What is Inventory Control?
Inventory control is the systematic regulation of goods and materials within a company’s stock. It
guides a business through the complexity of supply chains, demand forecasts, warehousing, and
avoiding and managing inventory obsolescence. Its prime directive is balancing customer demand
while minimising costs.
You see, having too much stock means capital is tied up, gathering dust, while having too little leads
to missed opportunities and disgruntled customers. Inventory control fine-tunes this balance,
ensuring that the right products are in the right place, at the right time, and in the exact quantities
needed.
What are the Types of Inventory Control?
Periodic Inventory Control
Periodic Inventory Control is a traditional method of tracking inventory where physical counts are
conducted at regular intervals, such as weekly, monthly, or annually. It involves the scheduled
examination of stock on hand.
Typically, this requires shutting down operations temporarily to perform manual counts, meticulously
checking items, and reconciling any discrepancies with recorded figures. The data gathered then
becomes the foundation for decisions regarding reordering, clearance of excess stock, and
identification of possible shrinkage.
Periodic Inventory Control is often found in environments where real-time monitoring is not crucial or
where the cost of implementing continuous systems is prohibitive. A small local bookstore might opt
for this method, conducting weekly or monthly counts to keep tabs on their inventory. Similarly, a
boutique shop selling handcrafted goods may integrate this method with other basic warehouse
inventory management techniques to maintain a balance between costs and efficiency.
Perpetual Inventory Control
Perpetual Inventory Control is a dynamic approach that focuses on continuously monitoring and
recording inventory transactions. The ongoing tracking of inventory levels characterizes it. Each time
a product is sold, received, moved, or otherwise altered, the inventory record is instantly updated.
This is typically facilitated through integration with modern technology, such as barcoding and
sophisticated software systems, which allow immediate capture and reflection of all inventory-related
activities.
Perpetual inventory control is particularly beneficial in large, tech-savvy businesses where real-time
information is crucial for optimal performance. For example, a large eCommerce platform might
employ perpetual inventory control to manage its vast and diverse product range, ensuring that stock
levels are always accurate and aligned with customer demands.
Methods of Inventory Control
ABC Analysis
ABC Analysis is a pivotal inventory control method that categorizes inventory into three different
classes based on their importance. Often referred to as the Pareto Principle, this method identifies
that 80% of a company’s profits typically come from 20% of its products.
The ABC Analysis method recognizes this disproportion and applies it to inventory management to
optimise resource allocation.
The ABC classification system is a strategic approach to inventory management.
The “A” category contains high-priority items that often account for 15-20% of the inventory but
generate 70-80% of revenue.
The “B” category represents a balance, typically accounting for 30% of the inventory and 15-20% of
the revenue.
The “C” category, although making up 50-60% of the inventory, only contributes around 5-10% to
revenue.
Last In, First Out (LIFO) & First In, First Out (FIFO)
LIFO (Last In, First Out) and FIFO (First In, First Out) are two essential inventory valuation methods
businesses use to manage and evaluate inventory. These methods dictate the order in which
inventory is sold and consequently affect the cost of goods sold and the value of remaining
inventory.
LIFO (Last In, First Out): Under LIFO, the most recently acquired items are sold first. The inventory
cost is based on the cost of items that were acquired last, while the older inventory remains on hand.
FIFO (First In, First Out): In contrast, FIFO considers that the oldest items in inventory are sold first.
It assumes that the items acquired first are the first to be sold, mirroring a more natural flow of
inventory.
Batch Tracking
Batch Tracking, also known as lot tracking, is a vital inventory control method that allows businesses
to track products through different stages of the production and distribution process. This method
involves grouping items with shared characteristics or features into batches or lots and tracking them
together as a single unit.
In industries where quality control, compliance, and traceability are paramount, batch tracking
becomes essential. It ensures that if an issue arises with a specific batch, the entire set can be
easily identified and isolated, preventing potential problems from escalating. This practice also
facilitates recalling products if necessary and helps in adherence to regulations and standards.
Safety Stock
Safety Stock, often referred to as “buffer stock,” is a term that finds its roots in inventory
management. It refers to the extra inventory held by a business to mitigate the risk of stockouts due
to unpredictable fluctuations in demand, supply delays, or other unforeseen disruptions in the supply
chain management.
Calculating the correct level of safety stock is vital. Too little may lead to stockouts, while too much
can tie up capital and lead to obsolescence. Here’s a general formula used to calculate safety stock:
Safety Stock = (Maximum Lead Time – Average Lead Time) * (Maximum Usage – Average Usage)
Functions of Inventory Control
Maintaining Inventory Specifications and IDs
The clear identification and categorisation of inventory items form the foundational bedrock of
inventory control. This ensures that every item can be swiftly located, tracked, and managed. By
implementing specific identification numbers and labels, businesses can eliminate confusion, reduce
errors, and promote efficiency in all inventory-related activities.
Barcode Implementation and Control
Barcodes serve as a significant tool in modern inventory management. By representing information
visually through various patterns, barcodes facilitate the quick scanning and processing of items.
Integration with various systems, including point-of-sale and warehouse management, enables
comprehensive tracking and reporting. The benefits of barcode implementation extend to reduced
manual errors, faster processing times, and improved inventory visibility.
Managing Inventory Lists
Effective list management is essential, and techniques such as categorizing items, employing
automated tracking tools, and implementing systematic inventory organization play a vital role.
With the assistance of inventory management software, businesses can achieve real-time updates,
leading to better decision-making. Regular updates and periodic audits ensure that the inventory lists
remain accurate and reflect the true state of warehouse storage
Real-life/Real-time Warehouse Reports
The era of real-time information has made real-time warehouse reporting an indispensable part of
inventory control. These live data insights enable businesses to react swiftly to changes, helping
better align with market demand. Various reporting tools and technologies provide real-time
statistics, trends, and actionable insights, thus positively impacting decision-making and overall
operational efficiency.
Inventory Storage Oversight
Proper inventory storage is paramount for preserving product quality and ensuring quick
accessibility. Tailoring storage strategies to different types of inventory – perishable, fragile, bulk
items, etc. – is essential for optimal efficiency. Continuous monitoring of storage conditions, like
temperature, humidity, and accessibility, ensures compliance with regulations and standards.
Accounting and Tax Operations Related to Warehouse
Management
Inventory control is closely tied to accounting and tax operations. Integrating inventory data with
accounting processes allows for more accurate financial statements and effective tax calculations.