.
Some common inventory counting methods include:
- Periodic inventory: A method used when companies are starting out with inventory control, periodic inventory means to count the entire stock weekly or monthly. While you’ll have an exact count at the end of the day, those quantities won’t be reliable for long.
- Cycle counting: Employed once periodic inventory counts become too frequent. Counting a portion of your inventory each day so over the course of a month the entirety of your inventory is counted. You can use these counts to pinpoint discrepancies and identify trends in damage, shrink and spoilage.
- ABC counting: This method uses cycle counting but adds more data into the mix. This involves ranking your products by priority based on their price and popularity. The top 20 percent of items that sell the fastest and are the most valuable are “A” items. The bottom 20 percent are “C” items, and everything in between are “B” items. “A” items are counted most frequently, such as daily or weekly, “B” items less often and “C” items are counted the least. This allows you to manage your stock counting calendar more easily while still maintaining a more accurate picture of your inventory levels.
- Just-in-time inventory: Considered a method for when a supply chain is in sync, just-in-time inventory (many times referred to as JIT inventory) coordinates receiving raw materials from the supplier as a customer purchases it, reducing waste in the form of inventory housing costs. This can be risky, however, because one slip up within the supply chain can throw off the entire process.
Inform demand forecasting
Inventory control and demand forecasting go hand in hand. Demand forecasting uses supply chain information in order to plan how much stock is needed to meet the expected demand. Effective demand forecasting not only prevents stockouts or overstocking, but it leads you to optimizing your inventory levels – the overall goal of inventory control.
We’ve said it before, but it bears repeating: good inventory control can help you reduce your supply chain costs. It’s not the Holy Grail or a silver bullet solution – there are costs in every aspect of business operations – but maintaining just enough inventory to supply your demand prevents overstocking, reduces warehousing costs, lowers overtime pay and more.
Improve customer satisfaction
While fulfillment is only one aspect of a customer’s overall opinion of your organization, it’s a key part. Businesses that can’t fulfill their orders on time or according to demand risk losing sales – 68 percent of customers surveyed in the most recent “Global State of Multichannel Customer Service Report” say they have stopped doing business with a brand due to a poor customer service experience. Accurately forecasting and maintaining sufficient stock goes a long way in cultivating a positive experience for your customers.
You may have inventory control measures in place but are considering ways to improve your efforts. We’ve already discussed how inventory control is important in improving customer satisfaction – this goes for both existing and new customers.
In 2019, 43 percent of wholesale distribution business leaders identified growing revenue from existing customers as a top strategy for building profits. However, one-third of businesses report having missed a shipping deadline because they sold an item that wasn’t in stock. Inventory-based problems such as missed deadlines or unavailable product hurt your organization’s credibility.
Whether your priority is to grow your business, better organize your stock or streamline your processes, integrate best practices with your strategy. Some best practices for inventory control include:
- Adding automation: Using technology, such as inventory control software, reduces the time and costs necessary to perform manual stock counts and minimizes risk and potential error. Additionally, real-time visibility into inventory data maintains an accurate picture of your inventory.
- Implementing quality control: Another aspect of customer satisfaction, quality control allows you to monitor batches of inventory, make better sales order decisions, meet regulatory requirements and more.
- Establishing inventory allocation rules: You may be thinking, “but my supply chain and forecasting are good. What else can I do?” Sometimes, inventory issues are outside of your control. Major supply chain interruptions, such as what occurred with the COVID-19 pandemic, can result in stockouts due to manufacturer and supplier problems. Establish a set of rules that prioritizes which customers should receive what inventory you do have in stock.
- Using economic order quantity: Also referred to as EOQ, economic order quantity is a formula for ordering inventory based on the ideal order quantity. EOQ is most useful when demand, ordering and holding costs are consistent, but can be modified to compensate for different production levels. Using an EOQ formula can help you determine the optimal inventory level to target in order to maintain enough stock to satisfy orders, but not too much that you are incurring holding costs.
- Setting reorder points: These establish a stock level at which it is necessary to reorder more inventory to prevent a stockout. Ensuring enough stock is on hand is necessary to building customer satisfaction and avoiding lost sales revenue.
- Performing regular audits and inventory counts: Maintaining regularity when it comes to counting your inventory through a streamlined process attempts to identify and prevent issues before they occur. This process can be automated within an inventory management system.
- Optimizing your shipping location: Using third-party distribution as a means to fill orders, such as distribution centers, in order to hold inventory closer to the customer can reduce costs in order to earn the lowest cost and fastest delivery.
Automated inventory control methods
While taking stock counts by hand and tracking inventory levels on spreadsheets will get the job done in terms of basic inventory control, they’re not the most efficient practices. Here, a little automation can go a long way. Some effective inventory control systems include:
- Mobile devices and apps
- Lot control
Barcoding and RFID
Using barcodes, RFID or QR codes is one method of tracking your inventory levels and movement. This automated process comes with a level of manual labor but automates the management side of inventory control. To get started, determine whether your product already uses a format you can leverage, such as UPC codes. Then decide where you need to add barcodes and what kind you want to use.
Mobile devices and apps
Using a mobile device reduces soft costs by eliminating the need to buy scan guns and reducing training time for employees by using devices with which they are already familiar. Additionally, if you operate your business using enterprise resource planning (ERP) software, your mobile devices can run apps connected to your ERP solution for increased automation.
Assigning each piece of inventory a lot ID identifies its batch, allowing you to locate and track items for details such as expiration dates, recalls, country of origin, materials and more. Lot control uses the ID to ensure regulatory requirements – shipping items separately that can’t be combined, identifying hazardous materials, controlling the sale to licensed customers and more.
Many inventory control systems allow you to trace products through their entire lifecycle by identifying each transaction involving a given product. They can also store detailed information, such as their lot or serial number, and utilize lot control to manage shelf life, expiration dates and sell by dates.
How to get started with inventory control software
While controlling your inventory is better than not, manually doing so has definite challenges: it’s time-consuming, labor-intensive, difficult to share or communicate, prone to human error and requires continuous monitoring. Using inventory control software has numerous benefits, such as:
- Knowing what you have in stock at any given time
- Preventing stock shortages, outages or a surplus
- Identifying discrepancies
- Automating inventory counts
- Managing obsolescence
- Location control in the warehouse
- Inventory analysis including ABC, cost valuation, margins, inventory turns, supply demand
- Inventory integrity for accounting entries and physical transactions, and for the perpetual inventory value to general ledger inventory value.
But how do you get started?
Assess your current processes for tracking and counting your inventory throughout its life within your supply chain. Then identify where improvements can be made – whether that involves a better tracking system or automation to reduce manual labor. Finally, review your software options to enact these improvements and choose the solution that best fits your organization’s needs.